Attached files
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EX-21 - EXHIBIT 21 - COVENTRY HEALTH CARE INC | exhibit21_12312009.htm |
EX-32 - EXHIBIT 32 - COVENTRY HEALTH CARE INC | exhibit32_12312009.htm |
EX-12 - EXHIBIT 12 - COVENTRY HEALTH CARE INC | exhibit12_12312009.htm |
EX-23 - EXHIBIT 23 - COVENTRY HEALTH CARE INC | exhibit23_12312009.htm |
EX-31.1 - EXHIBIT 31.1 - COVENTRY HEALTH CARE INC | exhibit311_12312009.htm |
EX-10.15 - EXHIBIT 10.15 - COVENTRY HEALTH CARE INC | exhibit1015_12312009.htm |
EX-31.2 - EXHIBIT 31.2 - COVENTRY HEALTH CARE INC | exhibit312_12312009.htm |
UNITED
STATES
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, 2009
OR
[
]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION
FILE NUMBER 1-16477
COVENTRY
HEALTH CARE, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
52-2073000
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
6705
Rockledge Drive, Suite 900, Bethesda, Maryland 20817
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (301)581-0600
Securities registered pursuant to Section 12(b) of the
Act:
Title
of each class:
|
Name
of each exchange on which registered:
|
Common
Stock, $.01 par value
|
New
York Stock Exchange
|
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [
] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes [ ] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act
(check one). Large accelerated filer [X] Accelerated filer [ ] Non-accelerated
filer [ ] Smaller reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
The
aggregate market value of the registrant’s voting Common Stock held by
non-affiliates of the registrant as of June 30, 2009 (computed by reference to
the closing sales price of such stock on the NYSE® stock market on such date)
was $2,798,307,209.
As of
January 31, 2010, there were 148,014,777 shares of the registrant’s voting
Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of
the registrant’s Proxy Statement for its 2010 Annual Meeting of Shareholders to
be filed with the Commission pursuant to Regulation 14A subsequent to the filing
of this Form 10-K Report are incorporated by reference in Items 10 through 14 of
Part III hereof.
FORM
10-K
TABLE
OF CONTENTS
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3
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12
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18
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18
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18
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18
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PART
II.
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18
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19
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20
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34
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35
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62
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62
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64
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PART
III.
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64
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64
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64
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64
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64
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PART
IV.
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65
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73
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74
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2
PART
I
This Form
10-K contains forward-looking statements which are subject to risks and
uncertainties in accordance with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements typically
include assumptions, estimates or descriptions of our future plans, strategies
and expectations, and are generally identifiable by the use of the words
“anticipate,” “will,” “believe,” “estimate,” “expect,” “intend,” “seek,” or
other similar expressions. Examples of these include discussions regarding our
operating and growth strategy, projections of revenue, income or loss and future
operations. Unless this Form 10-K indicates otherwise or the context otherwise
requires, the terms “Coventry,” “we,” “our,” “our Company,” “the Company,” or
“us” as used in this Form 10-K refer to Coventry Health Care, Inc. and its
subsidiaries as of December 31, 2009.
These
forward-looking statements may be affected by a number of factors, including,
but not limited to those contained in Item 1A, “Risk Factors” in this Form 10-K.
Actual operations and results may differ materially from those expressed in this
Form 10-K. Among the factors that may materially affect our business, operations
or financial condition are the ability to accurately estimate and control future
health care costs; the ability to increase premiums to offset increases in our
health care costs; economic conditions and disruptions in the financial markets;
changes in laws or regulations or alleged violations of regulations; changes in
government funding for Medicare and Medicaid; a reduction in the number of
members in our health plans; a failure to successfully integrate acquired
businesses into our operations; an ability to attract new members or to increase
or maintain our premium rates; the non-renewal or termination of our government
contracts, or unsuccessful bids for business with government agencies; failure
of our independent agents and brokers to continue to market our products to
employers; a failure to obtain cost-effective agreements with a sufficient
number of providers that could result in higher medical costs and a decrease in
our membership; negative publicity regarding the managed health care industry
generally or our Company in particular; a failure of our information technology
systems; periodic reviews, audits and investigations under our contracts with
federal and state government agencies; litigation including litigation based on
new or evolving legal theories; volatility in our stock price and trading
volume; our indebtedness, which imposes certain restrictions on our business and
operations; an inability to generate sufficient cash to service our
indebtedness; our certificate of incorporation and bylaws and Delaware law,
which could delay, discourage or prevent a change in control of our Company that
our stockholders may consider favorable; an impairment of our intangible assets;
an inability to capitalize on Medicare business
opportunities. Additionally, while we anticipate that national
healthcare reform will continue to be a focus at the federal level in the near
term, at this time it is unclear as to when any legislation might be enacted or
the content of any new legislation, and we cannot predict the effect on our
operations of proposed legislation or any other legislation that may be
adopted.
General
We are a
diversified national managed healthcare company based in Bethesda, Maryland,
operating health plans, insurance companies and network rental and workers’
compensation services companies. Through our Health Plan and Medical
Services Business, Specialized Managed Care Business, and Workers’ Compensation
Business divisions, we provide a full range of risk and fee-based managed care
products and services to a broad cross section of individuals, employer and
government-funded groups, government agencies, and other insurance carriers and
administrators.
Coventry
was incorporated under the laws of the State of Delaware on December 17, 1997
and is the successor to Coventry Corporation, which was incorporated on November
21, 1986. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports, as well as recent
press releases can be accessed free of charge on the Internet at
www.coventryhealth.com.
Our
Health Plan and Medical Services Division is primarily comprised of our
traditional health plan risk and non-risk products. Our health plans
offer products to individuals and employer groups of all sizes including health
maintenance organization (“HMO”), preferred provider organization (“PPO”) and
point of service (“POS”) products. We offer these products on an
underwritten or “risk” basis where we receive a monthly premium in exchange for
assuming underwriting risks including all medical and administrative
costs. We also offer commercial management services products on a
self-funded basis where we perform administrative services only (“ASO”)
including medical claims administration, pharmacy benefits management and
clinical programs such as utilization management and quality assurance for a
fixed fee with the customer assuming the risk for medical costs. Within these
products, we also offer consumer-directed benefit options including health
reimbursement accounts (“HRA”) and health savings accounts (“HSA”) to our
commercial customers. This division provides comprehensive health
benefits on a risk basis to members participating in the Medicare Advantage HMO,
Medicare Advantage PPO, and Medicaid programs for which it receives premium
payments from federal and state governments. In addition, through
December 31, 2009, this division provided services to members participating in
the Medicare Advantage Private Fee-for-Service (“PFFS”). During the
second quarter of 2009, our management decided not to renew the PFFS
product for the 2010 plan year due to a number of factors, including the
potential profitability of this product in light of declining federal
reimbursement rates and future legislative changes, medical cost trends and our
intention to focus on other lines of business. This non-renewal took
effect at the end of the term of this current year, December 31,
2009. Through this division we also contract with various
federal employee organizations to provide health insurance benefits under the
Federal Employees Health Benefits Program (“FEHBP”) and offer managed care and
administrative products to businesses that self-insure the health care benefits
of their employees. This division also contains our dental services
business.
We
operate local health plans that serve 23 markets, primarily in the Mid-Atlantic,
Midwest and Southeast United States. Our health plans are operated
under the names Altius Health Plans, Carelink Health Plans, Coventry Health
Care, Coventry Health and Life, Group Health Plan, HealthAmerica,
HealthAssurance, HealthCare USA, OmniCare, PersonalCare, Southern Health, Vista
and WellPath. Our health plans generally are located in small to mid-sized
metropolitan areas. For a complete list of our subsidiaries, refer to
Exhibit 21 included with this Annual Report on Form 10-K.
Our
Specialized Managed Care Division includes Medicare Part D, network rental, and
our mental-behavioral health benefits business. Our Medicare Part D
program provides eligible beneficiaries access to prescription drug coverage and
receives premium payments from the federal government. Our Network
Rental product offers provider network rental services through a national PPO
network to national, regional and local third party administrators (“TPA”) and
insurance carriers. Our mental-behavioral health benefits business
provides coordination of comprehensive mental health and substance abuse
treatment. Additionally, as discussed in Note D, Discontinued
Operations, to the consolidated financial statements, prior to its sale on July
31, 2009 our Medicaid/Public entity (“Public Sector”) provided products and
services to state Medicaid agencies and other government funded
programs.
Our
Workers’ Compensation Division is comprised of our workers’ compensation
services businesses which provide fee-based, managed care services such as
provider network access, bill review, care management services and pharmacy
benefit management to underwriters and administrators of workers’ compensation
insurance and large employer groups.
Additional
information about our three business divisions follows below.
3
Health Plan
and Medical Services Division
Health
Plan Commercial Risk Products
Our
health plans offer employer groups a full range of commercial risk products
designed to meet the needs and objectives of a wide range of employers and
members as well as to comply with regulatory requirements. Our health
plans also offer major medical and high-deductible products to individual
consumers. The distribution of these products is through independent
licensed brokers or directly from our sales organization. Our health
plans had 1.4 million commercial risk members as of December 31, 2009 that
accounted for $5.1 billion of revenue in 2009.
Our
health plan products vary with respect to product features, the level of
benefits provided, the costs to be paid by employers and members, including
deductibles and co-payments, and our members’ access to providers without
referral or preauthorization requirements.
Health
Maintenance Organizations
Our
health plan HMO products provide comprehensive health care benefits including
ambulatory and inpatient physician services, hospitalization, pharmacy, mental
health, ancillary diagnostic and therapeutic services. In general, a fixed
monthly premium covers all HMO services although benefit plans typically require
co-payments or deductibles in addition to the basic premium. A primary care
physician assumes overall responsibility for the care of a member, including
preventive and routine medical care and referrals to specialists and consulting
physicians. While an HMO member’s choice of providers is limited to those within
the health plan’s HMO network, the HMO member is typically entitled to coverage
of a broader range of health care services than is covered by typical
reimbursement or indemnity policies. Furthermore, many of our HMO products have
added features to more easily allow “direct access” to providers.
Preferred
Provider Organizations and Point of Service
Our
health plan risk-based PPO and POS products also provide comprehensive managed
health care benefits while allowing members to choose their health care
providers at the time medical services are required. Members may use providers
that do not participate in our health plan managed care networks but may incur
higher co-payments and other out-of-pocket costs than if the member chooses a
participating provider. Our health plans also offer high deductible products in
conjunction with our consumer directed products. Premiums for our PPO and POS
products typically are lower than HMO premiums due to the increased
out-of-pocket costs borne by the members.
Stop-Loss
Insurance
We offer
stop-loss insurance to enable us to serve as an integrated, single source for
the managed care needs of our self-insured clients. Stop-loss policies help
curtail the risk assumed by our self insured clients by covering such clients
expenses after they have paid out a predetermined amount. Stop-loss
policies are written through our wholly-owned insurance subsidiaries and can be
written for specific and/or aggregate stop-loss insurance.
Commercial
Management Services Products
Our
health plans offer management services and access to their provider networks to
employers that self-insure their employee health benefits. The management
services provided under these ASO arrangements typically include medical claims
administration, pharmacy benefits management, utilization management and quality
assurance. Other features commonly provided to fully insured customers (such as
value-added wellness benefits) are generally also available to ASO
customers. These ASO arrangements, through which our health plans
typically do not assume underwriting risk, include a fixed fee for these
management services and access to our provider networks. As of December 31,
2009, our health plans had approximately 685,000 non-risk health plan
members.
In
addition, we provide management services to plans in the FEHBP, which is the
largest employer-sponsored group health program in the United States. In the
FEHBP, federal employees have the opportunity to choose a health benefits
carrier from a number of offered plans each year. We provide management services
and/or serve as the plan administrator to multiple FEHBP plan sponsors including
the Mail Handlers Benefit Plan (“MHBP”), our largest client. The MHBP offers
health care benefits under the FEHBP to federal employees and annuitants
nationwide. Commercial management services accounted for $346.0
million of revenue for the year ended December 31, 2009.
Medicare
Advantage
As of
December 31, 2009, our health plans operated 13 Medicare Advantage coordinated
care plans in 16 states. The Centers for Medicare & Medicaid
Services (“CMS”) pays a county-specific fixed premium per member per month
(“PMPM”) under our health plan Medicare contracts. Our health plans
may also receive a monthly premium from their Medicare members and/or their
employer.
Until
December 31, 2009 we offered PFFS plans in 50 states plus Washington,
D.C. under the name Advantra Freedom. These plans were offered under
contracts with CMS and provided enrollees with all benefits they receive under
original Medicare as well as additional benefits such as preventive care,
eyeglasses/hearing aid coverage and pharmacy benefits. Enrollees were not
limited to network providers and could utilize any provider willing to accept
the plan’s terms and conditions. Providers generally received the same
reimbursement as under original Medicare. Our PFFS products were underwritten by
our insurance subsidiaries. In the second quarter of 2009, our
management decided not to renew our PFFS product effective for the 2010 plan
year. We considered a number of factors in determining the
non-renewal of the PFFS product, including the potential profitability of
this product in light of federal reimbursement rates, contracted network
requirements, and medical cost trends, as well as our intention to focus on
other lines of business. On May 1, 2009, we notified CMS of our intention
to cease offering PFFS products. This non-renewal took effect as of
December 31, 2009. Our Medicare Advantage line of business covered
515,000 members as of December 31, 2009 and accounted for $4.9 billion of
revenue in 2009. Revenue from our PFFS products accounted for
$2.9 billion of that total.
4
Medicaid
Certain
of our health plans offer health care coverage to Medicaid recipients in six
states which, as of December 31, 2009, covered 402,000 members and accounted for
$1.1 billion of revenue in 2009. These health plans enter into a Medicaid
Management Care contract with each of these individual states. Under a Medicaid
contract, the participating state pays a monthly premium per member based on the
age, sex, eligibility category and in some states, county or region of the
Medicaid member enrolled. In some states, these premiums are adjusted according
to the health risk associated with the individual member. The majority of our
Medicaid members are in the Florida, Michigan, Missouri, and
West Virginia markets, representing 92% of our total Medicaid
membership.
Dental
Benefit Services
We offer
a full suite of dental services including insured and administrative plans for
individuals and groups, a full-service dental third-party administrator
specializing in private-label programs, and a full suite of discount products.
These services are offered through Group Dental Service, Inc. (“GDS”), which is
based in Rockville, Maryland. We acquired a majority ownership
interest in GDS in May 2008. GDS accounted for $27.8 million of
revenue, after eliminations, in 2009.
Health Plan
Markets
The
geographic markets in which our health plans operate are described as
follows:
·
|
Delaware
— commercial products in
Delaware.
|
·
|
Florida
— commercial products in South Florida, the Tampa Bay area and in certain
counties in North Florida. Medicaid products in South Florida
as well as certain counties in North Florida and the state’s
panhandle. Medicare Advantage products in South Florida and the
Tampa Bay area.
|
·
|
Georgia
— commercial products in the greater Atlanta, Savannah, Augusta,
Macon and Columbus metropolitan areas and Medicare Advantage products in
Savannah and Atlanta.
|
·
|
Idaho —
commercial products throughout the
state.
|
·
|
Illinois
— commercial products, primarily in the Western, Northern (exclusive of
the Chicago Metropolitan area) and Central Illinois areas. Medicare
Advantage products in portions of Central, Western, and Northern
Illinois.
|
·
|
Iowa —
commercial products to members primarily in the Des Moines, Waterloo,
Sioux City and Ames metropolitan areas; Medicare Advantage products in
forty-four counties.
|
·
|
Kansas
— commercial products in Kansas and portions of Western Missouri;
Medicare Advantage products in the Kansas City and Wichita metropolitan
areas.
|
·
|
Louisiana
— commercial products, primarily in the New Orleans, Baton Rouge and
Shreveport metropolitan
areas.
|
·
|
Maryland
— Medicaid products in the Baltimore metropolitan
area. Commercial products primarily in the Baltimore
metropolitan area and in the Eastern Shore
area.
|
·
|
Michigan
— Medicaid products in Wayne and Oakland counties (Detroit metropolitan
areas).
|
·
|
Missouri
— commercial and Medicare Advantage products to members in the St.
Louis metropolitan and central Missouri area, including portions of
Southern Illinois; Medicaid products also in eastern, central and western
Missouri.
|
·
|
Nebraska
— commercial products primarily in the Omaha and Lincoln
metropolitan areas, coupled with significant network coverage in Central
and Western Nebraska; Medicare Advantage products in nineteen
counties.
|
·
|
Nevada —
commercial products, primarily in the Las Vegas metropolitan
areas.
|
·
|
North
Carolina — commercial products primarily in the Raleigh-Durham and
Charlotte metropolitan
areas.
|
·
|
Oklahoma
— commercial products in both the Oklahoma City and Tulsa
markets.
|
·
|
Pennsylvania
— commercial products in all Pennsylvania markets and portions of
Eastern Ohio and Medicare Advantage products in the Pittsburgh, Harrisburg
and State College metropolitan
areas.
|
·
|
South
Carolina — commercial products in the Charleston and Columbia
metropolitan areas.
|
·
|
Tennessee
— commercial products primarily in the metropolitan Memphis and West
Tennessee area, with additional networks in the far northern Mississippi
counties of DeSoto and Tate, and in eastern
Arkansas.
|
·
|
Utah —
commercial products and FEHBP throughout the state; and Medicare Advantage
Products throughout the state, excluding Washington
County.
|
·
|
Wyoming —
commercial and Medicare Advantage products primarily in the lower
south eastern counties near
Utah.
|
·
|
Virginia
— commercial, Medicaid, and Medicare products primarily in the Richmond,
Roanoke and Charlottesville metropolitan areas and the Shenandoah
Valley.
|
·
|
West
Virginia — commercial, Medicaid and Medicare Advantage products to
a service area covering a majority of the state’s
population.
|
Specialized
Managed Care Division
Medicare
Part D
The
Medicare Part D program provides eligible beneficiaries with access to
prescription drug coverage. As part of the Medicare Part D program,
eligible Medicare recipients are able to select a prescription drug plan. The
Medicare Part D prescription drug benefit is largely subsidized by the federal
government and is additionally supported by risk-sharing with the federal
government through risk corridors designed to limit the profits or losses of the
drug plans and through reinsurance for catastrophic drug costs. The government
subsidy is based on the national weighted average monthly bid, by Medicare
region, by participating plans for this coverage, adjusted for member
demographics and risk factor payments. The beneficiary will be responsible for
the difference between the government subsidy and their benefit plan’s bid,
together with the amount of their benefit plan’s supplemental premium.
Additional subsidies are provided for dual-eligible beneficiaries and specified
low-income beneficiaries.
Our
Medicare Part D business accounted for $1.5 billion of revenue in 2009 and had
1.7 million members as of December 31, 2009. The Medicare Part D
plans are marketed under the brand names of Advantra Rx, First Health Premier,
and First Health Secure. For 2009, certain of these plans include an option with
first dollar coverage (no deductible) and options for generic coverage within
the coverage gap in which no insurance coverage under the standard Part D
program is available. We have established partnerships with Medicare Supplement
insurance carriers and brokerage channels nationwide to distribute Medicare Part
D prescription drug products to Medicare beneficiaries on our
behalf. Medicare beneficiaries can also purchase our Medicare Part D
products via the internet.
Network
Rental
We offer
our national PPO network and other managed care products to national, regional
and local TPAs and insurance carriers. Primarily operating on a
business-to-business basis, Network Rental focuses on delivering managed care
and administrative solutions that increase client efficiency and improve their
product offerings. Network services are supplemented with a variety of product
offerings, including clinical management programs. Our network rental
businesses accounted for $85.6 million of revenue in 2009.
5
Mental-Behavioral
Health Services
We
operate in the managed behavioral healthcare industry and provide coordination
of comprehensive mental health and substance abuse treatment throughout the
United States. These services are provided through Mental Health
Network Institutional Services, Inc. (“MHNet”), our subsidiary based in Austin,
Texas. MHNet provides services to health plans and employer clients
and accounted for $31.1 million of revenue, after eliminations, in
2009.
Public
Sector
Our
Public Sector business, which we sold on July 31, 2009, provided state Medicaid
agencies and other government funded programs with the clinical, administrative
and technological tools needed to better manage their health care, pharmacy,
mental health and long-term care programs. Prior to the sale, our
Public Sector business accounted for $89.8 million of revenue in 2009, which is
reflected within discontinued operations.
Workers’
Compensation Division
Our
workers’ compensation products accounted for $757.1 million of revenue in
2009.
Bill
Review
Our
workers’ compensation Bill Review system provides national and multi-regional
workers’ compensation clients with a system to integrate and manage their
workers’ compensation medical data.
Bill
Review enables our clients to have an accurate and consistent application of
state fee schedule pricing, including applicable rules, regulations and clinical
guidelines. State fee schedules, which typically represent the maximum
reimbursement for medical services provided to the injured worker, differ by
state (and change as state laws and regulations are passed and /or amended). The
system features full integration with our provider network and provides a
seamless process for determining claim payment rates. As part of the bill
adjudication process, we subject bills to a sophisticated, proprietary process
to detect duplicate bills and correct billing irregularities and inappropriate
billing practices.
In
addition, our Bill Review system has a comprehensive reporting database that
produces a standard set of client savings and management reports. Clients who
utilize the Bill Review system have online access to their data and are able to
create reports at their desktops.
Pharmacy
Benefit Management
Insurance
carriers, TPAs and employers contract with our First Script pharmacy benefit
management program. First Script provides a retail network of over
61,000 pharmacies that can be accessed by workers’ compensation claimants
immediately after an injury has occurred. First Script continues to
provide service to these claimants upon compensability confirmation throughout
the life of their workers’ compensation claim. Home delivery of medication is
included as part of First Script’s integrated prescription
solution.
In
addition to providing network access to workers’ compensation claimants, First
Script also offers a full suite of drug utilization review tools and reports to
assist its clients in controlling their pharmacy costs. These tools
go beyond basic formulary management and include predictive indicators of claim
severity and direction. The application of these cost control tools
must be balanced with the need for claimants to receive their drugs in a
convenient and timely manner. Claimants who follow their doctor’s
prescription orders are more likely to recover quicker and return to work
earlier. Both of these outcomes further contribute to lowering the
client’s overall workers’ compensation claim costs.
Care
Management Services
Our Care
Management Services seek to promote appropriate healthcare access and
utilization by performing services designed to monitor cases and facilitate the
return to work of injured or ill employees who have been out of work, receiving
healthcare, or both, for an extended period of time due to a work-related or
auto incident or disability.
We
provide field case management services for workers’
compensation cases through case managers working on a one-on-one
basis with injured employees and their healthcare professional, employers, and
insurance company adjusters. Our telephonic case management services
consist of telephonic management of workers’ compensation and auto injury
claims, as well as short-term disability, long-term disability, and employee
absences covered under the Family and Medical Leave Act. We provide
our customers with access to healthcare professionals who perform independent
medical examinations to evaluate the medical condition and treatment plan of
patients. Our technology enables customers to make on-line referrals
and check on the current status of their cases. Customers use our
pre-certification and concurrent review services to ensure that a physician or
registered nurse reviews, and pre-certifies if appropriate, specified medical
procedures for medical necessity and appropriateness.
Provider
Network
Our
provider network is the core of our health care and workers’ compensation
businesses, providing the foundation for our products and services. We contract
with hospitals, physicians and other health care providers that provide health
care services at pre-negotiated rates to members and customers of various
payors, including employee groups, workers’ compensation payors, insurance
carriers, TPAs, HMOs, self-insured employers, union trusts and government
employee plans. Provider networks offer a means of managing health
care costs by reducing the per-unit price of medical services accessed through
the network while providing an increased number of patients to
providers.
Our
provider network optimizes client savings through a combination of increased
penetration to a broad network and discounted unit costs savings. The majority
of the facility contracts feature fixed rate structures that ensure cost
effectiveness while incentivizing providers to control utilization. The fixed
rate structures include per diems based on the intensity of care and/or
Diagnostics Related Group based pricing for inpatient care. Hospital outpatient
charges are typically controlled by fixed fee schedules. For facilities or
procedures not covered by fixed pricing arrangements, charge master controls are
generally negotiated, limiting the increasing trend of health care unit
cost.
6
Our
health plans maintain provider networks in the local markets in which they
operate. All of our health plans currently offer an open panel delivery system
where individual physicians or physician groups contract with the health plans
to provide services to members but also maintain independent practices in which
they provide services to individuals who are not members of our health
plans.
Most of
our health plan contracted primary care and specialist physicians are
compensated under an established local fee schedule(s) that is structured around
the resource-based relative value scale. The majority of our health
plans contract with hospitals to provide for inpatient care through per diem or
per case hospital rates. Outpatient services are contracted on a discounted
fee-for-service or a per case basis. Our health plans pay ancillary providers on
a fixed fee schedule or a capitation basis. Prescription drug benefits are
provided through a formulary and drug prices are negotiated at discounted rates
through a national network of pharmacies.
Our
health plans have capitation arrangements for certain ancillary health care
services, such as laboratory services and, in some cases, physician and
radiology services. Under some capitated arrangements, physicians may
also receive additional compensation from risk sharing and other incentive
arrangements. Capitation arrangements limit our health plans’ exposure to the
risk of increasing medical costs, but expose them to risk as to the adequacy of
the financial and medical care resources of the provider organization. Our
health plans are ultimately responsible for the coverage of their members
pursuant to the customer agreements. To the extent that the respective provider
organization faces financial difficulties or otherwise is unable to perform its
obligations under the capitation arrangements, our health plans will be required
to perform such obligations. Consequently, our health plans may have to incur
costs in excess of the amounts they would otherwise have to pay under the
original capitation arrangements. Medical costs associated with
capitation arrangements made up approximately 2.9%, 4.1%, and 4.9% of our total
medical costs for the years ended December 31, 2009, 2008 and 2007,
respectively. We do not consider the financial risk associated with our existing
capitation arrangements to be material.
Medical
Management
We have
established systems to monitor the availability, appropriateness and
effectiveness of the patient care that our network providers provide to our
members. We collect utilization data that is used to analyze over-utilization or
under-utilization of services and to assist in arranging for appropriate care
for our members and improving patient outcomes in a cost efficient manner. Our
corporate medical department monitors the medical management policies of our
subsidiaries and assists in implementing disease management programs, quality
assurance programs and other medical management tools. In addition, we have
internal quality assurance review committees made up of practicing physicians
and staff members whose responsibilities include periodic review of medical
records, development and implementation of standards of care based on current
medical literature and the collection of data relating to results of
treatment.
We have
developed a comprehensive disease management program that identifies those
members having certain chronic diseases, such as asthma and diabetes. Our case
managers proactively work with members and their physicians to facilitate
appropriate treatment, to help to ensure compliance with recommended therapies
and to educate members on lifestyle modifications to manage the disease. We
believe that our disease management program promotes the delivery of efficient
care and helps to improve the quality of health care delivered.
Our
medical directors supervise medical managers who review and approve, for
coverage in accordance with the health benefit plan, requests by physicians to
perform certain diagnostic and therapeutic procedures, using nationally
recognized clinical guidelines developed based on nationwide benchmarks that
maximize efficiency in health care delivery and InterQual, a nationally
recognized evidence-based set of criteria developed through peer reviewed
medical literature. Medical managers also continually review the status of
hospitalized patients and compare their medical progress with established
clinical criteria, make hospital rounds to review patients’ medical progress and
perform quality assurance and utilization functions.
Medical
directors also monitor the utilization of diagnostic services and encourage the
use of outpatient surgery and testing where appropriate. Data showing each
physician’s utilization profile for diagnostic tests, specialty referrals and
hospitalization are collected and presented to physicians. The medical directors
monitor these results in an attempt to ensure the use of cost-effective,
medically appropriate services.
We focus
on the satisfaction of our members. We monitor appointment availability,
member-waiting times, provider environments and overall member satisfaction. We
continually conduct membership surveys of existing employer groups concerning
the quality of services furnished and suggestions for improvement.
Information
Technology
We
believe that integrated and reliable information technology systems are critical
to our success. We have implemented advanced information systems to improve our
operating efficiency, support medical management, underwriting and quality
assurance decisions and effectively service our customers, members and
providers. Each of our health plans operates on a single financial reporting
system along with a common, fully integrated application which encompasses all
aspects of our health plan commercial, government and non-risk business,
including enrollment, provider referrals, premium billing and claims
processing.
We have
dedicated in-house teams providing infrastructure and application support
services to our members. Our data warehouse collects information from all of our
health plans and uses it in medical management to support our underwriting,
product pricing, quality assurance, rates, marketing and contracting functions.
We have dedicated in-house teams that convert acquired companies to our
information systems as soon as possible following the closing of the
acquisition.
In 2009,
approximately 78.0% of our claim transactions were received from providers in a
Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) compliant
electronic data interface format. In 2009, our claims system auto
adjudicated 83.6% of all claims, which improved our claims processing efficiency
and accuracy.
Marketing
We market
our products and services to individuals, employer groups, multi-site direct
accounts, self-insured employers, government employees, multi-employer trusts
with greater than 500 employees and through group health insurance carriers and
TPAs. When marketing on a business-to-business basis directly to
insurance carriers and TPAs, our customers have primary responsibility for
offering our services to their underlying clients. We also market to
both FEHB health plan sponsors and directly to federal
employees. Marketing is provided through our own direct sales staff
and a network of non-exclusive, independent brokers and focused on developing
new business as well as retaining existing business.
7
In
addition to our commercial HMO, PPO, and POS products, which are offered on a
fully insured and self-funded basis, our local health plans also continue to
expand the number of lower cost product options. These options
include Coventry FlexChoice, a family of “consumer-driven” products, whereby the
employee bears a substantially greater proportion of health care
costs.
While our
large group accounts may have benefit products offered to their employees by
multiple carriers, our small and medium size groups are most commonly offered
our services on an exclusive basis. In the case of insurance
carriers, we typically enter into a master service agreement under which we
agree to provide our cost management services to health care plans maintained by
the carrier’s customers. Our services are offered not only to new
insurance policyholders, but also to existing policyholders at the time group
health benefits are renewed.
Medicaid
products are marketed to Medicaid recipients by state Medicaid authorities and
through educational and community outreach programs.
Medicare
Advantage products, which can include both medical and pharmacy benefits, are
commonly promoted through mass media and direct mail to both individuals and
retirees of employer groups that provide benefits to
retirees. Networks of independent brokers are also used in the
marketing of Medicare products. Our Medicare Part D product is
marketed through our existing channels as well as through joint marketing
arrangements with Medicare Supplement health insurers, TPAs and related broker
distribution entities. Additionally, we have established partnerships
with Medicare Supplement health insurers and brokerage channels nationwide to
provide Medicare Advantage products to Medicare beneficiaries.
Workers’
compensation services are marketed to insurance carriers and TPAs, who in turn
take responsibility for marketing our services to their prospects and clients.
We also market directly to state funds, municipalities, self-insured payors and
other distribution channels.
Significant
Customers
The Mail
Handlers Benefit Plan represented 10.5%, 9.2%, and 14.7% of our
management services revenue for the years ended December 31, 2009, 2008 and
2007, respectively.
Our
health plan commercial business is diversified across a large customer base and
no customer group compromises 10% or more of our managed care premiums. We
received 50.7%, 38.1%, and 33.1% of our managed care premiums for the years
ended December 31, 2009, 2008 and 2007, respectively, from the federal Medicare
programs throughout our various health plan markets and from national Medicare
Part D and Medicare PFFS products. We also received 8.4%, 10.3%, and 10.7% of
our managed care premiums for the years ended December 31, 2009, 2008 and 2007,
respectively, from our state-sponsored Medicaid programs throughout our various
health plan markets. In 2009, the State of Missouri accounted for
almost half of our health plan Medicaid premiums.
Competition
The
managed care industry is highly competitive; both nationally and in the
individual markets we serve. Generally, in each market, we compete against local
health plans and nationally focused health insurers and managed care plans. We
compete for employer groups and members primarily on the basis of the price of
the benefit plans offered, locations of the health care providers, reputation
for quality care and service, financial stability, comprehensiveness of
coverage, diversity of product offerings and access to care. We also compete
with other managed care organizations and indemnity insurance carriers in
obtaining and retaining favorable contracts for health care services and
supplies.
We
compete in a highly fragmented market with national, regional and local firms
specializing in utilization review and PPO cost management services and with
major insurance carriers and TPAs that have implemented their own internal cost
management services. In addition, other managed care programs, such as HMOs and
group health insurers, compete for the enrollment of benefit plan participants.
We are subject to intense competition in each market segment in which we
operate. We distinguish ourselves on the basis of the quality and
cost-effectiveness of our programs, our proprietary computer-based integrated
information systems, our emphasis on commitment to service with a high degree of
physician involvement, our national provider network including its penetration
into secondary and tertiary markets and our role as an integrated provider of
PBM services.
Workers’
compensation competition includes regional and national managed care companies
and other service providers with an emphasis on PPO, clinical programs or bill
review. We differentiate ourselves based on our national PPO coverage and the
ability to provide an integrated product, coupled with technology that reduces
administrative cost. We compete with a multitude of PPOs, technology companies
that provide bill review services, clinical case management companies, pharmacy
benefit managers, and rehabilitation companies for the business of these
insurers. While experience differs with various clients, obtaining a workers’
compensation insurer as a new client typically requires extended discussions and
a significant investment of time. Given these characteristics of the competitive
landscape, client relationships are critical to the success of our workers’
compensation products.
Financial
Information
Required
financial information related to our business segments is set forth in Note B,
Segment Information, of our consolidated financial statements.
Corporate
Governance
Our Board
of Directors has adopted a Code of Business Conduct and Ethics applicable to the
members of our Board of Directors and our officers, including our Chief
Executive Officer, Chief Financial Officer, Corporate Controller and our
employees. In addition, the Board of Directors has adopted Corporate Governance
Guidelines and committee charters for our Audit Committee, Compensation
Committee and Nominating/Corporate Governance Committee. Our Code of Business
Conduct and Ethics, Corporate Governance Guidelines and current committee
charters can be accessed on our website at www.coventryhealth.com. Any
amendments to our Code of Business Conduct and Ethics are posted to and can be
accessed on our website.
8
Government
Regulation
As a
managed health care company, we are subject to extensive government regulation
of our products and services. The laws and regulations affecting our industry
generally give state and federal regulatory authorities broad discretion in
their exercise of supervisory, regulatory and administrative powers. These laws
and regulations are intended primarily for the benefit of the members of the
health plans. Managed care laws and regulations vary significantly from
jurisdiction to jurisdiction and changes are frequently considered and
implemented.
Congress
and state legislatures continue to focus on health care issues and to consider
major changes that would affect both public programs and privately-financed
health insurance arrangements. The U.S. House of Representatives and the U.S.
Senate each passed healthcare reform bills at the end of 2009; however neither
of these bills has yet to become law. The bills and other reform measures under
consideration include proposals that would result in significant new taxes on
the health insurance industry and/or on employers offering certain health
benefit plans, immediately effective market reforms (such as a ban on lifetime
limits, new benefit mandates, increased dependant coverage and limits on
pre-existing condition exclusions), expansion of eligibility under existing
Medicaid and/or FEHBP programs, minimum medical benefit ratios for health plans,
new individual insurance requirements, Medicare Advantage funding cuts,
administrative cost caps, and new government-run plans or insurance exchanges.
These or other changes could have a material adverse impact on our business
operations and financial condition. In addition, several states are
considering legislative proposals that could affect our ability to obtain
appropriate premium rates and that would mandate certain benefits and forbid
certain policy provisions, or otherwise materially adversely impact our business
operations and financial condition.
State
Regulation
The
states served by our health plans provide the principal legal and regulatory
framework for the commercial risk products offered by our insurance companies
and HMO subsidiaries. One of our insurance company subsidiaries, Coventry Health
and Life Insurance Company (“CH&L”), offers managed care products, primarily
PPO and POS products, in conjunction with our HMO subsidiaries in states where
HMOs are not permitted to offer these types of health care benefits. CH&L
does not currently offer traditional health indemnity insurance. In addition,
one of our subsidiaries, First Health Life & Health Insurance Company,
offers a small group PPO product in certain states.
