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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, 1997
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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
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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 Identification Number)
incorporation or organization)
3200 Highland Avenue
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Downers Grove, Illinois 60515
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (630) 241-7900
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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
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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, 1998, was approximately $1,270,134,275. On that date,
there were 24,021,452 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.
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DOCUMENTS INCORPORATED BY REFERENCE
1997 Annual Report to Stockholders...........................Parts I, II and IV
Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on
May 19, 1998....................................................Parts I and III
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PART I
ITEM 1. BUSINESS
GENERAL
First Health Group Corp., formerly known as HealthCare COMPARE Corp.,
(together with its subsidiaries hereinafter collectively referred to as the
"Company" or "FIRST HEALTH"), is the nation's premier full-service national
health benefits company servicing multi-sited national payers for both group
health and workers' compensation services. The Company believes it offers the
broadest selection of group health and workers' compensation medical cost
management services in the marketplace. The Company's strategy in helping
clients manage medical costs is to target the segments of opportunity in the
medical care marketplace which management believes offer the greatest
opportunities for savings. The target market for the Company's services are
multi-sited, widely geographically dispersed payers for health care services.
By identifying opportunities to manage medical cost trend, FIRST HEALTH
provides cost-effective programs that facilitate the delivery of quality
medical care, coupled with convenience and freedom of choice for benefit plan
participants. By also identifying comparable opportunities for workers'
compensation clients, FIRST HEALTH provides cost management services that focus
on early return to work, while helping to control the medical, indemnity and
administrative expenses associated with work-related injuries and illnesses.
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 July 1, the Company completed the acquisition of First Health
Strategies based in Salt Lake City, Utah, and First Health Services, based in
Richmond, Virginia. The two companies provide independent healthcare
administration services, such as claims administration and associated
healthcare management services, to the self-insured and the state government
markets. The acquisition was accounted for as a purchase. The aggregate cash
purchase price of approximately $196 million was financed through a credit
facility the Company entered into simultaneously with the close of the
acquisition (see FIRST HEALTH Acquisition).
On September 2, the Company completed the acquisition of Loyalty Life
Insurance Company which is an insurer licensed to conduct health insurance
business in 49 states that has no net insurance liabilities after reinsurance.
The acquisition was accounted for as a purchase and the Company paid
approximately $12 million subject to the satisfaction of certain contingencies.
On September 16, the Company's Board of Directors approved changing the
Company's name to First Health Group Corp. The name change is expected to
enhance the Company's marketing efforts by integrating its various operations
and service offerings under one brand name that communicates the full depth and
range of the Company's healthcare services. Additionally, the Board of
Directors also believes that the name "FIRST HEALTH" conveys the Company's
vision of being the first company to offer
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comprehensive healthcare services on a national scale and emphasizes the
quality of the Company's product.
Additionally, on September 16, the Board of Directors approved the
repurchase of an additional 2,500,000 shares, or 8%, of the Company's
outstanding stock. As of December 31, 1997, the Company had approximately 4.8
million shares available for repurchase under its various authorizations.
STRATEGY
FIRST HEALTH assists its clients with managing medical cost trend through
an array of programs designed to manage specific cost elements. 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.
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. The Company is in the
process of introducing its new services and expects to see substantial growth
in 1998 and beyond from these efforts.
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
managed care products to clients and prospective clients, both 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
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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.
Firms, such as FIRST HEALTH, offer 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. While medical costs are significantly less
in size, representing only about 4% of total health care expenditures, the
increase in costs is significant for employers and insurance carriers and have
risen more than 1000% since 1970. FIRST HEALTH and certain other cost
management firms offer numerous programs designed to control escalating medical
expenses, 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, the quality of that service, and
helping the injured employee in returning 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 29 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.
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PPO SERVICES - THE FIRST HEALTH NETWORK
Established in 1983, The FIRST HEALTH Network, previously known as The
AFFORDABLE Medical Network, develops and manages payer-based PPO networks
throughout the country that incorporate both group health and workers'
compensation medical providers. This is the largest area of the Company's
business and principally is responsible for the significant growth in revenue
and earnings since 1989. 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 1998, includes approximately
2,900 hospitals in 49 states. 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 235,000 physicians, clinical
laboratories, surgery centers, radiology facilities and other providers in 49
states, the District of Columbia and Puerto Rico.
