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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, 1998
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.
(Formerly HealthCare COMPARE Corp.)
(Exact name of registrant as specified in its charter)
Delaware 36-3307583
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3200 Highland Avenue
Downers Grove, Illinois 60515
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 241-7900
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 18, 1999, was approximately $477,695,094. On that
date, there were 30,881,299 shares of Common Stock issued and
outstanding. 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.
DOCUMENTS INCORPORATED BY REFERENCE
1998 Annual Report to Stockholders..................Parts I, II and IV
Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on
May 18, 1999...........................................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 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)
241-7900.
Recent Developments
On May 19, 1998, the Company's Board of Directors authorized a 2-for-1
Common Stock split effected in the form of a 100% distribution. The 2-
for-1 split was payable on June 23, 1998, to stockholders of record on
June 2, 1998. Stockholders received one additional share of Common Stock
for each share held of record. The stock split is intended to result in a
wider distribution and ownership of First Health's stock by enhancing
liquidity and making the stock more attractive to a broader range of
investors. The Company's last stock split, a 2-for-1, was in the second
quarter of 1991.
December 1, 1998, the Company's Board of Directors approved the
repurchase by the Company of up to an additional 15,000,000 shares or
approximately 26% of its outstanding common stock. From August 1996
through December 31, 1998, the Company has repurchased approximately 18.4
million of its shares. The Company may utilize working capital or
capacity under its existing $350 million credit facility to purchase
shares. At February 28, 1999, the Company had approximately 12.8 million
shares remaining under this authorization.
Strategy
First Health assists its group clients through an integrated health
benefits system that promotes the well-being and satisfaction of
participants while positively impacting an organization's medical cost
trends through:
* Single source accountability;
* 24-hours-a-day, 7 days-a-week availability to help participants
become more informed health care consumers;
* A broad national network of quality, cost-effective health care
providers--wherever care is needed;
* Timely service before, during and after care is delivered; and
* Services for lowering costs for medical care outside of the
Company's PPO network.
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 OUCH System capabilities, the Company provides
workers' compensation bill review services nationally. These services
are coupled with the Company's review programs and PPO networks in order
to provide a comprehensive product offering in the workers' compensation
arenas where, in recent years, medical costs have been rising faster than
in the group health arenas. 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 medical management programs designed to
control the number of health care units, such as its hospital review
program. First Health offers additional cost management programs which
are also intended to control the number of health care units provided,
including programs concentrating on mental health services, physical
therapy and chiropractic services. 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 will allow
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 managed care products to clients and
prospective clients for claims processing services and managed care
services 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. 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, clinical
management and 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
independent firms which are engaged primarily 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. In addition, a growing number of
health insurance carriers, HMOs and third party administrators have
established internal clinical management and PPO departments. However,
due to the tremendous resources required to develop an exclusive PPO
network, these organizations have not had nearly the same success in
establishing a national PPO network as the Company.
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 and4certain other cost management firms
offer numerous 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 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, also 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 1999, includes
approximately 3,200 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 290,000 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,
----------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Number of Hospitals in Network 1,900 2,100 2,320 2,650 3,220
Outpatient Care Network Providers 150,000 181,000 207,000 231,000 288,000
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 PPO networks, in
virtually all cases, the Company 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.
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
management 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
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 of
each PPO network. Additional information systems are utilized to develop
rate and fee objectives and strategies prior to initiating contract
negotiations with providers. The Company has invested substantially in
its information systems and anticipates continuing these investments in
the future. Currently the Company has major upgrades underway within its
clinical management and claims systems. First Health also maintains an
array of information systems 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 for a fee on a stand-alone basis. 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. The Company also provides clients with customized
software products to allow further analysis of health care cost issues.
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
services, including:
* medical, disability, dental and vision claims processing
* utilization management and case management
* national PPO network arrangements
* prescription drug plan administration and network management
* 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, known as The Act System.