Our
regulated subsidiaries are required by state law to file periodic reports and to
meet certain minimum capital and deposit and/or reserve requirements and may be
restricted from paying dividends to the parent or making other distributions or
payments under certain circumstances. They also are required to provide their
members with certain mandated benefits. Our HMO subsidiaries are required to
have quality assurance and educational programs for their professionals and
enrollees. Certain states’ laws further require that representatives of the
HMOs’ members have a voice in policy making. Most states impose requirements
regarding the prompt payment of claims and several states permit “any willing
provider” to join our network. Compliance with “any willing provider” laws could
increase our costs of assembling and administering provider
networks.
We
also are subject to the insurance holding company regulations in the states in
which our regulated subsidiaries operate. These laws and associated regulations
generally require registration with the state department of insurance and the
filing of reports describing capital structure, ownership, financial condition,
certain inter-company transactions and business operations. Most state insurance
holding company laws and regulations require prior regulatory approval or, in
some states, prior notice, of acquisitions or similar transactions involving
regulated companies, and of certain transactions between regulated companies and
their parents. In connection with obtaining regulatory approvals of
acquisitions, we may be required to agree to maintain capital of regulated
subsidiaries at specified levels, to guarantee the solvency of such subsidiaries
or to other conditions. Generally, our regulated subsidiaries are limited in
their ability to pay dividends to their parent due to the requirements of state
regulatory agencies that the subsidiaries maintain certain minimum capital
balances.
Our
workers’ compensation business is also subject to state governmental regulation.
Historically, governmental strategies to contain medical costs in the workers’
compensation field have been limited to legislation on a state-by-state basis.
Many states have adopted guidelines for utilization management and have
implemented fee schedules that list maximum reimbursement levels for health care
procedures. In certain states that have not authorized the use of a fee
schedule, we adjust bills to the usual and customary levels authorized by the
payor.
Most
states now impose risk-based or other net worth-based capital requirements on
our regulated entities. These requirements assess the capital adequacy of the
regulated subsidiary based upon the investment asset risks, insurance risks,
interest rate risks and other risks associated with the subsidiary’s business.
If a subsidiary’s capital level falls below certain required capital levels, it
may be required to submit a capital corrective plan to regulatory authorities
and at certain levels may be subjected to regulatory orders, including
regulatory control through rehabilitation or liquidation proceedings. See Part
II, Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources” for more
information.
Federal
Regulation
Privacy,
Security and other HIPAA Requirements
The use,
disclosure and secure handling of individually identifiable health information
by our business is regulated at the federal level, including the privacy
provisions of the Gramm-Leach-Bliley Act and privacy and security regulations
pursuant to HIPAA. Further, our privacy and security practices are subject to
various state laws and regulations. Varying requirements and enforcement
approaches in the different states may adversely affect our ability to
standardize our products and services across state lines. These state and
federal requirements change frequently as a result of legislation, regulations
and judicial or administrative interpretation. The American Recovery and
Reinvestment Act of 2009 (“ARRA”) broadened the scope of the HIPAA privacy and
security regulations. Among other things, ARRA strengthened the enforcement
provisions of HIPAA, which may result in increased enforcement
activity. Under ARRA, the Department of Health and Human Services
("DHHS") is required to conduct periodic compliance audits of entities covered
by the HIPAA regulations, known as covered entities, and their business
associates (entities that handle identifiable health information on behalf of
covered entities). Additionally, ARRA mandates that if a member requests a copy
of their medical record, it must be provided to them. Doctor's notes, medical
test results, lab results and billing information fall within this mandate. Many
of our business operations are considered to be covered entities under HIPAA,
while others are classified as business associates.
ARRA
broadens the applicability of the criminal penalty provisions under HIPAA to
employees of covered entities and requires DHHS to impose penalties for
violations resulting from willful neglect. ARRA also significantly increases the
amount of the civil penalties, with penalties of up to $50,000 per HIPAA
violation for a maximum civil penalty of $1,500,000 in a calendar year for
violations of the same requirement. In addition, ARRA authorizes
state attorneys general to bring civil actions seeking either injunction or
damages in response to violations of HIPAA privacy and security regulations that
threaten the privacy of state residents. Further, ARRA extends the application
of certain provisions of the HIPAA security and privacy regulations to business
associates and subjects business associates to civil and criminal penalties for
violation of the regulations. State and local authorities are
increasingly focused on the importance of protecting individuals from identity
theft, with a significant number of states enacting laws requiring businesses to
notify individuals of security breaches involving personal
information. As required by ARRA, DHHS published an interim final
rule on August 24, 2009, that requires covered entities to report breaches of
unsecured protected health information to affected individuals without
unreasonable delay, but not to exceed 60 days of recovery of the breach by the
covered entity or its agents. Notification must also be made to DHHS and, in
certain situations involving large breaches, to the media.
9
HIPAA
includes administrative requirements directed at simplifying electronic data
interchange through standardizing transactions and establishing uniform health
care provider, payer and employer identifiers. HIPAA also imposes
obligations for health insurance issuers and health benefit plan sponsors. HIPAA
requires guaranteed health care coverage for small employers having two to 50
employees and for individuals who meet certain eligibility requirements. HIPAA
also requires guaranteed renewability of health coverage for most employers and
individuals and contains nondiscrimination requirements. HIPAA limits exclusions
based on pre-existing conditions for individuals covered under group policies to
the extent the individuals had prior creditable coverage.
Failure
to comply with any of the statutory and regulatory HIPAA requirements, state
privacy and security requirements and other similar federal requirements could
subject us to significant penalties.
ERISA
The
provision of services to certain employee health benefit plans is subject to the
Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA regulates
certain aspects of the relationships between us and employers who maintain
employee benefit plans subject to ERISA. Some of our administrative services and
other activities may also be subject to regulation under ERISA. For instance,
the U.S. Department of Labor regulations under ERISA (insured and self-insured)
regulate the time allowed for health and disability plans to respond to claims
and appeals, establish requirements for plan responses to appeals and expand
required disclosures to participants and beneficiaries. In addition, some states
require licensure or registration of companies providing third party claims
administration services for benefit plans. We provide a variety of products and
services to employee benefit plans that are covered by ERISA.
Medicare and
Medicaid
Some of
our subsidiaries contract with CMS to provide services to Medicare beneficiaries
pursuant to the Medicare Advantage program. Some of our health plans also
contract with states to provide health benefits to Medicaid recipients. As a
result, we are subject to extensive federal and state regulations.
CMS
periodically performs risk adjustment data validation (“RADV”) audits for any
health plan operating under a Medicare managed care contract to determine the
plan’s compliance with state and federal law and contractual
obligations. Additionally, in some instances states engage peer
review organizations to perform quality assurance and utilization review
oversight of Medicare managed care plans. Our health plans are required to abide
by the peer review organizations’ standards.
CMS rules
require Medicaid managed care plans to have beneficiary protections and protect
the rights of participants in the Medicaid program. Specifically, states must
assure continuous access to care for beneficiaries with ongoing health care
needs who transfer from one health plan to another. States and plans must
identify enrollees with special health care needs and assess the quality and
appropriateness of their care. These requirements have not had a material
adverse effect on our business.
The
federal anti-kickback statute imposes criminal and civil penalties for paying or
receiving remuneration (which is deemed to include a kickback, bribe or rebate)
in connection with any federal health care program, including the Medicare,
Medicaid and FEHB Programs. The law and related regulations have been
interpreted to prohibit the payment, solicitation, offering or receipt of any
form of remuneration in return for the referral of federal health care program
patients or any item or service that is reimbursed, in whole or in part, by any
federal health care program. Similar anti-kickback provisions have been adopted
by many states, which apply regardless of the source of
reimbursement.
With
respect to the federal anti-kickback statute, there exists a statutory exception
and two safe harbors addressing certain risk-sharing arrangements. A safe harbor
is a regulation that describes relationships and activities that are deemed not
to violate the federal anti-kickback statute. However, failure to satisfy each
criterion of an applicable safe harbor does not mean that the arrangement
constitutes a violation of the law; rather the arrangement must be analyzed on
the basis of its specific facts and circumstances. We believe that our risk
agreements satisfy the requirements of these safe harbors. In addition, the
Office of the Inspector General has adopted other safe harbor regulations that
relate to managed care arrangements. We believe that the incentives offered by
our subsidiaries to Medicare and Medicaid beneficiaries and the discounts our
plans receive from contracting health care providers satisfy the requirements of
these safe harbor regulations. We believe that our arrangements do not violate
the federal or similar state anti-kickback laws.
CMS has
promulgated regulations that prohibit health plans with Medicare contracts from
including any direct or indirect payment to physicians or other providers as an
inducement to reduce or limit medically necessary services to a Medicare
beneficiary. These regulations impose disclosure and other requirements relating
to physician incentive plans such as bonuses or withholds that could result in a
physician being at “substantial financial risk” as defined in Medicare
regulations. Our ability to maintain compliance with such regulations depends,
in part, on our receipt of timely and accurate information from our providers.
Although we believe we are in compliance with all such Medicare regulations, we
are subject to future audit and review.
The
federal False Claims Act prohibits knowingly submitting false claims to the
federal government. Private individuals known as relators or
whistleblowers may bring actions on the government’s behalf under the False
Claims Act and share in any settlement or judgment. Violations of the
federal False Claims Act may result in treble damages and civil penalties of up
to $11,000 for each false claim. In some cases, whistleblowers, the
federal government and some courts have taken the position that providers who
allegedly have violated other statutes such as the federal anti-kickback statute
have thereby submitted false claims under the False Claims Act. The
Fraud Enforcement and Recovery Act of 2009 expanded the scope of the False
Claims Act by, among other things, creating liability for knowingly or
improperly avoiding repayment of an overpayment received from the government and
broadening protections for whistleblowers. Under the Deficit Reduction Act of
2006 (“DEFRA”), every entity that receives at least $5 million annually in
Medicaid payments must establish written policies for all employees, contractors
or agents, providing detailed information about false claims, false statements
and whistleblower protections under certain federal laws, including the federal
False Claims Act, and similar state laws. We have established written
policies that we believe comply with this provision of DEFRA.
A number
of states, including states in which we operate, have adopted their own false
claims provisions as well as their own whistleblower provisions whereby a
private party may file a civil lawsuit in state court. DEFRA creates
an incentive for states to enact false claims laws that are comparable to the
federal False Claims Act. From time to time, companies in the
healthcare industry, including ours, may be subject to actions under the False
Claims Act or similar state laws.
10
In July
2008, the Medicare Improvements for Patients and Providers Act of 2008, commonly
called MIPPA, became law. MIPPA increased restrictions on marketing
and sales activities of Medicare Advantage plans, including limitations on
compensation systems for agents and brokers, limitations on solicitation of
beneficiaries, and prohibitions regarding many sales
activities. MIPPA also imposed restrictions on Special Needs Plans,
increased penalties for reimbursement delays under Part D; required weekly
reporting of pricing standards by Medicare Part D plans, and implemented focused
cuts to certain Medicare Advantage programs. The Congressional Budget
Office estimated that the MIPPA would reduce federal spending on Medicare
Advantage plans by $48.7 billion over the 2008-2018 period. Failure
to comply with MIPPA or the regulations promulgated pursuant to MIPPA could
result in penalties including suspension of enrollment, suspension of payment,
suspension of marketing, fines and/or civil monetary penalties.
Federal Employees
Health Benefits Program
We
contract with the United States Office of Personnel Management (“OPM”) and with
various federal employee organizations to provide health insurance benefits
under the Federal Employees Health Benefits Program. These contracts are subject
to government regulatory oversight by the Office of the Inspector General
(“OIG”) of OPM who perform periodic audits of these benefit program activities
to ensure that contractors meet their contractual obligations with OPM. For our
managed care contracts, the OIG conducts periodic audits to, among other things;
verify that premiums established under its contracts are in compliance with
community rating requirements under the FEHB Program. The OPM may seek premium
refunds or institute other sanctions against health plans that participate in
the program. For our experience-rated plans, the OIG focuses on the
appropriateness of contract charges, the effectiveness of claims processing,
financial and cost accounting systems, and the adequacy of internal controls to
ensure proper contract charges and benefits payments. The OIG may seek refunds
of costs charged under these contracts or institute other sanctions against
health plans. These audits are generally a number of years in
arrears.
Managed Care
Legislative Proposals
In the
final months of 2009, both houses of the U.S. Congress passed separate bills
intended to reform the healthcare system. While neither of these bills has yet
become law, such laws or similar proposals have been, and we anticipate may
continue to be, a focus at the federal level. Several states are also
considering healthcare reform measures. This focus on healthcare reform,
including managed care reform, may increase the likelihood of significant
changes affecting the managed care industry and our business. At this
time, it is unclear as to when any reform proposals might be enacted or the
content of any new legislation, and we cannot predict the effect on our
operations of proposed legislation or any other reform proposals that may be
adopted.
Risk
Management
In the
normal course of business, we have been named as a defendant in various legal
actions such as actions seeking payments for claims for medical services denied
by the Company, medical malpractice actions, employment related claims and other
various claims seeking monetary damages. The claims are in various stages of
proceedings and some may ultimately be brought to trial. Incidents occurring
through December 31, 2009 may result in the assertion of additional claims. We
maintain general liability, professional liability and employment practices
liability insurances in amounts that we believe are appropriate, with varying
deductibles for which we maintain reserves. The professional liability and
employment practices liability insurances are carried through our captive
subsidiary.
Employees
At
January 31, 2010, we employed approximately 14,400 persons, none of whom are
covered by a collective bargaining agreement.
Acquisition
Growth
We began
operations in 1987 with the acquisition of the American Service Companies
entities, including Coventry Health and Life Insurance Company. We have grown
substantially through acquisitions. The table below summarizes all of our
significant acquisitions since 2005.
Markets
|
Type
of Business
|
Year
Acquired
|
|
First
Health Group Corp.
|
Multiple
Markets
|
Multiple
Products
|
2005
|
FirstGuard
Health Plan Missouri
|
Missouri
|
Medicaid
|
2007
|
Certain
workers' compensation business from Concentra, Inc.
|
Multiple
Markets
|
Management
Services
|
2007
|
Certain
group health insurance business from Mutual of Omaha
|
Nebraska
& Iowa
|
Multiple
Products
|
2007
|
Florida
Health Plan Administrators, LLC
|
Florida
|
Multiple
Products
|
2007
|
Mental
Health Network Institutional Services, Inc.
|
Multiple
Markets
|
Mental
Health Products
|
2008
|
Majority
Interest in Group Dental Services
|
Multiple
Markets
|
Dental
Products
|
2008
|
On
February 1, 2010 we completed our previously announced acquisition of
Preferred Health Systems, Inc. (“PHS”), a commercial health plan based in
Wichita, Kansas serving more than 100,000 commercial group risk members
and 20,000 commercial self-funded
members.
|
11
Executive
Officers of Our Company
The
following table sets forth information with respect to our executive officers as
of February 1, 2010:
Allen
F. Wise
|
67
|
Chief
Executive Officer and Director
|
Harvey
C. DeMovick, Jr.
|
63
|
Executive
Vice President
|
Thomas
C. Zielinski
|
58
|
Executive
Vice President and General Counsel
|
Michael
D. Bahr
|
51
|
Executive
Vice President, Commercial Business
|
John
J. Stelben
|
48
|
Interim
Chief Financial Officer and Treasurer
|
Patrisha
L. Davis
|
54
|
Senior
Vice President and Chief Human Resources Officer
|
Paul
C. Conlin
|
52
|
Senior
Vice President, Medicaid Business
|
John
J. Ruhlmann
|
47
|
Senior
Vice President and Corporate Controller
|
David
W. Young
|
45
|
President
and Chief Executive Officer, Workers Compensation
Business
|
Allen F. Wise
was appointed Chief Executive Officer of our Company in January
2009. He has been a director of our Company since October 1996 and
Executive Chairman since December 2008. He was non-executive Chairman
of the Board from January 2005 to December 2008. Mr. Wise was a
private investor from January 2005 to January 2009. Prior to that, he
was President and Chief Executive Officer of our Company from October 1996 to
December 2004.
Harvey C. DeMovick,
Jr. rejoined our Company in March 2009 and was elected Executive Vice
President of our Company in May 2009. From July 2007 to March 2009,
Mr. DeMovick had retired from our Company and was a private investor and
business consultant. From January 2005 to July 2007,
Mr. DeMovick was an Executive Vice President of our Company. He
served as our Chief Information Officer from April 2001 to July 2007 and managed
our Customer Service Operations from September 2001 to July
2007.
Thomas C.
Zielinski was elected Executive Vice President of our Company, effective
November 2007. He is also General Counsel of our Company and has
served in that capacity since August 2001. He served as Senior Vice
President of our Company from August 2001 to November 2007. Prior to
that time, Mr. Zielinski worked for 19 years in various capacities for the law
firm of Cozen and O'Connor, P.C., including as a senior member, shareholder and
Chair of the firm's Commercial Litigation Department.
Michael D.
Bahr was elected Executive Vice President of our Company in August
2009. From September 2003 to September 2009 he was President and
Chief Executive Officer of our Utah health plan. Mr. Bahr is an
associate of the Society of Actuaries and a member of the American Academy of
Actuaries.
John J.
Stelben was elected Interim Chief Financial Officer and Treasurer of our
Company in November 2009. From May 2005 to date, he has been a Senior
Vice President of our Company. He was a Vice President, Business
Development, of our Company from October 1998 to May 2005. Mr.
Stelben joined our Company in 1994 as the Controller of our Missouri health
plan.
Patrisha L.
Davis was elected Senior Vice President of our Company, effective June
2007. From November 2000 to date, she has been the Chief Human
Resources Officer of our Company. She was a Vice President of our
Company from March 2005 to June 2007. Ms. Davis has been a Human
Resources executive with our Company since April
1998.
Paul C.
Conlin joined our Company in June 2009 as a Senior Vice President in
charge of our Medicaid business. From September 2008 to June 2009 he
was an advisor to the Chief Financial Officer of UnitedHealth Group on clinical
affordability. From July 2006 to September 2008, he was an Executive
Vice President of UnitedHealth Group in charge of enterprise-wide commercial and
Medicare clinical operations. From April 2004 to July 2006, he was an
Executive Vice President of UnitedHealth Group in charge of the Northeast
network and clinical operations.
John J.
Ruhlmann was elected Senior Vice President of our Company in November
2006. Prior to that he was Vice President of our Company from November 1999 to
November 2006. He has served as our Corporate Controller since November
1999.
David W.
Young was elected President and Chief Executive Officer of our
subsidiary, Coventry Health Care Workers Compensation, Inc., in April
2009. From April 2007 to April 2009 he served as Senior Vice
President and Chief Operating Officer of the workers compensation division of
our Company. Prior to that time, from June 2003 to April 2007,
he served in the positions of President, Chief Operating Officer and Vice
President of Operations at Concentra Network Services, Inc., a private insurance
consulting company.
The risks
described below are not the only ones that we face. Additional risks not
presently known to us or that we currently deem immaterial may also impair our
business operations.
Our
business, financial condition or results of operations could be materially
adversely affected by any of these risks. Further, the trading price of our
common stock could decline due to any of these risks, and you may lose all or
part of your investment.
Our results of
operations may be adversely affected if we are unable to accurately estimate and
control future health care costs.
Most of
the premium revenue we receive is based upon rates set months before we deliver
services. As a result, our results of operations largely depend on our ability
to accurately estimate and control future health care costs. We base the
premiums we charge, at least in part, on our estimate of expected health care
costs over the applicable premium period. Accordingly, costs we incur
in excess of our cost projections generally are not recovered in the contract
year through higher premiums. We estimate our costs of future benefit claims and
related expenses using actuarial methods and assumptions based upon claim
payment patterns, inflation, historical developments (including claim inventory
levels and claim receipt patterns) and other relevant factors. We also record
benefits payable for future payments. We continually review estimates of future
payments relating to benefit claims costs for services incurred in the current
and prior periods and make necessary adjustments to our reserves. These
estimates involve extensive judgment, and have considerable inherent variability
that is sensitive to payment patterns and medical cost
trends. Factors that may cause health care costs to exceed our
estimates include:
12
·
|
an
increase in the cost of health care services and supplies, including
pharmaceuticals;
|
·
|
higher
than expected utilization of health care
services;
|
·
|
periodic
renegotiations of hospital, physician and other provider
contracts;
|
·
|
the
occurrence of catastrophic events, including epidemics and natural
disasters;
|
·
|
changes
in the demographics of our members and medical trends affecting
them;
|
·
|
general
inflation or economic downturns;
|
·
|
new
mandated benefits or other legislative or regulatory changes that increase
our costs;
|
·
|
clusters
of high cost cases;
|
·
|
changes
in or new technology; and
|
·
|
other
unforeseen occurrences.
|
In
addition, medical liabilities in our financial statements include our estimated
reserves for incurred but not reported and reported but not paid claims. The
estimates for medical liabilities are made on an accrual basis. We believe that
our reserves for medical liabilities are adequate, but we cannot assure you of
this. Increases from our current estimates of liabilities could
adversely affect our results of operations.
Our results of
operations will be adversely affected if we are unable to increase premiums to
offset increases in our health care costs.
Our
results of operations depend on our ability to increase premiums to offset
increases in our health care costs. Although we attempt to base the premiums we
charge on our estimate of future health care costs, we may not be able to
control the premiums we charge as a result of competition, government
regulations and other factors. Our results of operations could be adversely
affected if we are unable to set premium rates at appropriate levels or adjust
premium rates in the event our health care costs increase.
General
economic conditions and disruptions in the financial markets could adversely
affect our business, results of operations and investment
portfolio.
Worldwide
financial markets have experienced extreme disruptions, including
extraordinarily volatile stock prices and diminished liquidity and availability
of credit. Together with the current recessionary environment in the U.S. and
abroad and other unfavorable economic developments such as high unemployment,
these developments could adversely affect our business, results of operations
and investment portfolio.
For
instance, a decline in members covered under our plans could result from layoffs
and downsizing or the elimination of health benefits by employers seeking to cut
costs. Economic conditions could cause our existing members to seek
health coverage alternatives that we do not offer or could, in addition to
significant membership loss, result in lower average premium yields or decreased
margins on continuing membership. In addition, the economic downturn
could negatively affect our employer group renewals and our ability to increase
premiums.
The state
of the economy also adversely affects the states’ budgets, which can result in
states attempting to reduce payments to Medicaid plans in those states in which
we offer Medicaid plans, and to increase taxes and assessments on our
activities. Although we could attempt to mitigate our exposure from
such increased costs through, among other things, increases in premiums, there
can be no assurance that we will be able to do so.
A drop in
the prices of securities across global financial markets could negatively affect
our investment portfolio. Some of our investments could further
experience other-than-temporary declines in fair value, requiring us to record
impairment charges that adversely impact our financial results.
We conduct business
in a heavily regulated industry and changes in laws or regulations or alleged
violations of regulations could adversely affect our business and results of
operations.
Our
business is heavily regulated by federal, state and local authorities.
Legislation or other regulatory reform that increases the regulatory
requirements imposed on us or that changes the way we currently do business may
in the future adversely affect our business and results of operations.
Legislative or regulatory changes that could significantly harm us and our
subsidiaries include changes that:
·
|
impose
increased liability for adverse consequences of medical
decisions;
|
·
|
require
coverage of pre-existing
conditions;
|
·
|
limit
premium levels or establish minimum medical expense ratios for certain
products;
|
·
|
increase
minimum capital, reserves and other financial viability
requirements;
|
·
|
increase
government sponsorship of competing health
plans;
|
·
|
impose
fines or other penalties for the failure to pay claims
promptly;
|
·
|
impose
fines or other penalties as a result of market conduct
reviews;
|
·
|
prohibit
or limit rental access to health care provider
networks;
|
·
|
prohibit
or limit provider financial incentives and provider risk-sharing
arrangements;
|
·
|
require
health plans to offer expanded or new
benefits;
|
·
|
limit
the ability of health plans to manage care and utilization, including “any
willing provider” and direct access laws that restrict or prohibit product
features that encourage members to seek services from contracted providers
or through referral by a primary care
provider;
|
·
|
limit
contractual terms with providers, including audit, payment and termination
provisions;
|
·
|
implement
mandatory third party review processes for coverage denials;
and
|
·
|
impose
additional health care information privacy or security
requirements.
|
13
Congress
and state legislatures continue to focus on health care issues and to consider
major changes that would affect both public programs and privately-financed
health insurance arrangements. The U.S. House of Representatives and the U.S.
Senate each passed healthcare reform bills at the end of 2009; however neither
of these bills has yet become law. The bills and other reform measures under
consideration include proposals that would result in significant new taxes on
the health insurance industry and/or on employers offering certain plans,
immediately effective market reforms (such as a ban on lifetime limits, new
benefit mandates, increased dependant coverage and limits on pre-existing
condition exclusions), expansion of eligibility under existing Medicaid and/or
FEHBP programs, minimum medical benefit ratios for health plans, new individual
insurance requirements, Medicare Advantage funding cuts, administrative cost
caps, and new government-run plans or insurance exchanges. These or other
changes could have a material adverse impact on our business operations and
financial condition. In addition, several states are considering
legislative proposals that could impact our ability to obtain appropriate
premium rates and that would mandate certain benefits and forbid certain policy
provisions, or otherwise materially adversely impact our business operations and
financial condition.
We also
may be subject to governmental investigations or inquiries from time to time.
The existence of such investigations in our industry could negatively affect the
market value of all companies in our industry including our stock price. As a
result of recent investigations, including audits, CMS has imposed sanctions and
fines including immediate suspension of all enrollment and marketing activities
and civil monetary penalties on certain Medicare Advantage plans run by our
competitors. In addition, qui tam suits brought by whistleblowers
have resulted in significant settlements. Any similar governmental
investigations of Coventry could have a material adverse effect on our financial
condition, results of operations or business or result in significant
liabilities to the Company, as well as adverse publicity.
Changes
to laws may impact our ability to enroll beneficiaries and the viability of
certain of our Medicare Advantage plans. MIPPA imposes restrictions
on the ability to market Medicare Advantage and PDPs.
We are
required to obtain and maintain various regulatory approvals to offer many of
our products. Delays in obtaining or failure to obtain or maintain these
approvals could adversely impact our results of operations. Federal, state and
local authorities frequently consider changes to laws and regulations that could
adversely affect our business. We cannot predict the changes that government
authorities will approve in the future or assure you that those changes will not
have an adverse effect on our business or results of operations.
We may be adversely
affected by changes in government funding for Medicare and
Medicaid.
The
federal government and many states from time to time consider altering the level
of funding for government healthcare programs, including Medicare and
Medicaid. The DEFRA included Medicaid cuts of approximately $4.8
billion over five years. MIPPA reduced federal spending on the
Medicare Advantage program by $48.7 billion over the 2008-2018
period. In addition, MIPPA mandated that the Medicare Payment
Advisory Commission report on both the quality of care provided under Medicare
Advantage plans and the cost to the Medicare program of such
plans. Current healthcare reform proposals would impose additional
cuts to the Medicare Advantage program. Additional proposed
regulatory changes would, if implemented, further reduce federal Medicaid
funding. We cannot predict future Medicare or Medicaid funding levels
or ensure that changes to Medicare or Medicaid funding will not have an adverse
effect on our business or results of operations.
A reduction in the
number of members in our health plans could adversely affect our results of
operations.
A
reduction in the number of members in our health plans could adversely affect
our results of operations. Factors that could contribute to the loss of
membership include:
·
|
competition
in premium or plan benefits from other health care benefit
companies;
|
·
|
reductions
in the number of employers offering health care
coverage;
|
·
|
reductions
in work force by existing
customers;
|
·
|
adverse
economic conditions;
|
·
|
our
increases in premiums or benefit
changes;
|
·
|
our
exit from a market or the termination of a health
plan;
|
·
|
negative
publicity and news coverage relating to our company or the managed health
care industry generally; and
|
·
|
catastrophic
events, including natural disasters, epidemics, man-made catastrophes, and
other unforeseen occurrences.
|
Our growth strategy
is dependent in part upon our ability to acquire additional managed care
businesses and successfully integrate those businesses into our
operations.
Part of
our growth strategy is to grow through the acquisition of additional health
plans and other managed care businesses. Historically, we have significantly
increased our revenues through a number of acquisitions. We cannot assure you
that we will be able to continue to locate suitable acquisition candidates,
obtain required governmental approvals, successfully integrate the businesses we
acquire and realize anticipated operational improvements and cost savings. The
businesses we acquire also may not achieve our anticipated levels of
profitability. Our future growth rate will be adversely affected if we are not
able to successfully complete acquisitions. In such acquisitions, we
may assume liabilities that could adversely affect our
business. Additionally, we may issue stock in connection with such
acquisitions, which would result in dilution to existing stockholders, or we
could incur debt to finance such acquisitions.
Competition may
limit our ability to attract new members or to increase or maintain our premium
rates, which would adversely affect our results of
operations.
We
operate in a highly competitive environment that may affect our ability to
attract new members and increase premium rates. We compete with other health
plans for members. We believe the principal factors influencing the choice among
health care options are:
·
|
price
of benefits offered and cost and risk of alternatives such as
self-insurance;
|
·
|
location
and choice of health care
providers;
|
·
|
quality
of customer service;
|
·
|
comprehensiveness
of coverage offered;
|
·
|
reputation
for quality care;
|
·
|
financial
stability of the plan; and
|
·
|
diversity
of product offerings.
|
We
compete with other managed care companies that may have broader geographical
coverage, more established reputations in our markets, greater market share,
larger contracting scale, lower costs and/or greater financial and other
resources. We also may face increased rate competition from certain Blue Cross
plan competitors that might be required by state regulation to reduce capital
surpluses that may be deemed excessive.
14
The
non-renewal or termination of our government contracts, or unsuccessful bids for
business with government agencies, could adversely affect our business,
financial condition and results of operations.
Our
contracts with state government programs are subject to renewal, terminations
and competitive bidding procedures. In particular, the contract
between our HealthCare USA subsidiary and the Missouri Medicaid program, MO
HealthNet, runs from October 1, 2009 through June 30, 2010. This
contract is subject to two successive one-year extensions running through June
30, 2012, if MO HealthNet so elects. If we are unable to renew or
successfully re-bid for this and/or other of our state contracts, or if such
contracts were terminated or renewed on less favorable terms, our business,
financial condition and results of operations could be adversely
affected.
Additionally,
on May 1, 2009, we notified CMS of our intention to cease offering PFFS
products. This non-renewal took effect at the end of the term of this
current year, December 31, 2009.
We depend on the
services of non-exclusive independent agents and brokers to market our products
to employers, and we cannot assure you that they will continue to market our
products in the future.
We depend
on the services of independent agents and brokers to market our managed care
products and services, particularly to small employer group members. We do not
have long term contracts with independent agents and brokers, who typically are
not dedicated exclusively to us and frequently market the health care products
of our competitors. We face intense competition for the services and allegiance
of independent agents and brokers, and we cannot assure you that agents and
brokers will continue to market our products in a fair and consistent
manner.
If we fail to obtain
cost-effective agreements with a sufficient number of providers we may
experience higher medical costs and a decrease in our
membership.
Our
future results largely depend on our ability to enter into cost-effective
agreements with hospitals, physicians and other health care providers. The terms
of those provider contracts will have a material effect on our medical costs and
our ability to control these costs. In addition, our ability to contract
successfully with a sufficiently large number of providers in a particular
geographic market will impact the relative attractiveness of our managed care
products in those markets, and our ability to contract at competitive rates with
our PPO and workers’ compensation related providers will affect the
attractiveness and profitability of our products in the national account,
network rental and workers’ compensation businesses.
In some
of our markets, there are large provider systems that have a major presence.
Some of these large provider systems have operated their own health plans in the
past or may choose to do so in the future. These provider systems could
adversely affect our product offerings and results of operations if they refuse
to contract with us, place us at a competitive disadvantage or use their market
position to negotiate contracts that are less favorable to us. Provider
agreements are subject to periodic renewal and renegotiations. We cannot assure
you that these large provider systems will continue to contract with us or that
they will contract with us on terms that are favorable to us.
Negative publicity
regarding the managed health care industry generally, or our Company in
particular, could adversely affect our results of operations or
business.
Over the
last several years, the managed health care industry has been subject to a
significant amount of negative publicity. Negative publicity regarding the
managed health care industry generally, or our Company in particular, may result
in increased regulation and legislative review of industry practices, further
increase our costs of doing business and adversely affect our results of
operations by:
·
|
requiring
us to change our products and
services;
|
·
|
increasing
the regulatory burdens under which we operate;
or
|
·
|
adversely
affecting our ability to market our products or services to employers,
individuals or other customers.
|
Negative
publicity relating to our company also may adversely affect our ability to
attract and retain members.
A failure of our
information technology systems could adversely affect our
business.
We depend
on our information technology systems for timely and accurate information.
Failure to maintain effective and efficient information technology systems or
disruptions in our information technology systems could cause disruptions in our
business operations, loss of existing customers, difficulty in attracting new
customers, disputes with customers and providers, regulatory problems, increases
in administrative expenses and other adverse consequences.
We face periodic
reviews, audits and investigations under our contracts with federal and state
government agencies, and these audits could have adverse findings that may
negatively affect our business.
We
contract with various federal and state governmental agencies to provide managed
health care services. Pursuant to these contracts, we are subject to various
governmental reviews, audits and investigations to verify our compliance with
the contracts and applicable laws and regulations. Any adverse review, audit or
investigation could result in:
·
|
refunding
of amounts we have been paid pursuant to our government
contracts;
|
·
|
imposition
of fines, penalties and other sanctions on
us;
|
·
|
loss
of our right to participate in various federal
programs;
|
·
|
damage
to our reputation in various
markets;
|
·
|
increased
difficulty in selling our products and services;
and
|
·
|
loss
of one or more of our licenses to act as an insurer or HMO or to otherwise
provide a service.
|
CMS
periodically performs RADV audits and may seek return of premium payments made
to the company if risk adjustment factors are not properly supported by medical
record data. We estimate and record reserves for CMS audits based on
information available at the time the estimates are made. The judgments
and uncertainties affecting the application of these policies include
significant estimates related to the amount of hierarchical condition category
(“HCC”) revenue subject to audit and anticipated error rates. Although we
believe the Company maintains appropriate reserves for its exposure to the RADV
audits, actual results could differ materially from those
estimates. Accordingly, CMS audit results could have a material
adverse effect on our financial position, results of operations, and cash
flows.
15
We are subject to
litigation in the ordinary course of our business, including litigation based on
new or evolving legal theories that could adversely affect our results of
operations.
Due to
the nature of our business, we are subject to a variety of legal actions
relating to our business operations including claims relating to:
·
|
our
denial of non-covered benefits;
|
·
|
vicarious
liability for medical malpractice claims filed against our
providers;
|
·
|
disputes
with our providers alleging RICO and antitrust
violations;
|
·
|
disputes
with our providers over reimbursement and termination of provider
contracts;
|
·
|
disputes
related to our non-risk business, including actions alleging breach of
fiduciary duties, claim administration errors and failure to disclose
network rate discounts and other fee and rebate
arrangements;
|
·
|
disputes
over our co-payment calculations;
|
·
|
customer
audits of our compliance with our plan obligations;
and
|
·
|
disputes
over payments for out-of-network
benefits.
|
We
describe certain litigation to which we have been parties in Note L, Commitments
and Contingencies, to our consolidated financial statements. In
addition, plaintiffs continue to bring new types of legal claims against managed
care companies. Recent court decisions and legislative activity increase our
exposure to these types of claims. In some cases, plaintiffs may seek class
action status and substantial economic, non-economic or punitive damages. The
loss of even one of these claims, if it resulted in a significant damage award,
could have an adverse effect on our financial condition or results of
operations. In the event a plaintiff was to obtain a significant damage award it
may make reasonable settlements of claims more difficult to obtain. We cannot
determine with any certainty what new theories of recovery may evolve or what
their impact may be on the managed care industry in general or on us in
particular.