Since FIRST HEALTH'S acquisition of its PPO services in June 1988, it has
incurred substantial expense in expanding its PPO networks. The expansion has
occurred in the number of health care providers within existing areas and in
the number of networks throughout the country. The Company has expanded the
number of hospital networks not only in major metropolitan markets, but also in
targeted secondary and tertiary markets; many of the hospital and OCN providers
that have been added during the past few years have been in these areas.
Management expects to continue to incur significant expenses to further expand
its hospital and outpatient care networks, particularly in secondary and
tertiary markets and believes that its investment in developing these markets
significantly differentiates it from competitors.
The following table sets forth information with respect to the approximate
number of participating providers in The FIRST HEALTH Network at the end of
each of the past five years:
December 31,
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1993 1994 1995 1996 1997
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Number of Hospitals in Network 1,550 1,900 2,100 2,320 2,650
Outpatient Care Network
Providers 107,000 150,000 181,000 207,000 231,000
The FIRST HEALTH Network has been 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 unique 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
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on a number of factors including number of enrollees, networks selected, length
of contract and out-of-pocket benefit co-payments.
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 development process begins with an in-depth analysis of the
provider supply and demand in a targeted geographic area. Extensive data
analysis is performed with proprietary software on public data and client data
bases to identify the utilization and cost experience of payers by hospital
and service area; to develop profiles of average lengths of stay and costs per
day and per discharge by type of service and to measure the providers
performance against established quality standards. This assessment allows
FIRST HEALTH to determine and negotiate favorable rates which will result in
effective savings to clients. It also establishes the service and geographic
needs of clients which direct the selection of network providers.
Other demographic and environmental information gathered in the assessment
process, such as the economic condition of the area, major businesses in the
community and applicable legal and regulatory requirements, assists in
identifying key factors which can impact the network negotiating process. Site
visits to all key hospitals are also conducted by negotiators to gain a greater
understanding of the geography of the area, the hospital physical plant and the
competitive environment.
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 general criteria for hospital contracting are as follows:
- ACCESSIBILITY -- each hospital is evaluated as to whether it is
geographically accessible to current clients' employees.
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- AVAILABILITY -- each hospital's utilization and service patterns are
evaluated as to occupancy and scope of services.
- ACCEPTABILITY -- each hospital is evaluated as to whether it falls
within current client member utilization patterns.
- QUALITY -- each hospital is evaluated as to quality of care on a wide
range of criteria.
- COST -- each hospital's charges are evaluated using both public data
and client data.
The general criteria for physician contracting include:
- Valid state licensure
- Active Drug Enforcement Administration registration, if applicable
- Specialty board certification, if applicable
- Staff privileges at one or more network hospitals, where applicable
- Professional malpractice liability coverage
- A history of few malpractice claims
- No suspensions, limitations or revocations of hospital practice
privileges
- No sanctions or disciplinary actions as a Medicare, Medicaid or other
government provider
- No state license investigation, restriction, suspension or revocation
- No DEA license investigation, restriction, suspension or revocation
- No professional liability insurance cancellation
- No chronic illness or physical defect that impairs practice
- No mental illness or chemical dependency (substance abuse)
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.
Potential providers are invited to become preferred providers by
submitting proposed rates for services in a competitive bidding process. FIRST
HEALTH evaluates these proposals based on price, range of services, geographic
location, community reputation, historical utilization patterns and indications
of provider quality. FIRST HEALTH negotiates with the providers and selects
those which meet these selection criterion. 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
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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. Providers who do
not meet standards will not be selected or invited to remain in the network.
The Company has made significant investment in the development of data bases to
maintain and improve the quality of The FIRST HEALTH Network. Physicians
employed by the Company are active participants in the quality assessment
process. There is an established committee of physicians which meets regularly
to act on provider selection and retention decisions based on quality issues.
The clinical expertise available through the Company medical staff is a key
ingredient to the effectiveness of the quality assessment activities. The key
elements of the Company's PPO Quality Assessment program include:
- Networks that offer necessary and effective health care services which
are provided within an appropriate setting, in a timely fashion and in
a manner that maintains satisfaction and confidence.
- Networks that consist of a stable base of member providers that provide
a comprehensive range of cost-effective health care services which are
within reasonable access to network members.
- Network providers are required to meet clinical and operational
standards established by the federal and state licensing bodies and
other recognized professional organizations.
- Network providers are required to meet clinical and operational
standards.
