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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, 2001
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 15, 2002, was approximately $1,917,421,559. 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 100,297,654 shares of Common Stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
2001 Annual Report to Stockholders.................. Parts I, II and IV
Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on
May 15, 2002......................................... Parts I and III
PART I
Item 1. Business
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Forward-Looking Statements
This report includes certain forward-looking statements within the
meaning of the federal securities laws. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," "could"
and "should" and variations of these words and similar expressions are
intended to identify these forward-looking statements. Forward-looking
statements made by us are based on estimates, projections, beliefs and
assumptions of management at the time of such statements and are not
guarantees of future performance. We disclaim any obligation to update or
revise any forward-looking statements based on the occurrence of future
events, the receipt of new information or otherwise. Actual future
performance, outcomes and results may differ materially from those expressed
in forward-looking statements made by us as a result of a number of risks,
uncertainties and assumptions. For representative examples of these
factors, we refer you to the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our 2001 Annual Report to
Stochkholders.
General
First Health Group Corp., together with its consolidated subsidiaries
(referred to as "First Health," "us," "we," or "our"), is a full-service
national health benefits company. We specialize in providing large,
national employers and payors with a single source for their group health
programs by offering comprehensive, cost-effective and innovative solutions
for the health benefits needs of their employees nationwide. Through our
medical and pharmacy provider networks, we offer group health payors the
means to manage healthcare costs by reducing the per-unit price of medical
services provided. Through our workers' compensation service line, we
provide a full range of managed care services for insurance carriers, state
insurance funds, third party administrators, auto insurers and large, self-
insured national employers. Through our First Health Services service line,
we provide services to various state Medicaid and entitlement programs for
claims administration, pharmacy benefit management programs and medical
management and quality review services.
First Health is a Delaware corporation that was organized in 1982. Our
executive offices are located at 3200 Highland Avenue, Downers Grove,
Illinois 60515, and our telephone number is (630) 737-7900.
Recent Developments
On August 16, 2001, we completed the acquisition of CCN Managed Care,
Inc. ("CCN") and Preferred Works, Inc. ("PW" and together with CCN, "the CCN
Companies") from HCA-The Healthcare Company and VH Holdings, Inc.
(collectively, the "Sellers") for a purchase price of approximately $198
million in cash. The acquisition was effected pursuant to the terms of a
Stock Purchase Agreement, dated as of May 18, 2001 (as amended as of August
16, 2001). We financed the acquisition with borrowings under our existing
line of credit. CCN is a non-risk managed care company, based in San Diego,
CA, offering workers' compensation, group health and auto injury management
programs.
We reviewed the various businesses comprising the CCN Companies and
determined to hold PW and the Resource Opportunity, Inc. ("ROI") businesses
of CCN for sale. On December 28,2001, we completed the sale of the ROI
business for $9 million. We anticipate that the PW business will be sold in
the first half of 2002.
Introduction to Our Products and Services
We assist our clients through an integrated health plan offering that
positively impacts their medical cost trends while promoting the well-being
and satisfaction of plan participants. The components of our integrated
health plan offering are:
* A broad, national preferred provider organization (PPO) of quality,
cost-effective healthcare providers,
* Medical and pharmacy claims administration,
* Clinical and care support programs,
* Workers' compensation managed care solutions,
* Managed care programs for public-sector clients, and
* Insurance products.
Through The First Health[R] Network, our national PPO network, we offer
our clients services designed to control the price of a healthcare unit of
service. We specialize in the creation of client-specific networks, made up
of participating providers in The First Health[R] Network. Our ability to
analyze healthcare cost data allows us to use a client's actual history of
healthcare usage to structure a network of providers tailored to its needs.
While a client's cost savings are greatest when plan participants utilize
our network resources, our non-network products, such as the First Health
"Usual and Customary" Schedule, also help our clients manage the cost of
medical services.
For many of our corporate clients, we process medical claims and
provide various clinical and care support programs designed to help our
clients control the number of units of medical services, manage costly
diseases and increase compliance with prescribed treatment. These programs
include a full range of medical and mental healthcare and integrate our
pharmacy benefit management program to manage the full range of benefits.
An important feature of our health plan offering that distinguishes us from
our competitors is the availability of 24-hours-a-day, 7-days-a-week
telephonic assistance to aid plan participants with all benefits-related
needs. We believe that the continuous offering of new and improved programs
and services is important to the expansion of our business.
We have also integrated our managed care assets and clinical management
services with our ownership of small indemnity insurance companies to offer
our group health clients stop-loss protection.
In the workers' compensation area, our national network is coupled with
our medical management and bill review programs and to provide a
comprehensive product offering. Given rapidly increasing loss ratios in the
workers' compensation area in recent years, we believe that our product
offering can generate substantial savings for our workers' compensation
clients. We also make available to our workers' compensation clients the
First Health "Usual and Customary" Schedule, a proprietary non-network fee
schedule based on average network rates within certain geographic areas.
Through First Health Services, we provide claims administration,
pharmacy benefits management and medical management and quality review
services to public sector payors such as state Medicaid and state
entitlement programs.
Healthcare Reform, Expenditures and Managed Care
In recent years, political, economic and regulatory influences have
subjected the healthcare industry to fundamental change and consolidation.
Since 1993, the federal government has proposed various programs to reform
the healthcare system and expressed its commitment to:
* Increasing health care coverage for the uninsured,
* Controlling the continued escalation of health care expenditures,
and
* Allowing insureds to sue their ERISA or HMO health plan.
Even though Congress rejected various 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 healthcare delivery system.
Proposals under consideration at the federal level also would provide
incentives for the provision of cost-effective, quality healthcare through
encouraging managed care systems. In addition, many states are considering
various healthcare 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 participants. We
anticipate that Congress and state legislatures will continue to review and
assess alternative healthcare delivery systems and payment methodologies,
and that the public debate of these issues will likely continue in the
future. Although we believe that we are well-positioned to respond to those
concerns, we cannot predict what impact the proposed measures may have on
our business. The volatility of stock prices of companies in healthcare and
related industries reflects these concerns about proposed reform measures
and their potential effect.
We are monitoring developments concerning healthcare reform and
preparing strategic responses to different reform scenarios. In response to
pending legislation and market pressures and in anticipation of future
healthcare reform, we are broadening and diversifying our services so that
we will be less affected if healthcare reform proposals are enacted.