We have,
and expect to maintain, liability insurance coverage for some of the potential
legal liabilities we may incur. Currently, professional liability and employment
practices liability insurance is covered through our captive subsidiary.
Potential liabilities that we incur may not, however, be covered by insurance,
our insurers may dispute coverage or may be unable to meet their obligations or
the amount of our insurance coverage may be inadequate. We cannot assure you
that we will be able to obtain insurance coverage in the future, or that
insurance will continue to be available on a cost effective basis, if at
all.
Our stock price and
trading volume may be volatile.
From time
to time, the price and trading volume of our common stock, as well as the stock
of other companies in the health care industry, may experience periods of
significant volatility. Company-specific issues and developments generally in
the health care industry (including the regulatory environment) and the capital
markets and the economy in general may cause this volatility. Our stock price
and trading volume may fluctuate in response to a number of events and factors,
including:
·
|
variations
in our operating results;
|
·
|
changes
in the market’s expectations about our future operating
results;
|
·
|
changes
in financial estimates and recommendations by securities analysts
concerning our company or the health care industry
generally;
|
·
|
operating
and stock price performance of other companies that investors may deem
comparable;
|
·
|
news
reports relating to trends in our
markets;
|
·
|
changes
or proposed changes in the laws and regulations affecting our
business;
|
·
|
acquisitions
and financings by us or others in our industry;
and
|
·
|
sales
of substantial amounts of our common stock by our directors and executive
officers or principal stockholders, or the perception that such sales
could occur.
|
Our indebtedness
imposes certain restrictions on our business and operations.
The
indentures for our senior notes and bank credit agreement impose restrictions on
our business and operations. These restrictions limit our ability to, among
other things:
·
|
incur
additional debt;
|
·
|
pay
dividends, repurchase common stock, or make other restricted
payments;
|
·
|
create
or permit certain liens on our
assets;
|
·
|
sell
assets;
|
·
|
create
or permit restrictions on the ability of certain of our restricted
subsidiaries to pay dividends or make other distributions to
us;
|
·
|
enter
into transactions with affiliates;
|
·
|
enter
into sale and leaseback transactions;
and
|
·
|
consolidate
or merge with or into other companies or sell all or substantially all of
our assets.
|
Our ability to
generate sufficient cash to service our indebtedness will depend on numerous
factors beyond our control.
Our
ability to service our indebtedness will depend on our ability to generate cash
in the future. Our ability to generate the cash necessary to service our
indebtedness is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. We cannot
assure you that our business will generate sufficient cash flow from operations
or that future borrowings will be available in an amount sufficient to enable us
to service our indebtedness or to fund other liquidity needs. In addition, we
will be more vulnerable to economic downturns, adverse industry conditions and
competitive pressures as a result of our significant indebtedness. We may need
to refinance all or a portion of our indebtedness before maturity. We cannot
assure you that we will be able to refinance any of our indebtedness or that we
will be able to refinance our indebtedness on commercially reasonable
terms.
16
A
substantial amount of our cash flow is generated by our regulated
subsidiaries.
Our
regulated subsidiaries conduct a substantial amount of our consolidated
operations. Consequently, our cash flow and our ability to pay our debt and fund
future acquisitions depends, in part, on the amount of cash that the parent
company receives from our regulated subsidiaries. Our subsidiaries’ ability to
make any payments to the parent company will depend on their earnings, business
and tax considerations, legal and regulatory restrictions and economic
conditions. Our regulated subsidiaries are subject to HMO and insurance
regulations that require them to meet or exceed various capital standards and
may restrict their ability to pay dividends or make cash transfers to the parent
company. If our regulated subsidiaries are restricted from paying the parent
company dividends or otherwise making cash transfers to the parent company, it
could have a material adverse effect on the parent company’s cash flow. For
additional information regarding our regulated subsidiaries’ statutory capital
requirements, see Part II, Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- Statutory Capital Requirements.”
Our
certificate of incorporation and bylaws and Delaware law could delay, discourage
or prevent a change in control of our Company that our stockholders may consider
favorable.
Provisions
in our certificate of incorporation and bylaws and Delaware law may delay,
discourage or prevent a merger, acquisition or change in control involving our
company that our stockholders may consider favorable. These provisions could
also discourage proxy contests and make it more difficult for stockholders to
elect directors and take other corporate actions. Among other things, these
provisions:
·
|
provide
for a classified board of directors with staggered three-year terms so
that no more than one-third of our directors can be replaced at any annual
meeting;
|
·
|
provide
that directors may be removed without cause only by the affirmative vote
of the holders of two-thirds of our outstanding
shares;
|
·
|
provide
that amendment or repeal of the provisions of our certificate of
incorporation establishing our classified board of directors must be
approved by the affirmative vote of the holders of three-fourths of our
outstanding shares; and
|
·
|
establish
advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted on by stockholders at
a meeting.
|
These
provisions of our certificate of incorporation and bylaws and Delaware law may
discourage transactions that otherwise could provide for the payment of a
premium over prevailing market prices for our common stock and also could limit
the price that investors are willing to pay in the future for shares of our
common stock.
Our
results of operations and shareholders’ equity could be materially adversely
affected if we have an impairment of our intangible assets.
Due
largely to our past acquisitions, goodwill and other intangible assets represent
a substantial portion of our total assets. Goodwill and other intangible assets
were approximately $3.0 billion as of December 31, 2009, representing
approximately 36.7% of our total assets. In accordance with applicable
accounting standards, we perform periodic assessments of our goodwill and other
intangible assets to determine whether all or a portion of their carrying values
may no longer be recoverable, in which case a charge to earnings may be
necessary. This impairment testing requires us to make assumptions and judgments
regarding the estimated fair value of our reporting units. Fair value is
calculated using a blend of a projected income and market value approach.
Estimated fair values developed based on our assumptions and judgments might be
significantly different if other assumptions and estimates were to be used.
Any future evaluations requiring an asset impairment of our goodwill and
other intangible assets could materially affect our results of operations and
shareholders’ equity in the period in which the impairment occurs.
17
Our
efforts to capitalize on Medicare business opportunities could prove to be
unsuccessful.
Medicare
programs represent a significant portion of our business, accounting for
approximately 50.7% of our managed care premium revenue in 2009. In connection
with the passage of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the “Drug Act”) and the Drug Act’s implementing
regulations adopted in 2005, we have significantly expanded our Medicare health
plans and restructured our Medicare program management team and operations to
enhance our ability to pursue business opportunities presented by the Drug Act
and the Medicare program generally.
Particular
risks associated with our providing Medicare Part D prescription drug benefits
under the Drug Act include potential uncollectability of receivables, inadequacy
of underwriting assumptions, inability to receive and process information and
increased pharmaceutical costs (as well as the underlying seasonality of this
business).
In 2007,
we expanded our Medicare programs. Specifically, we expanded our
Medicare Part D prescription drug benefits plans to all states, and enhanced our
HMO/PPO product offerings. All of these growth activities required substantial
administrative and operational capabilities. If we are unable to
maintain the administrative and operational capabilities to address the
additional needs and increasing regulation of our remaining Medicare programs,
it could have a material adverse effect on our Medicare business and operating
results.
In
addition, if the cost or complexity of the recent Medicare changes exceed our
expectations or prevent effective program implementation, if the government
alters or reduces funding of Medicare programs, if we fail to design and
maintain programs that are attractive to Medicare participants or if we are not
successful in winning contract renewals or new contracts under the Drug Act’s
competitive bidding process, our current Medicare business and our ability to
expand our Medicare operations could be materially and adversely affected, and
we may not be able to realize any return on our investments in Medicare
initiatives.
None.
As of
December 31, 2009, we leased approximately 89,000 square feet of space for our
corporate office in Bethesda, Maryland. We also leased approximately 1,900,000
aggregate square feet for office space, subsidiary operations and customer
service centers for the various markets where our health plans and other
subsidiaries operate, of which approximately 4% is subleased. Our leases expire
at various dates from 2010 through 2019. We also own nine buildings throughout
the country with approximately 798,000 square feet, which is used for
administrative services related to our subsidiaries’ operations, of which
approximately 3% is subleased. We believe that our facilities are adequate for
our operations.
See Legal
Proceedings in Note L, Commitments and Contingencies, to the notes to the
consolidated financial statements, which is incorporated herein by
reference.
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year 2009.
Our
common stock is traded on the New York Stock Exchange (“NYSE”) stock market
under the ticker symbol “CVH.” The following table sets forth the quarterly
range of the high and low sales prices of the common stock on the NYSE stock
markets during the calendar period indicated. Such quotations represent
inter-dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions:
2009
|
2008
|
|||||
High
|
Low
|
High
|
Low
|
|||
First
Quarter
|
$ 17.33
|
$ 7.97
|
$ 63.89
|
$ 37.50
|
||
Second
Quarter
|
20.10
|
12.29
|
46.66
|
30.10
|
||
Third
Quarter
|
24.84
|
17.45
|
39.36
|
28.01
|
||
Fourth
Quarter
|
25.78
|
18.18
|
33.47
|
9.44
|
On
January 31, 2010, we had approximately 881 stockholders of record, not including
beneficial owners of shares held in nominee name. On January 31,
2010, our closing price was $22.88.
18
We have
not paid any cash dividends on our common stock and expect for the foreseeable
future to retain all of our earnings to finance the development of our business
or to repurchase our common stock or to pay down our debt. Our
ability to pay dividends is limited by certain covenants and restrictions
contained in our debt obligations and by insurance regulations applicable to our
subsidiaries. Subject to the terms of such insurance regulations and
debt covenants, any future decision as to the payment of dividends will be at
the discretion of our Board of Directors and will depend on our earnings,
financial position, capital requirements and other relevant factors. See Part
II, Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources.”
The
Company’s Board of Directors has approved a program to repurchase its
outstanding common shares. Share repurchases may be made from time to
time at prevailing prices on the open market, by block purchase, or in private
transactions. Under the share repurchase program, the Company
purchased 1.5 million shares of its common stock during 2009 at an aggregate
cost of $30.0 million, 7.3 million shares during 2008 at an aggregate cost of
$318.0 million, and 7.5 million shares during 2007 at an aggregate cost of
$429.0 million. As of December 31, 2009, the total remaining number of common
shares the Company is authorized to repurchase under this program is 5.2
million.
The
following table shows our purchases of our common shares during the quarter
ended December 31, 2009 (in thousands, except average price per share
information).
Total Number of
Shares Purchased (1)
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced
Plans
|
Maximum Number of
Shares That May Yet Be Purchased Under The Plan or Program (2)
|
||
October
1-31, 2009
|
3
|
$ 18.30
|
-
|
5,213
|
|
November
1-30, 2009
|
9
|
$ 22.72
|
-
|
5,213
|
|
December
1-31, 2009
|
-
|
-
|
5,213
|
||
Totals
|
12
|
$ 21.44
|
-
|
5,213
|
|
(1)
Includes shares purchased in connection with the vesting of restricted
stock awards to satisfy employees’ minimum statutory tax withholding
obligations.
(2)
These shares are under a stock repurchase program previously announced on
December 20, 1999, as
amended.
|
(in thousands,
except per share and membership data)
December
31,
|
|||||
2009
|
2008
|
2007
|
2006
|
2005
|
|
Operations Statement
Data (1,
2)
|
|||||
Operating
revenues
|
$
13,903,526
|
$
11,734,227
|
$
9,694,176
|
$
7,549,253
|
$
6,428,049
|
Operating
earnings
|
501,951
|
585,529
|
901,328
|
828,539
|
764,812
|
Earnings
before income taxes
|
504,554
|
571,861
|
963,212
|
883,021
|
772,486
|
Income
from continuing operations
|
315,334
|
362,000
|
605,444
|
551,457
|
485,020
|
(Loss)
income from discontinued operations, net of tax
|
(73,033)
|
19,895
|
20,650
|
8,588
|
16,619
|
Net
earnings
|
242,301
|
381,895
|
626,094
|
560,045
|
501,639
|
Basic
earnings per share from continuing operations
|
2.15
|
2.43
|
3.91
|
3.48
|
3.07
|
Basic
(loss) earnings per share from discontinued operations
|
(0.50)
|
0.13
|
0.13
|
0.05
|
0.11
|
Total
basic earnings per share
|
1.65
|
2.56
|
4.04
|
3.53
|
3.18
|
Diluted
earnings per share from continuing operations
|
2.14
|
2.41
|
3.85
|
3.42
|
3.00
|
Diluted
(loss) earnings per share from discontinued operations
|
(0.50)
|
0.13
|
0.13
|
0.05
|
0.10
|
Total
diluted earnings per share
|
1.64
|
2.54
|
3.98
|
3.47
|
3.10
|
Dividends
declared per share
|
-
|
-
|
-
|
-
|
-
|
Balance Sheet Data
(1,
2)
|
|||||
Cash
and investments
|
$ 3,855,647
|
$ 3,171,121
|
$
2,859,237
|
$
2,793,800
|
$
2,062,893
|
Total
assets
|
8,166,532
|
7,727,398
|
7,158,791
|
5,665,107
|
4,895,172
|
Total
medical liabilities
|
1,605,407
|
1,446,391
|
1,161,963
|
1,121,151
|
752,774
|
Other
long-term liabilities
|
456,518
|
368,482
|
445,470
|
309,616
|
309,742
|
Debt
|
1,599,027
|
1,902,472
|
1,662,021
|
760,500
|
770,500
|
Stockholders'
equity
|
3,712,554
|
3,430,669
|
3,301,479
|
2,953,002
|
2,554,703
|
Operating Data (1,
2)
|
|||||
Medical
loss ratio
|
85.4%
|
84.0%
|
79.6%
|
79.3%
|
79.4%
|
Operating
earnings ratio
|
3.6%
|
5.0%
|
9.3%
|
11.0%
|
11.9%
|
Administrative
expense ratio
|
15.5%
|
16.5%
|
17.0%
|
15.6%
|
16.1%
|
Basic
weighted average shares outstanding
|
146,652
|
148,893
|
154,884
|
158,601
|
157,965
|
Diluted
weighted average shares outstanding
|
147,395
|
150,208
|
157,357
|
161,434
|
161,716
|
Total
risk membership
|
4,020,000
|
3,281,000
|
3,140,000
|
2,620,000
|
1,983,000
|
Total
non-risk membership
|
1,249,000
|
1,347,000
|
1,533,000
|
1,487,000
|
1,723,000
|
(1)
Balance Sheet Data includes acquisition balances as of December 31 of the
year of acquisition. Operating Data includes the results of
operations of acquisitions from the date of the respective
acquisition. See the notes to the consolidated financial
statements for information about our
acquisitions.
(2)
Unless noted as discontinued operations, Operating Data excludes First
Health Services Corporation (“FHSC”) operating results for each
year presented due to the sale of this business in July
2009. Balance Sheet Data does not exclude FHSC balances for
2008 and prior as amounts are immaterial. See the notes to the
consolidated financial statements for additional information about our
discontinued operations
presentation.
|
19
The
following discussion should be read in conjunction with the accompanying audited
consolidated financial statements and notes thereto.
This Item
7 contains forward-looking statements as described in Part I. These
forward-looking statements involved risks and uncertainties described in Part
I., Item 1A, “Risk Factors.” The organization of our Management’s
Discussion and Analysis of Financial Condition and Results of Operations is as
follows:
·
|
Executive-Level
Overview
|
·
|
Critical
Accounting Policies
|
·
|
New
Accounting Standards
|
·
|
Acquisitions
|
·
|
Membership
|
·
|
Results
of Operations
|
·
|
Liquidity
and Capital Resources
|
·
|
Other
Disclosures
|
We are a
diversified national managed healthcare company based in Bethesda, Maryland,
operating health plans, insurance companies, network rental and workers’
compensation services companies. Through our Health Plan and Medical Services
Business, Specialized Managed Care Business, and Workers’ Compensation
divisions, we provide a full range of risk and fee-based managed care products
and services to a broad cross section of individuals, employer and
government-funded groups, government agencies, and other insurance carriers and
administrators.
·
|
·
|
Medicare
Part D membership growth of 752,000 from the prior year, an increase of
81%
|
·
|
Health
plan commercial group risk medical loss ratio of
81.9%
|
·
|
Cash
flow from operations was $881.8
million
|
·
|
Debt
reduction of $303.5 million from the prior year resulting in a 30.1% debt
to capital ratio at year-end
|
·
|
Operating
earnings as a percentage of total revenue were 3.6%, compared to 5.0% in
the prior year
|
·
|
Income
from continuing operations was $315.3 million, a decline of 13% from 2008
income from continuing
operations
|
·
|
Diluted
EPS from continuing operations was $2.14, a decline of 11% from 2008
diluted EPS from continuing
operations
|
Operating
Revenue and Products
We
operate health plans, insurance companies, managed care services companies, and
workers’ compensation services companies and generate our operating revenues
from premiums and fees for a broad range of managed care and management service
products. Managed care premiums for our commercial risk products, for
which we assume full underwriting risk, can vary. For example, premiums for our
PPO and POS products are typically lower than our HMO premiums due to medical
underwriting and higher deductibles and co-payments that are typically required
of the PPO and POS members. Managed care premium rates for our government
programs, Medicare and state-sponsored managed Medicaid, are largely established
by governmental regulatory agencies. These government products are offered in
select markets where we believe we can achieve profitable growth based upon
favorable reimbursement levels, provider costs and regulatory
climates.
Revenue
for our management services products (“non-risk”) is generally a fixed
administrative fee, provided on a predetermined contractual basis or on a
percentage-of-savings basis, for access to our health care provider networks and
health care management services, for which we do not assume underwriting risk.
The management services we provide typically include health care provider
network management, clinical management, pharmacy benefit management (“PBM”),
bill review, claims repricing, claims processing, utilization review and quality
assurance.
Operating
Expenses
We incur
medical costs related to our products for which we assume underwriting
risk. Our medical costs include medical claims paid under contractual
relationships with a wide variety of providers and capitation arrangements.
Medical costs also include an estimate of claims incurred but not
reported.
We
maintain provider networks that furnish health care services through contractual
arrangements with physicians, hospitals and other health care providers.
Prescription drug benefits are provided through a formulary comprised of an
extensive list of drugs. Drug prices are negotiated at discounted rates through
a national network of pharmacies. Drug costs for our risk products
are included in medical costs.
20
We have
capitation arrangements for certain ancillary heath care services such as
laboratory services and in some cases physician and radiology
services. A small percentage of our membership is covered by global
capitation arrangements. Under the typical arrangement, the provider receives a
fixed percentage of premium to cover costs of all medical care or of the
specified ancillary services provided to the globally capitated members. Under
some capitated arrangements, physicians may also receive additional compensation
from risk sharing and other incentive arrangements. Global capitation
arrangements limit our exposure to the risk of increasing medical costs, but
expose us to risk as to the adequacy of the financial and medical care resources
of the provider organization. We are ultimately responsible for the coverage of
our members pursuant to the customer agreements. To the extent that the
respective provider organization faces financial difficulties or otherwise is
unable to perform its obligations under the capitation arrangements, we will be
required to perform such obligations. Consequently, we may have to incur costs
in doing so in excess of the amounts we would otherwise have to pay under the
original global or ancillary capitation through our contracted network
arrangements. Medical costs associated with capitation arrangements
made up approximately 2.9% of the Company’s total medical costs for the year
ended December 31, 2009.
We have
established systems to monitor the availability, appropriateness and
effectiveness of the patient care we provide. We collect utilization data in
each of our markets that we use to analyze over-utilization or under-utilization
of services and assist our health plans in arranging for appropriate care for
their members and improving patient outcomes in a cost efficient manner. Medical
directors also monitor the utilization of diagnostic services and encourage the
use of outpatient surgery and testing where appropriate. Each health plan
collects data showing each physician’s utilization profile for diagnostic tests,
specialty referrals and hospitalization and presents such data to the health
plan’s physicians. The medical directors monitor these results in an effort to
ensure the use of medically, cost-effective appropriate services.
We incur
cost of sales expense for prescription drugs provided by our workers’
compensation pharmacy benefit manager and for the independent medical
examinations performed by physicians on injured workers. These costs
are associated with fee-based products.
Our
selling, general and administrative expenses consist primarily of salaries and
related costs for personnel involved in the administration of services we offer
as well as commissions paid to brokers and agents who assist in the sale of our
products. To a lesser extent, our selling, general and administration
expenses include other administrative and facility costs needed to provide these
administrative services. We operate regional service centers that
perform claims processing, premium billing and collection, enrollment and
customer service functions. Our regional service centers enable us to
take advantage of economies of scale, implement standardized management
practices and capitalize on the benefits of our integrated information
technology systems.
Cash
Flows
Critical
Accounting Policies
Revenue
Recognition
Managed
care premiums are recorded as revenue in the month in which members are entitled
to service. Premiums are based on both a per subscriber contract rate and the
number of subscribers in our records at the time of billing. Premium billings
are generally sent to employers in the month preceding the month of coverage.
Premium billings may be subsequently adjusted to reflect changes in membership
as a result of retroactive terminations, additions, or other changes. Due to
early timing of the premium billing, we are able to identify in the current
month the retroactive adjustments included on two subsequent months
billings. Current period revenues are adjusted to reflect these retroactive
adjustments.
Based on
information received subsequent to generating premium billings, historical
trends, bad debt write-offs and the collectibility of specific accounts, we
estimate, on a monthly basis, the amount of bad debt and future membership
retroactivity and adjust our revenue and allowances accordingly.
As of
December 31, 2009, we maintained allowances for retroactive billing adjustments
of approximately $22.6 million compared with approximately $35.0 million at
December 31, 2008. We also maintained allowances for doubtful accounts of
approximately $21.4 million and $11.0 million as of December 31, 2009 and 2008,
respectively. The calculation for these allowances is based on a percentage of
the gross accounts receivable with the allowance percentage increasing for older
receivables.
We
receive premium payments from the Centers for Medicare and Medicaid Services
(“CMS”) on a monthly basis for our Medicare membership to provide healthcare
benefits to our Medicare members. Premiums are fixed (subject to
retroactive risk adjustment) on an annual basis by contracts with CMS.
Membership and category eligibility are periodically reconciled with CMS and can
result in adjustments to revenue. CMS uses a risk adjustment model that
incorporates the use of HCC codes to determine premium payments to health
plans. We estimate risk adjustment revenues based on the diagnosis
data submitted to CMS. Changes in revenue from CMS resulting from the
periodic changes in risk adjustments scores for our membership are recognized
when the amounts become determinable and the collectibility is reasonably
assured.
CMS
periodically performs audits and may seek return of premium payments made to the
company if risk adjustment factors are not properly supported by medical record
data. We estimate and record reserves for CMS audits based on
information available at the time the estimates are made. The judgments
and uncertainties affecting the application of these policies include
significant estimates related to the amount of HCC revenue subject to audit and
anticipated error rates. Although we believe the Company maintains appropriate
reserves for its exposure to the risk adjustment data validation (“RADV”)
audits, actual results could differ materially from those
estimates.
21
We
contract with the United States Office of Personnel Management (“OPM”) and with
various federal employee organizations to provide health insurance benefits
under the Federal Employees Health Benefits Program (“FEHBP”). These contracts
are subject to government regulatory oversight by the Office of the Inspector
General (“OIG”) of OPM, which performs periodic audits of these benefit program
activities to ensure that contractors meet their contractual obligations with
OPM. For our managed care contracts, the OIG conducts periodic audits to,
among other things, verify that premiums established under its contracts are in
compliance with community rating requirements under the FEHBP. The
OPM may seek premium refunds or institute other sanctions against health plans
that participate in the program. For our experience-rated plans, the OIG
focuses on the appropriateness of contract charges, the effectiveness of claims
processing, financial and cost accounting systems, and the adequacy of internal
controls to ensure proper contract charges and benefits payments. The OIG
may seek refunds of costs charged under these contracts or institute other
sanctions against health plans. These audits are generally a number of
years in arrears. We estimate and record reserves for audit and other
contract adjustments for both our managed care contracts and our experience
rated plans based on appropriate guidelines. Any differences between
actual results and estimates are recorded in the year the audits are
finalized.
We enter
into performance guarantees with employer groups where we pledge that we will
meet certain standards. These standards vary widely and could involve customer
service, member satisfaction, claims processing, claims accuracy, telephone
response time, etc. We also enter into financial guarantees which can take
various forms including, among others, achieving an annual aggregate savings
threshold, achieving a targeted level of savings per-member per-month or
achieving overall network penetration in defined demographic markets. For each
guarantee, we estimate and record performance based revenue after considering
the relevant contractual terms and the data available for the performance based
revenue calculation. Pro-rata performance based revenue is recognized on an
interim basis pursuant to the rights and obligations of each party upon
termination of the contracts.
Medical
Claims Expense and Liabilities
Medical
liabilities consist of actual claims reported but not paid and estimates of
health care services incurred but not reported. Medical liabilities estimates
are developed using actuarial principles and assumptions that consider, among
other things, historical claims payment patterns, provider reimbursement
changes, historical utilization trends, current levels of authorized inpatient
days, other medical cost inflation factors, membership levels, benefit design
changes, seasonality, demographic mix change and other relevant
factors.
We employ
a team of actuaries that have developed, refined and used the same set of
reserve models over the past several years. These reserve models do not
calculate separate amounts for reported but not paid and incurred but not
reported, but rather a single estimate of medical claims liabilities. These
reserve models make use of both historical claim payment patterns as well as
emerging medical cost trends to project our best estimate of claim liabilities.
Within these models, historical data of paid claims is formatted into claim
triangles which compare claim incurred dates to the claim payment dates. This
information is analyzed to create “completion factors” that represent the
average percentage of total incurred claims that have been paid through a given
date after being incurred. Completion factors are applied to claims paid through
the financial statement date to estimate the ultimate claim expense incurred for
the current period. Actuarial estimates of claim liabilities are then determined
by subtracting the actual paid claims from the estimate of the ultimate incurred
claims.
Actuarial
standards of practice generally require the actuarially developed medical claims
estimates to cover obligations under an assumption of moderately adverse
conditions. Adverse conditions are situations in which the actual claims are
expected to be higher than the otherwise estimated value of such claims. In many
situations, the claims paid amount experienced will be less than the estimate
that satisfies the actuarial standards of practice. Medical claims liabilities
are recorded at an amount we estimate to be appropriate. Adjustments of prior
years estimates may result in additional medical costs or, as we experienced
during the last several years, a reduction in medical costs in the period an
adjustment was made. Our reserve models have historically developed favorably
suggesting that the accrued liabilities calculated from the models were more
than adequate to cover our ultimate liability for unpaid claims. We believe that
this favorable development has been a result of good communications between our
health plans and our actuarial staff regarding medical utilization, mix of
provider rates and other components of medical cost trend.
The
following table presents the components of the change in medical claims
liabilities for the years ended December 31, 2009, 2008 and 2007, respectively
(in thousands).
2009
|
2008
|
2007
|
||||
Medical
liabilities, beginning of year
|
$1,446,391
|
$1,161,963
|
$1,121,151
|
|||
Acquisitions (1)
|
-
|
7,590
|
126,583
|
|||
Reported
Medical Costs
|
||||||
Current
year
|
11,049,227
|
8,916,644
|
7,055,596
|
|||
Prior
year development
|
(189,833)
|
(48,065)
|
(135,065)
|
|||
Total
reported medical costs
|
10,859,394
|
8,868,579
|
6,920,531
|
|||
Claim
Payments
|
||||||
Payments
for current year
|
9,598,222
|
7,577,939
|
6,134,631
|
|||
Payments
for prior year
|
1,123,131
|
1,013,216
|
586,390
|
|||
Total
claim payments
|
10,721,353
|
8,591,155
|
6,721,021
|
|||
Change
in Part D Related Subsidy Liabilities
|
20,975
|
(586)
|
(285,281)
|
|||
Medical
liabilities, end of year
|
$1,605,407
|
$1,446,391
|
$1,161,963
|
|||
Supplemental
Information:
|
||||||
Prior year development (2)
|
2.1%
|
0.7%
|
2.5%
|
|||
Current year paid percent (3)
|
86.9%
|
85.0%
|
86.9%
|
|||
(1)
Acquisition balances represent medical liabilities of the acquired
company as of the applicable acquisition date.
|
||||||
(2)
Prior year reported medical costs in the current year as a
percentage of prior year reported medical costs.
|
||||||
(3)
Current year claim payments as a percentage of current year
reported medical costs.
|
The
negative medical cost amounts noted as “prior year development” are favorable
adjustments for claim estimates being settled for amounts less than originally
anticipated. As noted above, these favorable developments from original
estimates occur due to changes in medical utilization, mix of provider rates and
other components of medical cost trends. Medical claim liabilities are generally
paid within several months of the member receiving service from the provider.
Accordingly, the 2009 prior year development relates almost entirely to claims
incurred in calendar year 2008.
22
The
significant favorable / (unfavorable) factors driving the overall favorable
prior year development for 2009 include:
•
|
Lower
than anticipated medical cost increases of $105.4 million favorable
development
|
•
|
Lower
than anticipated large claim liabilities of $27.5 million favorable
development
|
•
|
Lower
than anticipated other specific case liabilities of $12.9 million
favorable development
|
•
|
Higher
than expected completion factors of $50.1 million favorable
development
|
•
|
Higher
than expected inpatient hospital utilization of $(3.6) million unfavorable
development
|
•
|
Higher
than anticipated membership of $(2.5) million unfavorable
development
|
The
increase in total reported medical cost from 2008 to 2009 was driven primarily
by growth in the medical cost base of the Company due to the growth in Part D
and PFFS membership and partially due to medical cost
inflation. Prior year development experienced in 2008 was less
favorable compared to amounts experienced in 2007 and 2009. The lower favorable
development is primarily attributable to our PFFS line of business. PFFS
experienced unfavorable development in 2008 due to lower than expected
completion factors.
The
change in Medicare Part D related subsidy liabilities identified in the table
above represents subsidy amounts received from CMS for reinsurance and for cost
sharing related to low income individuals. These subsidies are recorded in
medical liabilities and we do not recognize premium revenue or claims expense
for these subsidies.
For the
more recent incurred months', the percentage of claims paid to claims incurred
in those months is generally low. As a result, the completion factor methodology
is less reliable for such months. For that reason, incurred claims for recent
months are not projected solely from historical completion and payment patterns.
Instead, they are projected by estimating the claims expense for those months
based upon recent claims expense levels and health care trend levels, or “trend
factors.” As these months mature over time, the two estimates (completion factor
and trend) are blended with completion factors being used exclusively for older
months.
Within
the reserve setting methodologies for inpatient and non-inpatient services, we
use certain assumptions. For inpatient services, authorized days are used for
utilization factors, while cost trend assumptions are incorporated into per diem
amounts. The per diem estimates reflect anticipated effects of changes in
reimbursement structure and severity mix. For non-inpatient services, a
composite trend assumption is applied which reflects anticipated changes in cost
per service, provider contracts, utilization and other factors.
Changes
in the completion factors, trend factors and utilization factors can have a
significant effect on the claim liability. The following example (in thousands,
except percentages) provides the estimated effect to our December 31, 2009
unpaid claims liability assuming hypothetical changes in the completion, trend,
and inpatient day factors. While we believe the selection of factors and ranges
provided are reasonable, certain factors and actual results may
differ.
Completion
Factor
|
Claims
Trend Factor
|
Inpatient
Day Factor
|
||||||||
Increase
(Decrease) in Completion Factor
|
(Decrease)
Increase in Unpaid Claims Liabilities
|
(Decrease)
Increase in Claims Trend Factor
|
(Decrease)
Increase in Unpaid Claims Liabilities
|
(Decrease)
Increase in Inpatient Day Factor
|
(Decrease)
Increase in Unpaid Claims Liabilities
|
|||||
1.0
%
|
$
(78,022)
|
(4.0)
%
|
$
(100,515)
|
(1.5)
%
|
$
(2,641)
|
|||||
0.7
%
|
$
(52,450)
|
(2.5)
%
|
$
(62,822)
|
(1.0)
%
|
$
(1,761)
|
|||||
0.3
%
|
$
(25,923)
|
(1.0)
%
|
$
(25,129)
|
(0.5)
%
|
$
(880)
|
|||||
(0.3)%
|
$ 26,099
|
1.0
%
|
$
25,129
|
0.5
%
|
$ 880
|
|||||
(0.7)
%
|
$ 53,173
|
2.5
%
|
$
62,822
|
1.0
%
|
$ 1,761
|
|||||
(1.0)
%
|
$ 79,634
|
4.0
%
|
$ 100,515
|
1.5
%
|
$ 2,641
|
We also
establish reserves, if required, for the probability that anticipated future
health care costs and contract maintenance costs under our existing provider
contracts will exceed anticipated future premiums and reinsurance recoveries on
those contracts.
A regular
element of our unpaid medical claim liability estimation process is the
examination of actual results and if appropriate, the modification of
assumptions and inputs related to the process based upon past experience. Our
reserve setting methodologies have taken these changes into consideration when
determining the factors used in calculating our medical claims liabilities as of
December 31, 2009 by choosing factors that reflect more recent
experience.
We
believe that the amount of medical liabilities is adequate to cover our ultimate
liability for unpaid claims as of December 31, 2009. However, actual claim
payments and other items may differ from established estimates.
23
Investments
We
account for investments in accordance with ASC Topic 320 “Investments – Debt and
Equity Securities.” We invest primarily in fixed income securities and classify
all of our investments as available-for-sale. Investments are evaluated on an
individual security basis at least quarterly to determine if declines in value
are other-than-temporary. In making that determination, we consider all
available evidence relating to the realizable value of a security. This evidence
includes, but is not limited to, the following:
•
|
the
length of time and the extent to which the fair value has been less than
the amortized cost basis;
|
|
•
|
adverse
conditions specifically related to the security, an industry, or
geographic area;
|
|
•
|
the
historical and implied volatility of the fair value of the
security;
|
|
•
|
the
payment structure of the debt security and the likelihood of the issuer
being able to make payments that increase in the
future;
|
|
•
|
failure
of the issuer of the security to make scheduled interest or principal
payments;
|
|
•
|
any
changes to the rating of the security by a rating
agency;
|
|
•
|
recoveries
or additional declines in fair value subsequent to the balance sheet date;
and
|
|
•
|
if
we have decided to sell the security or it is more likely than not that we
will be required to sell the security before recovery of its amortized
cost.
|
Temporary
declines in value of investments classified as available-for-sale are netted
with unrealized gains and reported as a net amount in a separate component of
stockholders’ equity, net of taxes. When we determine that a decline
in fair value below amortized cost is judged to be other-than-temporary we are
required to recognize the credit loss component as a charge in net earnings.
Included in net earnings is the credit loss component of an other-than-temporary
impairment charge. Realized gains and losses on the sale of
investments are determined on a specific identification basis.
We use
prices from independent pricing services and, to a lesser extent, indicative
(non-binding) quotes from independent brokers, to measure the fair value of our
investment securities. We utilize multiple independent pricing
services and brokers to obtain fair values; however, we generally obtain one
price/quote for each individual security.
We
perform an analysis on market liquidity and other market related conditions to
assess if the evaluated prices represent a reasonable estimate of their fair
value. Examples of the procedures performed include, but are not
limited to, an on-going review of pricing service methodologies, review of the
prices received from the pricing service and comparison of prices for certain
securities with two different price sources for reasonableness. We
monitor pricing inputs to determine if the markets from which the data is
gathered are active. As further validation, we sample a security’s
past fair value estimates and compare the valuations to actual transactions
executed in the market on similar dates. As a result of this
analysis, if we determine there is a more appropriate fair value based upon
available market data, which happens infrequently, the price of the security is
adjusted accordingly.
Generally,
we do not adjust prices received from pricing services or brokers, unless it is
evident from our verification procedures the fair value measurement is not
consistent with ASC Topic 820. Based upon our internal price verification
procedures and review of fair value methodology documentation provided by
independent pricing services, we have concluded that the fair values provided by
pricing services and brokers are consistent with the guidance in ASC Topic
820.