- Network providers are required to monitor the quality of patient care
provided in their facilities and provide documentation upon request.
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. Clients rely on
FIRST HEALTH to determine PPO contractual payments for claims submitted by
hospital PPO providers. Hospital claims are sent from the client's claims
administrator or directly from the PPO provider to FIRST HEALTH for pricing at
the negotiated rates. In most cases, Outpatient Care Network claims are sent
directly to the claims administrator and are priced using FIRST HEALTH'S fee
schedules. These schedules are provided to the claims administrator on tape
and are updated on a regular basis.
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
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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.
CLINICAL MANAGEMENT SERVICES
FIRST HEALTH provides centralized clinical management programs
(utilization review and medical case management services) from its headquarters
in Downers Grove, Illinois, 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.
FIRST HEALTH'S approach to medical management is based on the development
of clinically valid review criteria and procedures using the resources of its
professional staff as well as resources external to FIRST HEALTH. Review
criteria are structured so that a review coordinator, or case manager, can
review the majority of cases presented. If a proposed hospital admission or
outpatient service fails to meet established criteria, a FIRST HEALTH-employed
or retained physician (or other doctoral level practitioner such as a Doctor of
Chiropractic or Doctor of Psychology) reviews the case and may contact the
patient's provider to obtain additional information.
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. The telephone lines at FIRST
HEALTH'S headquarters are staffed five days a week, eleven and one-half hours a
day. Calls placed at other hours are answered by a recorded message, giving
the caller the opportunity, in some circumstances, to leave recorded
information. 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 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
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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 provides its clients with standardized reports, on a regular
basis, which contain information that enables them to analyze the effectiveness
of FIRST HEALTH'S services.
CLINICAL MANAGEMENT SERVICES
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. FIRST
HEALTH'S hospital review program involves a review by FIRST HEALTH personnel of
the medical necessity of proposed hospital admissions under the participant's
benefit plan, as well as the proposed length of a patient's stay.
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 factors considered in determining the appropriate level of clinical
management include:
- The anticipated degree of case complexity.
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- The intensity of resources needed to manage the case.
- The potential variability in cost, quality and/or clinical outcomes.
FIRST HEALTH has defined three broad levels of case management intensity:
- TERTIARY CASE MANAGEMENT focuses on long-term or complex clinical
scenarios for which there are significant quality, cost and clinical
outcome risks. Cases that benefit from tertiary case management include
those which involve multiple providers, complex or long-term treatment
plans, multiple levels or sites of care, and an extended period of lost
time. Tertiary case management requires the expertise of most
experienced registered nurses, and frequently includes input from a
FIRST HEALTH Medical Director.
- SECONDARY CASE MANAGEMENT focuses on less complex medical situations
in which there are moderate cost, quality and clinical outcome risks.
Cases which benefit from secondary case management include those with a
need for coordination and management of medical services on an ongoing
basis.
- PRIMARY CASE MANAGEMENT is the least complex level of intervention and
focuses on short-term or episodic health care services. This level of
case management is appropriate for situations in which focused and
limited involvement by FIRST HEALTH will achieve the optimal cost,
quality and clinical outcome.
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.
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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. This staff consults with first
level reviewers, reviews cases which fail to meet criteria and discusses those
and other complex cases with participants' attending physicians.
BENEFIT PLAN RECOMMENDATIONS
The foundation of the Company's client relationships is a mutual
commitment of FIRST HEALTH and its clients to create an environment that
encourages participants to make the most effective use of their health benefit
package. Experience has pointed to some steps that the client can take 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.
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- - 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.
---------------------------------------------------------------
BENEFIT PLAN REDESIGN IMPACT MODEL
FIRST HEALTH has developed a computerized program
that calculates the most effective benefit plan
differential to achieve clients' target increases in
network penetration rates and cost savings.
-------------------------------------
Current Benefit Differential
Current Network
Penetration Rate
Current Network
Cost Savings
-------------------------------------
\/ \/ \/
[ BENEFIT PLAN REDESIGN PROGRAM ]
\/ \/ \/
Effective Benefit
Differential
\/ \/ \/
Increased Network
Penetration Rate
\/ \/ \/
[ INCREASED COST SAVINGS ]
Cost savings are not the only advantage of increased
network penetration. The Company selects providers to
join our networks based on stringent quality assessment
criteria. The more participants directed into the
network, the greater the probability of higher quality
outcomes and satisfied patients.