We offer numerous programs designed to help payors of healthcare
control their medical costs. Unlike HMOs, PPO companies typically do not
underwrite health insurance or assume related risks. While clinical
management and PPO services have been offered on a commercially significant
scale for the last ten years, the industry is currently highly fragmented
with numerous independent companies providing medical utilization review and
PPO services, primarily on regional or local levels. However, the rate of
consolidation among these companies is accelerating. Additionally, a
growing number of health insurance carriers, HMOs and third party
administrators have established internal clinical management and PPO
departments.
In the workers' compensation area, medical costs are rising at almost
twice the rate of general medical inflation. Although these medical costs
represent only about 5% of total healthcare expenditures, these costs have
risen more than 1000% since 1970 and represent a significant cost increase
for employers and insurance carriers. First Health and certain other cost
management companies 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 the group health market 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. Bill review services are applied in approximately
forty states that have medical fee schedules and in the remaining states
that allow a usual and customary review. In addition to the laws governing
workers' compensation in each state, over twenty-five states have enacted
specific managed care legislation. This legislation creates additional
opportunities to offer comprehensive managed care programs. The combination
of these services offers workers' compensation insurance carriers and
employers significant cost savings.
Our Products and Services
PPO Services - The First Health[R] Network
PPOs are groups of hospitals, physicians and other healthcare providers
that offer services at pre-negotiated rates to healthcare payors on behalf
of employee groups. PPO networks offer the employer an additional means of
managing healthcare costs by reducing the per-unit price of medical services
provided. Established in 1983, our national PPO network, known as The First
Health[R] Network, incorporates both group health and workers' compensation
medical providers. This is the largest area of our business, from which we
derive the greatest percentage of our revenues. The First Health[R] Network
consists of hospitals, physicians and other healthcare providers that offer
their services to our healthcare payor clients at negotiated rates in order
to gain access to our growing, national client base.
As of December 31, 2001, our hospital network included approximately
4,100 hospitals in 50 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, we have established an outpatient care network (OCN) comprising
approximately 390,000 physicians, clinical laboratories, surgery centers,
radiology facilities and other providers in 50 states, the District of
Columbia and Puerto Rico.
In the last several years, we have incurred substantial expense in
expanding our PPO network. We have increased both the number of healthcare
providers with whom we contract within existing geographical markets and the
number of geographical areas we serve. We have expanded the number of
contract hospitals not only in major metropolitan markets, but also in
targeted secondary and tertiary markets. Many of the hospital and OCN
providers that we have added to our network in recent years are located in
those secondary and tertiary markets. We expect to incur significant
expenses in connection with the continued growth of our network,
particularly into secondary and tertiary markets, and believe that this
investment will significantly differentiate us from our competitors.
The following table sets forth information with respect to the
approximate number of participating providers in The First Health[R] Network
at the end of each of the past five years:
December 31,
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1997 1998 1999 2000 2001
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Number of Hospitals in Network 2,650 3,220 3,510 3,700 4,100
Outpatient Care Network Providers 231,000 288,000 321,000 348,000 390,000
The First Health[R] Network was developed in response to the needs of
our national client base which is composed of a diverse group of healthcare
payors, such as group health and workers' compensation insurance carriers,
third party administrators, HMOs, self-insured employers, union trusts and
government employee plans. The breadth and depth of our client-base allows
us to negotiate favorable rates with current and prospective healthcare
providers throughout the country.
Compensation. As a fee for developing and managing our expansive PPO
network, we generally charge a percentage of savings realized by our
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 co-payments. Additionally, we have other fee
arrangements that provide for greater or lesser fees depending on the actual
savings or costs realized by the client based upon established criteria.
Approach to Network Development. Our strategy is to create a selective
network of individual providers from within The First Health[R] Network to
meet the medical, financial, geographic and quality needs of individual
clients and plan participants. We contract directly with each hospital and
generally do not contract with groups of hospitals or provider networks
established by other organizations. We believe that this provides maximum
control over the composition and rates in the network and ensures provider
stability in The First Health[R] Network. To further promote stability and
savings in the network, when possible, we enter into multi-year agreements
with our providers with nominal annual rate increases.
The First Health[R] Network consists of a full array of providers,
including hospitals and outpatient providers, such as 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, we are able to impact the vast majority of our clients'
healthcare costs and facilitate referrals within the network for all needed
care. Network providers benefit from their participation in The First
Health[R] Network through increased patient volume as patients are directed
to them through health benefit plans maintained by our clients and other
channeling mechanisms, such as our clinical and care support services and
on-line provider directories.
Our rate structure maximizes the savings for the client and gives
incentives to providers to deliver cost effective care. Unlike many other
PPOs that negotiate price discounts or separate rates for intensive care and
other specialty units, we strive to negotiate a single all-inclusive per
diem for medical/surgical and intensive care unit days in hospitals. The
majority of our hospital PPO contracts have such an all-inclusive rate
structure. We also control the charges for hospital outpatient care through
the use of reimbursement caps. These negotiated rates have resulted in
typical savings of more than 40% on inpatient hospital costs and 20-30% for
physician and outpatient costs.
We have utilized these negotiated rates to develop geographic-specific
"Usual and Customary" price caps for non-network services. The "Usual and
Customary" Schedule applies when non-network physicians or hospitals are
used and yields plan savings equivalent to the average network rate within
each geographic area. The schedule is possible because of our national
network, large database, direct provider contracts and transactional
capabilities.
After a network has been established, we provide a number of on-going
services for our clients, including consulting services, renegotiating
provider contracts and preparing annual evaluations profiling the
effectiveness of the network. We continuously refine our networks to expand
geographic coverage and improve the rate structure as care continues to
shift to outpatient settings.
We have established an extensive provider relations program in order to
promote ongoing and long-term positive business relationships with network
providers. 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. Due, in part, to the effectiveness of the provider
relations program, our retention rate has been more than 99% for hospitals
and more than 96% for physicians and other outpatient providers.
CCN. We believe that our recent acquisition of CCN will expand our
position as an industry leader in the workers' compensation, group health
and auto managed care areas. The addition of CCN network providers adds
significantly to the national reach of our network and offers our clients
and their employees more choices for their provider selection.
PPO Quality Assessment. Quality assessment of network providers is a
critical component in the selection and retention process. We have
established an intensive program whereby we evaluate each individual
provider against standards set for various quality indicators. Provider
evaluation begins prior to the selection of a provider and continues as long
as the provider remains in the network.