The
following table includes only our investments in an unrealized loss position at
December 31, 2009. For these investments, the table shows the gross
unrealized losses and fair value aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position (in thousands).
Less
than 12 months
|
12
months or more
|
Total
|
|||||||
Description
of Securities
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||
State
and municipal bonds
|
$ 49,963
|
$ (833)
|
$
12,898
|
$ (538)
|
$ 62,861
|
$
(1,371)
|
|||
US
Treasury securities
|
8,146
|
(32)
|
-
|
-
|
8,146
|
(32)
|
|||
Government
sponsored enterprises
|
45,331
|
(330)
|
-
|
-
|
45,331
|
(330)
|
|||
Residential
mortgage-backed securities
|
28,461
|
(645)
|
9,658
|
(287)
|
38,119
|
(932)
|
|||
Commercial mortgage-backed
securities
|
2,505
|
(17)
|
5,580
|
(490)
|
8,085
|
(507)
|
|||
Asset-backed
securities
|
-
|
-
|
2,255
|
(1,170)
|
2,255
|
(1,170)
|
|||
Corporate
debt and other securities
|
119,594
|
(1,091)
|
-
|
-
|
119,594
|
(1,091)
|
|||
Total
|
$
254,000
|
$
(2,948)
|
$
30,391
|
$
(2,485)
|
$
284,391
|
$
(5,433)
|
|||
The
unrealized losses presented in this table do not meet the criteria for an
other-than-temporary impairment. The unrealized losses are the result
of interest rate movements and significant increases in volatility and liquidity
concerns in the securities and credit markets. The Company does not
intend to sell and it is not more-likely-than not that the Company will be
required to sell before a recovery of the amortized cost basis of these
securities.
Our
municipal bond investments remain at an investment grade status based on their
own merits (excluding monoline insurers). Although we do not rely on
bond insurers exclusively to maintain our high level of investment credit
quality, $432.4 million of our $899.6 million total state and municipal bond
holdings are insured through a monoline insurer. For our
mortgaged-backed and asset-backed securities, our holdings remain at investment
grade with a AAA rating and AA+ rating, respectively. We participate
in only the higher level investment tranches. For our asset-backed
securities, we only participate in offerings that are over collateralized to
further protect our principal investment.
24
Goodwill
Goodwill
is subject to an annual assessment and periodically if other indicators are
present for impairment by applying a fair-value-based test. We performed a
goodwill impairment analysis, at the reporting unit level, as of October 1, our
annual impairment test date. However, each year we could be required
to evaluate the recoverability of goodwill and other indefinite lived intangible
assets prior to the required annual assessment if there is any indication of a
potential impairment. Those indications may include experiencing
disruptions to business, unexpected significant declines in operating results,
regulatory actions (such as heath care reform) that may impact operating
results, divestiture of a significant component of the business or a sustained
decline in market capitalization.
The
goodwill impairment test compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired. For our impairment analysis we relied on both the income
approach and the market approach. The income approach is based on the present
value of expected future cash flows. The income approach involves estimating the
present value of our estimated future cash flows utilizing a risk adjusted
discount rate. The market approach estimates a business’s fair value by
comparing our Company to similar publicly traded entities and also by analyzing
the recent sales of similar companies. The approaches were reviewed together for
consistency and commonality.
In the
case of a publicly traded company, the objective of the market capitalization
approach is to determine whether the quoted market price is indicative of the
fair value of its reporting units. In addressing the relationship of the
determined fair value of our reporting units to our market capitalization, we
considered factors outlined in ASC Topic 350, “Intangibles – Goodwill and Other”
including:
·
|
the
fair value of a reporting unit refers to the amount at which the unit as a
whole could be bought or sold in a current transaction between willing
parties;
|
·
|
quoted
market prices in active markets are the best evidence of fair value and
shall be used as the basis for the measurement, if
available;
|
·
|
the
market price of an individual equity security (and thus the market
capitalization of a reporting unit with publicly traded equity securities)
may not be representative of the fair value of the reporting unit as a
whole; and
|
·
|
the
quoted market price of an individual equity security, therefore, need not
be the sole measurement basis of the fair value of a reporting
unit.
|
As of
October 1, 2009 our market capitalization was below our book value which we
considered in our evaluation of fair value of goodwill. We concluded
that this did not affect the overall goodwill impairment analysis as we believe
our suppressed market capitalization to be primarily attributed to negative
market conditions as a result of the credit crisis, the economic
recession, debate over health care reform and current pricing and/or medical
trend issues within the managed care industry. We will continue to
monitor our market capitalization as a potential impairment indicator
considering overall market conditions and managed care industry
events. Any impairment charges that may result will be recorded in
the period in which the impairment is identified.
While we
believe we have made reasonable estimates and assumptions to calculate the fair
values of the reporting units and other intangible assets, it is possible a
material change could occur. Under the income approach, we assumed
certain growth rates, capital expenditures, discount rates and terminal growth
rates in our calculations. We also assume a control premium that is reasonable
based on our assessment of control premiums of entities of a similar size and/or
in a similar industry. If the assumptions used in our
fair-value-based tests differ from actual results, the estimates underlying our
goodwill impairment tests could be adversely affected.
As
discussed in Note E, Goodwill and Other Intangible Assets, to the consolidated
financial statements, we recorded an impairment charge of $72.4 million during
2009 related to the sale of FHSC.
Other Intangible
Assets
In
accordance with ASC 350-30, “General Intangibles Other than Goodwill,” we test
intangible assets not subject to amortization for impairment annually or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. The impairment test consists of a comparison of the fair
value of an intangible asset with its carrying amount. If the carrying amount of
the intangible asset exceeds its fair value, an impairment loss shall be
recognized in an amount equal to that excess. We have chosen October
1 as our annual impairment testing date. Our only intangible asset
that is not subject to amortization consists of a trade name which we determined
was not impaired based on the result of the October 1, 2009
analysis.
Also in
accordance with ASC 350-30 we review intangible assets that are subject to
amortization for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. An
impairment loss shall be recognized if the carrying amount of an intangible
asset is not recoverable and its carrying amount exceeds its fair
value. Our intangible assets that are subject to amortization consist
of our customer lists, licenses, and provider networks. Based on
events and circumstances, primarily lower than expected customer retention
levels, we recorded $5.5 million in impairment charges to certain customer list
balances in 2009.
See Note
E, Goodwill and Other Intangible Assets, to the consolidated financial
statements for additional disclosure related to our goodwill and other
intangible assets.
25
Other Long-Lived
Assets
In
accordance with ASC 360-10-35, we periodically review long-lived assets for
recoverability whenever adverse events or changes in circumstances indicate the
carrying value of the asset may not be recoverable. In assessing recoverability,
we must make assumptions regarding estimated future cash flows and other factors
to determine if an impairment loss may exist, and if so, estimate fair value. We
also must estimate and make assumptions regarding the useful life we assign to
our long-lived assets. If these estimates or their related
assumptions change in the future, we may be required to record impairment losses
or change the useful life, including accelerating depreciation for these
assets.
Our other
long-lived assets consist of property and equipment which are depreciated or
amortized over their estimated useful life, and are subject to impairment
reviews. In accordance with ASC 350-40, “Internal – Use Software,” the cost of
internally developed software is capitalized and included in property and
equipment. We capitalize costs incurred during the application development stage
for the development of internal-use software. These costs primarily relate to
payroll and payroll-related costs for employees along with costs incurred for
external consultants who are directly associated with the internal-use software
project. We have not incurred an impairment charge related to our
long-lived assets. See Note F, Property and Equipment, to the
consolidated financial statements for additional disclosure related to these
assets.
Stock-Based
Compensation Expense
We
account for share based compensation in accordance with the provisions of ASC
Topic 718 “Compensation – Stock Compensation.” Under the fair value recognition
provisions of ASC Topic 718, determining the appropriate fair value model and
calculating the fair value of share-based payment awards require the input of
subjective assumptions, including the expected life of the share-based payment
awards and stock price volatility. We believe that a blend of the implied
volatility of our tradeable options and the historical volatility of our share
price is a better indicator of expected volatility and future stock price trends
than historical volatility alone. Therefore, the expected volatility was based
on a blend of market-based implied volatility and the historical volatility of
our stock. The assumptions used in calculating the fair value of share-based
payment awards represent our best estimates. In addition, we are
required to estimate the expected forfeiture rate and recognize expense only for
those shares expected to vest. If our actual forfeiture rate is materially
different from our estimate, the stock-based compensation expense could be
significantly different from what we have recorded in the current period. See
Note H, Stock-Based Compensation, to the Consolidated Financial Statements in
Item 8 for a further discussion on stock-based compensation.
New
Accounting Standards
Acquisitions
For this
information, refer to Note C, Acquisitions, to the Notes to the Consolidated
Financial Statements herein.
The
following table presents our membership as of December 31, 2009 and 2008 (in
thousands).
As
of December 31,
|
||
Membership
by Product
|
2009
|
2008
|
Health
Plan Commercial Risk
|
1,418
|
1,575
|
Health
Plan Commercial ASO
|
685
|
714
|
Medicare
Advantage CCP
|
185
|
137
|
Medicaid
Risk
|
402
|
371
|
Health
Plan Total
|
2,690
|
2,797
|
Medicare
Advantage PFFS
|
329
|
243
|
Other
National Risk
|
2
|
24
|
Other
National ASO
|
565
|
633
|
Total
Medical Membership
|
3,586
|
3,697
|
Medicare
Part D
|
1,683
|
931
|
Total
Membership
|
5,269
|
4,628
|
26
Total
Health Plan membership decreased 107,000 primarily due to membership losses in
Commercial Risk. During 2009, the growth in national unemployment
resulted in an acceleration of “in group” Health Plan Commercial Risk membership
attrition compared to 2008. Additionally, the Commercial membership declined as
a result of premium pricing increases related to the higher medical cost
experienced in 2008. The increase in Medicare Advantage CCP
membership is primarily due to the result of our successful annual election
period and open enrollment period for 2009 and also due to
age-ins. Other National ASO membership decreased by 68,000 primarily
due to the attrition of membership associated with our loss of National Accounts
business compared to 2008.
The
increases in Medicare Part D membership of 752,000 and Medicare Advantage PFFS
of 86,000 were primarily the result of our successful annual election period and
open enrollment period for 2009. In
the second quarter of 2009, we decided not to renew our PFFS product
effective for the 2010 plan year. Our PFFS product represented $2.9
billion in revenue for the year ended December 31, 2009.
Results
of Continuing Operations
As
discussed in Note D, Discontinued Operations, to the consolidated financial
statements, on July 31, 2009 the Company sold its Medicaid/Public entity
business First
Health Services Corporation (“FHSC”) and therefore its operations are
classified as “discontinued” on the Company’s consolidated statements of
operations and excluded from the information below. Accordingly, the
amounts and discussion below relate to only the Company’s results from
continuing operations for all years presented.
The
following table is provided to facilitate a discussion regarding the comparison
of our consolidated results of continuing operations for each of the three years
in the period ended December 31, 2009 (dollars in thousands, except diluted
earnings per share amounts):
Increase
|
Increase
|
||||||||
Continuing
Operations
|
2009
|
2008
|
(Decrease)
|
2008
|
2007
|
(Decrease)
|
|||
Total
operating revenues
|
13,903,526
|
11,734,277
|
18.5%
|
11,734,277
|
9,694,176
|
21.0%
|
|||
Operating
earnings
|
501,951
|
585,529
|
(14.3%)
|
585,529
|
901,328
|
(35.0%)
|
|||
Operating
earnings as a % of revenue
|
3.6%
|
5.0%
|
(1.4%)
|
5.0%
|
9.3%
|
(4.3%)
|
|||
Income
from continuing operations
|
315,334
|
362,000
|
(12.9%)
|
362,000
|
605,444
|
(40.2%)
|
|||
Diluted
earnings per share
|
2.14
|
2.41
|
(11.2%)
|
2.41
|
3.85
|
(37.4%)
|
|||
Selling,
general and administrative
|
|||||||||
as
a percentage of revenue
|
15.5%
|
16.5%
|
(1.0%)
|
16.5%
|
17.0%
|
(0.5%)
|
Comparison
of 2009 to 2008
Managed
care premium revenue increased primarily as a result of higher membership in our
Medicare business in Part D, PFFS, and CCP as a result of successful enrollment
for 2009. The revenue increases were also a result of increased
Individual membership. Partially offsetting this increase was lower
revenue for our Commercial Risk business due to membership
declines.
Management
services revenue increased primarily due to the growth of our pharmacy benefit
management program in the Workers’ Compensation Division.
Medical
costs increased primarily as a result of the increase in Medicare membership, as
discussed above. Total medical costs as a percentage of premium
revenue, “medical loss ratio,” or “MLR” increased over the prior year as a
result of a change in our mix of business primarily related to Medicare
Advantage, Part D, and Commercial Risk.
Cost of
sales increased due to the growth of the pharmacy benefit management program
revenues in the Workers’ Compensation Division as noted above.
Selling,
general and administrative expense increased primarily due to the costs
associated with the growth in the Medicare business including higher wage
expense, an increase in broker commission costs and other member related costs
due to the higher Medicare membership. Additionally there was higher
wage expense related to annual incentive compensation accruals in the current
year, while such types of incentive payments were not earned and accrued in
2008; new executive hires in the current year; and severance expense related to
terminated employees in 2009. Selling, general and administrative
expense as a percentage of revenue improved as a result of expenses being
controlled at a rate lower than the increase in revenue.
Depreciation
and amortization expense increased in 2009 primarily due to impairment charges
to our customer list balances during 2009.
Interest
expense decreased due to the repayment of the Company’s revolving credit
facility and repurchase of senior notes during 2009 as well as decreased
interest rates on the revolving credit facility during the current
year.
Other
income, net increased for the current year due to a charge of $33.5 million for
the other-than-temporary impairment of investment securities recorded in
2008. This other-than-temporary impairment loss did not reoccur in
2009. Additionally, other income, net increased due to gains of $8.4
million on the repurchase of outstanding senior notes during
2009. Partially offsetting the increases was a $39 million current
year interest income decrease resulting from lower interest rates on the large
percentage of the portfolio invested in Treasury instruments and money market
funds.
The
effective tax rate on continuing operations increased to 37.5% as compared to
36.7% for the prior year due primarily to the proportion of our earnings in
states with higher tax rates.
27
Comparison
of 2008 to 2007
Management
services revenue increased compared to the prior year primarily as a result of
the acquisition of business from Concentra, Inc. (“Concentra”) and organic
growth in our workers’ compensation services business. This increase was
partially offset by the Other National ASO membership decline described
above.
Medical
costs increased as a result of new business as discussed
above. Medical costs also increased due to increased Commercial and
Medicare PFFS medical cost trends as well as unfavorable IBNR reserve
development with respect to our Medicare PFFS business. The Medicare
Part D medical loss ratio increase was a result of the premium rate changes from
the annual competitive bid filings for our Medicare Part D products and growth
in our low-income auto-assign population in 2008.
Selling,
general and administrative expense increased primarily due to normal operating
costs associated with our prior year acquisitions of Concentra, Mutual and
Vista, as well as costs related to growth of our Medicare business.
Depreciation
and amortization expense primarily increased as a result of the expense
associated with the amortizable intangible assets identified with our recent
acquisitions.
Interest
expense increased primarily as a result of the issuance of debt during the prior
year and due to interest expense incurred on the net draw down of $440.0 million
on the Revolving Credit Facility in October 2008. The increase was
partially offset by the redemption during the first quarter of 2007 of our
$170.5 million of outstanding 8.125% senior notes due February 15, 2012.
Associated with this redemption, we recognized $9.1 million of interest expense
in the prior year first quarter for both the premium paid on redemption as well
as the write off of associated deferred financing costs.
Other
income decreased due to a charge of $36.2 million that consisted of $33.5
million for the other-than-temporary impairment of investment securities and
$2.7 million in realized losses on the sale of securities. The
decrease also resulted from lower interest rates during 2008.
The
effective tax rate on continuing operations was essentially flat at 36.7%, as
compared to 37.1% for the prior year.
28
Segment
Results from Continuing Operations
As a
result of the change in our executive leadership, we realigned our
organizational structure during the first quarter of 2009. The new
organizational structure brings enhanced focus to areas of growth
opportunities. Accordingly, our reportable segments have changed to
the following three reportable segments: Health Plan and Medical Services,
Specialized Managed Care, and Workers’ Compensation. The Company’s segment
results for the prior years presented have been reclassified to conform to the
2009 segment presentation, including the presentation of discontinued
operations.
|
Year
Ended December
31,
|
Increase
|
Year
Ended December
31,
|
Increase
|
||||||||||||
Continuing Operations |
2009
|
2008
|
(Decrease)
|
2008
|
2007
|
(Decrease)
|
||||||||||
Operating
Revenues (in thousands)
|
||||||||||||||||
Commercial
risk
|
$
|
5,174,772
|
$
|
5,421,984
|
$
|
(247,212)
|
$
|
5,421,984
|
$ 4,889,769
|
$ 532,215
|
||||||
Commercial
Management Services
|
346,042
|
352,369
|
(6,327)
|
352,369
|
410,071
|
(57,702)
|
||||||||||
Medicare
Advantage
|
4,901,918
|
3,177,244
|
1,724,674
|
3,177,244
|
2,170,844
|
1,006,400
|
||||||||||
Medicaid
Risk
|
1,066,231
|
1,087,189
|
(20,958)
|
1,087,189
|
928,259
|
158,930
|
||||||||||
Health
Plan and Medical Services
|
11,488,963
|
10,038,786
|
1,450,177
|
10,038,786
|
8,398,943
|
1,639,843
|
||||||||||
Medicare
Part D
|
1,545,858
|
847,702
|
698,156
|
847,702
|
700,761
|
146,941
|
||||||||||
Other
Premiums
|
94,562
|
64,783
|
29,779
|
64,783
|
-
|
64,783
|
||||||||||
Other
Management Services
|
93,079
|
89,626
|
3,453
|
89,626
|
74,278
|
15,348
|
||||||||||
Specialized
Managed Care
|
1,733,499
|
1,002,111
|
731,388
|
1,002,111
|
775,039
|
227,072
|
||||||||||
Workers’
Compensation
|
757,105
|
736,695
|
20,410
|
736,695
|
525,797
|
210,898
|
||||||||||
Other/Eliminations
|
(76,041)
|
(43,365)
|
(32,676)
|
(43,365)
|
(5,603)
|
(37,762)
|
||||||||||
Total
Operating Revenues
|
$
|
13,903,526
|
$
|
11,734,227
|
$
|
2,169,299
|
$
|
11,734,227
|
$ 9,694,176
|
$ 2,040,051
|
||||||
Gross
Margin (in thousands)
|
||||||||||||||||
Health
Plan and Medical Services
|
$
|
1,957,265
|
$
|
1,887,998
|
$
|
69,267
|
$
|
1,887,998
|
$
|
2,024,770
|
$
|
(136,772)
|
||||
Specialized
Managed Care
|
339,861
|
250,158
|
89,703
|
250,158
|
227,580
|
22,578
|
||||||||||
Workers’
Compensation
|
516,277
|
541,095
|
(24,818)
|
541,095
|
431,989
|
109,106
|
||||||||||
Other/Eliminations
|
(10,099)
|
(9,203)
|
(896)
|
(9,203)
|
(4,502)
|
(4,701)
|
||||||||||
Total
|
$
|
2,803,304
|
$
|
2,670,048
|
$
|
133,256
|
$
|
2,670,048
|
$
|
2,679,837
|
$
|
(9,789)
|
||||
Revenue
and Medical Cost Statistics
|
||||||||||||||||
Managed
Care Premium Yields (per member per month):
|
||||||||||||||||
Health
plan commercial risk
|
$
|
301.63
|
$
|
286.30
|
5.4%
|
$
|
286.30
|
$
|
273.76
|
4.6%
|
||||||
Medicare Advantage risk (1)
|
$
|
855.16
|
$
|
862.60
|
(0.9%)
|
$
|
862.60
|
$
|
837.69
|
3.0%
|
||||||
Medicare Part D (2)
|
$
|
84.40
|
$
|
88.34
|
(4.5%)
|
$
|
88.34
|
$
|
99.57
|
(11.3%)
|
||||||
Medicaid
risk
|
$
|
229.94
|
$
|
208.50
|
10.3%
|
$
|
208.50
|
$
|
183.77
|
13.5%
|
||||||
Medical
Loss Ratios:
|
||||||||||||||||
Health
plan commercial risk
|
81.9%
|
81.7%
|
0.2%
|
81.7%
|
78.3%
|
3.4%
|
||||||||||
Medicare
Advantage risk
|
89.9%
|
89.0%
|
0.9%
|
89.0%
|
80.5%
|
8.5%
|
||||||||||
Medicare
Part D
|
85.7%
|
84.1%
|
1.6%
|
84.1%
|
78.1%
|
6.0%
|
||||||||||
Medicaid
risk
|
87.6%
|
85.3%
|
2.3%
|
85.3%
|
87.3%
|
(2.0%)
|
||||||||||
Total
|
85.4%
|
84.0%
|
1.4%
|
84.0%
|
79.6%
|
4.4%
|
||||||||||
(1) Revenue
per member per month excludes the effect of revenue ceded to external
parties.
|
||||||||||||||||
(2) Revenue
per member per month excludes the effect of CMS risk-share premium
adjustments and revenue ceded to external
parties.
|
29
Comparison
of 2009 to 2008
Health
Plan and Medical Services revenue increased over the prior year primarily due to
membership growth in the Medicare PFFS products, coupled with an increase in the
average realized premium yield per member per month for the product. Deducting
revenue ceded to third parties, the Medicare Advantage risk premium yield per
member per month for the year increased to $798.16 in 2009 from $742.07 in
2008. The increase is a result of a smaller portion of our Medicare
PFFS business in 2009 being ceded to external parties through quota share
arrangements. When reviewing the premium yield for Medicare Advantage
business, we believe that adjusting for the ceded revenue is useful for
comparisons to competitors that may not have similar ceding
arrangements. Additionally, the Medicare Advantage risk premium
yields have increased as a result of higher risk scores.
Medicaid
premium yields increased as a result of rate increases in Missouri, our largest
Medicaid market, effective July 1, 2008 and July 1, 2009 as well as rate
increases in Virginia and West Virginia effective July 1, 2009. The yields also
increased due to the termination of our Pennsylvania Medicaid behavioral health
contract, which had a lower premium yield. These increases in premium yield were
offset by declines in the membership of the Medicaid Risk
product. Membership declines also contributed to the reduction in
revenue for Commercial Risk products.
Gross
margin increased primarily due to the growth in the Medicare PFFS and Medicare
Advantage businesses as well as the improved medical loss ratios for the
Medicare PFFS product. The Medicare PFFS MLRs decreased over the prior year as
the prior year included unfavorable IBNR reserve development. The
increases in gross margin were partially offset by gross margin declines in
Commercial Risk and Medicaid. The Commercial Risk decline in gross
margin is a result of the decline in Commercial Risk membership discussed
earlier. The decline in Medicaid gross margin was due to a higher
medical loss ratio in 2009 as a result of higher medical cost trends and higher
inpatient utilization without rate increases sufficient to cover these cost
increases.
Specialized
Managed Care Division
Specialized
Managed Care revenue experienced a significant increase over the prior year due
to the large increase in membership for the Medicare Part D product. Medicare
Part D premium yields for 2009, excluding the effect of CMS risk sharing premium
adjustments and revenue ceded to external parties, decreased compared to 2008,
primarily due to the mix of products sold in 2009. The majority of the Medicare
Part D growth was in the lower cost, leaner benefit plans, which have a lower
premium. Including the effect of the CMS risk sharing premium adjustments as
well as the ceded revenue, the premium yields were $80.98 for 2009 compared to
$78.84 in 2008. The increase is a result of a smaller portion of our
Medicare Part D business in 2009 being ceded to external parties through quota
share arrangements.
When
reviewing the premium yield for Medicare Part D business, we believe that
adjusting for the ceded revenue is useful for comparisons to competitors that
may not have similar ceding arrangements. When reviewing the Medicare Part D
business, adjusting for the risk share amounts is useful to understand the
results of the Part D business because of our expectation that the risk sharing
revenue will eventually be insignificant on a full year basis.
The gross
margin for the Specialized Managed Care Division improved for 2009 primarily as
a result of increased Part D membership during the current periods, offset by an
increase in the Part D MLR due to higher than anticipated pharmacy costs in one
product.
Workers’
Compensation Division
Revenue
in the Workers’ Compensation Division increased in 2009 primarily due to the
growth of our pharmacy benefit management program. The increase was
partially offset by lower revenue in the division’s other business lines as a
result of lower claim volume.
Workers’
Compensation gross margin decreased over the prior year due to the decline in
claims volume in our bill review business, which is a higher margin product, and
growth in the pharmacy benefit management program which operates at a lower
margin.
30
Liquidity
and Capital Resources
Liquidity
The
nature of a majority of our operations is such that cash receipts from premium
revenues are typically received up to two months prior to the expected cash
payment for related medical costs. Premium revenues are typically received at
the beginning of the month in which they are earned, and the corresponding
incurred medical expenses are paid in a future time period, typically 15 to 60
days after the date such medical services are rendered. The lag between premium
receipts and claims payments creates positive cash flow and overall cash growth.
As a result, we typically hold approximately one to two months of “float.” In
addition, accumulated earnings provide further positive cash flow. Due to the
non-renewal of our PFFS product, we will be paying medical claims in 2010
without the benefit of premium collections for this product. As a
result, this will have a negative effect on cash flows. Despite this,
the Company has planned for this market exit and accordingly has ample current
liquidity. In addition, our long-term investment portfolio is
available for further liquidity needs including satisfaction of policy holder
benefits.
Our
investment guidelines require our fixed income securities to be investment grade
in order to provide liquidity to meet future payment obligations and minimize
the risk to the principal. Our fixed income portfolio has an average quality
rating of “AA+” and a modified duration of 2.8 years as of December 31, 2009.
Typically, the amount and duration of our short-term assets are more than
sufficient to pay for our short-term liabilities and we do not anticipate that
sales of our long-term investment portfolio will be necessary to fund our claims
liabilities.
Our cash
and investments, consisting of cash, cash equivalents, short-term investments,
and long-term investments, but excluding deposits of $75.3 million restricted
under state regulations, increased $675.8 million to $3.8 billion at December
31, 2009 from $3.1 billion at December 31, 2008.
The
demand for our products and services is subject to many economic fluctuations,
risks and uncertainties that could materially affect the way we do business. See
Part I, Item 1A, “Risk Factors,” in this Form 10-K for more information.
Management believes that the combination of our ability to generate cash flows
from operations, cash and investments on hand and the excess funds held in
certain of our regulated subsidiaries will be sufficient to fund continuing
operations, capital expenditures, debt interest costs, debt principal repayments
and any other reasonably likely future cash requirements.
Cash
Flows
Net cash
from operating activities for the year ended December 31, 2009, was a result of
net earnings plus non-cash adjustments to earnings including the impairment of
FHSC goodwill and an increase in both medical liabilities and other
payables. The increase in medical liabilities during 2009 is
primarily related to the growth in membership across the Medicare
business. Other payables increased primarily due to accruals for
annual incentive compensation programs, an increase in taxes payable, and
Medicare payables.
Our
net cash from operating activities in 2009 was $254.5 million higher than
2008. The primary driver of this increase was a change in other
receivables related to pharmacy rebate receivable accruals and CMS related
receivable accruals. Also contributing to the change in cash from
operating activities from 2009 compared to 2008 is the change in other payables,
which was the result of incentive compensation accruals in 2009 but not in 2008
and the increase in income taxes payable and Medicare payables during
2009. The increase in other receivables during 2008 and other
payables during 2009 was partially offset by a decline in net earnings in 2009
compared to 2008 and a smaller increase in medical liabilities in 2009 than in
2008.
Investing
Activities
Capital
expenditures in 2009 of approximately $60.3 million consisted primarily of
computer hardware, software and related costs associated with the development
and implementation of improved operational and communication
systems. Projected capital expenditures in 2010 of approximately
$55-$65 million consisted primarily of computer hardware, software and other
equipment.
Net cash
from investing activities for the year ended December 31, 2009 was an outflow
primarily due to a large amount of investment purchases during the period. This
outflow was partially offset by the proceeds received from the sales and
maturities of investments and also from the proceeds received from the disposal
of FHSC. Additionally, escrow payments totaling $10 million were
received during the period from previous acquisitions.
During
the prior year ended December 31, 2008, we made acquisitions using cash of
approximately $137.4 million, net of cash acquired.
Financing
Activities
•
|
We
repaid a total of $68.9 million principal amount of our remaining
outstanding Senior Notes for payments of $59.9 million, resulting in a
gain of $8.4 million, net of the write off of deferred financing
costs.
|
|
•
|
We
repaid $235.0 million of our Revolving Credit
Facility.
|
Our
credit facility requires compliance with a leverage ratio. All of our
senior notes and credit facility contain certain covenants and restrictions
regarding additional debt, dividends or other restricted payments, transactions
with affiliates, disposing of assets and in some cases provide for debt
repayment upon consolidations or mergers. As of December 31, 2009, we
were in compliance with applicable covenants under the senior notes and credit
facility.
Our Board
of Directors has approved a program to repurchase our outstanding common stock.
Stock repurchases may be made from time to time at prevailing prices on the open
market, by block purchase or in private transactions. As a part of this program,
1.5 million shares were purchased in 2009 at an aggregate cost of $30.0 million,
7.3 million shares of our common stock were purchased in 2008 at an aggregate
cost of $318.0 million and 7.5 million shares of our common stock were purchased
in 2007 at an aggregate cost of $429.0 million. As of December 31, 2009, the
total remaining common shares we are authorized to repurchase under this program
is 5.2 million.
31
Health
Plans
Our
regulated HMO and insurance company subsidiaries are required by state
regulatory agencies to maintain minimum surplus balances, thereby limiting the
dividends the parent may receive from our regulated entities. During 2009, we
received $121.0 million in dividends from our regulated subsidiaries and infused
$293.8 million in capital contributions into our subsidiaries, due primarily to
the significant growth of PFFS and Part D in 2009.
The
National Association of Insurance Commissioners (“NAIC”) has proposed that
states adopt risk-based capital (“RBC”) standards that would generally require
higher minimum capitalization requirements for HMOs and other risk-bearing
health care entities. RBC is a method of measuring the minimum amount of capital
appropriate for a managed care organization to support its overall business
operations in consideration of its size and risk profile. The managed care
organization’s RBC is calculated by applying factors to various assets, premiums
and reserve items. The factor is higher for those items with greater underlying
risk and lower for less risky items. The adequacy of a managed care
organization’s actual capital can then be measured by a comparison to its RBC as
determined by the formula. Our health plans are required to submit a RBC report
to the NAIC and their domiciled state’s department of insurance with their
annual filing.
Regulators
will use the RBC results to determine if any regulatory actions are required.
Regulatory actions that could take place, if any, range from filing a financial
action plan explaining how the plan will increase its statutory net worth to the
approved levels, to the health plan being placed under regulatory
control.
The
majority of states in which we operate health plans have adopted RBC policy that
recommends the health plans maintain statutory reserves at or above the “Company
Action Level” which is currently equal to 200% of their RBC. The State of
Florida does not currently use RBC methodology in its regulation of
HMOs. Some states, in which our regulated subsidiaries operate,
require deposits to be maintained with the respective states’ departments of
insurance. The table below summarizes our statutory reserve information, as of
December 31, 2009 and 2008 (in millions, except percentage data).
2009
|
2008
|
||
(unaudited)
|
|||
Regulated
capital and surplus
|
$ 1,643.7
|
$ 1,309.6
|
|
200%
of RBC (a,b)
|
$ 800.5
|
$ 665.3
|
|
Excess capital and surplus above 200% of RBC (a,b)
|
$ 843.2
|
$ 644.3
|
|
Capital and surplus as percentage of RBC (a,b)
|
411%
|
394%
|
|
Statutory
deposits
|
$ 75.3
|
$ 66.5
|
|
(a)
Unaudited
|
|||
(b)
As mentioned above, the State of Florida does not have a RBC requirement
for its regulated HMOs. Accordingly, the statutory reserve
information provided for Vista is based on the actual statutory minimum
capital required by the State of
Florida.
|
We
believe that all subsidiaries which incur medical claims maintain more than
adequate liquidity and capital resources to meet these short-term obligations as
a matter of both Company policy and applicable department of insurance
regulations.
Excluding
funds held by entities subject to regulation and excluding our equity method
investments, we had cash and investments of approximately $713.0 million and
$549.9 million at December 31, 2009 and 2008, respectively. The increase
resulted from the proceeds received from the disposal of FHSC, earnings from
non-regulated businesses, and dividends from our regulated
subsidiaries. These were partially offset by capital infusions into
our subsidiaries, payments made for share repurchases, and debt
repayments.
32
Other
As of
December 31, 2009, we were contractually obligated to make the following
payments during the next five years and thereafter (in thousands):
Payments
Due by Period
|
||||||
Contractual
Obligations
|
Total
|
Less
than
1
Year
|
1
- 3 Years
|
3
- 5 Years
|
More
than
5
Years
|
|
Senior
notes
|
$ 1,218,998
|
-
|
233,903
|
602,882
|
382,213
|
|
Interest
payable on senior notes
|
416,520
|
77,752
|
147,338
|
156,824
|
34,606
|
|
Credit
facilities
|
380,029
|
-
|
380,029
|
-
|
-
|
|
Interest payable on credit facilities (a)
|
7,697
|
3,044
|
4,653
|
-
|
-
|
|
Operating
leases
|
142,706
|
33,692
|
54,428
|
36,648
|
17,938
|
|
Total
contractual obligations
|
$ 2,165,950
|
114,488
|
820,351
|
796,354
|
434,757
|
|
Less
sublease income
|
(7,387)
|
(2,032)
|
(3,185)
|
(1,642)
|
(528)
|
|
Net
contractual obligations
|
$ 2,158,563
|
112,456
|
817,166
|
794,712
|
434,229
|
|
(a)
Interest payable on credit facilities has been estimated based on interest
rates as of February 2010 and assumes no additional changes in the
principal amount.
|
We have
typically paid 90% to 95% of medical claims within six months of the date
incurred and approximately 99% of medical claims within nine months of the date
incurred. Accordingly, we believe medical claims liabilities are short-term in
nature and therefore do not meet the listed criteria for classification as
contractual obligations and have been excluded from the table above. As of
December 31, 2009, we had $129.1 million of unrecognized tax
benefits. The above table excludes these amounts due to uncertainty
of timing and amounts regarding future payments.
Other
Disclosures
As a
managed health care company, we are subject to extensive government regulation
of our products and services. The laws and regulations affecting our industry
generally give state and federal regulatory authorities broad discretion in
their exercise of supervisory, regulatory and administrative powers. These laws
and regulations are intended primarily for the benefit of the members of the
health plans. Managed care laws and regulations vary significantly from
jurisdiction to jurisdiction and changes are frequently considered and
implemented. Likewise, interpretations of these laws and regulations are also
subject to change.
Although
the provisions of any future legislation adopted at the state or federal level
cannot be accurately predicted at this time, management believes that the
ultimate outcome of currently proposed legislation should not have a material
adverse effect on the results of our operations in the short-term. Nevertheless,
it is possible that future legislation or regulation could have a significant
effect on our operations. See “Government Regulation” under Part I.,
Item 1 for additional discussion of government regulation that impacts our
businesses.
2010
Outlook
Health Plan and
Medical Services Division – We expect our Commercial Group Risk
membership will be down for the year in the low to mid single digit range,
excluding the addition of the announced acquisition of Preferred Health Systems
(PHS) on February 1, 2010 and its commercial risk membership of approximately
100,000 members. For same store Commercial membership, the forecasted health
plan MLR is expected to be in the range of 81.5% to 82.0%, compared to 81.9% for
2009. Including the effect of the PHS acquisition, we expect the total
Commercial Group MLR to be in a range of 82.25% to 82.75%. Overall, we expect
the acquisition of PHS to be neutral to earnings for the
year.
