Back to GetFilings.com
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, 2003
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-15846
First Health Group Corp.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3307583
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3200 Highland Avenue
Downers Grove, Illinois 60515
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 737-7900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of June 30, 2003, the last business
day of the registrant's most recently completed second fiscal quarter was
$2,015,723,325, calculated by reference to the closing price of $27.56 for
the common stock on the Nasdaq National Market on that date. For purposes
of the foregoing calculation only, all directors, executive officers and
five-percent stockholders of the registrant have been deemed to be
affiliates.
As of March 1, 2004 there were 91,130,434 shares of common stock issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
2003 Annual Report to Stockholders.................. Parts I, II and IV
Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on
May 13, 2004........................................ Parts I and III
PART I
Item 1. Business
--------
Forward-Looking Statements
This report includes certain forward-looking statements within the
meaning of the federal securities laws. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," "could"
and "should" and variations of these words and similar expressions are
intended to identify these forward-looking statements. Forward-looking
statements made by us are based on estimates, projections, beliefs and
assumptions of management at the time of such statements and are not
guarantees of future performance. We disclaim any obligation to update or
revise any forward-looking statements based on the occurrence of future
events, the receipt of new information or otherwise. Actual future
performance, outcomes and results may differ materially from those expressed
in forward-looking statements made by us as a result of a number of risks,
uncertainties and assumptions. For representative examples of these factors,
we refer you to the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our 2003 Annual Report to
Stockholders.
General
First Health Group Corp., together with its consolidated subsidiaries
(referred to as "First Health," "FH," "us," "we," or "our"), is a full-
service national health benefits services company. We specialize in
providing large payors with integrated managed care solutions. We are a
national managed care company serving the group health, workers'
compensation and state agency markets.
First Health is a Delaware corporation that was organized in 1982. Our
executive offices are located at 3200 Highland Avenue, Downers Grove,
Illinois 60515, and our telephone number is (630) 737-7900. Our Internet
website is located at www.firsthealth.com. This report on Form 10-K, along
with our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, are available on our Internet
website as soon as practicable after such reports are filed with the
Securities and Exchange Commission.
For additional information concerning our business, please refer to the
financial statements included in our 2003 Annual Report to Stockholders.
Recent Developments
Acquisitions. On October 31, 2003, the Company completed the acquisition of
all of the outstanding shares of capital stock of Health Net Employer
Services, Inc. from Health Net, Inc. for approximately $79 million. The
purchase also includes Health Net Plus Managed Care Services, Inc. and
Health Net CompAmerica, Inc. Health Net Employer Services, Inc. is a
workers' compensation managed care company based in Irvine, Ca. The
acquisition was financed with borrowings under the Company's credit
facility.
On October 31, 2003 the Company completed the acquisition of PPO Oklahoma
for a purchase price of $10 million, subject to certain purchase price
adjustments. PPO Oklahoma operates almost exclusively in the state of
Oklahoma. The acquisition was financed with borrowings under the Company's
credit facility.
Introduction to Our Products and Services
We assist a broad range of payor clients through a portfolio of both
integrated and stand-alone managed care and administrative products. These
products are designed to produce a positive impact on medical care, to
manage medical costs and promote a high level of service and satisfaction
among end users. The components of our offerings include:
* A broad, national preferred provider organization (PPO) of directly
contracted, quality, cost-effective health care providers (which the
Company considers to be its most important asset)
* Clinical programs, including case management, disease management and
return to work programs
* Administrative products, including group health claims administration
and business process outsourcing for the workers' compensation
business, including bill review, first report of injury and front
end processing
* Pharmacy benefit management
* Fiscal agent services (generally for state entitlement programs)
* Group health insurance products
These products, particularly in the group health area, are offered as part
of a comprehensive, integrated package. They are supported by our integrated
IT infrastructure, centralized data and consumer and client services,
including:
* A suite of proprietary integrated applications that allow for
efficiency, control and flexibility
* Centralized data that enables easy access for service, product
development and analysis
* Member, provider, client and consultant websites
* Internal applications that support self service or interactive
dialogue with First Health representatives
* Consumer access to member service representatives who answer the
phone 24-hours-a-day, 7-days-a-week for group health services
* Account management teams dedicated to specific clients
Business Sectors
First Health offers its managed care and administrative products and
services to commercial payors in five different sectors. First Health also
serves public-sector payors. Our product and service offerings are centered
around our broad, national PPO network of medical providers.
Commercial Sectors
Group Health Corporate
----------------------
First Health serves national, multi-site, self-insured ERISA payors with its
health benefit services. A variety of stand-alone managed care services are
offered in this sector, as well as a portfolio of integrated health plan
offerings, which may include stop-loss insurance coverage. The Company's
target market generally consists of payors with 1,000 employees or more.
In addition, we service mid-size, self-insured ERISA payors in local and
regional markets with an integrated health plan offering, which may include
stop-loss insurance coverage. Generally, marketing in this sector is done
directly to payors and through relationships with select consultants and
brokers. The Company is focusing on this area for expanded growth in 2004
and beyond.
In this sector, First Health competes with large and mid-size national
carriers and, in some cases, third party administrators. In addition, other
programs, such as HMOs, compete for the enrollment of benefit plan
participants. We distinguish ourselves on the basis of the impact of our
proprietary national network, as well as our comprehensive case management
and disease management programs, coupled with our 24/7 member service and
outreach capabilities.