Quality assessment activities include:
* Physician credentialing,
* Peer review of applications when credentialing criteria are not
met,
* Physician recredentialing on a biennial basis,
* Claims profiling,
* Hospital profiling and credentialing,
* Ongoing monitoring based on external data and information gathered
through interaction with providers, and
* Quality investigations.
Medical Claims Administration
We provide "one-stop shopping" for employers offering indemnity, PPO
and point of service plans through our core competency of claims
administration and customer service. We provide clients with an integrated
package of healthcare benefits administration that includes:
* Telephonic availability to plan participants 24 hours a day, seven
days a week,
* Medical, disability, dental and vision claims processing,
* Prescription drug plan administration and network management, and
* Managed care administration.
* Data analysis.
Additionally, if they so desire, clients may utilize:
* COBRA administration,
* Flexible Spending Account administration, and
* Stop-loss brokerage
Our claims administration product is a sophisticated, technologically-
advanced claims processing, tracking and reporting system. A majority of
the processing is performed by our fully integrated and proprietary system
known as First Claim. The system supports a broad range of benefit
programs, including medical, dental and vision care, Medicare, prescription
drugs, COBRA, Health Insurance Portability and Accountability Act and
flexible spending accounts. Additionally, we are expanding our claims
administration capabilities by adding new and advanced features such as
imaging/OCR. We currently estimate that these development efforts will
significantly enhance and improve upon the efficiency and the capabilities
of First Claim. Such modifications are expected to be ongoing over the next
two years.
Our system helps clients increase the cost effectiveness of their
benefit plans by offering such features as on-line reporting capability,
Electronic Data Interchange, known as EDI, rapid and responsive customer
service, automatic tracking of annual, lifetime, per-case and floating
maximums, and full integration with all of our other departments and
services. This integration benefits our clients because we can analyze
claims data as well as clinical management, pharmacy and network usage data.
This analysis enables us to provide comprehensive management reports that
can be used to make benefit changes to reduce medical costs. In addition,
because our claims system is an on-line, "real time," interactive system,
clients can expect plan participant issues to be minimized because claims
can be paid promptly and accurately.
We provide a single-vendor environment which benefits plan participants
as well as our clients. Plan participants have just one number to call for
all healthcare benefit information. The round-the-clock, toll-free number
that they call to locate a network provider or to obtain general health
information is the same number that they call with claims and eligibility
inquiries. Additionally, our claims process can be virtually paperless for
the plan participant, especially when a network provider is used, which is a
critical step in enhancing his or her satisfaction. This system
automatically calculates benefits and issues checks, letters and Explanation
of Benefits (EOBs) to plan participants and providers.
Our claims system incorporates available advanced technologies,
including:
* Imaging and OCR technology
We use imaging/OCR to turn each claim into an electronic record.
This provides for greater processing efficiency, better control of
inventory, management of workflow and business continuity.
* Online reporting and data retrieval
After a claim is entered, the system verifies eligibility, applies
appropriate deductibles, adjudicates the claims against
predetermined negotiated or usual and customary guidelines,
matches pre-certification outcomes, searches for previous history
of coordination of benefits, and auto-adjudicates or 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 and mails them the next day.
* EDI
We contract with several commercial claims clearinghouses to
gather claims received via EDI from providers who transmit their
claims to one of these clearinghouses. The clearinghouses batch
claims destined for us and forward them to us every day.
Performing these functions electronically enhances efficiency and
accuracy.
* Tracking annual, lifetime and floating maximums
Each client's benefit plan(s) is loaded onto our system which
tracks benefit maximums on-line for every plan participant. When
a participant 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
By integrating our managed care and claims systems, we enable
health plan members to access all health benefits information
including claims history, eligibility, deductibles, maximum
accumulations and benefit explanation information through a
single, round-the-clock, toll-free number.
Clinical and Care Support Programs
We provide centralized clinical and care support programs, including
utilization review, medical case management and disease management services,
through an internal staff consisting primarily of allied health
professionals and registered nurses and physicians. Our staff is located at
our headquarters in Downers Grove, Illinois and at our offices in Houston,
Texas and Scottsdale, Arizona. Additionally, we maintain a nationwide
network of consulting physicians with a full range of specialties. These
clinical and care support services are coupled with our PPO and claims
processing services to provide an integrated service offering.
Our clinical and care support programs advise plan participants and
their dependents of review requirements. Plan participants, or their
attending physicians, utilize the program by calling one of our toll-free
numbers prior to a proposed hospitalization or outpatient service or within
two business days of an emergency admission or outpatient service. From
these calls, our clinical management staff gathers the medical information
necessary to enable it to perform a review. Applying our clinically valid,
proprietary review criteria, we then determine whether to recommend
certification of the proposed hospitalization or outpatient service as
medically necessary under the participant's healthcare plan. Upon
completion of our review, we advise the participant, the interested
healthcare providers and our 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. For a client for whom we pay claims, we also use the review outcome
to pay claims in accordance with the client's benefit plan.
We do not practice medicine and our services are advisory in nature.
All decisions regarding medical treatment are made by the patient and the
patient's attending physician. Patients can call us on a toll-free line if
they have questions regarding our services. Clients and their claim
administrators also can obtain additional information from our Client
Services staff.
Our medical case management program is also designed to provide clients
with careful management of all cases involving complex, high-cost or chronic
conditions or catastrophic illnesses. Our nurse case managers and
physicians identify potentially large claim cases through medical and
pharmacy claim triggers and periodic reviews and interactions with
individual members. Closely conferring with an attending physician and
other providers to identify cost-effective treatment alternatives is our
primary management tool. Such alternatives may include moving a patient
from an acute-care hospital to a less expensive setting - 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, we will serve as a referral for alternative available services,
provide recommendations regarding continued usage of these services and
negotiate discounts with providers when 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 us is made by the patient and
his or her physician.
Our care support program is a patient-focused program that enables us
to identify high-risk plan participants with chronic diseases that account
for a large portion of healthcare dollar expenditures. Our care support
program is a comprehensive approach starting with predictive modeling of a
client's specific population. The program is centered on the patient,
allowing, among other things, the following:
* Highly-personalized patient education and support initiatives,
* Channeling to network providers,
* Medication compliance support and other activities aimed at
increasing patient compliance with health and treatment programs,
* Inpatient monitoring,
* Discharge planning, and
* Intensive case management.
This approach allows for coordination of information for plan participants
with a series of needs which may overlap among many diseases.