As
previously announced, we have decided not to renew our national PFFS product for
the 2010 plan year. There will be a claims run out period for this product in
2010, which we believe has been adequately reserved for as of the 2009 year
end.
For our
Health Plan based Medicare Advantage product, we currently are forecasting
membership to remain approximately flat for 2010 against 2009 results. We expect
the 2010 Medicare Advantage MLR to be in the mid 80%s.
Specialized Managed
Care Division – After our significant membership growth in 2009, we
expect our Medicare Part D product to be down slightly to approximately 1.6
million members for 2010. This slight decrease reflects the loss of some auto
assign regions along with some State Pharmacy Assistance Program members. Our
MLR expectation for 2010 will be similar to our actual results in 2009, which
was in the mid 80%s.
Workers'
Compensation Division – We believe our Workers' Compensation Division
will remain stable compared to 2009, with continued focus on the supporting
administrative cost structure.
Regarding
our balance sheet and liquidity, we ended the year with approximately $510
million in free cash at the parent level, and approximately $1.8 billion in
cash, cash equivalents and U.S. Treasury securities on a consolidated basis.
After a $110 million payment during the fourth quarter in 2009, we have a net
balance owing on our revolving line of credit of $380 million. As usual, our
first priority with our free cash will be to support the regulatory capital
needs of our subsidiaries, and to maintain liquidity.
Regarding
our effective tax rate, we expect it will range from 37% to 38% for the full
year of 2010.
33
Under an
investment policy approved by our Board of Directors, we invest primarily in
marketable U.S. government and agency, state, municipal, mortgage-backed and
asset-backed securities and corporate debt obligations that are investment
grade. Our Investment Policy and Guidelines generally do not permit the purchase
of equity-type investments or fixed income securities that are below investment
grade. Our investment guidelines include a permitted exception to allow for such
investments if those investments are obtained through a business combination and
if, in our best interest, such investments were not disposed within 90 days
after acquisition. As described in the notes to the financial statements, we
acquired investments in an equipment leasing limited liability company through
our acquisition of First Health and in an insurance agency through our
acquisition of Vista. We have classified all of our investments as
available-for-sale. We are exposed to certain market risks including interest
rate risk and credit risk.
We have
established policies and procedures to manage our exposure to changes in the
fair value of our investments. Our policies include an emphasis on credit
quality and the management of our portfolio’s duration and mix of securities. We
believe our investment portfolio is diversified and currently expect no material
loss to result from the failure to perform by the issuers of the debt securities
we hold. The mortgage-backed securities are insured by several associations,
including Government National Mortgage Administration, Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation.
We invest
primarily in fixed income securities and classify all our investments as
available-for-sale. Investments are evaluated on an individual security basis at
least quarterly to determine if declines in value are other-than-temporary. In
making that determination, we consider all available evidence relating to the
realizable value of a security. This evidence includes, but is not limited to,
the following:
•
|
the
length of time and the extent to which the fair value has been less than
the amortized cost basis;
|
|
•
|
adverse
conditions specifically related to the security, an industry, or
geographic area;
|
|
•
|
the
historical and implied volatility of the fair value of the
security;
|
|
•
|
the
payment structure of the debt security and the likelihood of the issuer
being able to make payments that increase in the
future;
|
|
•
|
failure
of the issuer of the security to make scheduled interest or principal
payments;
|
|
•
|
any
changes to the rating of the security by a rating
agency;
|
|
•
|
recoveries
or additional declines in fair value subsequent to the balance sheet date;
and
|
|
•
|
if
we have decided to sell the security or it is more likely than not that we
will be required to sell the security before recovery of its amortized
cost.
|
Temporary
declines in value of investments classified as available-for-sale are netted
with unrealized gains and reported as a net amount in a separate component of
stockholders’ equity, net of taxes. When we determine that a decline
in fair value below amortized cost is judged to be other–than–temporary we are
required to recognize the credit loss component as a charge in net earnings.
Realized gains and losses on the sale of investments are determined on a
specific identification basis. See Note G, Investments, to our consolidated
financial statements in this Form 10-K for more information concerning
other-than-temporary impaired investments.
Our
investments at December 31, 2009 mature according to their contractual terms, as
follows, in thousands (actual maturities may differ because of call or
prepayment rights):
Amortized
|
Fair
|
|||
As
of December 31, 2009
|
Cost
|
Value
|
||
Maturities:
|
||||
Within
1 year
|
$ 612,960
|
$ 616,177
|
||
1
to 5 years
|
753,697
|
780,908
|
||
5
to 10 years
|
440,552
|
459,092
|
||
Over
10 years
|
516,638
|
534,165
|
||
Total
|
$
2,323,847
|
2,390,342
|
||
Equity
method investments
|
46,751
|
|||
Total
short-term and long-term securities
|
$
2,437,093
|
Our
projections of hypothetical net gains in fair value of our market rate sensitive
instruments, should potential changes in market rates occur, are presented
below. The projection is based on a model, which incorporates effective
duration, convexity and price to forecast hypothetical instantaneous changes in
interest rates of positive and negative 100, 200 and 300 basis points. The model
only takes into account the fixed income securities in the portfolio and
excludes all cash. While we believe that the potential market rate change is
reasonably possible, actual results may differ.
Increase
(decrease) in fair value of portfolio
|
|||||
given
an interest rate (decrease) increase of X basis points
|
|||||
As
of December 31, 2009
|
|||||
(in
thousands)
|
|||||
(300)
|
(200)
|
(100)
|
100
|
200
|
300
|
$
151,668
|
$
121,433
|
$
67,554
|
$
(70,749)
|
$
(140,078)
|
$
(206,500)
|
34
To
the Board of Directors and Stockholders of Coventry Health Care,
Inc.
We have
audited the accompanying consolidated balance sheets of Coventry Health Care,
Inc. and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2009. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a)(2). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Coventry Health Care,
Inc. and subsidiaries at December 31, 2009 and 2008, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedule referred to above, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Coventry Health Care, Inc.’s internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 26, 2010
expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Baltimore,
Maryland
February
26, 2010
35
Consolidated
Balance Sheets
(in
thousands)
December 31,
2009
|
December
31, 2008
|
||||||
ASSETS
|
|||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
1,418,554
|
$
|
1,123,114
|
|||
Short-term
investments
|
442,106
|
338,129
|
|||||
Accounts
receivable, net of allowance of $21,350 and
$11,040 as
of December 31, 2009 and 2008, respectively
|
258,993
|
293,636
|
|||||
Other
receivables, net
|
496,059
|
524,803
|
|||||
Other
current assets
|
234,446
|
130,808
|
|||||
Total
current assets
|
2,850,158
|
2,410,490
|
|||||
Long-term
investments
|
1,994,987
|
1,709,878
|
|||||
Property
and equipment, net
|
271,931
|
308,016
|
|||||
Goodwill
|
2,529,284
|
2,695,025
|
|||||
Other
intangible assets, net
|
471,693
|
546,168
|
|||||
Other
long-term assets
|
48,479
|
57,821
|
|||||
Total
assets
|
$
|
8,166,532
|
$
|
7,727,398
|
|||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Medical
liabilities
|
$
|
1,605,407
|
$
|
1,446,391
|
|||
Accounts
payable and other accrued liabilities
|
682,171
|
474,561
|
|||||
Deferred
revenue
|
110,855
|
104,823
|
|||||
Total
current liabilities
|
2,398,433
|
2,025,775
|
|||||
Long-term
debt
|
1,599,027
|
1,902,472
|
|||||
Other
long-term liabilities
|
456,518
|
368,482
|
|||||
Total
liabilities
|
4,453,978
|
4,296,729
|
|||||
Stockholders’
equity:
|
|||||||
Common
stock, $.01 par value; 570,000 authorized
|
1,905
|
1,903
|
|||||
190,462
issued and 147,990 outstanding in 2009
|
|||||||
190,318
issued and 148,288 outstanding in 2008
|
|||||||
Treasury
stock, at cost; 42,472 in 2009; 42,031 in 2008
|
(1,282,054)
|
(1,287,662)
|
|||||
Additional
paid-in capital
|
1,750,113
|
1,748,580
|
|||||
Accumulated
other comprehensive income, net
|
41,406
|
8,965
|
|||||
Retained
earnings
|
3,201,184
|
2,958,883
|
|||||
Total
stockholders’ equity
|
3,712,554
|
3,430,669
|
|||||
Total
liabilities and stockholders’ equity
|
$
|
8,166,532
|
$
|
7,727,398
|
See
accompanying notes to the consolidated financial statements.
36
Consolidated
Statements of Operations
(in
thousands, except per share data)
For
the years ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
revenues:
|
||||||||||||
Managed
care premiums
|
$
|
12,717,399
|
$
|
10,563,163
|
$
|
8,689,633
|
||||||
Management
services
|
1,186,127
|
1,171,064
|
1,004,543
|
|||||||||
Total
operating revenues
|
13,903,526
|
11,734,227
|
9,694,176
|
|||||||||
Operating
expenses:
|
||||||||||||
Medical
costs
|
10,859,394
|
8,868,579
|
6,920,531
|
|||||||||
Cost
of sales
|
240,828
|
195,600
|
93,808
|
|||||||||
Selling,
general and administrative
|
2,151,799
|
1,940,820
|
1,646,865
|
|||||||||
Depreciation
and amortization
|
149,554
|
143,699
|
131,644
|
|||||||||
Total
operating expenses
|
13,401,575
|
11,148,698
|
8,792,848
|
|||||||||
Operating
earnings
|
501,951
|
585,529
|
901,328
|
|||||||||
Interest
expense
|
84,875
|
96,386
|
82,217
|
|||||||||
Other
income, net
|
87,478
|
82,718
|
144,101
|
|||||||||
Earnings
before income taxes
|
504,554
|
571,861
|
963,212
|
|||||||||
Provision
for income taxes
|
189,220
|
209,861
|
357,768
|
|||||||||
Income
from continuing operations
|
315,334
|
362,000
|
605,444
|
|||||||||
(Loss)
income from discontinued operations, net of tax
|
(73,033)
|
19,895
|
20,650
|
|||||||||
Net
earnings
|
$
|
242,301
|
$
|
381,895
|
$
|
626,094
|
||||||
Net
earnings per share:
|
||||||||||||
Basic
earnings per share from continuing operations
|
$
|
2.15
|
$ |
2.43
|
$ |
3.91
|
||||||
Basic
(loss) earnings per share from discontinued operations
|
(0.50)
|
0.13
|
0.13
|
|||||||||
Total
basic earnings per share
|
$
|
1.65
|
$
|
2.56
|
$
|
4.04
|
||||||
Diluted
earnings per share from continuing operations
|
$
|
2.14
|
$
|
2.41
|
$
|
3.85
|
||||||
Diluted
(loss) earnings per share from discontinued operations
|
(0.50)
|
0.13
|
0.13
|
|||||||||
Total
diluted earnings per share
|
$
|
1.64
|
$
|
2.54
|
$
|
3.98
|
||||||
Weighted
average common shares outstanding:
|
||||||||||||
Basic
|
146,652
|
148,893
|
154,884
|
|||||||||
Effect of dilutive options and restricted stock |
|
743
|
1,315
|
2,473
|
||||||||
Diluted
|
147,395
|
150,208
|
157,357
|
See
accompanying notes to the consolidated financial statements.
37
Coventry Health Care, Inc.
and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Stockholders’ Equity
Years
Ended December 31, 2009, 2008 and 2007
(in
thousands, except shares which are in millions)
Accumulated
|
||||||||
Treasury
|
Additional
|
Other
|
Total
|
|||||
Common
Stock
|
Stock,
|
Paid-In
|
Comprehensive
|
Retained
|
Stockholders'
|
|||
Shares
|
Amount
|
at
Cost
|
Capital
|
Income
(Loss), Net
|
Earnings
|
Equity
|
||
Balance,
December 31, 2006
|
187.6
|
$
1,876
|
$ (563,909)
|
$1,571,101
|
$ (3,519)
|
$1,947,453
|
$
2,953,002
|
|
Comprehensive
income:
|
||||||||
Net
earnings
|
626,094
|
626,094
|
||||||
Other
comprehensive income:
|
||||||||
Holding
gain, net
|
17,697
|
|||||||
Reclassification
adjustment
|
(1,162)
|
|||||||
|
16,535
|
|||||||
Deferred
tax effect
|
(6,281)
|
(6,281)
|
||||||
Comprehensive
income
|
636,348
|
|||||||
Employee
stock plans activity
|
2.3
|
23
|
16,014
|
131,888
|
147,925
|
|||
Cumulative
adjustment upon adoption of FIN 48
|
3,441
|
3,441
|
||||||
Treasury
shares acquired
|
(439,237)
|
(439,237)
|
||||||
Balance,
December 31, 2007
|
189.9
|
$ 1,899
|
$
(987,132)
|
$ 1,702,989
|
$ 6,735
|
$2,576,988
|
$ 3,301,479
|
|
Comprehensive
income:
|
||||||||
Net
earnings
|
381,895
|
381,895
|
||||||
Other
comprehensive income:
|
||||||||
Holding
gain, net
|
7,652
|
|||||||
Reclassification
adjustment
|
(3,996)
|
|||||||
3,656
|
||||||||
Deferred
tax effect
|
(1,426)
|
(1,426)
|
||||||
Comprehensive
income
|
384,125
|
|||||||
Employee
stock plans activity
|
0.4
|
4
|
22,607
|
45,591
|
68,202
|
|||
Treasury
shares acquired
|
(323,137)
|
(323,137)
|
||||||
Balance,
December 31, 2008
|
190.3
|
$ 1,903
|
$ (1,287,662)
|
$
1,748,580
|
$
8,965
|
$
2,958,883
|
$
3,430,669
|
|
Comprehensive
income:
|
||||||||
Net
earnings
|
242,301
|
242,301
|
||||||
Other
comprehensive income:
|
||||||||
Holding
gain, net
|
64,791
|
|||||||
Reclassification
adjustment
|
(11,609)
|
|||||||
53,182
|
||||||||
Deferred
tax effect
|
(20,741)
|
(20,741)
|
||||||
Comprehensive
income
|
274,742
|
|||||||
Employee
stock plans activity
|
0.2
|
2
|
35,568
|
1,533
|
37,103
|
|||
Treasury
shares acquired
|
(29,960)
|
(29,960)
|
||||||
Balance,
December 31, 2009
|
190.5
|
$ 1,905
|
$ (1,282,054)
|
$ 1,750,113
|
$ 41,406
|
$ 3,201,184
|
$ 3,712,554
|
See
accompanying notes to the consolidated financial statements.
38
Consolidated
Statements of Cash Flows
(in
thousands)
Years
Ended December 31,
|
|||||||
|
2009
|
2008
|
2007
|
||||
Cash
flows from operating activities:
|
|||||||
Net
earnings
|
$ 242,301
|
$ 381,895
|
$ 626,094
|
||||
Adjustments
to reconcile net earnings to
|
|||||||
cash
provided by operating activities:
|
|||||||
Depreciation
and amortization
|
151,815
|
150,226
|
142,569
|
||||
Amortization
of stock compensation
|
47,047
|
60,582
|
64,129
|
||||
Deferred
income tax benefit
|
(87,610)
|
(34,178)
|
(25,017)
|
||||
Loss
on other-than-temporarily impaired securities
|
-
|
36,160
|
-
|
||||
Loss
on disposal of FHSC
|
81,557
|
-
|
-
|
||||
Gain
on repurchase of debt
|
(8,371)
|
(4,628)
|
-
|
||||
Other
adjustments
|
8,642
|
10,243
|
6,635
|
||||
Changes
in assets and liabilities,
|
|||||||
net
of effects of the purchase of subsidiaries:
|
|||||||
Accounts
receivable
|
12,258
|
(28,699)
|
2,523
|
||||
Other
receivables
|
19,235
|
(198,904)
|
(89,190)
|
||||
Medical
liabilities
|
159,095
|
276,417
|
(98,781)
|
||||
Accounts
payable and other accrued liabilities
|
223,182
|
(49,689)
|
(20,122)
|
||||
Other
changes in assets and liabilities
|
32,692
|
27,931
|
(28,830)
|
||||
Net
cash from operating activities
|
881,843
|
627,356
|
580,010
|
||||
Cash
flows from investing activities:
|
|||||||
Capital
expenditures, net
|
(60,323)
|
(69,371)
|
(61,307)
|
||||
Proceeds
from sales of investments
|
292,515
|
696,806
|
1,022,810
|
||||
Proceeds
from maturities of investments
|
522,144
|
166,034
|
321,561
|
||||
Purchases
of investments
|
(1,140,475)
|
(1,034,892)
|
(1,633,113)
|
||||
Proceeds
(payments) for acquisitions, net
|
10,197
|
(137,374)
|
(1,192,601)
|
||||
Proceeds
from FHSC disposal, net
|
115,437
|
-
|
-
|
||||
Net
cash from investing activities
|
(260,505)
|
(378,797)
|
(1,542,650)
|
||||
Cash
flows from financing activities:
|
|||||||
Proceeds
from issuance of stock
|
1,224
|
7,233
|
52,262
|
||||
Payments
for repurchase of stock
|
(32,796)
|
(323,137)
|
(439,237)
|
||||
Proceeds
from issuance of debt, net
|
-
|
668,409
|
1,153,280
|
||||
Repayment
of debt
|
(294,930)
|
(423,872)
|
(260,500)
|
||||
Excess
tax benefit from stock compensation
|
604
|
387
|
31,534
|
||||
Net
cash from financing activities
|
(325,898)
|
(70,980)
|
537,339
|
||||
Net
change in cash and cash equivalents
|
295,440
|
177,579
|
(425,301)
|
||||
Cash
and cash equivalents at beginning of period
|
1,123,114
|
945,535
|
1,370,836
|
||||
Cash
and cash equivalents at end of period
|
$
1,418,554
|
$ 1,123,114
|
$ 945,535
|
||||
Supplemental
disclosure of cash flow information:
|
|||||||
Cash
paid for interest
|
$ 84,383
|
$ 93,219
|
$ 55,596
|
||||
Income
taxes paid, net
|
$ 190,703
|
$ 273,917
|
$ 445,284
|
See
accompanying notes to the consolidated financial statements.
39
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009, 2008 and 2007
Coventry
Health Care, Inc. (together with its subsidiaries, the “Company” or “Coventry”)
is a diversified national managed health care company based in Bethesda,
Maryland operating health plans, insurance companies, network rental and
workers’ compensation services companies. Through its Health Plan and Medical
Services Business, Specialized Managed Care Business Division and Workers’
Compensation Business, the Company provides a full range of risk and fee-based
managed care products and services to a broad cross section of individuals,
employer and government-funded groups, government agencies, and other insurance
carriers and administrators.
Since the Company began operations in
1987 with the acquisition of the American Service Companies entities, including
Coventry Health and Life Insurance Company (“CH&L”), the Company has grown
substantially through acquisitions. See Note C, Acquisitions, to these
consolidated financial statements for information on the Company's recent
acquisitions.
Significant
Accounting Policies
Basis of
Presentation - The consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
and include the accounts of the Company and its subsidiaries. All inter-company
transactions have been eliminated.
Use of
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
amounts.
Significant
Customers - The Company’s health plan business is diversified across a
large customer base and there are no commercial groups that make up 10% or more
of Coventry’s managed care premiums. The Company received 50.7%, 38.1%, and
33.1% of its managed care premiums for the years ended December 31, 2009, 2008
and 2007, respectively, from the federal Medicare program throughout its various
markets. The Company also received 8.4%, 10.3%, and 10.7% of its managed care
premiums for the years ended December 31, 2009, 2008 and 2007, respectively,
from its state-sponsored Medicaid programs throughout its various markets. For
the years ended December 31, 2009, 2008 and 2007, the State of Missouri
accounted for almost half the Company’s Medicaid premiums. The
Company received 10.5%, 9.2%, and 14.7% of its management services revenue from
a single customer, Mail Handlers Benefit Plan, for the years ended December 31,
2009, 2008 and 2007, respectively.
Cash and Cash
Equivalents - Cash and cash equivalents consist principally of money
market funds, commercial paper, certificates of deposit, and treasury bills. The
Company considers all highly liquid securities purchased with an original
maturity of three months or less to be cash equivalents.
Investments -
The Company accounts for investments in accordance with ASC 320-10 “Accounting
for Certain Investments in Debt and Equity Securities,” ASC 320-10-35-35
“Accounting for Debt Securities After an Other-than-Temporary Impairment,” and
with ASC 320-10-65 related to its fixed maturities securities as of April 1,
2009. The Company invests primarily in fixed income securities and
classifies all of its investments as available-for-sale. Investments are
evaluated on an individual security basis at least quarterly to determine if
declines in value are other-than-temporary. In making that determination, the
Company considers all available evidence relating to the realizable value of a
security. This evidence is reviewed at the individual security level and
includes, but is not limited to, the following:
•
|
the
length of time and the extent to which the fair value has been less than
the amortized cost basis;
|
|
•
|
adverse
conditions specifically related to the security, an industry, or
geographic area;
|
|
•
|
the
historical and implied volatility of the fair value of the
security;
|
|
•
|
the
payment structure of the debt security and the likelihood of the issuer
being able to make payments that increase in the
future;
|
|
•
|
failure
of the issuer of the security to make scheduled interest or principal
payments;
|
|
•
|
any
changes to the rating of the security by a rating
agency;
|
|
•
|
recoveries
or additional declines in fair value subsequent to the balance sheet date;
and
|
|
•
|
if
we have decided to sell the security or it is more likely than not that we
will be required to sell the security before recovery of its amortized
cost.
|
Temporary
declines in value of investments classified as available-for-sale are netted
with unrealized gains and reported as a net amount in a separate component of
stockholders’ equity, net of taxes. When we determine that a decline in fair
value below amortized cost is judged to be other–than–temporary we are required
to recognize the credit loss component as a charge in net earnings. Realized
gains and losses on the sale of investments are determined on a specific
identification basis.
Investments
with original maturities in excess of three months and less than one year are
classified as short-term investments and generally consist of corporate bonds,
U.S. Treasury notes and commercial paper. Long-term investments have original
maturities in excess of one year and primarily consist of fixed income
securities.
Other
Receivables - Other receivables include pharmacy rebate receivables of
$314.9 million and $220.9 million at the December 31, 2009 and 2008,
respectively. Other receivables also include Medicare Part D program
related, risk share and subsidy receivables, Medicare risk adjuster receivables,
Office of Personnel Management (“OPM”) receivables, receivables from providers
and suppliers, interest receivables, and any other receivables that do not
relate to premiums. The decrease in other receivables during
2009 primarily resulted from a decrease in the Medicare Part D related
receivables, other receivables, and due from seller, partially offset by an
increase in the pharmacy rebate receivables.
Other Current
Assets – Other Current Assets primarily includes deferred tax assets and
also includes prepaid expenses. For more information see Note I.,
Income Taxes, to consolidated financial statements.
40
Property and
Equipment - Property, equipment and leasehold improvements are recorded
at cost. In accordance with ASC 350-40, “Internal – Use Software,” the cost of
internally developed software is capitalized and included in property and
equipment. The Company capitalizes costs incurred during the application
development stage for the development of internal-use software. These costs
primarily relate to payroll and payroll-related costs for employees along with
costs incurred for external consultants who are directly associated with the
internal-use software project. Depreciation is computed using the straight-line
method over the estimated lives of the related assets or, if shorter, over the
terms of the respective leases.
Long-term
Assets - Long-term assets primarily include assets associated with senior
note issuance costs and reinsurance recoveries. The reinsurance recoveries were
obtained with the acquisition of First Health Group Corp. (“First Health”) and
are related to certain life insurance receivables from a third party insurer for
liabilities that have been ceded to that third party
insurer.
Business
Combinations, Accounting for Goodwill and Other Intangibles - The Company
accounts for Business Combinations in accordance with ASC 805-10 and accounts
for Intangibles – Goodwill and Other in accordance with ASC
350-10. Goodwill and other intangible assets that have indefinite
lives are subject to a periodic assessment for impairment by applying a
fair-value-based test. The Company’s annual impairment test date is October 1 of
each fiscal year. For goodwill, the Company performs a two-step
impairment test. In the first step, the Company compares the fair value of each
reporting unit to its carrying value. The Company has five reporting units:
Health Plans, Workers’ Compensation, MHNet, Medicare Part D, and Network
Rental. The Company determines the fair value of its reporting units
based on a weighting of income and market approaches. The market approach
estimates the reporting unit’s fair value by utilizing market multiples of
revenue or earnings for comparable companies. The income approach is based on
the present value of estimated future cash flows. If the fair value
of the reporting unit exceeds the carrying value of the net assets assigned to
that unit, goodwill is not impaired and no further testing is performed. If the
carrying value of the net assets assigned to the reporting unit exceeds the fair
value of the reporting unit, then the Company must perform the second step of
the impairment test in order to determine the implied fair value of the
reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill
exceeds its implied fair value, the Company records an impairment charge equal
to the difference. Impairment charges are recorded in the period
incurred. See Note E, Goodwill and Other Intangible Assets, to consolidated
financial statements for disclosure related to these assets.
The fair
value of the indefinite-lived intangible asset is estimated and compared to the
carrying value. The Company estimates the fair value of the
indefinite-lived intangible asset using an income approach. The Company
recognizes an impairment loss when the estimated fair value of the
indefinite-lived intangible asset is less than the carrying value.
Other
acquired intangible assets are separately recognized upon meeting certain
criteria. Such intangible assets include, but are not limited to, trade and
service marks, health provider contracts, customer lists and licenses. An
intangible asset that is subject to amortization is tested for recoverability
whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable. The Company amortizes other acquired intangible assets
with finite lives using the straight-line method over the estimated economic
lives of the assets, ranging from three to 20 years.
Discontinued
Operations – The Company accounts for discontinued operations in
accordance with ASC 360-10 “Accounting for the Impairment or Disposal of
Long-Lived Assets.” The Company determines whether the group of
assets being disposed of comprises a component of the entity, which requires
cash flows that can be clearly distinguished from the rest of the
entity. The Company also determines whether the cash flows associated
with the group of assets have been or will be eliminated from the ongoing
operations of the Company as a result of the disposal transaction and whether
the Company has no significant continuing involvement in the operations of the
group of assets after disposal. If these determinations result in an
affirmative response, the results of operations of the asset group being
disposed of, as well as the gain or loss on disposal are aggregated for separate
presentation apart from the continuing operating results of the Company in the
Consolidated Statements of Operations. See Note D, Discontinued
Operations, to consolidated financial statements for additional disclosure
related to our discontinued operations.
Medical Liabilities
and Expense - Medical liabilities consist of actual claims reported but
not paid and estimates of health care services incurred but not reported. The
estimated claims incurred but not reported are based on historical data, current
enrollment, health service utilization statistics and other related information.
In determining medical liabilities, the Company employs standard actuarial
reserve methods that are specific to each market’s membership, product
characteristics, geographic territories and provider network. The Company also
considers utilization frequency and unit costs of inpatient, outpatient,
pharmacy and other medical expenses, as well as claim payment backlogs and the
timing of provider reimbursements. The Company also establishes reserves, if
required, for the probability that anticipated future health care costs and
contract maintenance costs under the group of existing contracts will exceed
anticipated future premiums and reinsurance recoveries on those contracts. These
accruals are continually monitored and reviewed, and as settlements are made or
accruals adjusted, differences are reflected in current operations. Changes in
assumptions for medical costs caused by changes in actual experience could cause
these estimates to change in the near term.
41
The
following table presents the components of the change in medical claims
liabilities for the years ended December 31, 2009, 2008 and 2007, respectively
(in thousands).
2009
|
2008
|
2007
|
||||
Medical
liabilities, beginning of year
|
$1,446,391
|
$1,161,963
|
$1,121,151
|
|||
Acquisitions (1)
|
-
|
7,590
|
126,583
|
|||
Reported
Medical Costs
|
||||||
Current
year
|
11,049,227
|
8,916,644
|
7,055,596
|
|||
Prior
year development
|
(189,833)
|
(48,065)
|
(135,065)
|
|||
Total
reported medical costs
|
10,859,394
|
8,868,579
|
6,920,531
|
|||
Claim
Payments
|
||||||
Payments
for current year
|
9,598,222
|
7,577,939
|
6,134,631
|
|||
Payments
for prior year
|
1,123,131
|
1,013,216
|
586,390
|
|||
Total
claim payments
|
10,721,353
|
8,591,155
|
6,721,021
|
|||
Change
in Part D Related Subsidy Liabilities
|
20,975
|
(586)
|
(285,281)
|
|||
Medical
liabilities, end of year
|
$1,605,407
|
$1,446,391
|
$1,161,963
|
|||
Supplemental
Information:
|
||||||
Prior year
development (2)
|
2.1%
|
0.7%
|
2.5%
|
|||
Current year paid
percent (3)
|
86.9%
|
85.0%
|
86.9%
|
|||
(1)
Acquisition balances represent medical liabilities of the acquired
company as of the applicable acquisition date.
|
||||||
(2)
Prior year reported medical costs in the current year as a
percentage of prior year reported medical costs.
|
||||||
(3)
Current year claim payments as a percentage of current year
reported medical costs.
|
The
negative medical cost amounts noted as “prior year development” are favorable
adjustments for claim estimates being settled for amounts less than originally
anticipated. As noted above, these favorable developments from original
estimates occur due to changes in medical utilization, mix of provider rates and
other components of medical cost trends. Medical claim liabilities are generally
paid within several months of the member receiving service from the provider.
Accordingly, the 2009 prior year development relates almost entirely to claims
incurred in calendar year 2008.
The
change in Medicare Part D related subsidy liabilities identified in the table
above represent subsidy amounts received from CMS for reinsurance and for cost
sharing related to low income individuals. These subsidies are recorded in
medical liabilities and we do not recognize premium revenue or claims expense
for these subsidies.
Other Long-term
Liabilities – Other long-term liabilities consist primarily of
deferred tax liabilities, liability for unrecognized tax benefits, and
liabilities associated with the 401(k) Restoration and Deferred Compensation
Plan.
Comprehensive
Income – Comprehensive income includes net earnings and unrealized net
gains and losses on investment securities. Other comprehensive income is net of
reclassification adjustments to adjust for items currently included in net
earnings, such as realized gains and losses on investment securities. The
deferred tax provision for unrealized holding gains arising from investment
securities during the years ended December 31, 2009, 2008 and 2007 was $25.3
million, $3.0 million, and $6.3 million respectively. The deferred
tax provision for reclassification adjustments for gains included in net
earnings on investment securities during the years ended December 31, 2009, 2008
and 2007 was $4.5 million, $1.6 million, and $0.5 million,
respectively.
Revenue
Recognition - Managed care premiums are recorded as revenue in the month
in which members are entitled to service. Premiums are based on a per subscriber
contract rate and the subscribers in the Company’s records at the time of
billing. Premium billings are generally sent to employers in the month
proceeding the month of coverage. Premium billings may be subsequently adjusted
to reflect changes in membership as a result of retroactive terminations,
additions, or other changes. The Company also receives premium payments from
Centers for Medicare & Medicaid Services (“CMS”) on a monthly basis for its
Medicare membership. Membership and category eligibility are periodically
reconciled with CMS and such reconciliations could result in adjustments to
revenue. CMS uses a risk adjustment model to determine premium
payments to health plans. This risk adjustment model apportions
premiums paid to all health plans according to health severity based on
diagnosis data provided to CMS. The Company estimates risk adjustment
revenues based on the diagnosis data submitted to CMS. Changes in
revenue from CMS resulting from the periodic changes in risk adjustments scores
for our membership are recognized when the amounts become determinable and the
collectibility is reasonably assured.
42
The
Company also receives premium payments on a monthly basis from the state
Medicaid programs with which the Company contracts for the Medicaid members for
whom it provides health coverage. Membership and category eligibility are
periodically reconciled with the state Medicaid programs and such
reconciliations could result in adjustments to revenue. Premiums collected in
advance are recorded as deferred revenue. Employer contracts are typically on an
annual basis, subject to cancellation by the employer group or by the Company
upon 30 days notice.
The
Medicare Part D program gives beneficiaries access to prescription drug
coverage. Coventry has been awarded contracts by CMS to offer various
Medicare Part D plans on a nationwide basis, in accordance with guidelines put
forth by the agency. Payments from CMS under these contracts include amounts for
premiums, amounts for risk corridor adjustments and amounts for reinsurance and
low-income cost subsidies.
The
Company recognizes premium revenue for the Medicare Part D program ratably over
the contract period for providing insurance coverage. Regarding the CMS risk
corridor provision, an estimated risk sharing receivable or payable is
recognized based on activity-to-date. Activity for CMS risk sharing is
accumulated at the contract level and recorded within the consolidated balance
sheet in other receivables or other accrued liabilities depending on the net
contract balance at the end of the reporting period with corresponding
adjustments to premium revenue. Costs for covered prescription drugs are
expensed as incurred.
Subsidy
amounts received for reinsurance and for cost sharing related to low income
individuals are recorded in medical liabilities and will offset medical costs
when paid. The Company does not recognize premium revenue or claims expense for
these subsidies as the Company does not incur any risk with this part of the
program.
A
reconciliation of the final risk sharing, low-income subsidy, and reinsurance
subsidy amounts is performed following the end of contract year. For both
contract years of 2008 and 2009, as of December 31, 2009, the CMS risk sharing
payable was $4.8 million and is included in accounts payable and other accrued
liabilities and the CMS risk sharing receivable was $9.1 million and is included
in other receivables. For both contract years of 2007 and 2008, as of December
31, 2008, the CMS risk sharing payable was $21.4 million and is included in
accounts payable and other accrued liabilities and the CMS risk sharing payable
was $7.0 million and is included in other receivables. As of December
31, 2009, the reinsurance subsidy amounts payable totaled $84.5 million and is
included in medical liabilities and the reinsurance subsidy amounts payable
totaled $62.8 million and is included in other receivables. As of December 31,
2008, the reinsurance subsidy amounts payable totaled $55.8 million and is
included in medical liabilities and the reinsurance subsidy amounts receivable
totaled $12.8 million and is included in other receivables.
The
Company has quota share arrangements on business with certain individual and
employer groups with two of its Medicare distribution partners covering portions
of the Company’s Medicare Part D and Medicare Private Fee for Service
products. As a result of the quota share sharing arrangements, for
the years ended December 31, 2009, 2008, and 2007, the Company ceded premium
revenue of $416.5 million, $574.1 million, and $250.2 million, respectively, and
the associated medical costs to these partners. The ceded amounts are
excluded from the Company’s results of operations. The Company is not relieved
of its primary obligation to the policyholder under this ceding
arrangement.
Management
services revenue is generally a fixed administrative fee, provided on a
predetermined contractual basis or on a percentage-of-savings basis, for access
to the Company’s health care provider networks and health care management
services, for which it does not assume underwriting risk. Percentage of savings
revenue is determined using the difference between charges billed by contracted
medical providers and the contracted reimbursement rates for the services billed
and is recognized based on claims processed. The management services the Company
provides typically include health care provider network management, clinical
management, pharmacy benefit management, bill review, claims repricing, claims
processing, utilization review and quality assurance.
The
Company enters into performance guarantees with employer groups where it pledges
to meet certain standards. These standards vary widely and could involve
customer service, member satisfaction, claims processing, claims accuracy,
telephone response time, etc. The Company also enters into financial guarantees
which can take various forms including, among others, achieving an annual
aggregate savings threshold, achieving a targeted level of savings per-member,
per-month or achieving overall network penetration in defined demographic
markets. For each guarantee, the Company estimates and records performance based
revenue after considering the relevant contractual terms and the data available
for the performance based revenue calculation. Pro-rata performance based
revenue is recognized on an interim basis taking into account the ultimate
rights and obligations of the parties upon termination of the
contracts.
Revenue
for pharmacy benefit management services for Workers' Compensation business is
derived on a pre-negotiated amount per pharmacy claim which
includes the cost of the pharmaceutical. Revenue and a
corresponding cost of sales to a third party vendor related to the sale of
pharmaceuticals is recorded when a pharmacy transaction is processed by the
Company. No pharmacy rebate revenue is collected or recorded related
to the Company’s Worker’s Compensation business.