---------------------------------------------------------------
- - 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.
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- - 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 healthcare cost management services. This information
system is composed of four parts: proprietary software, a database of hospital
utilization norms, a database of patient-specific information and an automated
data reporting and transmission capability.
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. In addition, FIRST HEALTH'S proprietary software generates
extensive reports for its clients. These reports typically itemize all cases
reviewed or cases involving PPO services and detail the effectiveness of the
services provided. If requested, FIRST HEALTH will customize these reports to
fit the needs of a particular client.
The hospital utilization norms database consists of information against
which FIRST HEALTH analyzes a participant's proposed treatment plan in order to
determine whether the proposed length of stay can be certified as medically
necessary. This data base has been compiled from commercially available
information. FIRST HEALTH has enhanced this database to include proprietary
information derived from its experience in performing utilization management
services.
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. Currently the Company is
implementing a major system rewrite and enhancement to its utilization
management information systems.
FIRST HEALTH'S information system also has the capability of sending
machine-readable computer tapes or information by electronic transfer directly
to the computers of third party payers and/or clients in order to expedite
claims administration. 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
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excess of 100,000 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, including:
- Technical support through a technical response help desk
- User training and documentation
- Database management
- The ability to process from single or multiple sites.
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.
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COMPENSATION. The Company generally receives an agreed upon percentage of
total savings generated for clients through bill reviews 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.
CLAIMS ADMINISTRATION CAPABILITIES
Through the recent acquisition of First Health Strategies, the claims
administration process has been integrated into its other service offerings the
Company provides, including its PPO network and clinical management services.
The key advantage is the ease of administration that comes from working with
one company that fully integrates health benefits services. Clients no longer
need to prepare and send several data tapes to different locations, or
coordinate interactions between different vendors; FIRST HEALTH offers one
vendor, one program and one solution.
This integration further 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'S ABILITY TO INTERFACE VARIOUS OTHER
SERVICES ALLOWS FIRST HEALTH TO "OWN" EVERY
PIECE OF PARTICIPANT DATA, WHICH ENABLES IT TO:
=> Provide a virtually paperless claims process
for the participant.
=> Track utilization patterns more effectively.
=> Design/model benefit plans specific to
client's needs.
=> Identify and target certain patients and/or
services for more intensive clinical case
management.
=> Merge clinical management, claims and
prescription data to identify case management
opportunities faster.
=> Provide timely management tools used by our
clients to make business decisions.
====================================================
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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 customary 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(R) OnCall 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.
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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 National Association of Letter Carriers
Boilermakers National Health and Welfare Norwest Corporation
Fund Pacific Telesis Group
CNF Transportation, Inc. State Farm Mutual Automobile Insurance
ConAgra, Inc. Company
General Motors Corporation Tandy Corporation
Hewlett-Packard Company Texas Instruments Employees' Health
Hartford Financial Services, Inc. Benefits Trust
Kemper National Services The RETA Trust
Liberty Mutual Insurance Company The Sherwin-Williams Company
McDonald's Corporation Travelers Property Casualty
NALCO Chemical Company 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
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plans due to the impact of FIRST HEALTH'S provider networks and medical
management expertise which have been developed over the last decade.
FIRST HEALTH has developed, in conjunction with its risk products users, a
single source of accountability for all elements of their health plan, and all
at a guaranteed cost on a per-employee per-month charge. The Company calls
this product Confident Care.
The Company's product promotes the continuity of care through a single
point of entry into the health care delivery system. By calling the 24-hour,
7-day-a-week toll-free number, 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.
Plan Design
In each employer's case, the Company will require adoption of a benefit
plan with significant out-of-pocket costs for employees accessing a
non-contracted PPO provider (generally a 30% effective differential).
Program Features
The Company's risk products generally include the following:
- - All medical claims incurred during the effective plan year.
- - All managed care fees, including complete clinical management programs and
24-hour, 7-day toll-free access.
- - Employee communications.
- - Access to The FIRST HEALTH Networks.
- - Claims administration services.
- - Premium for aggregate stop loss policy.
- - All implementation fees.
- - The Company's pharmacy program.
- - FIRST HEALTH National Transplant Program.
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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 a 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.