ACT was developed completely in-house by First Health through its
acquisition in July, 1997 and is owned entirely by the Company.
ACT supports a broad range of benefit programs, including medical care,
prescription drugs, long-term disability, short-term disability, FLEX
accounts, vision care and dental care. Additionally, in order to enhance
the Company's claims processing capabilities, the Company is in the
process of enhancing the ACT system. The Company currently estimates
that these development efforts will significantly enhance and improve
upon the capabilities of ACT and these efforts are expected to cost in
total approximately $15 million to become commercially viable. Such
modifications are expected to be completed in the next 1 to 2 years, with
a substantial portion of the expenditures being incurred during 1999.
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 data 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 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
The integration inherent in First Health On-Call
enables the participant to access all claims information
including claims history, eligibility, deductibles and maximum
accumulations, as well as Explanation of Benefit (EOB)
information through the 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 management programs
(utilization review and medical case 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. Historically, First Health charged its clients a "capitated
fee," i.e., a fixed monthly fee for each participant (excluding covered
dependents) in a client-sponsored health care plan, plus an hourly fee
for case management. The amount of the capitated fee varies depending on
the size of the client and the number and type of review programs
selected by the client. Several years ago, the Company began selling its
clinical management services coupled with its PPO services. As a result,
the fee is an "add-on" to the PPO fee. For other medical consulting
services, the Company charges fees on an hourly basis rather than a
capitated basis.
Clients who purchase First Health's clinical management programs
advise their participants and dependents of review requirements. A
participant, or his or her attending physician, utilizes a clinical
management 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. It 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. First Health does not practice medicine and its services
are advisory in nature. All decisions regarding the payment or denial of
benefits and about eligibility or coverage under the benefit plan are
made only by the claims administrator. All decisions regarding the
patient's medical treatment are made by the patient and the patient's
attending physician, not by First Health.
First Health provides standard educational materials which can be used
by its clients for advising participants of the utilization management
services. First Health also works with clients in developing customized
materials for this purpose. 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.
First Health offers several clinical management services from which
its clients may select. Most of First Health's clients subscribe to its
hospital review services, which forms as the base to which First Health's
other programs may be added. More than 90% of First Health's clients
subscribe to at least one additional First Health service First Health
also offers its services on a stand-alone basis, without requiring
participation in its hospital review program. The following is a summary
of the Company's current principal programs.
Hospital Review. First Health's hospital review program is designed
to reduce 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.
Case Management. The medical case management program is 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 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.
Referral Management. For clients who subscribe to First Health's
point-of-service program, referral to physician specialists is managed
through the Clinical Management area. When a referral from a primary
care physician to a specialist is required, a patient calls the toll-free
telephone number. These referrals are reviewed and authorized for a
specified period of time.
PPO Redirection and Telephonic Provider Directory. For clients who
subscribe to First Health's clinical management program and The First
Health Network, the Company will attempt to redirect the patient to a PPO
hospital or outpatient provider located near the patient. Additionally,
the clients' participants can call the Company's telephonic provider
directory line to request a network provider of their choosing who is
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.
Other Clinical Management Programs:
* Managed Surgical Opinion * Prospective Chiropractic Review
* Mental Health Review Services * Maternity Risk Assessment
Physician Resources
First Health believes that its in-house physician staff is an
invaluable resource in its clinical management programs. 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.
Information System
Management of First Health believes its interactive, on-line computer-
based information system has been a major factor in its ability to
provide clients with comprehensive healthcare information. First Health's
proprietary software programs record and access patient and provider
information. This allows Company personnel to access utilization norms
and standards as part of the review process or to analyze cost data in
negotiating reimbursement rates with health care providers. First
Health's proprietary software generates extensive internal reports to
supplement the review process by informing reviewers when specific
follow-up activities, such as case management screening, are required to
be performed by First Health personnel.
The patient-specific database consists of data that has been collected
concerning each proposed hospital admission, including patient
demographics, medical history and diagnostic and procedural information.