43
Based on
information received subsequent to premium billings being sent, historical
trends, bad debt write-offs and the collectibility of specific accounts, the
Company estimates, on a monthly basis, the amount of bad debt and future
retroactivity and adjusts its revenue and reserves accordingly.
Premiums
for services to federal employee groups are subject to audit and review by the
OPM on a periodic basis. Such audits are usually a number of years in arrears.
Adjustments are recorded as additional information regarding the audits and
reviews becomes available. Any differences between actual results and estimates
are recorded in the period the audits are finalized.
Cost of Sales
– Cost of sales consists of the expense for prescription drugs provided by the
Company’s workers’ compensation pharmacy benefit manager and for the independent
medical examinations performed by physicians on injured
workers. These costs are associated with fee-based products and
exclude the cost of drugs related to the risk products recorded in medical
costs.
Contract Acquisition
Costs – Costs related to the acquisition of customer contracts, such as
commissions paid to outside brokers, are paid on a monthly basis and expensed as
incurred. For the Medicare Advantage business, the Company advances
commissions and defers amortization of these costs to the period in which
revenue associated with the acquired customer is earned, which is generally not
more than one year.
Income Taxes
– The Company files a consolidated federal tax return for the Company and its
subsidiaries. The Company accounts for income taxes in accordance with ASC Topic
740 “Income Taxes.” The deferred tax assets and/or liabilities are determined by
multiplying the differences between the financial reporting and tax reporting
bases for assets and liabilities by the enacted tax rates expected to be in
effect when such differences are recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. The realization of total deferred tax
assets is contingent upon the generation of future taxable income in the tax
jurisdictions in which the deferred tax assets are located. Taxable
income includes the impact of the reversal of deferred tax liabilities. Valuation
allowances are provided to reduce such deferred tax assets to amounts more
likely than not to be ultimately realized.
Earnings Per
Share - Basic earnings per share are based on the weighted average number
of common shares outstanding during the year. Diluted earnings per share assume
the exercise of all options and the vesting of all restricted stock using the
treasury stock method. Potential common stock equivalents to purchase 12.2
million, 8.3 million, and 3.2 million shares for the years ended December 31,
2009, 2008 and 2007, respectively, were excluded from the computation of diluted
earnings per share because the potential common stock equivalents were
anti-dilutive.
Other Income,
net - Other income, net includes interest income, net of fees, gains on
the repayment of debt, realized gains and losses on sales of investments, and
charges on the other-than-temporary impairment of investment
securities.
New
Accounting Standards
In June
2009, the FASB established the FASB ASC, or Codification, which on July 1, 2009
became the single official source of authoritative, nongovernmental GAAP,
superseding existing FASB, AICPA, EITF, and related literature. Prospectively,
only one level of authoritative GAAP will exist, excluding the guidance issued
by the SEC. All other literature will be non-authoritative. The Codification
does not change GAAP but instead reorganizes the U.S. GAAP pronouncements into
accounting topics, and displays all topics using a consistent structure. As the
Codification does not change GAAP, it did not have a material effect on the
Company’s financial statements. Previous references to applicable literature via
the Company’s disclosures have been updated with references to the new
Codification section.
In
May 2009, the FASB issued ASC Topic 855, “Subsequent Events,” which
required the Company to evaluate subsequent events through the date the
financial statements are issued. This standard requires an entity to recognize
in its financial statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the balance sheet date
(recognized subsequent events) and prohibits an entity from recognizing the
effects of subsequent events that provide evidence about conditions that did not
exist at the balance sheet date (non-recognized subsequent events). The Company
adopted the provisions of this standard as of June 30, 2009. The adoption of
this standard did not impact the Company’s financial position or results of
operations. The disclosures required by this standard are presented in Note S,
Subsequent Events, to the consolidated financial statements.
In April
2009, the FASB issued ASC 320-10-65-1, “Transition Related to FASB Staff
Position FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments.” This guidance relates to fixed maturity
securities and requires that other-than-temporary impairment losses related to
credit deterioration be included in the statements of operations and that losses
related to other market factors be included as a component of other
comprehensive income. The Company adopted the provisions of this update as of
April 1, 2009. The portion of the Company’s impairment charge that was recorded
prior to 2009 that was not either related to credit deterioration or to
securities that the Company had made the decision to sell was insignificant.
Accordingly, the Company did not record a cumulative effect transition
adjustment and therefore the adoption of pronouncement did not impact the
Company’s financial position or results of operations. The disclosures required
by this update are presented in Note G, Investments, to the consolidated
financial statements.
In April
2009, the FASB issued ASC 825-10-65-1, “Transition Related to FASB Staff
Position FAS 107-1 and APB 128-1, Interim Disclosures about Fair Value of
Financial Instruments.” This guidance requires disclosing qualitative and
quantitative information about the fair value of all financial instruments on a
quarterly basis, including methods and significant assumptions used to estimate
fair value during the period. These disclosures were previously only done
annually. The disclosures required by this update were effective for the quarter
ended June 30, 2009 and are included in Note G, Investments, to the consolidated
financial statements.
In April
2009, the FASB issued ASC 820-10-65-4, “Transition Related to FASB Staff
Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly.” This guidance reaffirms that fair value is
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date under current market conditions. This update also reaffirms the
need to use judgment in determining if a formerly active market has become
inactive and in determining fair values when the market has become inactive. The
adoption of this update did not impact the Company’s financial position or
results of operations.
In
December 2007, the FASB issued ASC 805-10, “Business Combinations," which
requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired. ASC 805-10 was effective for
financial statements issued for fiscal years beginning after December 15,
2008. Early adoption was prohibited. The Company
implemented ASC 805-10 effective January 1, 2009. The potential
impact of adopting ASC 805-10 on the Company’s future consolidated financial
statements will depend on the magnitude and frequency of the Company’s future
acquisitions.
In
December 2007, the FASB issued ASC 810-10, "Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51," which clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. ASC 810-10 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Early adoption is prohibited. The
adoption of ASC 810-10 did not impact the Company's financial position or
results of operations.
44
B.
SEGMENT INFORMATION
As a
result of the change in its executive leadership, the Company realigned its
organizational structure during 2009. The Company’s new organizational structure
brings enhanced focus to areas of anticipated growth opportunities. As a result,
the Company’s reportable segments have changed to the following three reportable
segments: Health Plan and Medical Services, Specialized Managed Care, and
Workers’ Compensation. Each of these segments, which the Company also refers to
as “Divisions,” is separately managed and provides separate operating results
that are evaluated by the Company’s chief operating decision maker.
The
Health Plan and Medical Services Division is primarily comprised of the
Company’s traditional health plan risk businesses and products and its Medicare
Advantage Private Fee-for-Service (“PFFS”) product. In the second
quarter of 2009, the Company’s management decided not to renew the PFFS
product effective for the 2010 plan year. Additionally, through this Division
the Company contracts with various federal employee organizations to provide
health insurance benefits under the Federal Employees Health Benefits Program
(“FEHBP”) and offers managed care and administrative products to businesses that
self-insure the health care benefits of their employees. This Division also
contains the Company’s dental services business.
The
Specialized Managed Care Division is comprised of its Medicare Part D program,
its network rental business (“Network Rental”) and its mental-behavioral health
benefits business. As discussed in Note D, Discontinued Operations, to the
consolidated financial statements, on July 31, 2009 the Company sold its
Medicaid/Public entity business, First Health Services Corporation (“FHSC”).
FHSC was a reporting unit within the Specialized Managed Care Division. FHSC
operations are recognized within the line item “(Loss) income from discontinued
operations, net of tax” in the Company’s consolidated statements of operations
and have been excluded from the continuing operations segment results presented
below.
The
Workers’ Compensation Division is comprised of the Company’s workers’
compensation services businesses, which provides fee-based, managed care
services such as access to our provider networks, pharmacy benefit management,
and care management to underwriters and administrators of workers’ compensation
insurance.
The table
below summarizes the results from continuing operations of the Company’s
reportable segments through the gross margin level, as that is the measure of
profitability used by the chief operating decision maker to assess segment
performance and make decisions regarding the allocation of resources. A
reconciliation of gross margin to operating earnings at a consolidated
continuing operations level is also provided. Total assets by reportable segment
are not disclosed as these assets are not reviewed separately by the Company’s
chief operating decision maker. The dollar amounts in the segment tables are
presented in thousands. The Company’s segment results for the prior years have
been reclassified to conform to the 2009 presentation.
45
Year
Ended December 31, 2009
|
|||||||||||||||
Health
Plan and Medical Services
|
Specialized
Managed Care
|
Workers’
Comp.
|
Elim.
|
Continuing
Operations Total
|
|||||||||||
Operating
revenues
|
|||||||||||||||
Managed
care premiums
|
$
|
11,142,921
|
$
|
1,640,420
|
$
|
-
|
$
|
(65,942)
|
$
|
12,717,399
|
|||||
Management
services
|
346,042
|
93,079
|
757,105
|
(10,099)
|
1,186,127
|
||||||||||
Total
operating revenues
|
11,488,963
|
1,733,499
|
757,105
|
(76,041)
|
13,903,526
|
||||||||||
Medical
costs
|
9,531,698
|
1,393,638
|
-
|
(65,942)
|
10,859,394
|
||||||||||
Cost
of sales
|
-
|
-
|
240,828
|
-
|
240,828
|
||||||||||
Gross
margin
|
$
|
1,957,265
|
$
|
339,861
|
$
|
516,277
|
$
|
(10,099)
|
$
|
2,803,304
|
|||||
Selling,
general and administrative
|
2,151,799
|
||||||||||||||
Depreciation
and amortization
|
149,554
|
||||||||||||||
Operating
earnings
|
$
|
501,951
|
|||||||||||||
Year
Ended December 31, 2008
|
|||||||||||||||
Health
Plan and Medical Services
|
Specialized
Managed Care
|
Workers’
Comp.
|
Elim.
|
Continuing
Operations Total
|
|||||||||||
Operating
revenues
|
|||||||||||||||
Managed
care premiums
|
$
|
9,686,417
|
$
|
912,485
|
$
|
-
|
$
|
(35,739)
|
$
|
10,563,163
|
|||||
Management
services
|
352,369
|
89,626
|
736,695
|
(7,626)
|
1,171,064
|
||||||||||
Total
operating revenues
|
10,038,786
|
1,002,111
|
736,695
|
(43,365)
|
11,734,227
|
||||||||||
Medical
costs
|
8,150,788
|
751,953
|
-
|
(34,162)
|
8,868,579
|
||||||||||
Cost
of sales
|
-
|
-
|
195,600
|
-
|
195,600
|
||||||||||
Gross
margin
|
$
|
1,887,998
|
$
|
250,158
|
$
|
541,095
|
$
|
(9,203)
|
$
|
2,670,048
|
|||||
Selling,
general and administrative
|
1,940,820
|
||||||||||||||
Depreciation
and amortization
|
143,699
|
||||||||||||||
Operating
earnings
|
$
|
585,529
|
|||||||||||||
Year
Ended December 31, 2007
|
|||||||||||||||
Health
Plan and Medical Services
|
Specialized
Managed Care
|
Workers’
Comp.
|
Elim.
|
Continuing
Operations Total
|
|||||||||||
Operating
revenues
|
|||||||||||||||
Managed
care premiums
|
$
|
7,988,872
|
$
|
700,761
|
$
|
-
|
$
|
-
|
$
|
8,689,633
|
|||||
Management
services
|
410,071
|
74,278
|
525,797
|
(5,603)
|
1,004,543
|
||||||||||
Total
operating revenues
|
8,398,943
|
775,039
|
525,797
|
(5,603)
|
9,694,176
|
||||||||||
Medical
costs
|
6,374,173
|
547,459
|
-
|
(1,101)
|
6,920,531
|
||||||||||
Cost
of sales
|
-
|
-
|
93,808
|
-
|
93,808
|
||||||||||
Gross
margin
|
$
|
2,024,770
|
$
|
227,580
|
$
|
431,989
|
$
|
(4,502)
|
$
|
2,679,837
|
|||||
Selling,
general and administrative
|
1,646,865
|
||||||||||||||
Depreciation
and amortization
|
131,644
|
||||||||||||||
Operating
earnings
|
$
|
901,328
|
During
the year ended December 31, 2008, the Company completed two business
combinations. These business combinations were accounted for using the purchase
method of accounting and therefore the operating results of each acquisition
have been included in the Company’s consolidated financial statements since the
date of their acquisition. The purchase price for each business combination was
allocated to the assets, including the identifiable intangible assets, and
liabilities based on estimated fair values. The excess of the purchase price
over the net identifiable assets acquired was allocated to
goodwill.
The
following table summarizes the business combinations for the year ended December
31, 2008. The purchase price of each business combination includes the payment
for net worth and estimated transition costs. The purchase price, inclusive of
all retroactive balance sheet settlements to date and transaction cost
adjustments, is presented below (in millions):
Effective
Date
|
Market
|
Price
|
|||
Mental Health Network Institutional Services, Inc.
(“MHNet”)
|
February
13, 2008
|
Multiple
Markets
|
$ 103
|
||
Majority ownership interest in Group Dental Services
(“GDS”)
|
May
14, 2008
|
Multiple
Markets
|
$ 35
|
On
February 13, 2008, the Company completed its acquisition of MHNet, a
mental-behavioral health company based in Austin, Texas. On May 14,
2008, the Company completed its acquisition of a majority ownership interest in
GDS, a dental company based in Rockville, Maryland. As a result of
these acquisitions the Company recorded $111.2 million of goodwill, none of
which is expected to be deductible for tax purposes.
During
2007 the Company acquired Vista Health Plans (“Vista”), businesses from Mutual
of Omaha, and Concentra. These acquisitions were individually
insignificant but were significant when aggregated. As a result of
these acquisitions, the Company recorded $952.8 million of goodwill, of which,
$289.1 million is expected to be deductible for tax purposes. The
following table lists the assigned value of the intangible assets as of the
acquisition date (in millions) and the associated amortization
period:
46
Estimated
|
Amortization
|
||
Fair
Value
|
Period
(Years)
|
||
Goodwill
|
$ 952.8
|
||
Customer
lists
|
227.2
|
8.8
|
|
Provider
network
|
8.4
|
16.3
|
|
Total
intangible assets
|
$
1,188.4
|
The
following unaudited pro forma consolidated results of operations assume the
acquisitions made during the year ended December 31, 2007 occurred on January 1,
2007 (in millions, except per share data):
Operating
revenues
|
$
10,666.0
|
Net
earnings
|
$ 615.3
|
Earnings
per share, basic
|
$ 3.98
|
Earnings
per share, diluted
|
$ 3.91
|
The pro forma amounts represent the historical operating
results of the Company and its 2007 acquisitions. Excluded from the
pro forma are the discontinued operations of FHSC, which was sold in July 2009.
Included in the pro forma is the effect of the amortization of finite lived
intangible assets arising from the purchase price allocation, interest expense
related to financing the acquisitions and the associated income tax effects of
the pro forma adjustments. The pro forma amounts assume that debt issuance and
debt refinancing that occurred in 2007, which coincided with the acquisitions,
would have occurred at the beginning of the year. In addition, the pro forma
amounts exclude $35.0 million in acquisition related costs that were incurred as
a result of the acquisition. The pro forma amounts are presented for comparison
purposes and are not necessarily indicative of the operating results that would
have occurred if the acquisitions had been completed at the beginning of the
periods presented, nor are they necessarily indicative of operating results in
future periods.
D.
DISCONTINUED OPERATIONS
On July
31, 2009, the Company completed the sale of its fee-based Medicaid services
subsidiary FHSC to Magellan Health Services, Inc. (“Magellan”) for $117.5
million in cash, which includes adjustments for changes in working capital. FHSC
was a component of the Company’s business operations within its Specialized
Managed Care operating segment. In accordance with ASC 205-20 “Discontinued
Operations,” FHSC’s operations and disposal costs are presented as (loss) income
from discontinued operations, net of tax in the Company’s consolidated
statements of operations.
The
following table presents select FHSC discontinued operations information (in
thousands):
Years
ended December 31,
|
||||||||
2009
|
2008
|
2007
|
||||||
FHSC
revenues
|
$
|
89,808
|
$
|
179,419
|
$
|
185,355
|
||
FHSC
earnings before taxes
|
14,218
|
33,915
|
31,658
|
|||||
FHSC
goodwill impairment, before taxes
|
(72,373)
|
-
|
-
|
|||||
Loss
on disposal of FHSC, before taxes
|
(4,123)
|
-
|
-
|
|||||
(Loss)
income from discontinued
|
||||||||
operations,
including loss on
|
||||||||
disposal in 2009, before taxes
|
(62,278)
|
33,915
|
31,658
|
|||||
Provision
for taxes on discontinued operations and disposal of FHSC
|
10,755
|
14,020
|
11,008
|
|||||
(Loss)
income from discontinued operations, net of tax
|
$
|
(73,033)
|
$
|
19,895
|
$
|
20,650
|
||
The
Company considered the then pending sale of FHSC a potential indicator of
impairment and in accordance with ASC Topic 350, “Intangibles – Goodwill and
Other,” it was determined that the carrying value of the reporting unit was in
excess of fair value. Accordingly, the Company performed an estimate of the
probable impairment loss, determined that the goodwill allocated to the
reporting unit was impaired, and recorded a gross impairment charge of $72.4
million during the year ended December 31, 2009.
The table
below shows the carrying amounts of the major classes of assets and liabilities
of FHSC as of December 31, 2008, that were included as part of the disposal
group on the July 31, 2009 sale to Magellan (in thousands):
FHSC
Assets
|
|||
Accounts
receivable, net
|
$ 27,084
|
||
Prepaid
expenses and other
|
2,180
|
||
Current
assets
|
29,264
|
||
Property
and equipment, net
|
4,192
|
||
Goodwill
and other intangibles
|
161,930
|
||
Deferred
tax asset
|
4,833
|
||
Other
assets
|
102
|
||
Total
Assets
|
$
200,321
|
||
FHSC Liabilities |
|
||
Accounts
payable
|
$ 6,625
|
||
Deferred
revenue
|
3,337
|
||
Deferred
tax liability
|
1,362
|
||
Total
Liabilities
|
$ 11,324
|
47
E.
GOODWILL AND OTHER INTANGIBLE ASSETS
The
changes in the carrying amount of goodwill for the years ended December 31, 2009
and 2008 were as follows (in thousands):
Total
|
|||
Balance,
December 31, 2007
|
$ 2,573,325
|
||
Acquisition
of MHNet
|
85,661
|
||
Acquisition
of GDS
|
26,718
|
||
Other
adjustments
|
9,321
|
||
Balance,
December 31, 2008
|
$ 2,695,025
|
||
FHSC
impairment charge
|
(72,373)
|
||
FHSC
sale
|
(85,724)
|
||
Other
adjustments
|
(7,644)
|
||
Balance,
December 31, 2009
|
$ 2,529,284
|
The Company completed its 2009 annual impairment test of
goodwill in accordance with ASC Topic 350 and determined that there were no
further impairments. In performing its impairment analysis the
Company identified its reporting units in accordance with the provisions of ASC
Topic 350 and ASC Topic 280 “Segment Reporting.”
In
accordance with ASC Topic 350, for the purpose of testing goodwill for
impairment, acquired assets and assumed liabilities were assigned to a reporting
unit as of the acquisition date if both of the following criteria were met: (1)
the asset will be employed in or the liability relates to the operations of a
reporting unit and (2) the asset or liability will be considered in determining
the fair value of the reporting unit. Corporate assets or liabilities
were also assigned to a reporting unit if both of these criteria were
met.
In order
to determine the fair value of its reporting units, the Company weighted the
income approach and the market approach. Under the income approach,
the Company assumed certain growth rates, capital expenditures, discount rates
and terminal growth rates in its calculations. The key assumptions used to
determine the fair value of the Company’s reporting units included terminal
values based upon long term growth rates and a discount rate based on the
Company’s weighted average cost of capital adjusted for the risks associated
with the operations. The market approach estimates a business’s fair value by
utilizing market multiples.
As an overall test of the reasonableness of the
estimated fair values of the reporting units, the Company compared the aggregate
fair values of its reporting units to its market capitalization. The
comparison confirmed that the determined fair values were representative of
market views when applying a reasonable control premium. We determined
that our control premium was reasonable based on a review of such premiums for
entities of similar size and/or in similar industries.
The
Company will continue to monitor its market capitalization in relation to
aggregate fair values of its reporting units to determine if events and
circumstances warrant the performance of an interim impairment
analysis.
48
Other Intangible
Assets
The other
intangible asset balances are as follows (in thousands):
Gross
|
Net
|
||||
Carrying
|
Accumulated
|
Carrying
|
Amortization
|
||
Amount
|
Amortization
|
Amount
|
Period
|
||
As
of December 31, 2009
|
|||||
Amortized
other intangible assets
|
|||||
Customer
Lists
|
$ 555,962
|
$ 224,789
|
$ 331,173
|
7-15
Years
|
|
HMO
Licenses
|
12,600
|
7,122
|
5,478
|
20
Years
|
|
Provider
Networks
|
62,000
|
14,353
|
47,647
|
15-20
Years
|
|
Trade
Names
|
3,449
|
1,954
|
1,495
|
3-4
Years
|
|
Total amortized other intangible assets |
|
$ 634,011
|
$ 248,218
|
$ 385,793
|
|
Unamortized
other intangible assets
|
|||||
Trade
Names
|
$ 85,900
|
$ -
|
$ 85,900
|
---
|
|
Total unamortized other intangible assets |
|
$ 85,900
|
$ -
|
$ 85,900
|
|
Total other intangible assets |
|
$ 719,911
|
$ 248,218
|
$ 471,693
|
|
As
of December 31, 2008
|
|||||
Amortized
other intangible assets
|
|||||
Customer
Lists
|
$ 572,100
|
$ 171,327
|
$ 400,773
|
3-15
Years
|
|
HMO
Licenses
|
12,600
|
6,528
|
6,072
|
15-20
Years
|
|
Provider
Networks
|
62,000
|
11,143
|
50,857
|
15-20
Years
|
|
Trade
Names
|
3,449
|
883
|
2,566
|
3-4
Years
|
|
Total amortized other intangible assets |
|
$ 650,149
|
$ 189,881
|
$ 460,268
|
|
Unamortized
other intangible assets
|
|||||
Trade
Names
|
$ 85,900
|
$ -
|
$ 85,900
|
---
|
|
Total unamortized other intangible assets |
|
$ 85,900
|
$ -
|
$ 85,900
|
|
Total other intangible assets |
|
$ 736,049
|
$ 189,881
|
$
546,168
|
Other
intangible asset amortization expense for the years ended December 31, 2009,
2008 and 2007 was $71.0 million, $65.6 million, and $48.2 million,
respectively.
Based on
events and circumstances, primarily lower than expected customer retention
levels, we recorded $5.5 million in impairment charges to our customer list
balances in 2009. The impairment charges, which are included in the
line item depreciation and amortization in the Company’s consolidated statements
of operations, related to components of its Health Plan and Medical Services
operating segment and its Specialized Managed Care operating segment,
respectively. The fair values were based on present value
calculations which are Level 3 in the fair value hierarchy.
The
Company performed an impairment test of its unamortized other intangible asset
(trade name) as of October 1, 2009, and determined that the asset was not
impaired.
Estimated
intangible amortization expense is $63.3 million for the year ending December
31, 2010, $62.4 million for the year ending December 31, 2011, $62.0 million for
the year ending December 31, 2012 and $61.6 million for the year ending December
31, 2013 and $61.1 million for the year ending December 31, 2014. The
weighted-average amortization period is approximately 10 years for other
intangible assets.
F.
PROPERTY AND EQUIPMENT
Property
and equipment is comprised of the following (in thousands):
As
of December 31,
|
Depreciation
|
|||
2009
|
2008
|
Period
|
||
Land
|
$ 24,779
|
$ 24,779
|
---
|
|
Buildings
and leasehold improvements
|
142,605
|
144,890
|
1-40
Years
|
|
Developed
software
|
174,887
|
164,783
|
1-9
Years
|
|
Equipment
|
336,904
|
334,679
|
3-7
Years
|
|
Sub-total
|
679,175
|
669,131
|
||
Less:
accumulated depreciation
|
(407,244)
|
(361,115)
|
||
Property
and equipment, net
|
$
271,931
|
$
308,016
|
Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was $80.8 million,
$84.6 million, and $94.4 million, respectively. Included in the depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was $25.4 million,
$29.9 million, and $32.9 million, respectively, of amortization expense for
developed software.
49
G.
INVESTMENTS
Investments
The
Company adopted the provisions of ASC 320-10-65-1 related to its fixed maturity
securities as of April 1, 2009. The portion of the Company’s
impairment charge that was recorded prior to 2009 that was not related to a
belief that the entire amortized cost basis would not be recovered,
to credit deterioration of the specific security, or to securities that the
Company has made the decision to sell, was
insignificant. Accordingly, the Company did not record a cumulative
effect transition adjustment upon adoption.
The
Company considers all of its investments as available-for-sale securities and,
accordingly, records unrealized gains and losses within accumulated other
comprehensive income (loss) in the stockholders’ equity section of its
consolidated balance sheets. Certain prior year investment balances
have been reclassified in the tables below to conform to the 2009 presentation
requirements.
The
amortized cost, gross unrealized gain or loss and estimated fair value of
short-term and long-term investments by security type were as follows at
December 31, 2009 and 2008 (in thousands):
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||
As of December 31, 2009 |
Cost
|
Gain
|
Loss
|
Value
|
|
|
|||||
State
and municipal bonds
|
$ 863,561
|
$ 37,392
|
$ (1,371)
|
$ 899,582
|
|
US
Treasury securities
|
566,057
|
2,572
|
(32)
|
568,597
|
|
Government-sponsored enterprise securities (1)
|
231,645
|
4,225
|
(330)
|
235,540
|
|
Residential mortgage-backed securities (2)
|
229,665
|
10,581
|
(932)
|
239,314
|
|
Commercial
mortgage-backed securities
|
26,891
|
344
|
(507)
|
26,728
|
|
Asset-backed securities (3)
|
48,434
|
4,441
|
(1,170)
|
51,705
|
|
Corporate
debt and other securities
|
357,594
|
12,373
|
(1,091)
|
368,876
|
|
$ 2,323,847
|
$ 71,928
|
$ (5,433)
|
$2,390,342
|
||
Equity method investments (4)
|
46,751
|
||||
$2,437,093
|
|||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||
As of December 31, 2008 |
Cost
|
Gain
|
Loss
|
Value
|
|
|
|||||
State
and municipal bonds
|
$ 826,136
|
$ 19,677
|
$ (4,546)
|
$ 841,267
|
|
US
Treasury securities
|
457,507
|
5,932
|
(54)
|
463,385
|
|
Government-sponsored enterprise securities (1)
|
92,901
|
4,014
|
-
|
96,915
|
|
Residential mortgage-backed securities (2)
|
297,456
|
8,306
|
(2,863)
|
302,899
|
|
Commercial
mortgage-backed securities
|
49,394
|
15
|
(7,618)
|
41,791
|
|
Asset-backed securities (3)
|
65,307
|
70
|
(6,896)
|
58,481
|
|
Corporate
debt and other securities
|
191,053
|
1,449
|
(2,813)
|
189,689
|
|
$ 1,979,754
|
$ 39,463
|
$ (24,790)
|
$1,994,427
|
||
Equity method investments (4)
|
53,580
|
||||
$2,048,007
|
(1)
|
Includes
FDIC insured Temporary Liquidity Guarantee Program
securities.
|
(2)
|
Agency
pass-through, with the timely payment of principal and interest
guaranteed.
|
(3)
|
Includes
auto loans, credit card debt, and rate reduction
bonds.
|
(4)
|
Includes
investments in entities accounted for under the equity method of
accounting and therefore are presented at their carrying
value.
|
Through
its acquisition of First Health on January 28, 2005, the Company acquired eight
separate investments (tranches) in a limited liability company that invests in
equipment that is leased to third parties. The total investment as of December
31, 2009 was $44.1 million and is accounted for using the equity method. The
Company’s proportionate share of the partnership’s income was $0.9 million, $5.4
million, and $4.5 million for the years ended December 31, 2009, 2008 and 2007,
respectively, and is included in other income in the Company’s statements of
operations. The Company has between a 20% and 25% interest in the limited
partners share of each individual tranche of the partnership (approximately 10%
of the total partnership). During 2009, the Company determined that
events and changes in circumstances occurred, indicating that the carrying value
might not be fully recoverable. Accordingly, the investment was
evaluated to determine fair value during the fourth quarter. As a
result of this evaluation, the Company recorded an impairment charge of $2.5
million at December 31, 2009. The carrying value of this investment at December
31, 2009 approximates fair value.
50
Through
its acquisition of Vista on September 10, 2007, the Company acquired a 50%
investment in Carefree Insurance Services (“Carefree”). Carefree
performs marketing and sales of several Individual and Medicare
products. As of December 31, 2009, the Company’s total investment was
$2.7 million and is accounted for using the equity method.
The
amortized cost and estimated fair value of available for sale debt securities by
contractual maturity were as follows at December 31, 2009 and 2008 (in
thousands):
As
of December 31, 2009
|
As
of December 31, 2008
|
|||||||
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||
Cost
|
Value
|
Cost
|
Value
|
|||||
Maturities:
|
||||||||
Within
1 year
|
$ 612,960
|
$ 616,177
|
$ 410,097
|
$ 411,874
|
||||
1
to 5 years
|
753,697
|
780,908
|
590,678
|
588,629
|
||||
5
to 10 years
|
440,552
|
459,092
|
381,324
|
385,756
|
||||
Over
10 years
|
516,638
|
534,165
|
597,655
|
608,168
|
||||
Total
|
$ 2,323,847
|
$ 2,390,342
|
$ 1,979,754
|
$ 1,994,427
|
Investments
with long-term option adjusted maturities, such as residential and commercial
mortgage-backed securities, are included in the over 10 year category.
Actual maturities may differ due to call or prepayment rights.
Gross
investment gains of $14.0 million and gross investment losses of $2.4 million
were realized on sales of investments for the year ended December 31,
2009. This compares to gross investment gains of $7.6 million and
gross investment losses of $37.0 million that were realized on sales and the
other-than-temporary impairment of investments for the year ended December 31,
2008, and gross investment gains of $1.7 million and gross investment losses of
$0.5 million that were realized on investment sales for the year ended December
31, 2007. The Company's other-than-temporary impairment charge and
its realized gains and losses are recorded in other income, net in the Company's
consolidated statements of operations.
During
the year ended December 31, 2008, we recognized a $33.5 million
other-than-temporary impairment charge related to 31 securities, including our
investments in Lehman Brothers Holdings, Inc., certain corporate financial
holdings, auction rate securities and mortgage backed and asset-backed
securities. This other-than-temporary impairment charge was
representative of credit losses and therefore was recognized in
earnings.
The
following table shows the Company’s investments’ gross unrealized losses and
fair value, at December 31, 2009 and December 31, 2008, aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position (in thousands).
At December 31,
2009
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||
Description
of Securities
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||
State
and municipal bonds
|
$ 49,963
|
$ (833)
|
$
12,898
|
$ (538)
|
$ 62,861
|
$
(1,371)
|
|||
US
Treasury securities
|
8,146
|
(32)
|
-
|
-
|
8,146
|
(32)
|
|||
Government
sponsored enterprises
|
45,331
|
(330)
|
-
|
-
|
45,331
|
(330)
|
|||
Residential
mortgage-backed securities
|
28,461
|
(645)
|
9,658
|
(287)
|
38,119
|
(932)
|
|||
Commercial mortgage-backed
securities
|
2,505
|
(17)
|
5,580
|
(490)
|
8,085
|
(507)
|
|||
Asset-backed
securities
|
-
|
-
|
2,255
|
(1,170)
|
2,255
|
(1,170)
|
|||
Corporate
debt and other securities
|
119,594
|
(1,091)
|
-
|
-
|
119,594
|
(1,091)
|
|||
Total
|
$
254,000
|
$
(2,948)
|
$
30,391
|
$
(2,485)
|
$
284,391
|
$
(5,433)
|
|||
At December 31,
2008
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||
Description
of Securities
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||
State
and municipal bonds
|
$
154,665
|
$ (3,052)
|
$ 21,441
|
$ (1,494)
|
$176,106
|
$ (4,546)
|
|||
US
Treasury securities
|
274,891
|
(54)
|
-
|
-
|
274,891
|
(54)
|
|||
Government
sponsored enterprises
|
-
|
-
|
-
|
-
|
-
|
-
|
|||
Residential
mortgage-backed securities
|
29,634
|
(1,238)
|
10,436
|
(1,625)
|
40,070
|
(2,863)
|
|||
Commercial mortgage-backed
securities
|
23,807
|
(3,287)
|
17,379
|
(4,331)
|
41,186
|
(7,618)
|
|||
Asset-backed
securities
|
46,508
|
(2,413)
|
9,135
|
(4,483)
|
55,643
|
(6,896)
|
|||
Corporate
debt and other securities
|
78,730
|
(1,450)
|
4,063
|
(1,363)
|
82,793
|
(2,813)
|
|||
Total
|
$
608,235
|
$ (11,494)
|
$
62,454
|
$ (13,296)
|
$670,689
|
$ (24,790)
|
The
unrealized losses presented in this table do not meet the criteria for an
other-than-temporary impairment. The unrealized losses are the result
of interest rate movements and significant increases in volatility and liquidity
concerns in the securities and credit markets. The Company has
not decided to sell and it is not more-likely-than not that the Company will be
required to sell before a recovery of the amortized cost basis of these
securities.
The
Company continues to review its investment portfolios under its impairment
review policy. Given the current market conditions and the significant judgments
involved, there is a continuing risk that further declines in fair value may
occur and additional other-than-temporary impairments may be recorded in future
periods.
Fair Value
Measurements
ASC Topic
820, “Fair Value Measurements and Disclosures,” defines fair value and requires
a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value based on the quality and reliability of the inputs or
assumptions used in fair value measurements.
51
The
Company’s Level 1 securities primarily consist of US Treasury securities and
cash. The Company determines the estimated fair value for its Level 1 securities
using quoted (unadjusted) prices for identical assets or liabilities in active
markets.
The
Company’s Level 2 securities primarily consist of government-sponsored
enterprise securities, state and municipal bonds, mortgage-backed securities,
asset-backed securities, corporate debt, and money market funds. The Company
determines the estimated fair value for its Level 2 securities using the
following methods: quoted prices for similar assets/liabilities in active
markets, quoted prices for identical or similar assets in non-active markets
(few transactions, limited information, non-current prices, high variability
over time), inputs other than quoted prices that are observable for the
asset/liability (e.g. interest rates, yield curves volatilities, default rates,
etc.), and inputs that are derived principally from or corroborated by other
observable market data.
The
Company’s Level 3 securities primarily consist of corporate financial holdings,
and mortgage backed and asset-backed securities that were thinly traded due to
market volatility and lack of liquidity. The Company determines the estimated
fair value for its Level 3 securities using unobservable inputs that cannot be
corroborated by observable market data including, but not limited to, broker
quotes, default rates, benchmark yields, credit spreads and prepayment
speeds.