Workers' Compensation Services
Our medical management process for workers' compensation cases 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, as soon as
medically feasible. A case manager is responsible for the overall
coordination of the many comprehensive services that may be needed, such as
review of rehabilitation, chiropractic care and home health services, with a
constant focus on the injured worker's ability to return to productivity.
Bill Review System. We provide 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. Our computer system consolidates all of these
functions, thereby reducing the amount of paperwork and costs associated
with claims processing, and is a highly cost-effective alternative for large
workers' compensation entities that generally process in excess of 500,000
bills annually. We are also currently in the process of developing a system
that can be used by organizations that process less than 500,000 bills
annually. We estimate that this system will be implemented by mid to late-
2002. By integrating our bill review system with our medical case
management and PPO services, we believe we offer one of the most
comprehensive workers' compensation medical cost management programs in the
industry.
Our bill review services 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. In these states, our
bill review process identifies and corrects inappropriate billing practices
and applies state fee schedules. In the remaining states that have not
established maximum fees and allow, instead, a usual and customary review,
we utilize our proprietary "Usual and Customary" Schedule which establishes
price billing caps for provider services within specific geographic areas.
Provider network discounts are applied as well during the review.
Additionally, through our system, we are able to go beyond "traditional"
bill review services to provide enhanced savings by identifying and
repricing non-related services, upcoding and unbundling of charges and other
features. We also integrate bill review data with our medical management
and quality assessment activities.
We have an agreeement with Electronic Data Systems Corporation (EDS)
whereby we utilize EDS' extensive data processing and communications
networks for data processing, electronic claims transmission and marketing
support services. EDS also modified our comprehensive bill review and audit
processing system to handle workers' compensation claims and integrated the
system with our medical case management programs. The initial term of the
EDS agreement was scheduled to expire on January 1, 2005, and has been
extended to at least 2010.
Our bill review services help decrease the administrative costs of
workers' compensation payors because we handle virtually all aspects of bill
review functions. We offer two variations of bill review services:
Systems Lease: The systems technology is brought to the client's
office where their staff performs bill review.
Service Bureau: Bills are sent to our processing centers and we key
the bills and perform bill review.
Marketing. We market our workers' compensation programs to insurance
carriers, third party administrators, state workers' compensation funds, and
self-insured, self-administered companies. We currently include offices of
six of the top ten workers' compensation insurers among our clients. We
provide worksite posters, provider directories (either paper or electronic)
and other materials to our payor-clients to encourage their injured
employees to utilize our provider network.
Compensation. We generally receive an agreed upon percentage of total
savings generated for clients through our bill review and PPO services plus
a per-bill fee. Savings are generally calculated as the difference between
the charges that medical providers bill the payor clients and the amount
that we have recommended for payment after the application of the fee
schedule and PPO rates.
First Health Services
First Health Services, to be referred to as FH Services, provides
value-added automation, administration, payment and healthcare management
services for public sector clients. Specifically, FH Services includes the
following programs:
* Pharmacy Benefit Management,
* Healthcare Management, and
* Fiscal Agent.
We have been able to utilize our Medicaid fiscal agent expertise, our
base of experience in the public sector and our client relationships with
over 25 state governments to provide new products and services as the public
sector health programs (primarily Medicaid) move toward managed care.
Pharmacy Benefit Management (PBM). FH Services' PBM program manages
pharmacy benefit plans for Medicaid programs and state-funded specialty
programs. Our PBM program is one of the largest of its kind in the country
and provides a full range of services, including:
* Pharmacy point-of-sale eligibility verification and claims
processing,
* Provider network development and management,
* Disease state management programs,
* Prospective and retrospective drug utilization reviews, known as
DUR,
* Provider profiling, formulary development and 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 payors as prescription drug expenses grow. Our PBM program is
one of the few large-scale participants in the market not aligned with or
controlled by a drug manufacturer. We believe our role as an independent
provider of PBM services gives us a distinct competitive advantage in the
growing sectors of managed care organizations and state government plans,
where clinical autonomy is often a requirement. Furthermore, we believe
that FH Services is a national leader in this area with substantial
experience managing pharmacy plans for Medicaid and elderly populations.
This clinical and management expertise gives us a competitive advantage in
the rapidly growing market of managed care organizations serving the public
sector on a capitated (per person) basis.
FH 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. FH Services' DMP focuses on those
patients who experience preventable therapeutic problems such as non-
compliance, inappropriate therapy and adverse drug reactions. The program
includes prior authorization initiatives, prospective DUR, retrospective DUR
and educational intervention initiatives, known as concurrent DUR.
Healthcare Management. FH Services' Healthcare Management program
provides external quality of care evaluation, utilization review and long-
term care review services to Medicaid programs, state mental health
agencies, HMOs, managed care organizations and other healthcare programs
desiring to improve quality of care, contain costs, ensure appropriate care
and measure outcomes.
The external quality of care 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.
The utilization review services cover 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. The Healthcare Management program 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
healthcare while containing costs.
Under the long-term care review services, we provide level-of-care
determinations as well as pre-admission screenings and annual resident
reviews to determine the need for specialized services for mental illness,
mental retardation or related conditions.
Fiscal Agent. FH Services' fiscal agent program administers state
Medicaid health plans and other state funded healthcare programs by
providing clients with full fiscal agent operations and systems maintenance
and enhancement. Under this product line, we provide:
* Eligibility verification and ID card issuance,
* Healthcare claims receipt, resolution, processing and payment,
* Provider relations,
* Third party liability processing,
* Financial reconciliation functions, and
* Client reporting.
Our customers include state Medicaid agencies, state departments of
human services, departments of health and managed care organizations serving
Medicaid populations. Public sector clients may also procure fiscal agent
services to support other government programs, such as state employee
benefit plans, early intervention programs or other healthcare initiatives.
Typically, fiscal agent systems are modified to meet a specific state's
program policy and administration requirements and services are offered for
all claim types. We are one of four major competitors in the Medicaid
fiscal agent field.
FH Services has developed and operates a Health Care Financing
Administration-approved information system for each client. These systems
are utilized to process and adjudicate eligibility, healthcare claims and
encounters, pay providers under a full range of reimbursement methods and
generate reports for use in managing the program.
In addition, there are several additional benefits that FH Services
receives from operating the fiscal agent business:
* The contracts are profitable, with very little new capital
investment required,
* The expertise, capabilities and systems developed from these
contracts have provided a platform for expansion into other
products, services and customer segments, and
* Customer relationships with the states have proven valuable in
developing other business in the PBM and Healthcare Management
programs.