First Health's review personnel can access the current status of the
patient's case to identify more cost-effective treatment alternatives.
All correspondence confirming First Health's recommendations with
respect to a prescribed treatment plan is automatically generated and
sent to the attending physician, participant and plan administrator by
the system.
Bill Review Using the OUCH 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.
Since these system capabilities are integrated with its utilization
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 (fee schedule) has been established for
workers' compensation medical claims. The review process corrects errors
a provider might make in applying these fee schedules. OUCH Systems also
reviews whether the appropriate level of service was billed. 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 clinical management programs.
Systems development occurred throughout the latter half of 1989, with
operations beginning in the first quarter of 1990.
Bill review decreases workers' compensation payers' administrative
costs because First Health maintains virtually all aspects of the
program.
First Health offers three 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.
* EDI Service Bureau: Clients electronically transmit key data
elements to First Health and First Health
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:
American International Group NALCO Chemical Company
Boilermakers National Health National Association of Letter Carriers
and Welfare Fund Norwest Corporation
CNF Transportation, Inc. State Farm Mutual Automobile
ConAgra, Inc. Insurance Company
Eaton Corporation Tandy Corporation
General Motors Corporation Texas Instruments Employees' Health
Hewlett-Packard Company Benefits Trust
Hartford Financial Services, Inc. The RETA Trust
Kemper National Services The Sherwin-Williams Company
Liberty Mutual Insurance Company Travelers Property Casualty
McDonald's Corporation Walgreen Co.
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
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 medical plans for multi-sited employers. The
medical plans are expected to provide HMO-like performance for self-
funded ERISA plans and stop-loss insurance products.
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. 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.
Specific Stop-Loss Insurance
Specific stop-loss insurance provides protection against high medical
claims on any one individual during the plan year. It limits the client's
cost of eligible medical expenses for each plan participant.
If eligible medical expenses on a covered individual are incurred and
paid during the contract period, and the individual's deductible is
exceeded, the client will be reimbursed for the amount of the loss that
exceeds the deductible. The per-person deductible is determined prior to
the start of the contract period and all reimbursements will be paid
directly to the client, not the participant or provider.
Aggregate Stop-Loss Insurance
Aggregate stop-loss insurance helps limit clients' overall annual
claims cost. It will reimburse the client when eligible claims for the
self-funded plan, as a whole, exceed the aggregate deductible level and
are incurred and paid during the contract period. This protection guards
against unexpected fluctuations in claims frequency or large dollar
volume.
Health plan benefits such as medical, dental, vision, prescription
drugs and short-term disability may or may not be included in an
aggregate stop-loss contract, depending on the client's needs.
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 provides clinical Drug Utilization Review services. The
primary objective of DUR is to provide pertinent health-related
information to providers to assist in the clinical management of their
patients. Services' DUR programs operate at the individual patient level
and are defined as follows:
* Prospective DUR. On-line real-time DUR alert messaging to the
pharmacy which operates as part of the POS claims adjudication
process; occurs before prescription is filled.
* Retrospective DUR. Computer-generated patient profiles identifying
trends or patterns of drug use; occurs after prescription is filled.
Based on DUR findings, interventions or actions can improve quality of
care and modify drug utilization patterns which produce cost savings,
help to maintain program integrity and assist in identification and
correction of drug misuse or fraud and abuse.
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.
When a state initiates a capitated Medicaid Managed Care Program, the
federal Health Care Finance Administration (HCFA) requires that an
External Quality Review Organization (EQRO) be employed to monitor health
care quality and service quality of the HMOs and MCOs serving Medicaid
enrollees. 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.
Contract for state funded health care programs, in addition to the
Medicaid fiscal agent contracts above, include the following:
* Health Benefits Management. Education, outreach, enrollment and
call-center services for the Missouri Managed Care Program known as
MC+. MC+ is a phased-in transition of member Medicaid population
into a managed care environment. Services contacts Medicaid
recipients, educates them on HMO options available, and enrolls them
into the member selected MCO plan.