In order to prepare stop-loss quotes, FIRST HEALTH requires the following
information:
AGGREGATE STOP-LOSS SPECIFIC STOP-LOSS
------------------- ------------------
- - Previous claims history - Previous history of catastrophic
claims
- - Enrollment demographics - Disclosure of current and/or
anticipated future claimants
- - Description of medical - Enrollment demographics
benefit plan
- Description of medical benefit plan
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FIRST HEALTH ACQUISITION
BACKGROUND
The group of health care administration companies which was formerly owned
by First Data Corporation ("First Data") was acquired by the Company on July 1,
1997 for a purchase price of $202 million in cash, subject to a working capital
adjustment which resulted in a reduction of the purchase price to approximately
$196 million. The historic First Health was originally formed by First
Financial Management Corporation ("First Financial Management") through the
acquisitions of First Health Services (formerly The Computer Company) in 1989,
First Mental Health (formerly Mental Health Management of America) in 1991,
First Health Strategies (formerly ALTA Health Strategies) in 1992 and Employee
Benefit Plans ("EBP") in 1995, creating a leading fully-integrated health care
services firm, serving both private and public sector markets. In 1995, First
Financial Management merged into First Data, creating a diversified financial
services business.
SUMMARY
Composed of two leading health care administration businesses, First
Health Strategies ("Strategies") and First Health Services ("Services"), the
combined companies provide a full portfolio of health plan management solutions
to a broad customer base of private corporations and public agencies.
Strategies, headquartered in Salt Lake City, Utah, is the nation's largest
third party administrator ("TPA") of health care and prescription drug benefits
for self-funded employer benefit plans, and one of the nation's top five claims
administrators. Strategies provides solutions to its clients through a fully
integrated portfolio of claims administration and value-added services to meet
the needs of today's buyers, including third party and outsourced claims
administration, cost management services, pharmacy benefit management, data
analysis and stop-loss insurance brokerage. With over 35 years of experience
and a highly recognizable client base, Strategies has achieved a position in
the marketplace as a premier provider of services to large group (more than
1,000 employees) clients.
Services, headquartered in Richmond, Virginia, provides value-added
automation, administration, payment and health care management services for
public sector clients, and is one of the few national providers serving the
public sector. Services delivers a comprehensive line of products and services
in the fields of Pharmacy Benefit Management, Health Plan Administration, and
Utilization and Quality Reviews through three distinct business units:
Pharmacy Benefits Management; First Mental Health; and Fiscal Agent. For over
20 years, First Health Services has used its expertise and knowledge in the
Medicaid fiscal agent business and other public sector programs to develop and
deliver new services to the public sector market segment.
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FIRST HEALTH STRATEGIES PRODUCTS
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. Strategies 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
Strategies' CLAIMS ADMINISTRATION product is a sophisticated,
technologically advanced claims processing, tracking and reporting system. A
majority of this processing is performed by Strategies' fully integrated and
proprietary system, known as Automated Claims Technology II ("ACTII"). ACTII
was developed completely in-house and is owned entirely by the Company. ACTII
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
ActII system. The Company currently estimates that these development efforts
will significantly enhance and improve upon the capabilities of ActII and these
efforts are expected to cost approximately $10 million to become commercially
viable. Such modifications are expected to be completed in the next 2 to 3
years, with a substantial portion of the expenditures being incurred within the
next 12 to 24 months.
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. ACTII also
interfaces with The FIRST HEALTH Network.
In addition to its core claims administration product, Strategies provides
value-added services, including the following:
- - UTILIZATION MANAGEMENT AND CASE MANAGEMENT. Strategies has developed a
sophisticated Utilization Management capability which provides case
management, utilization review, large case identification and management,
concurrent review, pre-certification and authorization, discharge
planning, and psychiatric case management. These activities will be
consolidated into the parent company's utilization management activities
throughout 1998.
- - NATIONWIDE PPO NETWORK ARRANGEMENTS. Strategies had worked with various
Preferred Provider Organizations (PPOs) throughout the country to provide
clients with PPO arrangements as part of their plan. Strategies' claims
administration system also allows for many PPO claims to be repriced
on-line, rather than being sent to the PPO for repricing. The Company
will be utilizing exclusively FIRST HEALTH Network after the acquisition
is fully integrated in 1998.
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- - PRESCRIPTION DRUG BENEFIT MANAGEMENT (ALTA RX). ALTA Rx, Strategies' full
service PBM program, provides prescription drug benefit plan
administration, drug utilization review, and a nationwide network of
nearly 50,000 pharmacies. Claims processing of ALTA Rx claims is
outsourced to Strategies' sister company, First Health Services.