As a fee for providing our fiscal agent services, we receive a
predetermined, contractual rate that is based upon the number of
transactions processed.
Other Services
Pharmacy Benefit Management. In addition to FH Services offering our
PBM program to Medicaid and state-funded programs, we have integrated our
PBM program with our claims administration, clinical and network programs.
The components of our integrated PBM program include a national pharmacy
network, formulary management, drug utilization review and online pharmacy
claim adjudication. These services are designed to control drug
expenditures as well as overall health plan expenditures through linkage of
the pharmacy data with other core data to identify high risk plan
participants. Once identified, our clinical staff works with these plan
participants to help them manage their conditions that require medication.
PPO Redirection and Telephonic Provider Directory. Through this
service line, we attempt to redirect plan participants to nearby PPO
hospitals or outpatient providers. Additionally, plan participants may
access our website or call our telephonic provider directory line to
determine whether a network provider of their choosing is available within a
reasonable proximity to his or her residence or place of work. Both the
payor and plan participant benefit from the cost savings achieved by
utilizing a PPO network hospital or outpatient provider.
Health Information. We also provide a 24-hour-a-day, 7-day-a-week
telephonic service, which includes the following features:
* Helping plan participants obtain answers to claims-related and general
medical questions,
* Assisting plan participants in making informed healthcare decisions,
* Facilitating communication between providers and plan participants, and
* Identifying patient situations that may be appropriate for referral to
clinical management services.
First Health[R] National Transplant Program. As medical technology
advances, new and more complicated procedures, such as transplants, are
becoming increasingly common. In an attempt to assist our clients in
meeting these technological advances and their related costs, we have
developed The First Health[R] National Transplant Program.
This program is designed to facilitate the cost-effective use of high
quality transplant services through a fully-integrated system, whereby case
management staff assists in the coordination of the transplant process from
the determination of the need for a transplant through providing follow-up
care for one year after the transplant is performed.
The goals of the 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 healthcare costs by contracting a cost-effective package
rate with high quality transplant centers that have a proven
performance record of desirable outcomes, and
* Improving predictability of transplant costs by establishing fixed
fees that share risk with the providers for the procedure and
associated care for one year after the transplant.
Transplants included in the program include heart, lung, heart/lung,
liver, kidney, kidney/pancreas and bone marrow (both allogenic and
autologous).
Physician Resources. We believe that our in-house physician staff is
an invaluable resource in our clinical and care support programs and in
developing clinical policy and guidelines. Our staff includes experienced
board certified physicians in such specialties as family practice, internal
medicine, cardiology, gynecology, urology, orthopedics, psychiatry,
pediatrics and surgery, as well as doctoral-level practitioners from various
fields, including clinical psychology and chiropractic medicine. In
addition, we have a nationwide network of consulting physicians in the
significant specialties. Our staff of physicians is crucial to the
development and maintenance of clinically-valid review criteria and our
network quality assessment efforts.
Benefit Plan Recommendations. Our clients can take various steps in
benefit plan design that will help accomplish their goal of managing long-
term healthcare costs. A client's ability to accomplish this goal through
us is contingent on:
* Reasonable incentives for plan participants to comply with our
notification procedures and clinical management recommendations
because early notification is essential to effective case
management and helps ensure not only cost effectiveness but also
successful 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 out of pocket maximums sufficiently
large so as to reinforce co-payment/coinsurance differentials,
* Coverage for travel and organ-donor costs for services at network
transplant providers,
* Distribution to all plan participants of a First Health
identification card, including the toll-free telephone number,
prior to the implementation date because it communicates to network
providers that the member in a plan that uses First Health, and
* A program of effective communication to plan participants about our
programs because well-planned, timely communication increases
participant satisfaction and compliance significantly.
Cost Data Analysis. Healthcare cost data analysis services are also
made available to our clients. With these services, we are able to provide
clients with in-depth customized information concerning their healthcare
cost and utilization experience. We analyze our clients' healthcare claims
information and benefit plans using our internally developed proprietary
software in order to provide each client with a specific healthcare cost
profile and suggest appropriate cost management programs. This software
also allows us to simulate how changes in a benefit plan's structure will
affect the overall cost of a benefit program.
Internet Applications. Our 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 provides access to the same,
weekly-updated information regarding hospital and outpatient care providers
in The First Health[R] Network that is also made available through our toll-
free telephonic provider directory. While the electronic directory is
easily accessible on the web for use by a large audience, the directory
maker and worksite poster applications 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 plan participants to search for a
hospital, physician or clinic in The First Health[R] Network. Users may
search for a provider by name, city, county or zip code within a 5-mile
default radius and receive a map with directions to the provider.
Directory Maker. Directory maker is designed to allow clients to
create and print custom directories of The First Health[R] Network providers
at their places of business. 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
criteria by which the data will be sorted. Directories are typically
created in two hours, and then made available on the Internet in PDF format
for printing.
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 on the Internet by zip code within a 5-
mile radius default to find providers in The First Health[R] Network. In
addition, clients can specify physicians, clinics and hospitals or any
combination of the three to print on a poster. The poster is produced
immediately in a common format for easy printing.
Internet Sites
Member Site. We offer a customized member services website entitled
"My First Health" to assist plan participants in utilizing our services.
The applications on this website allow plan participants to:
* Access general information about us,
* Print commonly used health benefits forms, including claims forms,
* Locate a provider in The First Health[R] Network,
* Obtain answers to frequently asked questions about The First
Health[R] Network,
* Send us an e-mail with health plan questions,
* View past year's claims and check status of recently submitted
claims, and
* Obtain health information.
We are evaluating additional services for this site, with the intent of
having them available in 2002, including:
* Eligibility status,
* Benefit plan summaries,
* Accumulation of total payments, deductibles and related items,
* Ability to resolve a pending claim online, and
* Ability to research and save personalized health information.
Provider Site. We currently offer providers in The First HealthR
Network access to a customized provider Internet site. This site allows
providers access to complete client listings, payor lists and referral
directories, pre-certification submissions, demographic data updates and
formularies. This site is being further developed in 2002. At that time, we
plan to expand the provider Internet site to include the following:
* Eligibility lookup and verification,
* Online claims submission,
* Summary of clients' plan documents,
* Information about us, and
* Survey tools for provider satisfaction.