* City Early Intervention Programs. A legislated entitlement program
designed to provide managed care services from birth to age two for
children who exhibit a disability or delay that is cognitive,
physical, communicative, social, emotional or adaptive, irrespective
of financial resources.
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.
Integrated Managed Care Products
The Company has introduced a number of new services during the last
few years that incorporate various features of First Health's clinical
management and PPO services in order to provide clients increased
opportunities for medical cost savings. Common characteristics of these
new services include:
* More aggressively managed provider networks.
* More aggressive risk sharing financial arrangements with providers.
* Improved communication and linkage with members and participants.
* Longer term contracts with providers.
* Intensive medical case management intervention.
These programs constitute important elements of the Company's risk
products and programs it is in the process of introducing.
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).
FIRST HEALTH Point of Service Program. The Point of Service Program
is comparable to a "gatekeeper" approach whereby a primary care physician
(PCP) coordinates his/her patients' use of the health care system. The
gatekeeper approach has been set up to attain two major objectives: (1)
to coordinate and manage a patient's course of treatment and (2) to
control costs and utilization.
The Company has developed a program to more effectively address both
client objectives for, and drawbacks to, current approaches. In addition
to coordinating the course of treatment and controlling costs and
utilization, the objectives of the Company's Point of Service Program are
to:
* Encourage the use of primary care network providers as the first
course of treatment and network providers, in general, as required;
* Provide early case identification of complex or chronic patients who
could benefit from case management intervention; and,
* Maintain the element of choice for the patient's selection of their
physician.
Year 2000 Matters
See Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Company's 1998 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 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, 1998, First Health had approximately 4,000
employees, including approximately 1,900 employees involved in claims
processing and related activities; 650 employees in various clinical
management and quality assessment activities; 500 employees in
information systems; 230 employees in sales and marketing and the
remainder involved with accounting, 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.
Although First Health believes that its level of Directors' and
Officers' and Errors and Omissions insurance coverage is appropriate, no
assurance can be given that insurance coverage would protect it from loss
in the event of any litigation or adverse interpretation of statutes and
regulations by governmental or other bodies. Further, there can be no
assurance that such insurance will continue to be available on a
commercially reasonable basis.
Item 2. Properties
First Health owns four office buildings consisting of an aggregate of
approximately 465,000 square feet of space. One is in Downers Grove,
Illinois where the Company is headquartered, and the other three are 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.
Additionally, the Company has numerous other smaller locations 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.
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, 1998.
Executive Officers of the Company
Name Age Position
---- --- --------
James C. Smith 58 President and Chief Executive Officer
Daniel Brunner 55 Executive Vice President,
Government Affairs
Mary Anne Carpenter 53 Executive Vice President, Service Products
A. Lee Dickerson 49 Executive Vice President, Provider Networks
Patrick G. Dills 45 Executive Vice President, Sales
Ronald H. Galowich 63 Secretary
Lottie A. Kurcz 44 Senior Vice President, Strategic
Business Development
Jerry L. Seiler 58 Controller
Susan T. Smith 48 General Counsel, Assistant Secretary
Joseph E. Whitters 40 Vice President, Finance and
Chief Financial Officer
Edward L. Wristen 47 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. 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 1998 Annual Report to Stockholders.
Information concerning the Company's dividend policy is set forth under
"Dividend Policy" in the Company's 1998 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 1998 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 1998 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 1998 Annual Report on page 22 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 1998 Annual Report to Stockholders on the pages indicated below
and are incorporated herein by reference.
Financial Statements: Page No.
Report of Independent Auditors 27
Consolidated Balance Sheets as of 28
December 31, 1997 and 1998
Consolidated Statements of Operations for the Years Ended 29
December 31, 1996, 1997 and 1998
Consolidated Statements of Comprehensive Income for the Years 29
Ended December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the 30-31
Years Ended December 31, 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity for the 32-33
Years Ended December 31, 1996, 1997 and 1998
Notes to Consolidated Financial Statements 34-43
Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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 18, 1999 (the "Proxy Statement"), and such information
is incorporated herein by reference.