The
following table presents the fair value hierarchy for the Company’s financial
assets measured at fair value on a recurring basis at December 31, 2009 and 2008
(in thousands):
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
||||||
At December 31,
2009
|
Total
|
Level
1
|
Level
2
|
Level
3
|
||||
Cash
and cash equivalents
|
$
|
1,418,554
|
$
|
398,073
|
$
|
1,020,481
|
$
|
-
|
State
and municipal bonds
|
899,582
|
-
|
899,582
|
-
|
||||
US
Treasury securities
|
568,597
|
568,597
|
-
|
-
|
||||
Government-sponsored
enterprise securities
|
235,540
|
-
|
235,540
|
-
|
||||
Residential
mortgage-backed securities
|
239,314
|
-
|
236,214
|
3,100
|
||||
Commercial
mortgage-backed securities
|
26,728
|
-
|
26,728
|
-
|
||||
Asset-backed
securities
|
51,705
|
-
|
47,267
|
4,438
|
||||
Corporate
debt and other securities
|
368,876
|
-
|
360,250
|
8,626
|
||||
Total
|
$
|
3,808,896
|
$
|
966,670
|
$
|
2,826,062
|
$
|
16,164
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
||||||
At December 31,
2008
|
Total
|
Level
1
|
Level
2
|
Level
3
|
||||
Cash
and cash equivalents
|
$
|
1,123,114
|
$
|
609,195
|
$
|
513,919
|
$
|
-
|
State
and municipal bonds
|
841,267
|
-
|
833,287
|
7,980
|
||||
US
Treasury securities
|
463,385
|
463,385
|
-
|
-
|
||||
Government-sponsored
enterprise securities
|
96,915
|
-
|
96,915
|
-
|
||||
Residential
mortgage-backed securities
|
302,899
|
-
|
302,899
|
-
|
||||
Commercial
mortgage-backed securities
|
41,791
|
-
|
41,791
|
-
|
||||
Asset-backed
securities
|
58,481
|
-
|
56,231
|
2,250
|
||||
Corporate
debt and other securities
|
189,689
|
-
|
176,764
|
12,925
|
||||
Total
|
$
|
3,117,541
|
$
|
1,072,580
|
$
|
2,021,806
|
$
|
23,155
|
The
following table provides a summary of changes in the fair value of the Company’s
Level 3 financial assets for the years ended December 31, 2009 and 2008 (in
thousands):
Year Ended
December 31, 2009
Total
Level 3
|
Municipal
bonds
|
Mortgage-backed
securities
|
Asset-backed
securities
|
Corporate and
other
|
|||||
Beginning
Balance, January 1
|
$ 23,155
|
$ 7,980
|
$ -
|
$ 2,250
|
$ 12,925
|
||||
Transfers
to (from) Level 3
|
-
|
-
|
-
|
-
|
-
|
||||
Total
gains or losses (realized / unrealized)
|
|
|
|
|
|||||
Included
in earnings
|
13,245
|
2,683
|
3,255
|
1,614
|
5,693
|
||||
Included
in other comprehensive income
|
7,866
|
-
|
1,355
|
2,534
|
3,977
|
||||
Purchases,
issuances and settlements
|
(28,102)
|
(10,663)
|
(1,510)
|
(1,960)
|
(13,969)
|
||||
Ending
Balance, December 31, 2009
|
$ 16,164
|
$ -
|
$ 3,100
|
$ 4,438
|
$ 8,626
|
Year Ended
December 31, 2008
Total
Level 3
|
Municipal
bonds
|
Mortgage-backed
securities
|
Asset-backed
securities
|
Corporate and
other
|
|||||
Beginning
Balance, January 1
|
$ 10,797
|
$ -
|
$ -
|
$ 8,308
|
$ 2,489
|
||||
Transfers
to (from) Level 3
|
39,576
|
13,500
|
8,421
|
1,775
|
15,880
|
||||
Total
gains or losses (realized / unrealized)
|
|
|
|
|
|
||||
Included
in earnings
|
(31,880)
|
(5,318)
|
(5,267)
|
(4,172)
|
(17,123)
|
||||
Included
in other comprehensive income
|
192
|
(2)
|
(2)
|
(96)
|
292
|
||||
Purchases,
issuances and settlements
|
4,470
|
(200)
|
(3,152)
|
(3,565)
|
11,387
|
||||
Ending
Balance, December 31, 2008
|
$ 23,155
|
$ 7,980
|
$ -
|
$ 2,250
|
$ 12,925
|
52
H.
STOCK-BASED COMPENSATION
The
Company has one stock incentive plan, the Amended and Restated 2004 Stock
Incentive Plan (the “Stock Incentive Plan”) under which shares of the Company’s
common stock are authorized for issuance to key employees, consultants and
directors in the form of stock options, restricted stock and other stock-based
awards. Shares available for issuance under the Stock Incentive Plan were 6.8
million as of December 31, 2009.
Stock Options
Under the
Stock Incentive Plan, the terms and conditions of option grants are established
on an individual basis with the exercise price of the options being equal to not
less than 100% of the fair value of the underlying stock at the date of grant.
Options generally become exercisable after one year in either 33% or 25%
increments per year and expire ten years from the date of grant. At December 31,
2009, the Stock Incentive Plan had outstanding options representing 13.0 million
shares of common stock.
The
Company continues to use the Black-Scholes-Merton option pricing model and
amortizes compensation expense over the requisite service period of the grant.
The methodology used in 2009 to derive the assumptions used in the valuation
model is consistent with that used in prior years. The following average values
and weighted-average assumptions were used for option grants.
2009
|
2008
|
2007
|
|||
Black-Scholes-Merton
Value
|
$
7.11
|
$ 13.16
|
$ 16.79
|
||
Dividend
yield
|
0.0%
|
0.0%
|
0.0%
|
||
Risk-free
interest rate
|
1.7%
|
2.9%
|
4.7%
|
||
Expected
volatility
|
60.8%
|
32.3%
|
25.6%
|
||
Expected
life (in years)
|
3.8
|
4.2
|
4.1
|
The
Company has not paid dividends in the past nor does it expect to pay dividends
in the future. As such, the Company used a dividend yield percentage of zero.
The Company uses a risk-free interest rate consistent with the yield available
on a U.S. Treasury note with a term equal to the expected term of the underlying
grants. The expected volatility was estimated based upon a blend of the implied
volatility of the Company’s tradeable options and the historical volatility of
the Company’s share price. The expected life was estimated based upon exercise
experience of option grants made in the past to Company employees.
The
Company granted 3.5 million stock options during the twelve months ended
December 31, 2009. The Company recorded compensation expense related to stock
options of approximately $30.6 million, $35.3 million, and $36.1 million, for
the years ended December 31, 2009, 2008 and 2007, respectively. The total
intrinsic value of options exercised was $1.5 million, $10.4 million, and $77.9
million for the years ended December 31, 2009, 2008 and 2007, respectively. As
of December 31, 2009, there was $35.5 million of total unrecognized compensation
cost (net of expected forfeitures) related to nonvested stock option grants
which is expected to be recognized over a weighted average period of 2.1
years.
The
following table summarizes stock option activity for the year ended December 31,
2009:
Shares
|
Weighted-Average
|
|
Aggregate
Intrinsic
Value
|
Weighted
Average
Remaining
|
||||
(in
thousands)
|
Exercise Price |
(in
thousands)
|
Contractual Life | |||||
Outstanding
at January 1, 2009
|
11,576
|
$ 43.13
|
||||||
Granted
|
3,466
|
$ 15.71
|
||||||
Exercised
|
(136)
|
$ 8.40
|
||||||
Cancelled
and expired
|
(1,873)
|
$ 46.79
|
||||||
Outstanding
at December 31, 2009
|
13,033
|
$ 35.67
|
33,581
|
5.83
|
||||
Exercisable
at December 31, 2009
|
8,242
|
$ 38.99
|
10,210
|
4.32
|
Restricted Stock
Awards
The
Company awarded 1.7 million shares of restricted stock in the twelve months
ended December 31, 2009. The value of the Company’s restricted shares
is amortized over various vesting periods through 2013. The Company recorded
compensation expense related to restricted stock grants, including restricted
stock granted in prior periods, of approximately $16.5 million, $25.3 million,
and $28.1 million for the years ended December 31, 2009, 2008 and 2007,
respectively. The total unrecognized compensation cost (net of expected
forfeitures) related to the restricted stock was $36.3 million at December 31,
2009, and is expected to be recognized over a weighted average period of 2.2
years. The weighted-average fair value of restricted stock granted was $16.43,
$39.06, and $59.42 per share for the years ended December 31, 2009, 2008 and
2007, respectively. The total fair value of shares vested during the years ended
December 31, 2009, 2008 and 2007 was $8.5 million, $17.3 million, and $39.2
million, respectively.
The
following table summarizes restricted stock award activity for the year ended
December 31, 2009:
Weighted-Average
|
||||
Shares
|
Grant-Date
Fair
|
|||
(in
thousands)
|
Value
Per Share
|
|||
Nonvested,
January 1, 2009
|
1,460
|
$ 43.80
|
||
Granted
|
1,743
|
$ 16.43
|
||
Vested
|
(459)
|
$ 45.45
|
||
Forfeited
|
(518)
|
$ 32.81
|
||
Nonvested,
December 31, 2009
|
2,226
|
$ 24.43
|
53
Performance
Share Units
During
the twelve months ended December 31, 2009, the Company granted performance share
units (“PSUs”) to key employees pursuant to the Stock Incentive Plan. The
PSUs represent hypothetical shares of the Company’s common stock. The holders of
PSUs have no rights as shareholders with respect to the shares of the Company’s
common stock to which the awards relate. The PSUs will vest based upon the
achievement of certain performance goals and vest over various periods through
2011. All PSUs that vest will be paid out in cash based upon the
price of the Company’s common stock and therefore are classified as a liability
by the Company. The liability on the Company’s books at December 31,
2009 was $13.8 million, of which $10.9 million was paid out in February
2010.
The
following table summarizes PSU activity for the twelve months ended December 31,
2009 (in thousands):
Units
|
||
Outstanding,
January 1, 2009
|
-
|
|
Granted
|
936
|
|
Vested
|
(436)
|
|
Cancelled/Forfeited
|
(132)
|
|
Outstanding,
December 31, 2009
|
368
|
The
Company recorded compensation expense related to the PSUs of approximately $13.8
million for the year ended December 31, 2009.
I.
INCOME TAXES
Years
ended December 31,
|
||||||
2009
|
2008
|
2007
|
||||
Current
provision:
|
||||||
Federal
|
$
233,951
|
$
210,877
|
$
341,436
|
|||
State
|
42,002
|
32,210
|
41,376
|
|||
Deferred
benefit:
|
||||||
Federal
|
(60,864)
|
(36,050)
|
(23,600)
|
|||
State
|
(25,869)
|
2,824
|
(1,444)
|
|||
Income
tax expense
|
$ 189,220
|
$
209,861
|
$
357,768
|
The
Company’s effective tax rate differs from the federal statutory rate of 35% as a
result of the following:
Years
ended December 31,
|
|||||
2009
|
2008
|
2007
|
|||
Statutory
federal tax rate
|
35.00%
|
35.00%
|
35.00%
|
||
Effect
of:
|
|||||
State
income taxes, net of federal benefit
|
1.72%
|
2.42%
|
2.32%
|
||
Tax
exempt investment income
|
(1.71%)
|
(1.55%)
|
(0.70%)
|
||
Remuneration
disallowed
|
0.35%
|
0.00%
|
0.03%
|
||
Other
|
2.14%
|
0.83%
|
0.50%
|
||
Effective
tax rate
|
37.50%
|
36.70%
|
37.15%
|
54
The effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2009 and 2008 are presented below (in
thousands):
December
31,
|
|||||
Deferred tax assets: |
2009
|
2008
|
|||
|
|||||
Net
operating loss carryforward
|
$ 28,359
|
$ 31,125
|
|||
Deferred
compensation
|
66,464
|
55,999
|
|||
Deferred
revenue
|
8,392
|
7,755
|
|||
Medical
liabilities
|
79,781
|
40,660
|
|||
Accounts
receivable
|
9,011
|
5,094
|
|||
Other
accrued liabilities
|
96,393
|
32,372
|
|||
Unrealized
capital losses
|
2,670
|
9,076
|
|||
Capital
loss carryforward
|
1,787
|
2,476
|
|||
Internally
developed software
|
1,221
|
-
|
|||
|
Other
assets
|
18,079
|
2,669
|
||
Gross
deferred tax assets
|
312,157
|
187,226
|
|||
Less
valuation allowance
|
(3,101)
|
-
|
|||
Deferred
tax asset
|
309,056
|
187,226
|
|||
Deferred tax
liabilities:
|
|||||
Unrealized
gain on securities
|
(25,085)
|
(5,703)
|
|||
Other
liabilities
|
(9,959)
|
(7,460)
|
|||
Depreciation
|
(35,502)
|
(19,517)
|
|||
Intangibles
|
(187,527)
|
(204,957)
|
|||
Internally
developed software
|
-
|
(17,062)
|
|||
Tax
benefit of limited partnership investment
|
(41,804)
|
(56,284)
|
|||
Gross
deferred tax liabilities
|
(299,877)
|
(310,983)
|
|||
Net deferred tax asset (liability) (1)
|
$ 9,179
|
$ (123,757)
|
|||
(1)
Includes $207.1 million and $94.0 million classified as current assets at
December 31, 2009 and 2008, respectively, and $(198.0) million and
$(217.7) million classified as noncurrent assets (liabilities) at December
31, 2009 and 2008, respectively.
|
At
December 31, 2009, the Company had approximately $72 million of federal and $198
million of state tax net operating loss carryforwards. The Federal
net operating losses were primarily acquired through various acquisitions and
are subject to limitation under Internal Revenue Code Section
382. The net operating loss carryforwards can be used to reduce
future taxable income, and expire over varying periods through the year
2029. A valuation allowance of approximately $3.0 million has been
recorded for 2009 for certain net operating loss deferred tax assets because the
Company believes it is not more likely than not that these deferred tax assets
will be realized before expiration of those net operating losses.
The
Company’s current income taxes payable has been increased by tax expense
resulting from equity based compensation transactions. For the year
ended December 31, 2009, these expenses were debited to shareholder’s equity and
amounted to $8.1 million. For the year ended December 31, 2008, the
Company's current income taxes payable were reduced by tax benefits resulting
from equity based transactions. These benefits were credited to
shareholder's equity and amounted to approximately $0.4 million.
The
Company adopted ASC 740-10 “Accounting for Uncertainty in Income Taxes,”
effective January 1, 2007 which clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in accordance with ASC Topic
740 “Income Taxes” on January 1, 2007. ASC 740-10 prescribes a more likely than
not threshold for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. For a tax
benefit to be recognized, a tax position must be more likely than not to be
sustained upon examination by applicable taxing authorities. The
benefit recognized is the amount that has a greater than 50% likelihood of being
realized upon final settlement of the tax position. The change in net
assets, because of applying this pronouncement, is considered a change in
accounting principle with the cumulative effect of the change required to be
treated as an adjustment to the opening balance of retained
earnings. The cumulative effect of implementing ASC 740-10 was an
increase of $3.4 million to the beginning balance of retained earnings for the
year ended December 31, 2007.
A
reconciliation of the total amounts of unrecognized tax benefits for the years
ended December 31, 2009, 2008 and 2007 is as follows (in
thousands):
2009
|
2008
|
2007
|
|
Gross
unrecognized tax benefits - beginning balance
|
$ 51,841
|
$ 83,482
|
$ 78,514
|
Gross
increases to tax positions taken in the current period
|
98,254
|
25,469
|
63,517
|
Gross
increases to tax positions taken in prior periods
|
17,865
|
14,456
|
-
|
Gross
decreases to tax positions taken in prior periods
|
(34,777)
|
(68,585)
|
(53,160)
|
Decreases
relating to settlements with tax authorities
|
-
|
(874)
|
-
|
Decreases
due to a lapse of statute of limitations
|
(4,099)
|
(2,107)
|
(5,389)
|
Gross
unrecognized tax benefits - ending balance
|
$ 129,084
|
$ 51,841
|
$ 83,482
|
The total
amount of unrecognized tax benefits, as of December 31, 2009, 2008 and 2007,
that if recognized would affect the effective tax rate was $40.4 million, $32.4
million, and $17.1 million, respectively. Further, the Company is
unaware of any positions for which it is reasonably possible that the total
amounts of unrecognized tax benefits will significantly increase or decrease
within the next twelve months.
Penalties
and tax-related interest expense are reported as a component of income tax
expense. As of December 31, 2009, 2008, and 2007, the total amount of income
tax-related accrued interest and penalties, net of related tax benefit,
recognized in the statement of financial position was $6.5 million, $9.6
million, and $10.2 million, respectively. For the years ended December 31, 2009,
2008, and 2007, the total amount of income tax-related accrued interest and
penalties, net of related tax benefit, recognized in the statement of operations
was $2.8 million, $2.4 million, and $4.5 million, respectively.
55
The
Company is regularly audited by federal, state and local tax authorities, and
from time to time these audits result in proposed assessments. Tax
years 2006-2008 remain open to examination by these tax
jurisdictions. The Company believes appropriate provisions for all
outstanding issues have been made for all jurisdictions and all open
years.
During
the year ended December 31, 2009, the Internal Revenue Service (“IRS”) completed
its examination of the income tax returns of the Company for the years ended
December 31, 2005 and 2006. Tax assessed as a result of this examination was not
material. During the year ended December 31, 2008, the IRS completed its
examination of the income tax returns of First Health Group Corporation ("FHGC")
for all years through 2004. Additionally, the Company settled certain income tax
examinations with various state and local tax authorities. Tax assessed as a
result of these examinations, if any, was not material. FHGC is also
subject to ongoing examinations by certain state tax authorities for
pre-acquisition years. The Company believes that appropriate
provisions have been provided for all FHGC open tax years.
J.
EMPLOYEE BENEFIT PLANS
The
Company sponsors one defined contribution retirement plan qualifying under the
Internal Revenue Code Section 401(k): the Coventry Health Care, Inc. Retirement
Savings Plan (the “Savings Plan”). All employees of Coventry Health
Care, Inc. and employees of its subsidiaries can elect to participate in the
Savings Plan. T. Rowe Price is the custodial trustee of all Savings
Plan assets, participant loans and the Coventry Health Care, Inc. common stock
in the Savings Plan.
Under the
Savings Plan, participants may defer up to 75% of their eligible compensation,
limited by the maximum compensation deferral amount permitted by applicable law.
The Company makes matching contributions in the Company’s common stock equal to
100% of the participant’s contribution on the first 3% of the participant’s
eligible compensation and equal to 50% of the participant’s contribution on the
second 3% of the participant’s eligible compensation. Participants vest
immediately in all safe harbor matching contributions. The Savings
Plan permits all participants regardless of service to sell the employer match
portion of the Coventry common stock in their accounts, during certain times of
the year, and transfer the proceeds to other Coventry 401(k) funds of their
choosing. All costs of the Savings Plan are funded by the Company and
participants as they are incurred.
As a
result of corporate acquisitions and transactions, the Company has acquired
entities that have sponsored other qualified plans. All qualified
plans sponsored by the acquired subsidiaries of the Company have either
terminated or merged with and into the Savings Plan. The cost of the
Savings Plan, including the acquired plans, for 2009, 2008 and 2007 was
approximately $30.3 million, $31.5 million, and $21.6 million,
respectively.
401(k) Restoration
and Deferred Compensation Plan
The
Company is the sponsor of a 401(k) Restoration and Deferred Compensation Plan
(“RESTORE”). Under RESTORE, participants may defer up to 75% of their base
salary and up to 100% of any bonus awarded. The Company makes
matching contributions equal to 100% of the participant’s contribution on the
first 3% of the participant’s compensation and 50% of the participant’s
contribution on the second 3% of the participant’s compensation. Participants
vest in the Company’s matching contributions ratably over two years. All costs
of RESTORE are funded by the Company as they are incurred.
The cost,
principally employer matching contributions, of RESTORE charged to operations
for 2009, 2008 and 2007 was $0.9 million, $0.2 million, and $1.8 million,
respectively.
Executive Retention
Plans
Stock Incentive
Plan
For
information regarding the Company’s stock-based compensation, please refer to
Note H, Stock-Based Compensation, to the notes to the consolidated financial
statements.
K.
DEBT
The
Company’s outstanding debt was as follows at December 31, 2009 and 2008 (in
thousands):
December
31,
|
December
31,
|
|||
2009
|
2008
|
|||
5.875%
Senior notes due 1/15/12, net of repurchases
|
$ 233,903
|
$ 250,000
|
||
6.125%
Senior notes due 1/15/15, net of repurchases
|
228,845
|
250,000
|
||
5.95%
Senior notes due 3/15/17, net of repurchases and unamortized discount of
$1,022 at December 31, 2009
|
382,213
|
388,816
|
||
6.30%
Senior notes due 8/15/14, net of unamortized discount of $1,061 at
December 31, 2009
|
374,037
|
398,627
|
||
Revolving Credit Facility due 7/11/12, 0.79%
weighted average interest rate for the period ended December 31, 2009
|
380,029
|
615,029
|
||
Total
Debt
|
$ 1,599,027
|
$ 1,902,472
|
56
During
2009 the Company repaid a total of $68.9 million principal of outstanding senior
notes for payments of $59.9 million, resulting in a gain of $8.4 million. These
gains were net of the write off of deferred financing costs. The funds for the
repayments were provided by cash from operations.
During
2009 the Company repaid $235 million on its Revolving Credit Facility. The
remaining outstanding balance of $380 million will be used to optimize the
Company’s liquidity position and for other general corporate
purposes.
During
November and December 2008, the Company repaid a principal total of $10 million
of its outstanding 5.95% Senior Notes due March 15, 2017.
During
2008 the Company drew down $543.5 million from its Revolving Credit Facility and
repaid $103.5 million of this amount. The remaining outstanding balance of
$615.0 million was used to optimize the Company’s liquidity position during the
current uncertain macroeconomic environment and for general corporate purposes.
Also, from time to time throughout 2008 the Company drew down amounts as needed
and repaid certain amounts on its Revolving Credit Facility for general
corporate purposes.
The
Company’s senior notes and credit facility contain certain covenants and
restrictions regarding additional debt, dividends or other restricted payments,
transactions with affiliates, asset dispositions, and consolidations or mergers.
Additionally, the Company’s credit facility requires compliance with a leverage
ratio of 3 to 1. As of December 31, 2009, the Company was in compliance with the
applicable covenants and restrictions under its senior notes and credit
facility.
Loans
under the credit facilities bear interest at a margin or spread in excess of
either (1) the one-, two-, three-, six-, nine-, or twelve- month rate for
Eurodollar deposits (the “Eurodollar Rate”) or (2) the greater of the federal
funds rate plus 0.5% or the base rate of the Administrative Agent (“Base Rate”),
as selected by the Company. The margin or spread depends on the Company’s
non-credit-enhanced long-term senior unsecured debt ratings and varies from
0.350% to 1.000% for Eurodollar Rate advances and from 0.000% to 0.500% for Base
Rate advances.
As of
December 31, 2009, the aggregate maturities of debt based on their contractual
terms, gross of unamortized discount, are as follows (in
thousands):
Year
|
Amount
|
|
2010
|
$ -
|
|
2011
|
-
|
|
2012
|
613,932
|
|
2013
|
-
|
|
2014
|
375,098
|
|
Thereafter
|
612,080
|
|
Total
|
$
1,601,110
|
Lease
Payments
|
Sublease
Income
|
Net
Lease Payments
|
|
2010
|
$ 33,692
|
$ (2,032)
|
$ 31,660
|
2011
|
29,684
|
(1,710)
|
27,974
|
2012
|
24,744
|
(1,475)
|
23,269
|
2013
|
17,697
|
(777)
|
16,920
|
2014
|
11,109
|
(426)
|
10,683
|
Thereafter
|
25,780
|
(967)
|
24,813
|
Total
|
$ 142,706
|
$ (7,387)
|
$ 135,319
|
The Company operates in
leased facilities with original lease terms of up to thirteen years with options
for renewal. Total rent expense was $35.6 million, $40.8 million, and $33.1
million, for the years ended December 31, 2009, 2008 and 2007,
respectively.
57
Legal
Proceedings
In the
normal course of business, the Company has been named as a defendant in various
legal actions such as actions seeking payments for claims denied by the Company,
medical malpractice actions, employment related claims and other various claims
seeking monetary damages. The claims are in various stages of proceedings and
some may ultimately be brought to trial. Incidents occurring through December
31, 2009 may result in the assertion of additional claims. The Company maintains
general liability, professional liability and employment practices liability
insurances in amounts that it believes are appropriate, with varying deductibles
for which it maintains reserves. The professional liability and employment
practices liability insurances are carried through its captive subsidiary.
Although the results of pending litigation are always uncertain, the Company
does not believe the results of such actions currently threatened or pending,
including those described below, will individually or in the aggregate, have a
material adverse effect on its consolidated financial position or results of
operations.
The
Company has received a subpoena from the U.S. Attorney for the District of
Maryland, Northern Division, requesting information regarding the operational
process for confirming Medicare eligibility for its Workers Compensation
set-aside product. The Company is fully cooperating and is providing the
requested information. The Company cannot predict what, if any, actions may be
taken by the U.S. Attorney. However, based on the information known to date, the
Company does not believe that the outcome of this inquiry will have a material
adverse effect on its financial position or results of operations.
First
Health Group Corp, Inc. (“FHGC”), a subsidiary of the Company, is a party to
various lawsuits filed in the state and federal courts of Louisiana involving
disputes between providers and workers compensation payors who access FHGC’s
contracts with these providers to reimburse them for services rendered to
injured workers. FHGC has written contracts with providers in Louisiana which
expressly state that the provider agrees to accept a specified discount off
their billed charges for services rendered to injured workers. The discounted
rate set forth in the FHGC provider contract is less than the reimbursement
amount set forth in the Louisiana Workers Compensation Fee Schedule. For this
reason, workers compensation insurers and third party administrators (“TPAs”)
for employers who self insure worker compensation benefits, contract with FHGC
to access the FHGC provider contracts. Thus, when a FHGC contracted provider
renders services to an injured worker, the workers compensation insurer or the
TPA reimburses the provider for those services in accordance with the discounted
rate in the provider’s contract with FHGC. These workers compensation insurers
and TPAs are referred to as “payors” in the FHGC provider contract and the
contract expressly states that the discounted rate will apply to those payors
who access the FHGC contract. Thus, the providers enter into these contracts
with FHGC knowing that they will be paid the discounted rate by every payor who
chooses to access the FHGC contract. So that its contracted providers know which
payors are accessing their contract, FHGC sends regular written notices to its
contracted providers and maintains a provider website which lists each and every
payor who is accessing the FHGC contract.
Four
providers who have contracts with FHGC filed a state court class action lawsuit
against FHGC and certain payors alleging that FHGC violated Louisiana’s Any
Willing Provider Act (the “Act”), which requires a payor accessing a preferred
provider network contract to give a one time notice 30 days before that payor
uses the discounted rate in the preferred provider network contract to pay the
provider for services rendered to a member insured under that payor’s health
benefit plan. These provider plaintiffs allege that the Any Willing Provider Act
applies to medical bills for treatment rendered to injured workers and that the
Act requires point of service written notice in the form of a benefit
identification card. If a payor is found to have violated the Act’s notice
provision, the court may assess up to $2,000 in damages for each instance when
the provider was not given proper notice that a discounted rate would be used to
pay for the services rendered. In response to the state court class action, FHGC
and certain payors filed a suit in federal court against the same four provider
plaintiffs in the state court class action seeking a declaratory judgment that
FHGC’s contracts are valid and enforceable, that its contracts are not subject
to the Any Willing Provider Act since that Act does not apply to medical
services rendered to injured workers and that FHGC is exempt from the notice
requirements of the Act because it has contracted directly with each provider in
its network. The federal district court ruled in favor of FHGC and declared that
its contracts are not subject to the Any Willing Provider Act, that FHGC was
exempt from the Act’s notice provision because it contracted directly with the
providers, and that FHGC’s contracts were valid and enforceable, i.e., the four
provider plaintiffs were required to accept the discounted rate in accordance
with the terms of their written contracts with FHGC. Despite the federal court’s
decision, the provider plaintiffs continued to pursue their state court class
action against FHGC and filed a motion for partial summary judgment seeking
damages of $2,000 for each provider visit where the provider was not given a
benefit identification card at the time the service was performed. In response
to the motion for partial summary judgment filed in the state court action, FHGC
obtained an order from the federal court which enjoined, barred and prevented
any of the four provider plaintiffs or their counsel from pursuing any claim
against FHGC before any court or tribunal arising under Louisiana’s Any Willing
Provider Act. Despite the issuance of this federal court injunction, the
provider plaintiffs and their counsel pursued their motion for partial summary
judgment in the state court action. Before the state court held a hearing on the
motion for partial summary judgment, FHGC moved to decertify the class on the
basis that the four named provider plaintiffs had been enjoined by the federal
court from pursuing their claims against FHGC. The state court denied the motion
to decertify the class but did enter an order permitting FHGC to file an
immediate appeal of the state court’s denial of the motion. Even though FHGC had
filed its appeal and there were no class representatives since all four named
plaintiffs had been enjoined from pursuing their claims against FHGC, the state
court held a hearing and granted the plaintiffs’ motion for partial summary
judgment. The trial court granted the motion despite the fact that (1) the court
lacked jurisdiction due to the appeal filed by FHGC challenging the denial of
its motion to decertify the class; (2) there were no named class representatives
because all four named plaintiffs had been enjoined from pursuing their claims
against FHGC; (3) none of the providers in the class ever submitted a claim for
payment to FHGC and therefore FHGC never made any discounted payments to any of
the providers in the class in the absence of notice; (4) FHGC has contracted
directly with every provider in the class and therefore, under the Act’s express
language, FHGC was exempt from giving notice under the Act; and (5) the claims
of the provider plaintiffs are time barred. The amount of the partial judgment
was for $262 million. FHGC has taken an appeal from the entry of that judgment
seeking to vacate its entry as invalid as a matter of law and has also taken an
appeal from the lower court’s denial of FHGC’s motion to decertify the class.
FHGC will file a motion with the federal court for sanctions against the
provider plaintiffs and their counsel for violating the injunction issued by the
federal district court which barred and enjoined them from pursuing their claims
against FHGC in the state court action. The Company believes that FHGC will be
successful in its efforts to overturn the partial summary judgment, has accrued
an adequate reserve for its potential exposure, and that the actions will not
have a material adverse effect on its financial position or the results of
operations.
In a
related matter, FHGC has filed another lawsuit in Louisiana federal district
court against 85 Louisiana providers seeking a declaratory judgment that its
contracts are valid and enforceable, that its contracts are not subject to the
Louisiana’s Any Willing Provider Act because its contracts pertain to payment
for services rendered to injured workers, and FHGC is exempt from the notice
provision of the Any Willing Provider Act because it has contracted directly
with the providers. This lawsuit is assigned to the same federal district court
judge who issued the decision and injunction in the lawsuit filed by FHGC
against the four provider plaintiffs in the state court action.
On
September 3, 2009, a shareholder, who owns less than 5,000 shares, filed a
putative securities class action against the Company and three of its current
and former officers in the federal district court of Maryland. Subsequent to the
filing of the complaint, three other shareholders and/or investor groups filed
motions with the court for appointment as lead plaintiff and approval of
selection of lead and liaison counsel. By agreement, the four shareholders
submitted a stipulation to the court regarding appointment of lead plaintiff and
approval of selection of lead and liaison counsel. In December, 2009, the court
approved the stipulation and ordered the lead plaintiff to file a consolidated
and amended complaint. To date, no consolidated and amended complaint has been
filed. The purported class period is February 9, 2007 to
October 22, 2008. The complaint alleges that the Company’s public statements
contained false, misleading and incomplete information regarding the Company’s
profitability, particularly the profit margins for its Medicare PFFS products.
The Company will vigorously defend against the allegations in the lawsuit.
Although it cannot predict the outcome, the Company believes this lawsuit will
not have a material adverse effect on its financial position or results of
operations.
58
On
October 13, 2009, two former employees and participants in the Coventry Health
Care Retirement Savings Plan filed a putative ERISA class action lawsuit against
the Company and several of its current and former officers, directors and
employees in the U.S. District Court for the District of Maryland. Plaintiffs
allege that defendants breached their fiduciary duties under ERISA by offering
and maintaining Company stock in the Plan after it allegedly became imprudent to
do so and by allegedly failing to provide complete and accurate information
about the Company’s financial condition to plan participants in SEC filings and
public statements. Three similar actions by different plaintiffs were later
filed in the same court and were consolidated on December 9, 2009. A
consolidated complaint has not yet been filed. The Company intends to vigorously
defend against the allegations in the consolidated lawsuit, which is expected to
be filed shortly. Although it cannot predict the outcome, the Company believes
this lawsuit will not have a material adverse effect on its financial position
or results of operations.
There are
several lawsuits filed against Vista Health Plan by non-participating providers
seeking to be paid their full billed charges for services rendered to Vista's
members. Vista reimburses non-participating providers at rates which are usual
and customary for similar services in the same geographical area. Based on the
various stages of development of these lawsuits, including discussions of
settlement, the Company has recognized reserves for estimates of probable
loss. Although it cannot predict the outcome, the Company believes
these lawsuits will not have a material adverse effect on its financial position
or results of operations.
Capitation
Arrangements
A small
percentage of the Company’s membership is covered by global capitation
arrangements. Under the typical arrangement, the provider receives a fixed
percentage of premium to cover all the medical costs provided to the globally
capitated members. Under some capitated arrangements, physicians may also
receive additional compensation from risk sharing and other incentive
arrangements. Global capitation arrangements limit the Company’s exposure to the
risk of increasing medical costs, but expose the Company to risk as to the
adequacy of the financial and medical care resources of the provider
organization. In addition to global capitation arrangements, the Company has
capitation arrangements for ancillary services, such as mental health care. The
Company is ultimately responsible for the coverage of its members pursuant to
the customer agreements. To the extent that the respective provider organization
faces financial difficulties or otherwise is unable to perform its obligations
under the capitation arrangements, the Company will be required to perform such
obligations. Consequently, the Company may have to incur costs in excess of the
amounts it would otherwise have to pay under the original global or ancillary
capitation arrangements. Medical costs associated with capitation arrangements
made up approximately 2.9%, 4.1%, and 4.9% of the Company’s total medical costs
for the years ended December 31, 2009, 2008 and 2007,
respectively.
CMS
Audits
CMS
periodically performs audits and may seek return of premium payments made to the
company if risk adjustment factors are not properly supported by medical record
data. We estimate and record reserves for CMS audits based on
information available at the time the estimates are made. The judgments
and uncertainties affecting the application of these policies include
significant estimates related to the amount of HCC revenue subject to audit and
anticipated error rates. Although we believe the Company maintains appropriate
reserves for its exposure to the RADV audits, actual results could differ
materially from those estimates. Accordingly, CMS audit results could
have a material adverse effect on our financial position, results of operations,
and cash flows.
M.
CONCENTRATIONS OF CREDIT RISK
Concentration
of credit risk with respect to receivables is limited due to the large number of
customers comprising the Company’s customer base and their breakdown among
geographical locations. The Company believes the allowance for doubtful accounts
adequately provides for estimated losses as of December 31, 2009. The Company
has a risk of incurring losses if such allowances are not adequate.
The
Company contracts with a pharmacy benefit manager (“PBM”) to manage our pharmacy
benefits for our members and to provide rebate administration services on behalf
of the Company. As of December 31, 2009, the Company had pharmacy
rebate receivables of $314.9 million due from the PBM resulting from the normal
cycle of rebate processing, data submission and collection of
rebates. The Company has credit risk due to the concentration of
receivables with this single vendor. The Company only records the
pharmacy rebate receivables to the extent that the amounts are deemed probable
of collection.
N.
STATUTORY INFORMATION
The
Company’s regulated HMO and insurance company subsidiaries are required by state
regulatory agencies to maintain minimum surplus balances, thereby limiting the
dividends the parent may receive from its regulated entities. During 2009, the
Company received $121.0 million in dividends from its regulated subsidiaries and
paid $293.8 million in capital contributions to these subsidiaries.
The
National Association of Insurance Commissioners (“NAIC”) has proposed that
states adopt risk-based capital (“RBC”) standards that, if adopted, would
generally require higher minimum capitalization requirements for HMOs and other
risk-bearing health care entities. RBC is a method of measuring the minimum
amount of capital appropriate for a managed care organization to support its
overall business operations in consideration of its size and risk profile. The
managed care organization’s RBC is calculated by applying factors to various
assets, premiums and reserve items. The factor is higher for those items with
greater underlying risk and lower for less risky items. The adequacy of a
managed care organization’s actual capital can then be measured by a comparison
to its RBC as determined by the formula. The Company’s health plans are required
to submit an RBC report to the NAIC and their domiciled state’s department of
insurance with their annual filing.