Client Site. Clients have access to customized information and
applications including:
* Internet channeling tools (including electronic directory,
directory maker and worksite poster applications),
* Bill review data analysis application,
* Claims inventory logs,
* Claims administration reports,
* Printing of temporary ID cards
In 2002, our clients will also have access to:
* Eligibility files, as well as the ability to make changes and
updates,
* News and legislative updates, and
* Online implementations.
Stop-Loss Insurance
Our stop-loss insurance capabilities enable us to serve as an
integrated single source for the managed care needs of our clients who are
self-insured employers. Because our stop-loss rates are based on the
savings and value generated through our various services, we are able to
offer competitive rates and policies and multiple-year rate guarantees that
include fixed-percent increases and are based upon loss results. Stop-loss
policies are written through our wholly-owned insurance subsidiaries and can
be written for specific and/or aggregate stop-loss insurance. This is the
only insurance product that we are currently emphasizing in our sales
efforts.
Clients and Marketing
We primarily market our services to national, multi-site direct
accounts, including self-insured employers, government employee groups and
multi-employer trusts with greater than 1,000 employees or members. During
2001, one client (Mail Handlers Benefit Plan), for whom we provided PPO
services, accounted for 12.7% of our total revenues. In addition, we market
our services to and through group health and workers' compensation insurance
carriers. The following are representative clients of First Health:
Agilent Technologies, Inc. Liberty Mutual Insurance Company
Albertson's, Inc. McDonald's Corporation
American International Group Motorola
Boilermakers National Health and National Association of Letter
Welfare Fund Carriers
ConAgra Foods, Inc. Radio Shack Corporation
Crawford and Company State Farm Mutual Automobile
Insurance Company
Eaton Corporation Texas Instruments Employees' Health
Benefits Trust
HCA Inc. The Mail Handlers Benefit Plan
Hartford Financial Services, Inc. The Sherwin-Williams Company
Kemper National Services Travelers Property and Casualty
We presently have approximately 110 group health and workers'
compensation insurance carrier clients. Typically, we enter into a master
service agreement with an insurance carrier under which we agree to provide
our cost management services to healthcare plans maintained by the carrier's
policyholders. Our 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 our services to its policyholders, relieving us
of a significant marketing expense.
We typically enter into standardized service contracts with our direct
accounts and master service agreements with our 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 notice given one to six months prior to
expiration. While these contracts are generally exclusive as to a client's
ability to use other PPO companies in identified geographic areas, they are
generally non-exclusive as to a client's right to provide in-house medical
review services.
Competition
We compete 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 that have
implemented their own internal cost management services. In addition, other
managed care programs, such as HMOs and indemnity insurers, compete for the
enrollment of benefit plan participants. We are subject to intense
competition in each market segment in which we compete and many of our
competitors have greater financial and marketing resources than we do. We
distinguish ourselves on the basis of the quality and cost-effectiveness of
our programs, our proprietary computer-based integrated information system,
our emphasis on commitment to service with a high degree of physician
involvement, the penetration of our network into secondary and tertiary
markets and our role as an integrated provider of PBM services. Due to the
quality of our services, we tend to charge more for our services than many
of our competitors.
The insurer market for workers' compensation programs is somewhat
concentrated with the top ten insurers controlling over 50% of the insured
market. We have focused our efforts on the top tier of the workers'
compensation market. Although we currently include several regional offices
of six of the top ten workers' compensation insurers among our clients, we
compete with a multitude of PPOs, technology companies that provide bill
review services, clinical case management companies and rehabilitation
companies for the business of these insurers. While experience differs with
various clients, obtaining a workers' compensation insurer as a new client
typically requires extended discussions and a significant investment of
time. Given these characteristics of the competitive landscape, client
relationships are critical to the success of our workers' compensation
products.
Over the last few years, we believe that the so-called "Silent"
Preferred Provider Organizations, or non-directed networks, have developed
into a major competitive threat. By using "Silent" Preferred Provider
Organizations, medical reimbursement payors seek to avail themselves of PPO
discounts without providing any apparent patient channeling mechanisms.
Management believes that these organizations undermine the trust of
providers who offer preferred rates to networks anticipating active patient
directing programs. 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. We
believe that "silent" PPO networks can and do undermine that bargain.
Employees
As of December 31, 2001, we had approximately 4,465 employees,
including approximately 1,935 employees involved in claims processing and
related activities, 730 employees in information systems, 520 employees in
various clinical management and quality assessment activities, 480 employees
in PPO development and operations, 345 employees in sales, account
management and marketing and the remainder involved with accounting, legal,
human resources, facilities, and other administrative, support and executive
functions. We also have a nationwide network of conferring physicians in
various specialties, most of whom are compensated on an hourly or per visit
basis when they are requested to render consulting services on our behalf.
None of our employees are presently covered by a collective bargaining
agreement and we consider our relations with our employees to be good.
Information Systems
Our system and suite of integrated applications utilize centralized
stores of corporate data. Our information technology consists of three
layers. The first level consists of database servers located in a secure
corporate center. We also have a backup data center in place for business
continuity. The second level consists of integrated provider, plan
participant and client corporate databases. Our suite of applications is
the third level. The modular architecture of these applications is designed
to provide flexible access to corporate databases, while maintaining tight
control of our data assets.
Government Regulations and Risk Management
Federal-Level Regulation. Managed healthcare programs are subject to
various federal laws and regulations. Both the nature and degree of
applicable government regulation vary greatly depending upon the specific
activities involved. Generally, parties that actually provide or arrange
for the provision of healthcare services, assume financial risk related to
the provision of those services, or undertake direct responsibility for
making payment or payment decisions for those services, are subject to a
number of complex regulatory schemes that govern many aspects of their
conduct and operations.
While our management and information services typically have not been
the subject of extensive regulation by the federal government, the last
decade has witnessed increased regulation of our industry. In particular,
the Health Insurance Portability and Accountability Act of 1996 (HIPAA) will
impose obligations previously unknown to managed healthcare service
providers. HIPAA is designed to reduce the amount of administrative waste
in the healthcare industry and to protect the privacy of patients' medical
information. Among other things, HIPAA establishes new requirements for the
confidentiality of patient health information and standard formats for the
secure transmission of healthcare data among healthcare providers, payors
and plans. The regulations under HIPAA will require, among other things,
that health plans give patients a clear written explanation of how they
intend to use, keep and disclose patient health information, prohibit health
plans from conditioning payment or coverage on a patient's agreement to
disclose health information for other purposes, and create federal criminal
penalties for health plans, providers and claims clearinghouses that
knowingly and improperly disclose information or obtain information under
false pretenses. The regulations regarding the standard formats for the
secure transmission of healthcare information will become effective in
October 2002 and the regulations regarding privacy issues will become
effective in April 2003.