- - STOP-LOSS BROKERAGE. Strategies provides brokerage services for its
clients to obtain stop-loss coverage through a variety of leading
stop-loss insurers.
- - DATA ANALYSIS. Strategies uses its array of experience and vast database
of medical claims history in offering its clients data analysis products.
Critical health care information is available to clients through the
various products. The system applies leading edge technology to analyze
claim experience, utilization review activities and managed care savings.
These tools also have become increasingly valued by managed care companies
who use the provider profiling and comparative analysis options to manage
providers and health care delivery systems.
The Company will focus the activities of Strategies on larger multi-sited
national employers of 1,000 employees or more.
FIRST HEALTH SERVICES OVERVIEW
FIRST HEALTH Services ("Services"), headquartered in Richmond, Virginia,
provides value-added automation, administration, payment, and health care
management services for public sector clients. Services is composed of three
individually operated businesses: 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.
Over the last 24 years, 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 23 state governments, to provide new
products and services as the public sector health programs (including Medicare
and Medicaid) move toward managed care. Today, Services is in the
advantageous position of being one of the few national public sector firms in
its markets.
PHARMACY BENEFIT MANAGEMENT (PBM)
Services' PBM business is one of the largest PBMs. 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.
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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' PBM business provides on-line, real time claims processing at
the Point of Sale, provider and member services through a 1-800-call center,
clinical DUR services and formulary/rebate management for managed care clients
and FIRST HEALTH Strategies' ALTA Rx clients.
Services provides clinical Drug Utilization Review ("DUR") 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
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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 business provides customers with full fiscal agent
operations and systems maintenance and enhancement. Under this line of
business, 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, or specialty carve-out arrangement, with both hard
copy and/or electronic inputs or payments.
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. Those enrollment files are electronically
transmitted to the state.
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27
- 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.
Prior to the acquisition of Services by FIRST HEALTH, the company had not
pursued new business in this sector due to the differing strategic focus of its
former parent company. 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.
OPERATIONS
Each of the Services business units operates as a separate entity with
distinct sales and marketing and operational organization, although there is
operational overlap with respect to certain claims processing functions
(pharmacy for Medicaid clients and an IBM data center which supports both the
PBM and Fiscal Agent businesses).
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.
27
28
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.
This program requires clients to implement special benefit plan provisions
designed to enhance participation in the system.
The National Transplant Program enables clients to consider covering their
insureds for transplant procedures of proven medical value. The program
includes a coordination by case managers to assist patients, their families and
our clients throughout the process. Furthermore, by using contracted
transplant centers and providers, the patient is treated by providers with a
proven track record for quality care. A case manager is involved in the case
from the time the need for a transplant has been identified through one year
following the surgery. The intensity of case management involvement varies,
depending on the complexity of the case.
Transplants included in the program include: heart, lung, heart/lung,
liver, kidney, kidney/pancreas and bone marrow (both allogenic and autologous).
PHARMACY PROGRAM. FIRST HEALTH has developed a pharmacy program (PBM)
designed to assist clients in reducing health care costs through negotiated
pricing for pharmaceutical products, a drug formulary, and case management
services and is being integrated with the PBM that was acquired as part of the
FIRST HEALTH acquisition. Pharmacy related costs are one of the fastest
growing components of medical care.
To provide a more complete and effective medical cost management system,
the Company has linked the pharmacy program with FIRST HEALTH'S case management
services to identify high utilizers of prescription drugs, to intervene where
appropriate for case management services and to encourage the adoption of cost
effective treatment plans. This approach identifies alternatives which enable
our clients and their members to control potentially unnecessary medical costs
not only for pharmacy expenses, but also for other medical and behavioral
health treatment services.
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:
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29
- 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
The Company has identified its significant applications that will require
modification to ensure Year 2000 compliance. Internal and external resources
are being used to make the required modifications and test Year 2000
compliance. The Company plans to complete the modifications and testing
process of all significant applications by May 1999, which is prior to any
anticipated impact on its operating systems. The total cost of the Year 2000
project is estimated at $10 million and is being funded through operating cash
flows. Of the total project cost, approximately $3.5 million is attributable
to the purchase of new hardware and software which will be capitalized. The
remaining $6.5 million, which will be expenses as incurred, is not expected to
have a material effect on the results of operations. The Company expects to
receive reimbursement of at least 10% of the costs directly from a number of
its clients due to the nature of its contractual arrangements with these
entities.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
trained personnel and the ability to locate and correct relevant computer
codes.