59
Regulators
will use the RBC results to determine if any regulatory actions are required.
Regulatory actions that could take place, if any, range from filing a financial
action plan explaining how the plan will increase its statutory net worth to the
approved levels, to the health plan being placed under regulatory
control.
The
majority of states in which the Company operates health plans have adopted a RBC
policy that recommends the health plans maintain statutory reserves at or above
the ”Company Action Level,” which is currently equal to 200% of their RBC. The
State of Florida does not currently use RBC methodology in its regulation of
HMOs. Some states, in which the Company’s regulated subsidiaries operate,
require deposits to be maintained with the respective states’ departments of
insurance. The table below summarizes the Company’s statutory reserve
information as of December 31, 2009 and 2008 (in millions, except percentage
data).
2009
|
2008
|
||
(unaudited)
|
|||
Regulated
capital and surplus
|
$ 1,643.7
|
$ 1,309.6
|
|
200%
of RBC (a,b)
|
$ 800.5
|
$ 665.3
|
|
Excess capital and surplus above 200% of RBC (a,b)
|
$ 843.2
|
$ 644.3
|
|
Capital and surplus as percentage of RBC (a,b)
|
411%
|
394%
|
|
Statutory
deposits
|
$ 75.3
|
$ 66.5
|
|
(a)
Unaudited
|
|||
(b)
As mentioned above, the State of Florida does not have a RBC requirement
for its regulated HMOs. Accordingly, the statutory reserve
information provided for Vista is based on the actual statutory minimum
capital required by the State of
Florida.
|
The
increase in capital and surplus for our regulated subsidiaries primarily
resulted from net earnings and capital contributions made by the parent company,
partially offset by dividends paid to the parent company.
The
Company believes that all subsidiaries which incur medical claims maintain more
than adequate liquidity and capital resources to meet these short-term
obligations as a matter of both Company policy and applicable department of
insurance regulations.
Excluding
funds held by entities subject to regulation and excluding our equity method
investments, the Company had cash and investments of approximately $713.0
million and $549.9 million at December 31, 2009 and 2008,
respectively. The increase resulted from the proceeds received from
the disposal of FHSC, earnings from non-regulated businesses, and dividends from
the Company’s regulated subsidiaries. These were partially offset by
capital infusions into the Company’s subsidiaries, and payments made for share
repurchases.
O.
OTHER INCOME, NET
Other income, net for the years ended December 31, 2009,
2008 and 2007 includes interest income, net of fees, of approximately $65.5
million, $104.6 million, and $138.7 million, respectively. Other income, net also
includes gains of $8.4 million and $4.6 million on the repayment of outstanding
debt for the years ended December 31, 2009 and 2008,
respectively. For the year ended December 31, 2009, other income, net
included a gain on disposal of investments of $11.6 million. For the
year ended December 31, 2008, other income, net included a charge of $33.5
million for the other-than-temporary impairment of investment
securities.
P.
SHARE REPURCHASE PROGRAM
The
Company’s Board of Directors has approved a program to repurchase its
outstanding common shares. Share repurchases may be made from time to
time at prevailing prices on the open market, by block purchase, or in private
transactions. Under the share repurchase program the Company purchased 1.5
million shares of its common stock during 2009 at an aggregate cost of $30.0
million, 7.3 million shares during 2008 at an aggregate cost of
$318.0 million, and 7.5 million shares during 2007 at an aggregate cost of
$429.0 million. As of December 31, 2009, the total remaining common shares the
Company is authorized to repurchase under this program is 5.2 million. Excluded
from these amounts are shares purchased in exchange for employee payroll taxes
on vesting of restricted stock awards as these purchases are not part of the
program.
60
The
following is a summary of unaudited quarterly results of operations (in
thousands, except per share data) for the years ended December 31, 2009 and
2008. Due to rounding of quarterly results, total amounts for each
year may differ immaterially from the annual results.
Quarters
Ended
|
||||
March
31,
|
June
30,
|
September
30,
|
December
31,
|
|
2009
|
2009
|
2009
|
2009
|
|
Operating
revenues
|
$ 3,532,895
|
$ 3,498,374
|
$ 3,444,110
|
$ 3,428,147
|
Operating
earnings
|
63,325
|
102,459
|
152,762
|
183,406
|
Earnings
before income taxes
|
61,061
|
112,579
|
150,077
|
180,838
|
Income
from continuing operations
|
38,108
|
67,708
|
100,439
|
109,080
|
Income
(loss) from discontinued operations, net of tax
|
6,060
|
(49,283)
|
(29,810)
|
-
|
Net
earnings
|
44,168
|
18,425
|
70,629
|
109,080
|
Basic
earnings per share from continuing operations
|
0.26
|
0.46
|
0.68
|
0.75
|
Basic
earnings (loss) per share from discontinued operations
|
0.04
|
(0.33)
|
(0.20)
|
-
|
Total
basic earnings per share
|
0.30
|
0.13
|
0.48
|
0.75
|
Diluted
earnings per share from continuing operations
|
0.26
|
0.46
|
0.68
|
0.74
|
Diluted
earnings (loss) per share from discontinued operations
|
0.04
|
(0.34)
|
(0.20)
|
-
|
Total
diluted earnings per share
|
0.30
|
0.12
|
0.48
|
0.74
|
Quarters
Ended
|
||||
March
31,
|
June
30,
|
September
30,
|
December
31,
|
|
2008
|
2008
|
2008
|
2008
|
|
Operating
revenues
|
$ 2,897,024
|
$ 2,934,740
|
$ 2,925,721
|
$ 2,976,742
|
Operating
earnings
|
189,112
|
121,385
|
156,437
|
118,595
|
Earnings
before income taxes
|
195,522
|
129,149
|
124,010
|
123,181
|
Income
from continuing operations
|
122,164
|
79,512
|
78,978
|
81,346
|
Income
from discontinued operations, net of tax
|
2,865
|
3,639
|
6,496
|
6,895
|
Net
earnings
|
125,029
|
83,151
|
85,474
|
88,241
|
Basic
earnings per share from continuing operations
|
0.80
|
0.53
|
0.54
|
0.55
|
Basic
earnings per share from discontinued operations
|
0.02
|
0.02
|
0.04
|
0.05
|
Total
basic earnings per share
|
0.82
|
0.55
|
0.58
|
0.60
|
Diluted
earnings per share from continuing operations
|
0.79
|
0.52
|
0.53
|
0.55
|
Diluted
earnings per share from discontinued operations
|
0.02
|
0.02
|
0.04
|
0.05
|
Total
diluted earnings per share
|
0.81
|
0.55
|
0.58
|
0.60
|
R.
RELATED PARTY TRANSACTION
Allen F.
Wise, Chief Executive Officer and Director of the Company, owns a majority
interest in Health Risk Partners (“HRP”), an organization that has entered into
a written contract with the Company to provide various services
relating to the Company’s Medicare line of business. The contract was
negotiated and entered into on an arms-length basis. Two other Directors of the
Company own minority interests in HRP. Specifically, HRP provides
operational consulting, data processing, data reporting, and chart review/coding
services, premium reconciliation, and hierarchical condition categories (“HCC”)
revenue compliance related to the Company’s Medicare business. For
the years ended December 31, 2009 and 2008, the Company incurred expenses of
approximately $12.2 million and $1.1 million, respectively, to HRP for services
rendered under the contract. At December 31, 2009 and 2008, the
Company had accrued amounts to HRP of approximately $4.6 million and $1.2
million. These amounts are recognized within accounts payable and other accrued
liabilities in the Company’s consolidated balance sheets.
S.
SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through February 26, 2010, the date of
issuance of the financial statements.
On
February 1, 2010 the Company completed its previously announced acquisition of
Preferred Health Systems, Inc. (“PHS”), a commercial health plan based in
Wichita, Kansas serving more than 100,000 commercial group risk members and
20,000 commercial self-funded members.
61
None.
Coventry’s
management, including the principal executive officer and principal financial
officer, is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial
reporting (as defined in Rule 13a-15(f) under the U.S. Securities Exchange Act
of 1934) is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
Internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the Company’s assets; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that the Company’s receipts and expenditures are
being made only in accordance with authorizations of the Company’s management
and directors; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.
Coventry’s
management has performed an assessment of the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2009 based on
criteria established by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”), Internal Controls – Integrated Framework, and
believes that the COSO framework is a suitable framework for such an
evaluation. Management has concluded that the Company’s internal
control over financial reporting was effective as of December 31,
2009.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009 has been audited by Ernst & Young LLP, the independent
registered public accounting firm that audited the Company’s consolidated
financial statements for the year ended December 31, 2009, and their opinion is
included in this Annual Report on Form 10-K.
Disclosure
Controls and Procedures
We have
performed an evaluation as of the end of the period covered by this report of
the effectiveness of our “disclosure controls and procedures” (as defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934), under the
supervision and with the participation of our Chief Executive Officer and our
Chief Financial Officer. Based upon our evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective.
Changes
in Internal Control over Financial Reporting
There
have been no significant changes in our internal control over financial
reporting during the quarter ended December 31, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. Changes to certain processes, information
technology systems and other components of internal control over financial
reporting resulting from the acquisitions may occur and will be evaluated by
management as such integration activities are implemented.
62
Report of
Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders of Coventry Health Care, Inc.
We have
audited Coventry Health Care, Inc.’s internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Coventry Health Care, Inc.’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Coventry Health Care, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Coventry Health Care, Inc.’s consolidated
balance sheets as of December 31, 2009 and 2008 and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2009 of Coventry Health Care, Inc.,
and our report dated February 26, 2010 expressed an unqualified opinion
thereon.
/s/ Ernst
& Young LLP
Baltimore,
Maryland
February
26, 2010
63
None.
The
information set forth under the captions “Election of Directors,” “Section 16(a)
Beneficial Ownership Reporting Compliance,” and “Corporate Governance” in our
definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be
held on May 20, 2010, which we intend to file within 120 days after our fiscal
year-end, is incorporated herein by reference. As provided in General
Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation
S-K, information regarding executive officers of our Company is provided in Part
I of this Annual Report on Form 10-K under the caption, “Executive Officers of
our Company.”
The
information set forth under the caption “Executive Compensation” in our
definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be
held on May 20, 2010, which we intend to file within 120 days after our fiscal
year-end, is incorporated herein by reference.
The
information set forth under the captions, “Executive Compensation,” and “Stock
Ownership of Principal Stockholders, Directors and Executive Officers” in our
Proxy Statement for our 2010 Annual Meeting of Stockholders to be held on May
20, 2010, which we intend to file within 120 days after our fiscal year-end, is
incorporated herein by reference.
Equity
Compensation Plan Information
The
following table set forth certain information, as of December 31, 2009,
concerning shares of common stock authorized for issuance under all of our
equity compensation plans.
(a) | (b) | (c) | |
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-Average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
Equity compensation plans approved by stockholders | 13,033,213(1) | $ 38.987(2) | 6,823,405 |
Equity compensation plans not approved by stockholders | - | - | - |
Total | 13,033,213 | - | 6,823,405 |
|
(1) Includes
stock options and restricted stock units convertible into stock under the
Company’s Amended and Restated 2004 Incentive Plan, which was approved by
the stockholders on May 21, 2009. Also includes stock options
under the Amended and Restated 1998 Stock Incentive Plan, which was
approved by the stockholders on June 8,
2000.
|
|
(2) Includes
only outstanding stock options and stock units granted under the Amended
and Restated 2004 Incentive Plan and the Amended and Restated 1998 Stock
Incentive Plan. Restricted stock awards were issued on the date
of grant and are not included.
|
The
information set forth under the captions, “Transactions With Related Persons,
Promoters and Certain Control Persons” and “Corporate Governance,” in our
definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be
held on May 20, 2010, which we intend to file within 120 days after our fiscal
year-end, is incorporated herein by reference.
The
information set forth under the captions, “Fees Paid to Independent Auditors”
and “Procedures for Pre-approval of Independent Auditor Services” in our
definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be
held on May 20, 2010, which we intend to file within 120 days after our fiscal
year-end, is incorporated herein by reference.
64
PART
IV
Form
10-K
|
||
Pages
|
||
35
|
||
36
|
||
37
|
||
38
|
||
39
|
||
40
|
2.
Financial Statement Schedules
Schedule
I, Condensed Financial Information of Parent Company
65
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
(PARENT
COMPANY ONLY)
COVENTRY
HEALTH CARE, INC.
CONDENSED
BALANCE SHEETS
(in
thousands)
|
|||||
December 31, 2009 |
December
31, 2008
|
||||
ASSETS
|
|||||
Current
assets:
|
|||||
Cash
and cash equivalents
|
$
|
344,025
|
$
|
183,602
|
|
Short-term
investments
|
195,071
|
208,906
|
|||
Other
receivables, net
|
6,597
|
18,705
|
|||
Other
current assets
|
35,556
|
18,031
|
|||
Total
current assets
|
581,249
|
429,244
|
|||
Long-term
investments
|
28,830
|
4,804
|
|||
Property
and equipment, net
|
4,226
|
6,584
|
|||
Investment
in subsidiaries
|
4,914,948
|
5,125,879
|
|||
Other
long-term assets
|
81,117
|
109,966
|
|||
Total
assets
|
$
|
5,610,370
|
$
|
5,676,477
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||
Current
liabilities:
|
|||||
Accounts
payable and other accrued liabilities
|
$
|
200,547
|
$
|
56,479
|
|
Total
current liabilities
|
200,547
|
56,479
|
|||
Long-term
debt
|
1,599,026
|
1,902,472
|
|||
Notes
payable to subsidiary
|
69,235
|
261,070
|
|||
Other
long-term liabilities
|
29,008
|
25,787
|
|||
Total
liabilities
|
1,897,816
|
2,245,808
|
|||
Stockholders'
equity:
|
|||||
Common
stock, $.01 par value; 570,000 authorized
|
1,905
|
1,903
|
|||
190,462
issued and 147,990 outstanding in 2009
|
|||||
193,318
issued and 148,288 outstanding in 2008
|
|||||
Treasury
stock, at cost; 42,472 in 2009; 42,031 in 2008
|
(1,282,054)
|
(1,287,662)
|
|||
Additional
paid-in capital
|
1,750,113
|
1,748,580
|
|||
Accumulated
other comprehensive income, net
|
41,406
|
8,965
|
|||
Retained
earnings
|
3,201,184
|
2,958,883
|
|||
Total
stockholders' equity
|
3,712,554
|
3,430,669
|
|||
Total
liabilities and stockholders' equity
|
$
|
5,610,370
|
$
|
5,676,477
|
See
accompanying notes to the condensed financial statements.
66
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
(PARENT
COMPANY ONLY)
COVENTRY
HEALTH CARE, INC.
CONDENSED
STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
For
the years ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
|||||||||
Revenues:
|
|||||||||||
Management
fees charged to operating subsidiaries
|
$
|
252,962
|
$
|
192,359
|
$
|
128,915
|
|||||
Expenses:
|
|||||||||||
Selling,
general and administrative
|
214,733
|
133,008
|
158,635
|
||||||||
Depreciation
and amortization
|
2,208
|
1,034
|
743
|
||||||||
Interest
expense
|
88,250
|
104,811
|
97,987
|
||||||||
Total
expenses
|
305,191
|
238,853
|
257,365
|
||||||||
Investment
and other income, net
|
8,456
|
8,139
|
12,062
|
||||||||
Loss
before income taxes and equity in net
|
|||||||||||
earnings
of subsidiaries
|
(43,773)
|
(38,355)
|
(116,388)
|
||||||||
Benefit
for income taxes
|
16,415
|
14,076
|
43,226
|
||||||||
Loss
before equity in net earnings of
|
|||||||||||
subsidiaries
|
(27,358)
|
(24,279)
|
(73,162)
|
||||||||
Equity
in net earnings of subsidiaries
|
269,659
|
406,174
|
699,256
|
||||||||
Net
earnings
|
$
|
242,301
|
$
|
381,895
|
$
|
626,094
|
See
accompanying notes to the condensed financial statements.
67
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
(PARENT
COMPANY ONLY)
COVENTRY
HEALTH CARE, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(in
thousands)
For
the years ended December 31,
|
||||||||
2009 |
2008
|
2007
|
||||||
Net
cash from operating activities
|
$
|
114,403
|
$
|
(28,165)
|
$
|
(92,037)
|
||
Cash
flows from investing activities:
|
||||||||
Capital
expenditures, net
|
275
|
(1,472)
|
(498)
|
|||||
Proceeds
from the sales and maturities of investments
|
308,742
|
147,764
|
391,127
|
|||||
Purchases
of investments and other
|
(259,955)
|
(238,578)
|
(314,223)
|
|||||
Capital
contributions to subsidiaries
|
(293,750)
|
(225,199)
|
(71,892)
|
|||||
Dividends
from subsidiaries
|
635,137
|
639,050
|
626,600
|
|||||
Proceeds
(payments) for acquisitions, net
|
10,197
|
(137,374)
|
(1,192,601)
|
|||||
Net
cash from investing activities
|
400,646
|
184,191
|
(561,487)
|
|||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of stock
|
1,224
|
7,233
|
52,262
|
|||||
Payments
for repurchase of stock
|
(32,796)
|
(323,137)
|
(439,237)
|
|||||
Repayment
of debt
|
(294,930)
|
(423,872)
|
(260,500)
|
|||||
Repayment
of note to subsidiaries, net
|
(28,728)
|
(12,307)
|
(12,000)
|
|||||
Proceeds
from issuance of debt
|
---
|
668,409
|
1,153,280
|
|||||
Excess
tax benefit from stock compensation
|
604
|
387
|
31,534
|
|||||
Net
cash from financing activities
|
(354,626)
|
(83,287)
|
525,339
|
|||||
Net
change in cash and cash equivalents
|
160,423
|
72,739
|
(128,185)
|
|||||
Cash
and cash equivalents at beginning of period
|
183,602
|
110,863
|
239,048
|
|||||
Cash
and cash equivalents at end of period
|
$
|
344,025
|
$
|
183,602
|
$
|
110,863
|
See
accompanying notes to the condensed financial statements.
68
COVENTRY
HEALTH CARE, INC.
SCHEDULE
1 – PARENT COMPANY ONLY FINANCIAL INFORMATION
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
A. BASIS
OF PRESENTATION
Coventry
Health Care, Inc. (“Coventry” or the “Company”) parent company financial
information has been derived from its consolidated financial statements and
should be read in conjunction with the consolidated financial statements
included in this Form 10-K. The accounting policies for the
registrant are the same as those described in Note A, Organization and Summary
of Significant Accounting Policies, of the notes to the Company’s consolidated
financial statements. The accounts of all subsidiaries are excluded
from the parent company financial information.
For
information regarding the Company’s debt, commitments and contingencies, and
income taxes, refer to the respective notes to the Company’s consolidated
financial statements.
B. SUBSIDIARY
TRANSACTIONS
Through
intercompany service agreements approved, if required, by state regulatory
authorities, our parent company charges a management fee for reimbursement of
certain centralized services provided to its subsidiaries.
During
2009, 2008 and 2007 we received $121.0 million, $332.1 million, and $421.6
million in dividends from our regulated subsidiaries, respectively, and infused
$293.8 million, $225.2 million, and $71.9 million in capital contributions into
our regulated subsidiaries, respectively.
During 2009 a subsidiary of the parent company merged into the
parent company which effectively cancelled the note receivable/payable between
the companies of $156.5 million at December 31, 2009.
69
3.
Exhibits Required To Be Filed By Item 601 Of Regulation S-K
|
Description
of Exhibit
|
|
2.1
|
Membership
Interest Purchase Agreement among Steven M. Scott and Rebecca J. Scott, as
tenants by the entirety, Rebecca J. Scott FHPA Trust, Florida Health Plan
Administrators, LLC and Coventry Health Care, Inc, dated as of July 6,
2007 (Incorporated by reference to Exhibit 2.1 to Coventry’s Current
Report on Form 8-K filed July 12, 2007).
|
|
3.1
|
Restated
Certificate of Incorporation of Coventry Health Care, Inc. (Incorporated
by reference to Exhibit 3.1 to Coventry's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006, filed on August 9,
2006).
|
|
3.2
|
Amended
and Restated Bylaws of Coventry Health Care, Inc. (Incorporated by
reference to Exhibit 3. to Coventry's Current Report on Form 8-K filed on
March 10, 2009).
|
|
4.1
|
Specimen
Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to
Coventry's Annual Report on Form 10-K for the fiscal year ended December
31, 2005, filed on March 9, 2006).
|
|
4.2
|
Indenture
for the 2012 Notes, dated as of January 28, 2005, between Coventry and
Wachovia Bank, National Association, a national banking association, as
Trustee (Incorporated by reference to Exhibit 4.1 to Coventry’s Current
Report on Form 8-K filed on January 28, 2005).
|
|
4.3
|
Form
of Note for the 2012 Notes issued pursuant to the Indenture dated as of
January 28, 2005 between Coventry Health Care, Inc., as Issuer, and
Wachovia Bank, National Association, as Trustee (Incorporated by reference
to Exhibit 4.1 to Coventry’s Current Report on Form 8-K filed on January
28, 2005).
|
|
4.4
|
Indenture
for the 2015 Notes, dated as of January 28, 2005, between Coventry and
Wachovia Bank, National Association, a national banking association, as
Trustee (Incorporated by reference to Exhibit 4.2 to Coventry’s Current
Report on Form 8-K filed on January 28, 2005).
|
|
4.5
|
Form
of Note for the 2015 Notes issued pursuant to the Indenture dated as of
January 28, 2005 between Coventry Health Care, Inc., as Issuer, and
Wachovia Bank, National Association, as Trustee (Incorporated by reference
to Exhibit 4.2 to Coventry’s Current Report on Form 8-K filed on January
28, 2005).
|
|
4.6
|
Registration
Rights Agreement for the 2012 Notes, dated as of January 28, 2005, by and
among Coventry and Lehman Brothers Inc., CIBC World Markets Corp., ABN
AMRO Incorporated, Banc of America Securities LLC, Wachovia Securities and
Piper Jaffray & Co. (Incorporated by reference to Exhibit 4.3 to
Coventry’s Current Report on Form 8-K filed on January 28,
2005).
|
|
4.7
|
Registration
Rights Agreement for the 2015 Notes, dated as of January 28, 2005, by and
among Coventry and Lehman Brothers Inc., CIBC World Markets Corp., ABN
AMRO Incorporated, Banc of America Securities LLC, Wachovia Securities and
Piper Jaffray & Co. (Incorporated by reference to Exhibit 4.4 to
Coventry’s Current Report on Form 8-K filed on January 28,
2005).
|
|
4.8
|
Indenture
dated as of March 20, 2007 between Coventry Health Care, Inc., as Issuer,
and The Bank of New York, as Trustee (Incorporated by reference to Exhibit
4.1 to Coventry’s Current Report on Form 8-K, filed on March 20,
2007).
|
|
4.9
|
Officer’s
Certificate pursuant to the Indenture dated March 20, 2007 (Incorporated
by reference to Exhibit 4.2 to Coventry’s Current Report on Form 8-K filed
March 20, 2007).
|
|
4.10
|
Global
Note for the 2017 Notes, dated as of March 20, 2007 between Coventry
Health Care, Inc., as Issuer and The Bank of New York, as Trustee
(Incorporated by reference to Exhibit 4.3 to Coventry’s Current Report on
Form 8-K filed March 20, 2007).
|
70
4.11
|
First
Supplemental Indenture dated as of August 27, 2007 among Coventry Health
Care, Inc., as Issuer and Union Bank of California, as Trustee
(Incorporated by reference to Exhibit 4.1 to Coventry’s Current Report on
Form 8-K filed on August 27, 2007).
|
|
4.12
|
Officer’s
Certificate pursuant to the Indenture dated August 27, 2007 (Incorporated
by reference to Exhibit 4.2 to Coventry’s Current Report on Form 8-K filed
August 27, 2007).
|
|
4.13
|
Global
Note for the 2014 Notes, dated as of August 27, 2007 between Coventry
Health Care, Inc., as Issuer and Union Bank of California, as Trustee
(Incorporated by reference to Exhibit 4.3 to Coventry’s Current Report on
Form 8-K filed March 20, 2007).
|
|
10.1
|
Amended
and Restated Credit Agreement dated July 11, 2007, by and
among Coventry Health Care, Inc., as borrower, with several
banks and other financial institutions or entities from time to time
parties thereto, Citibank, N.A., as Administrative Agent, J.P. Morgan
Chase Bank, N.A., as Syndication Agent, Deutche Bank Securities Inc.,
Lehman Brothers Commercial Bank, and The Royal Bank of Scotland PLC, as
Co-Documentation Agents, and Citigroup Global Markets Inc. and J.P. Morgan
Securities Inc., as Joint Lead Arrangers and Joint Bookrunners
(Incorporated by reference to Exhibit 10.1 to Coventry’s Current Report on
Form 8-K filed July 17, 2007).
|
|
10.2
|
*
|
Employment
Agreement between Coventry Health Care, Inc. and Dale B. Wolf, dated as of
December 19, 2007, effective January 1, 2008 (Incorporated by reference to
Exhibit 10.1 to Coventry’s Current Report on Form 8-K filed on December
20, 2007).
|
10.3
|
*
|
Separation
of Employment Agreement and General Release dated May 4, 2009 by and
between Dale B. Wolf and Coventry Health Care, Inc. (Incorporated by
reference to Exhibit 10.1 to Coventry’s Current Report on Form 8-K filed
May 7, 2009).
|
10.4
|
*
|
Employment
Agreement between Coventry Health Care, Inc. and Shawn M. Guertin, dated
as of December 19, 2007, effective January 1, 2008 (Incorporated by
reference to Exhibit 10.2 to Coventry’s Current Report on Form 8-K filed
on December 20, 2007).
|
10.5
|
Separation
and Consulting Agreement dated November 16, 2009 by and between Shawn M.
Guertin (Incorporated by reference to Coventry’s Current Report on Form
8-K dated November 20, 2009).
|
|
10.6
|
*
|
Employment
Agreement between Coventry Health Care, Inc. and Allen F. Wise, dated as
of April 30, 2009, effective as of January 26, 2009 (Incorporated by
reference to Exhibit 10.1 to Coventry’s Current Report on Form 8-K filed
on May 7, 2009).
|
10.7
|
*
|
Employment
Agreement between Coventry Health Care, Inc. and Harvey C. DeMovick, dated
as of May 17, 2009, effective as of February 2, 2009.
|
10.8
|
*
|
Employment
Agreement between Coventry Health Care, Inc. and Francis S. Soistman,
dated as of December 19, 2007, effective January 1, 2008 (Incorporated by
reference to Exhibit 10.4 to Coventry’s Current Report on Form 8-K filed
on December 20, 2007).
|
10.9
|
*
|
Employment
Agreement between Coventry Health Care, Inc. and Thomas C. Zielinski,
dated as of December 19, 2007, effective January 1, 2008 (Incorporated by
reference to Exhibit 10.8 to Coventry’s Form 10-K for the fiscal year
ended December 31, 2007, filed on February 28, 2008).
|
10.10
|
*
|
Agreement
effective as of June 17, 1999, executed by James E. McGarry and Coventry
Health Care, Inc. (Incorporated by reference to Exhibit 10.3 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, filed on August 15, 1999).
|
10.11
|
*
|
Summary
of 2010 Executive Management Incentive Plan.
|
10.12
|
*
|
2010
Executive Management Incentive Plan
|
10.13
|
*
|
Compensation
Program for Non-Employee Directors, effective January 1, 2006
(Incorporated by reference to Exhibit 10.1 to Coventry’s Current Report on
Form 8-K filed on November 10, 2005).
|
10.14
|
*
|
Deferred
Compensation Plan for Non-Employee Directors, effective January 1, 2006
(Incorporated by reference to Exhibit 10.13 to Coventry's Annual Report on
Form 10-K for the fiscal year ended December 31, 2005, filed on March 9,
2006).
|
10.15
|
*
|
Summary
of Non-Employee Directors’ Compensation.
|
10.16
|
*
|
Coventry
Health Care, Inc. Amended and Restated 1998 Stock Incentive Plan, amended
as of June 5, 2003 (Incorporated by reference to Exhibit 10.15 to
Coventry's Annual Report on Form 10-K for the fiscal year ended December
31, 2003, filed on March 10, 2004).
|
10.17
|
*
|
Coventry
Health Care, Inc. Amended and Restated 2004 Incentive Plan (Incorporated
by reference to Appendix A to Coventry's Definitive Proxy Statement filed
on April 10, 2009).
|
10.18
|
*
|
Form
of Coventry Health Care, Inc. Non-Qualified Stock Option Agreement
(Incorporated by reference to Exhibit 10.18 to Coventry's Annual Report on
Form 10-K for the fiscal year ended December 31, 2004, filed on March 16,
2005).
|
10.19
|
*
|
Form
of Amendment to Coventry Health Care, Inc. Non-Qualified Stock Option
Agreement (Incorporated by reference to Exhibit 10.2 to Coventry's Annual
Report on Form 10-K for the fiscal year ended December 31, 2005, filed on
March 9, 2006).
|
10.20
|
*
|
Form
of Coventry Health Care, Inc. Restricted Stock Award Agreement
(Incorporated by reference to Exhibit 10.19 to Coventry's Annual Report on
Form 10-K for the fiscal year ended December 31, 2004, filed on March 16,
2005).
|
10.21
|
*
|
Form
of Amendment to Coventry Health Care, Inc. Restricted Stock Agreement
(Incorporated by reference to Exhibit 10.3 to Coventry's Annual Report on
Form 10-K for the fiscal year ended December 31, 2005, filed on March 9,
2006).
|
71
10.22
|
*
|
Form
of Coventry Health Care, Inc. Performance-Based Restricted Stock Award
Agreement (Incorporated by reference to Exhibit 10.21 to Coventry's Annual
Report on Form 10-K for the fiscal year ended December 31, 2005, filed on
March 9, 2006).
|
10.23
|
*
|
Form
of Restricted Stock Award Agreement (Incorporated by reference to Exhibit
10.1 to Coventry’s Current Report on Form 8-K, filed on October 2,
2008).
|
10.24
|
*
|
Form
of Restrictive Covenants Agreement (Incorporated by reference to Exhibit
10.2 to Coventry’s Current Report on Form 8-K, filed on October 2,
2008).
|
10.25
|
*
|
Form
of Coventry Health Care, Inc. Restricted Stock Award Agreement
(Incorporated by reference to Exhibit 10.1 to Coventry’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2009, filed on August 7,
2009).
|
10.26
|
*
|
Form
of Coventry Health Care, Inc. Restricted Stock Award Agreement
(Incorporated by reference to Exhibit 10.2 to Coventry’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2009, filed on August 7,
2009).
|
10.27
|
*
|
Form
of Coventry Health Care, Inc. Performance Stock Units Agreement
(Incorporated by reference to Exhibit 10.3 to Coventry’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2009, filed on August 7,
2009).
|
10.28
|
*
|
2006
Mid-Term Executive Retention Program (Incorporated by reference to Exhibit
10.1 to Coventry's Current Report on Form 8-K filed on May 25,
2006).
|
10.29
|
*
|
Coventry
Health Care, Inc. Supplemental Executive Retirement Plan, as amended and
restated effective January 1, 2003, including the First Amendment
effective as of January 1, 2004 (Incorporated by reference to Exhibit
10.31 to Coventry's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004, filed March 16, 2005).
|
10.30
|
*
|
Second
Amendment to Coventry Health Care, Inc. Supplemental Executive Retirement
Plan, as amended and restated effective January 1, 2003, including the
First Amendment effective as of January 1, 2004, effective May 18, 2005
(Incorporated by reference to Exhibit 10 to Coventry's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2005, filed August 9,
2005).
|
10.31
|
*
|
Third
Amendment to Coventry Health Care, Inc. Supplemental Executive Retirement
Plan (now known as the 401(k) Restoration and Deferred Compensation Plan),
effective as of December 1, 2006 (Incorporated by reference to Exhibit
10.28.3 of Coventry’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2006, filed on February 28, 2007).
|
12
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
14
|
Code
of Business Conduct and Ethics initially adopted by the Board of Directors
of Coventry on February 20, 2003, as amended on March 3, 2005 and November
1, 2006 (incorporated by reference to Exhibit 14 to Coventry’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2007, filed on
February 28, 2008).
|
|
21
|
Subsidiaries
of the Registrant.
|
|
23
|
Consent
of Ernst & Young LLP.
|
|
31.1
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 302 of
the Sarbanes-Oxley Act of 2002 made by Allen F. Wise, Chief Executive
Officer and Director.
|
|
31.2
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 302 of
the Sarbanes-Oxley Act of 2002 made by John J. Stelben, Interim Chief
Financial Officer and Treasurer.
|
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 made by Allen F. Wise, Chief Executive
Officer and Director and John J. Stelben, Interim Chief Financial Officer
and Treasurer.
|
Ü Indicates
management compensatory plan, contract or arrangement.
72
COVENTRY
HEALTH CARE, INC.
|
||||
(Registrant)
|
||||
Date:
|
February 26, 2010
|
By: /s/ Allen
F. Wise
|
||
Allen
F. Wise
|
||||
Chief
Executive Officer
|
||||
and
Director
|
||||
Date:
|
February 26, 2010
|
By: /s/ John
J. Stelben
|
||
John
J. Stelben
|
||||
Interim
Chief Financial Officer
|
||||
and
Treasurer
|
||||
Date:
|
February 26, 2010
|
By: /s/ John
J. Ruhlmann
|
||
John
J. Ruhlmann
|
||||
Senior
Vice President and Corporate Controller
|
||||
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 and on the date indicated.
|
||||
Signature
|
Title (Principal
Function)
|
Date
|
||
By: /s/ Allen
F. Wise
|
Chief
Executive Officer and Director
|
February
26, 2010
|
||
Allen
F. Wise
|
||||
By: /s/ Joel
Ackerman
|
Director
|
February
26, 2010
|
||
Joel
Ackerman
|
||||
By: /s/ L.
Dale Crandall
|
Director
|
February
26, 2010
|
||
L.
Dale Crandall
|
||||
By: /s/ Lawrence
N. Kugelman
|
Director
|
February
26, 2010
|
||
Lawrence
N. Kugelman
|
||||
By: /s/ Daniel
N. Mendelson
|
Director
|
February
26, 2010
|
||
Daniel
N. Mendelson
|
||||
By: /s/ Rodman
W. Moorhead, III
|
Director
|
February
26, 2010
|
||
Rodman
W. Moorhead, III
|
||||
By: /s/ Michael
A. Stocker, M.D.
|
Director
|
February
26, 2010
|
||
Michael
A. Stocker, M.D.
|
||||
By: /s/ Elizabeth
E. Tallett
|
Director
|
February
26, 2010
|
||
Elizabeth
E. Tallett
|
||||
By: /s/ Timothy
T. Weglicki
|
Director
|
February
26, 2010
|
||
Timothy
T. Weglicki
|
||||
73
Reg.
S-K: Item 601
Exhibit
No.
|
Description
of Exhibit
|
|
10.15
|
Summary
of Non-Employee Directors’ Compensation.
|
|
12
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
21
|
Subsidiaries
of the Registrant.
|
|
23
|
Consent
of Ernst & Young LLP.
|
|
31.1
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 302 of
the Sarbanes-Oxley Act of 2002 made by Allen F. Wise, Chief Executive
Officer and Director.
|
|
31.2
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 302 of
the Sarbanes-Oxley Act of 2002 made by John J. Stelben, Interim Chief
Financial Officer and Treasurer.
|
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 made by Allen F. Wise, Chief Executive
Officer and Director and John J. Stelben, Interim
Chief Financial Officer and
Treasurer.
|
|
Note:
This index only lists the exhibits included in this Form 10-K. A complete
list of exhibits can be found in “Item 15. Exhibits, Financial Statement
Schedules” of this Form 10-K.
|
74