We have formed a corporate HIPAA Administrative Simplification
Committee and Workgroup to identify processes, systems or policies that will
require modification and to implement appropriate remediation and
contingency plans to avoid any adverse impact on our ability to perform
services in accordance with the applicable standards. We are communicating
with significant third-party business partners to assess their readiness and
the extent to which we will need to modify our relationship with these third
parties when conducting EDI or e-commerce.
The cost of this compliance effort is estimated to be approximately $3
million and is already included in our EDI and E-Commerce initiatives.
However, there can be no guarantee that the costs will not materially differ
from those anticipated or that we will not be materially impacted.
Additionally, we expect to receive reimbursement directly from a number of
our clients due to the nature of the contractual arrangement with these
entities.
State-Level Regulation. Our activities are subject to state
regulations applicable to managed healthcare service providers. We believe
that we are in compliance in all material respects with all current state
regulatory requirements applicable to our business as it is presently
conducted. However, changes in our business or in state regulations could
affect the level of services that we are required to provide or could affect
the rates we can charge for our healthcare products and services.
The workers' compensation segment of our business is more sensitive to
state governmental regulation. Historically, governmental strategies to
contain medical costs in the workers' compensation field have been limited
to legislation on a state-by-state basis. For example, many states have
implemented fee schedules that list maximum reimbursement levels for
healthcare procedures. In certain states that have not authorized the use
of a fee schedule, we adjust bills to the usual and customary levels
authorized by the payor. Opportunities for our services could increase as
more states legislate additional cost containment strategies. Conversely,
we could be adversely affected if states elect to reduce the extent of
medical cost containment strategies available to insurance carriers and
other payors, or adopt other strategies for cost containment that would not
support a demand for our services.
Item 2. Properties
----------
We own six office buildings consisting of an aggregate of approximately
625,000 square feet of space. Our headquarters are located in Downers
Grove, Illinois and our other five offices are located in West Sacramento,
California; Houston, Texas; Pittsburgh, Pennsylvania; Tucson, Arizona; and
Scottsdale, Arizona. Additionally, we lease significant office space in
Salt Lake City, Utah; San Diego, California; Milwaukee, Wisconsin; Richmond
Virginia; Tampa, Florida; and Boise, Idaho. We also have numerous smaller
leased facilities throughout the nation.
All of our 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 our
operating needs in the foreseeable future.
Item 3. Legal Proceedings
-----------------
We are subject to various claims arising in the ordinary course of
business and are parties to various legal proceedings that constitute
litigation incidental to our business. Our wholly owned subsidiary, First
Health Services Corporation, which we acquired in July 1997, continues to be
subject to an investigation by the District of Columbia Office of Inspector
General (OIG). In July 2000, the OIG issued a report evaluating the
District of Columbia's Medicaid program and suggesting ways to improve the
program. FH Services has acted as the program's fiscal agent intermediary
for 20 years. The OIG report included allegations that, from 1993 to 1996,
FH Services, in its role as fiscal agent intermediary, made erroneous
Medicaid payments to providers on behalf of patients no longer eligible to
receive Medicaid benefits. We do not believe that the resolution of the
claim or the investigation will materially affect our business or financial
position.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the year ended December 31, 2001.
Executive Officers of the Company
Name Age Position
--------------------- ---- -------------------------------------------
Edward L. Wristen 50 President and Chief Executive Officer
A. Lee Dickerson 52 Executive Vice President, Provider Networks
Patrick G. Dills 48 Executive Vice President, Sales
Susan T. Smith 51 General Counsel and Secretary
Joseph E. Whitters 43 Vice President, Finance and Chief Financial
Officer
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. In January
2001, Mr. Wristen became President of the Company. In January 2002, Mr.
Wristen became Chief Executive Officer of the Company. 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.
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.
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.
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.
---------------------------------------------------------------------
Our common stock has been quoted on the Nasdaq National Market under the
symbol "FHCC" since our 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 our common stock on the Nasdaq
National Market and the approximate number of holders of record of our
common stock is set forth under "Common Stock" in our 2001 Annual Report to
Stockholders. Information concerning our dividend policy is set forth under
"Dividend Policy" in our 2001 Annual Report to Stockholders. All such
information is incorporated herein by reference.
Item 6. Selected Financial Data.
-----------------------
Selected financial data for each of our last five fiscal years is set
forth under "Selected Financial Data" in our 2001 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
our 2001 Annual Report to Stockholders and is incorporated herein by
reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
The disclosures required by this item are contained in our 2001 Annual
Report under the caption "Market Risk" and are incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
The financial statements required by this item are contained in our 2001
Annual Report to Stockholders on the pages indicated below and are
incorporated herein by reference.
Financial Statements: Page No.
-------------------- -------
Report of Independent Auditors 33
Consolidated Balance Sheets as of
December 31, 2000 and 2001 34-35
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 2000 and 2001 36
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 1999, 2000 and 2001 37
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 2000 and 2001 38-39
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 2000 and 2001 40-41
Notes to Consolidated Financial Statements 42-55
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 our executive officers is set forth under
the caption "Executive Officers of the Company" in Part I. Other
information regarding our executive officers, as well as certain information
regarding First Health's directors, will be included in the Proxy Statement
for our Annual Meeting of Stockholders to be held on May 15, 2002 (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, the Report of
the Compensation Committee of the Board of Directors on Executive
Compensation contained in the Proxy Statement is not incorporated by
reference herein, in any of our previous filings under either the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
or in any of our 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 26
and 27 of this report.
(2) Consolidated Financial Statements Schedules:
Schedule II - Valuation and Qualifying Accounts and Reserves.
Schedule IV - Reinsurance
(3) Exhibits
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K/A dated August 16, 2001 reporting
under Item 7, the financial statements of CCN Managed Care, Inc. and the pro
forma consolidated financial statements of First Health Group Corp.
First Health Group Corp.