In addition, the Company has communicated with others with whom it does
significant business to determine Year 2000 compliance readiness and the extent
to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be converted in a timely manner, or that a
failure to convert by another company, or a conversion that is incompatible,
with the Company's systems, would not have a material adverse effect on the
Company.
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.
29
30
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, 1997, FIRST HEALTH had approximately 5,000 employees,
including approximately 2,800 employees involved in claims processing and
related activities; 800 employees in various clinical management and quality
assessment activities; 600 employees in information systems; 350 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
30
31
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 three office buildings consisting of an aggregate of
approximately 385,000 square feet of space. One is in Downers Grove, Illinois
where the Company is headquartered, and the other two are in West Sacramento,
California and Scottsdale, Arizona. Additionally, the Company leases
significant office space in the Salt Lake City, Utah; Milwaukee, Wisconsin;
Richmond, Virginia; Houston, Texas; 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, 1997.
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32
EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION
- ------------------- --- --------------------------------------------
James C. Smith 57 President and Chief Executive Officer
Daniel Brunner 54 Executive Vice President,
Government Affairs
Mary Anne Carpenter 52 Executive Vice President, Service Products
A. Lee Dickerson 48 Senior Vice President, Provider Networks and
OUCH Systems Administration
Patrick G. Dills 44 Executive Vice President, Managed Care Sales
Ronald H. Galowich 62 Secretary
Lottie A. Kurcz 43 Senior Vice President, Strategic Business Development
Jerry L. Seiler 57 Controller
Susan T. Smith 47 General Counsel
Joseph E. Whitters 39 Vice President, Finance and
Chief Financial Officer
Edward L. Wristen 46 Executive Vice President, Risk Products
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
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33
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.
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.
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34
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 1997
Annual Report to Stockholders. Information concerning the Company's dividend
policy is set forth under "Dividend Policy" in the Company's 1997 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 1997 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 1997 Annual Report to Stockholders and is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are contained in the
Company's 1997 Annual Report to Stockholders on the pages indicated below and
are incorporated herein by reference.
FINANCIAL STATEMENTS: PAGE NO.
Report of Independent Auditors 23
Consolidated Balance Sheets as of
December 31, 1996 and 1997 24
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 25
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995, 1996 and 1997 26-27
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997 28-29
Notes to Consolidated Financial Statements 30-39
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
19, 1998 (the "Proxy Statement"), and such information is incorporated herein
by reference.
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36
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.
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37
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 35 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 1997.
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38
FIRST HEALTH GROUP CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, 1997:
- ---------------------------------
Allowance for Doubtful Accounts $2,573,000 $6,235,000 (1) $(2,308,000) $6,500,000
========== =========== =========== ===========
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
========== =========== =========== ===========
Year Ended December 31, 1995:
- ---------------------------------
Allowance for Doubtful Accounts $3,874,000 $(620,000) $(447,000) $2,807,000
========== =========== =========== ===========
Accrued Restructuring Expenses $2,570,000 $(100,000) $(1,034,000) $1,436,000
========== =========== =========== ===========
(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.
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39
FIRST HEALTH GROUP CORP.
SCHEDULE IV - REINSURANCE
YEARS ENDED DECEMBER 31, 1997 AND 1996
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
------------- --------- ---------- ---------- ----------
Year ended 12/31/97:
- -------------------
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%
============= ============== ========== ========== ==
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40
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 27, 1998
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 ______, 1998:
SIGNATURE TITLE
- ------------------------- ---------------------------------------------
/s/Thomas J. Pritzker * Chairman of the Board
- -------------------------
Thomas J. Pritzker
/s/James C. Smith President, Chief Executive Officer,
- ------------------------- Director (Principal Executive Officer)
James C. Smith
/s/Robert J. Becker, M.D. * Chairman Emeritus
- -------------------------
Robert J. Becker, M.D.