PART III
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 page 28
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 1998.
First Health Group Corp.
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1998, 1997 and 1996
Additions
Balance at Charged to Adjustments Balance at
Beginning Costs and and End of
Description of Period Expenses Charge-offs Period
- ----------- ---------- ---------- ----------- ----------
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
========== ========== =========== ==========
Year Ended
December 31, 1996:
Allowance for Doubtful
Accounts $ 2,807,000 $ (200,000) $ ( 34,000) $ 2,573,000
========== ========== =========== ==========
Accrued Restructuring
Expenses $ 1,436,000 $ 69,000 $ (364,000) $ 1,141,000
========== ========== =========== ==========
(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, 1998, 1997 and 1996
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
------------- --------------- ----------- ----------- ----
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%
============= =============== =========== =========== ====
Year ended 12/31/96:
Life insurance in force: $ 26,915,000 $ (13,804,000) $ 18,071,000 $ 31,182,000 58%
============= =============== =========== =========== ====
Premiums:
Life insurance 360,000 (149,000) 59,000 270,000 22%
Accident and health
insurance 14,107,000 (7,643,000) 1,172,000 7,636,000 15%
------------- --------------- ----------- ----------- ----
Total premiums $ 14,467,000 $ (7,792,000) $ 1,231,000 $ 7,906,000 16%
============= =============== =========== =========== ====
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 29, 1999
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, 1999:
Signature Title
--------------------------- -------------------------------------
/s/Thomas J. Pritzker Chairman of the Board
Thomas J. Pritzker
/s/James C. Smith President, Chief Executive Officer,
James C. Smith Director (Principal Executive Officer)
/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, Government
Daniel Brunner 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, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998 and have issued our report
thereon, dated February 19, 1999; such consolidated financial statements
and report are included in your 1998 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 19, 1999
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)
10.27-10.35. Omitted
10.36. HealthCare COMPARE Corp. 1989 Employee Stock Purchase
Plan. {10.36} (7)
10.37-10.54. 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. Employment Agreement dated January 1, 1997 between
HealthCare COMPARE Corp. and James C. Smith. {10.95} (20)
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. Employment Agreement dated July 1, 1997 between
HealthCare COMPARE Corp. and Joseph E. Whitters.
{10.100} (22)
10.101. Employment Agreement dated July 1, 1997 between
HealthCare COMPARE Corp. and Ed Wristen. {10.101} (22)
Exhibit No. Description
10.102. Employment Agreement dated July 1, 1997 between
HealthCare COMPARE Corp. and Lottie Kurcz. {10.102}
(22)
10.103. Employment Agreement dated July 1, 1997 between
HealthCare COMPARE Corp. and Mary Anne Carpenter.
{10.103} (22)
10.104. Employment Agreement dated July 1, 1997 between
HealthCare COMPARE Corp. and Susan T. Smith. {10.104}
(22)
10.105. Employment Agreement dated July 1, 1997 between
HealthCare COMPARE Corp. and A. Lee Dickerson. {10.105}
(22)
10.106. Employment Agreement dated April 29, 1997 between
HealthCare COMPARE Corp. and Patrick G. Dills. {10.106}
(22)
10.107. Employment Agreement dated July 1, 1997 between
HealthCare COMPARE Corp. and Jerry L. Seiler. {10.107}
(22)
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}
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").
10.111. 1998 Stock Option Plan {4} (23)
10.112. 1998 Directors Stock Option Plan {4} (24)
11. Computation of Basic and Diluted Earnings Per Share.
13. 1998 Annual Report to Stockholders.
22. Subsidiaries of the Company.
23. Consent of Deloitte & Touche LLP
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.