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 2001, 2000, and 1999
Balance at Additions Charged Adjustments Balance at
Beginning to Costs and and End of
Description of Period Expenses Charge-offs Period
------------ ---------- ---------- ----------- ----------
Year Ended December 31, 2001
-----------------------------
Allowance for Doubtful Accounts $10,811,000 $ 4,003,000 (1) $ (487,000) $14,327,000
========== ========== =========== ==========
Accrued Restructuring Expenses $ 4,249,000 $41,113,000 (2) $ (8,887,000) $36,475,000
========== ========== =========== ==========
Year Ended December 31, 2000
----------------------------
Allowance for Doubtful Accounts $10,844,000 $ -- $ (33,000) $10,811,000
========== ========== =========== ==========
Accrued Restructuring Expenses $ 5,149,000 $ -- $ (900,000) $ 4,249,000
========== ========== =========== ==========
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
========== ========== =========== ==========
(1) Additions represent allowance for doubtful accounts that were included
in the purchase accounting adjustments related to the acquisition of CCN
Managed Care, Inc., not charged to expenses.
(2) Additions represent accrued restructuring expenses that were included
in the purchase accounting adjustments related to the acquisition of CCN
Managed Care, Inc., not charged to expenses.
First Health Group Corp.
Schedule IV - Reinsurance
Years Ended December 31, 2001, 2000 and 1999
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
----------- -------------- --------- ---------- ---
Year ended 12/31/01:
-------------------
Life insurance in force: $172,677,000 $ (163,781,000) $ -- $ 8,896,000 --%
=========== ============== ========= ========== ===
Premiums:
Life insurance 2,129,000 (2,032,000) 37,000 134,000 21%
Accident and health
insurance 16,491,000 (2,860,000) 907,000 14,538,000 10%
----------- -------------- --------- ---------- ---
Total premiums $ 18,620,000 $ (4,892,000) $ 944,000 $14,672,000 10%
=========== ============== ========= ========== ===
Year ended 12/31/00:
-------------------
Life insurance in force: $195,112,000 $ (185,455,000) $ -- $ 9,657,000 --%
=========== ============== ========= ========== ===
Premiums:
Life insurance 4,064,000 (3,906,000) 42,000 200,000 21%
Accident and health
insurance 13,614,000 (2,853,000) 1,214,000 11,975,000 10%
----------- -------------- --------- ---------- ---
Total premiums $ 17,678,000 $ (6,759,000) $1,256,000 $12,175,000 10%
=========== ============== ========= ========== ===
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%
=========== ============== ========= ========== ===
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/Edward L. Wristen
----------------------------
Edward L. Wristen, President
and Chief Executive Officer
Date: March 29, 2002
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 29, 2002:
Signature Title
------------------------------ ------------------------------------
/s/James C. Smith Chairman of the Board
James C. Smith Director
/s/Edward L. Wristen President and Chief Executive Officer
Edward L. Wristen Director (Principal Executive Officer)
/s/Joseph E. Whitters Vice President, Finance and Chief
Joseph E. Whitters Financial Officer (Principal
Financial and Accounting Officer)
/s/Michael J. Boskin Director
Michael J. Boskin
/s/Daniel Brunner Director
Daniel Brunner
/s/Raul Cesan Director
Raul Cesan
/s/Robert S. Colman Director
Robert S. Colman
/s/Ronald H. Galowich Director
Ronald H. Galowich
/s/Harold S. Handelsman Director
Harold S. Handelsman
/s/Don Logan Director
Don Logan
/s/William Mayer Director
William Mayer
/s/Thomas J. Pritzker Director
Thomas J. Pritzker
/s/David Simon Director
David Simon
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, 2001 and 2000, and for each of the three years in
the period ended December 31, 2001 and have issued our report thereon, dated
February 18, 2002; such consolidated financial statements and report are
included in the Company's 2001 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 Company'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, 2002
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)
Exhibit No. Description
----------------------------------------------------------------------------
10.27-10.68. Omitted
10.69. Second Restatement of the HealthCare COMPARE Corp.
Retirement Savings Plan. {10.69} (14)
10.70. Director's Option Plan dated May 23, 1991. {10.70} (14)
10.71. 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. 1995 Employee Stock Option Plan. (4.1) {18}
10.95-10.98 Omitted
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. {10.113} (26)
10.114. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Ed Wristen. {10.114} (26)
10.115. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Mary Anne Carpenter. {10.115}
(26)
10.116. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Lottie Kurcz. {10.116} (26)
10.117. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Susan T. Smith. {10.117} (26)
10.118. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and A. Lee Dickerson. {10.118} (26)
10.119 Omitted.
Exhibit No. Description
----------------------------------------------------------------------------
10.120. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Joseph E. Whitters. {10.120} (26)
10.121. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Patrick G. Dills. {10.121} (26)
10.122. Option Agreement dated as of May 18, 1999 by and between
the Company and James C. Smith {10.122} (27)
10.123. Option Agreement dated as of May 18, 1999 by and between
the Company and James C. Smith {10.123} (27)
10.124. 2000 Stock Option Plan {4} (28)
10.125. Option Agreements dated March 20, 2001 between First
Health Group Corp. and Edward L. Wristen. {10.125} (30)
10.126. 2001 Director's Stock Option Plan {4} (31)
10.127. 2001 Stock Option Plan {4} (32)
10.128. Stock Purchase Agreement dated as of May 18, 2001, among
the Company and HCA-the Healthcare Company and VH
Holdings, Inc. {10.128} (33)
10.129. Agreement and Acknowledgment with respect to the Stock
Purchase Agreement, dated as of August 16, 2001, among the
Company and HCA-the Healthcare Company and VH Holdings,
Inc. {10.129} (33)
11. Computation of Basic and Diluted Earnings Per Share.
13. 2001 Annual Report to Stockholders.
21. Subsidiaries of the Company.
23. Consent of Deloitte & Touche LLP
Exhibit No. Description
----------------------------------------------------------------------------
{ } 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 10-K 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 10-K for the year ended December 31,
1998 and filed with the Securities and Exchange Commission
on March 29, 1999.
(26) Annual Report on Form 10-K for the year ended December 31,
1999 and filed with the Securities and Exchange Commission
on March 24, 2000.
(27) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on March 19, 2001
(28) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on March 19, 2001
Exhibit No. Description
----------------------------------------------------------------------------
(29) Annual Report on Form 10-K for the year ended December 31,
2000 and filed with the Securities and Exchange Commission
on March 22, 2001.
(30) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on August 15, 2001.
(31) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on August 15, 2001.
(32) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on August 15, 2001.
(33) Current Report on Form 8-K as filed with the Securities
and Exchange Commission on August 27, 2001.