/s/Joseph E. Whitters * Chief Financial Officer
- ------------------------- (Principal Financial Officer)
Joseph E. Whitters
/s/Jerry L. Seiler * Controller
- ------------------------- (Principal Accounting Officer)
Jerry L. Seiler
/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 Affairs,
- ------------------------- Director
Daniel Brunner
/s/Robert S. Colman * Director
- -------------------------
Robert S. Colman
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41
SIGNATURE TITLE
- ------------------------- ---------------------------------------------
/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
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42
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. (formerly HealthCare COMPARE Corp.) as of December 31, 1997 and 1996, and
for each of the three years in the period ended December 31, 1997 and have
issued our report thereon, dated February 23, 1998; such consolidated financial
statements and report are included in your 1997 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 23, 1998
43
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 to 10.10. Omitted
10.11. HealthCare COMPARE Corp. 1987 Stock Option Plan, as amended
and restated. {4} (5)
10.12. Amendment No. 1 to HealthCare COMPARE Corp. Stock Option
Plan, as amended and restated {10.12} (6)
10.13.-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
44
Exhibit No. Description
- -------------------------------------------------------------------------------
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)
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. Omitted
10.73. Option Agreement dated as of July 1, 1993 by and between
the Company and James C. Smith. {10.73} (15)
10.74. Option Agreement dated as of July 1, 1993 by and between
the Company and James C. Smith. {10.74} (15)
10.75. Option Agreement dated as of July 1, 1993 by and between
the Company and James C. Smith. {10.75} (15)
10.76. Employment Agreement dated as of July 1, 1993 by and between
COMPARE and Daniel S. Brunner. {10.76} (15)
10.77.-10.80. Omitted
10.81. PPO Agreement dated October 1, 1990 between the Company and
National Association of Letter Carriers. {10.81}
10.82. First Combined Amendment to the PPO Agreement, each dated
October 1, 1990, between AFFORDABLE HealthCare Concepts and
National Association of Letter Carriers Health Benefit Plan.
{10.82}
10.83. Second Amendment to the PPO Agreement, each dated October 1,
1990, as amended between AFFORDABLE HealthCare Concepts and
National Association of Letter Carriers Health Benefit Plan.
{10.83}
10.84. Utilization Management Agreement dated January 1, 1989
between HealthCare COMPARE Corp. and National Association of
Letter Carriers. {10.84}
45
Exhibit No. Description
- -------------------------------------------------------------------------------
10.85. First Amendment to the Utilization Management Agreement
dated January 1, 1989 between HealthCare COMPARE Corp. and
National Association of Letter Carriers. {10.85}
10.86. Second Amendment to the Utilization Management Agreement
dated January 1, 1989 between HealthCare COMPARE Corp. and
National Association of Letter Carriers. {10.86}
10.87. Third Amendment to the Utilization Management Agreement
dated January 1, 1989 between HealthCare COMPARE Corp. and
National Association of Letter Carriers. {10.87}
10.88. Fourth Amendment to the Utilization Management Agreement
dated January 1, 1989 between HealthCare COMPARE Corp. and
National Association of Letter Carriers. {10.88}
10.89. Fifth Amendment to the Utilization Management Agreement
dated January 1, 1989 between HealthCare COMPARE Corp. and
National Association of Letter Carriers. {10.89}
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.
46
Exhibit No. Description
- -------------------------------------------------------------------------------
10.101. Employment Agreement dated July 1, 1997 between HealthCare
COMPARE Corp. and Ed Wristen.
10.102. Employment Agreement dated July 1, 1997 between HealthCare
COMPARE Corp. and Lottie Kurcz.
10.103. Employment Agreement dated July 1, 1997 between HealthCare
COMPARE Corp. and Mary Anne Carpenter.
10.104. Employment Agreement dated July 1, 1997 between HealthCare
COMPARE Corp. and Susan T. Smith.
10.105. Employment Agreement dated July 1, 1997 between HealthCare
COMPARE Corp. and A. Lee Dickerson.
10.106. Employment Agreement dated April 29, 1997 between HealthCare
COMPARE Corp. and Patrick G. Dills.
10.107. Employment Agreement dated July 1, 1997 between HealthCare
COMPARE Corp. and Jerry L. Seiler.
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 10Q
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}
11. Computation of Basic and Diluted Earnings Per Share.
13. 1997 Annual Report to Stockholders. {Filed under separate
cover}
22. Subsidiaries of the Company.
23. Consent of Deloitte & Touche LLP
24. Powers of Attorney of certain officers and directors of the
Company.
27. Financial data schedules of the Company.