Federal Employee Health Benefits (FEHB) Sector
----------------------------------------------
First Health has competed in the FEHB Program for nearly two decades. The
FEHB Program is the largest employer-sponsored group health program in the
U.S. This is both a business-to-business and business-to-consumer sector,
where federal employees have the opportunity to receive health benefits from
a number of offered plans each year. For our largest client in this sector,
the Mail Handlers Benefit Plan (MHBP), First Health serves as the plan
administrator. For all other clients, we provide a variety of managed care
and administrative services.
In this sector, we market directly to the consumer to gain additional
membership in the MHBP. In 2003, we launched a national consumer direct
response campaign, including direct mail, print and television. We expect to
continue direct marketing as a means of increasing membership in the MHBP.
Various health plans are offered under the FEHB Program, including Blue
Cross plans and HMOs. First Health distinguishes itself by our experience
and long-term presence in this market and our ability to offer a single
source program that impacts cost on a national basis. The Company
anticipates that it will lose about 10% of the enrollment in the MHBP in
2004 as a result of significant increases in member contributions effective
in January 2004 in response to increased costs in 2003.
Group Health Third Party Administrators (TPA)
---------------------------------------------
First Health offers its national PPO and other managed care products to
national, regional and local TPAs. This sector is served by both the First
Health brand and CCN brand networks, with CCN comprising the majority of
business. This is largely a business-to-business sector, focusing on
delivering managed care and administrative solutions that increase client
efficiency and profit.
The TPAs' sales and marketing staff has primary responsibility for offering
our services to their clients, relieving us of significant marketing
expense. We support these efforts through participation in the proposal
process. The clients of the TPAs, to which we provide services, typically
have less than 1,000 employees/members, so there is generally very little
conflict with our corporate sales initiative.
First Health competes largely with stand-alone national, regional and local
PPOs in this sector. We distinguish ourselves on the basis of our network
results as well as our ability to interact efficiently with clients in a
variety of ways, including remote web repricing and electronic data
interchange ("EDI") connectivity.
Health Insurance Carriers
-------------------------
The company offers services in this sector that include the First Health[R]
Network, supplemented with a variety of product options, including clinical
management programs, pharmacy benefit management and imaging/medical records
repository. This is a highly regulated environment which requires investment
in infrastructure to comply with regulatory requirements. The carrier sector
has experienced high and increasing administrative costs, creating a market
where First Health can leverage its investment in technology and related
infrastructure to impact these costs.
The insurance carrier's sales and marketing staff ordinarily has the
responsibility for offering our services to its policyholders, mitigating
significant marketing expense. These clients generally are selling to
individuals and small employers (less than 250 employees) and our technology
allows them to have a more cost effective offering.
Competitors in the carrier sector include national, regional and local PPO
networks. First Health distinguishes itself through our ability to reduce
both medical and administrative costs.
Workers' Compensation
---------------------
First Health targets insurance carriers, TPAs, state funds, federal
employees and self-insured employers with its workers' compensation
programs. In this area, First Health offers managed care services, including
the First Health[R] Network and business process outsourcing, including bill
review, imaging and work flow management and first report of injury. This
sector has experienced significant challenges in recent years due to
increases in medical costs and a decline in investment income for insurance
carriers. As a result, there is a demand by payors for products that target
high cost and/or high volume services. In order to provide services that
target increased areas for cost savings, First Health has developed products
such as a subset-point-of-entry network (smaller network of providers), a
managed physical therapy program, an appointment setting program, and a pain
management network and will continue development of such programs. In
addition, our business process outsourcing provides customers with work flow
and medical records solutions to maximize the financial impact for every
claim.
In this sector we market 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.
The competition includes mostly regional managed care companies with an
emphasis on PPO, clinical programs or bill review. First Health
differentiates itself based on national PPO results and the ability to
provide an integrated product, coupled with technology that reduces
administrative cost.
These commercial revenue sectors are all focused around the Company's
national proprietary PPO Network and are the largest contributors to our
revenue.
Public Sector
-------------
Our subsidiary, First Health Services, provides integrated automation,
administration, payment and health care management services for public
sector claims. Specifically, First Health Services includes the following
programs:
* Pharmacy benefit management
* Health care management
* Fiscal agent services
We have been able to utilize our Medicaid fiscal agent expertise, our base
of experience in the public sector and our client relationships with over 24
state governments to provide new products and services as the public sector
health programs (primarily Medicaid) move toward more efficient utilization
of health care services.
Health Care Reform
------------------
In 2003, H.R. 1., the Medicare reform and prescription drug legislation, was
signed into law. This bill makes sweeping changes to the Medicare program.
However, most of these changes do not take effect until 2006. The Company
currently derives no revenue from Medicare and the effects of the
legislation are not currently estimated to have any material effect on
revenue or profitability. Key parts of the legislation include:
* Access to a discount drug card for Medicare beneficiaries until
December 31, 2005
* Employer eligibility for a 28% federal subsidy for retiree prescription
drug costs if they offer an actuarial-equivalent qualified prescription
drug plan
* Beginning in 2006, beneficiaries can choose to enroll in a voluntary
drug benefit plan (the new Medicare Part D)
* Beginning in 2006, regional PPOs will be a new option under the
Medicare Advantage program
* Beginning in 2004, Health Savings Accounts (HSA) are authorized and
can be offered in conjunction with a high-deductible health plan.
Contributions can be made by the employer or the employee and
are excluded from income and wages for tax purposes. Amounts not
distributed can be carried over to the next year. HSAs are portable
and are owned by the individual.
First Health is actively monitoring the rule-making process to determine the
extent to which we will have an opportunity to participate in these new
programs and to advise our employer clients on participation.
Description of Products and Services
Commercial
----------
Preferred Provider Organization (PPO) - The First Health[R] Network
-------------------------------------------------------------------
PPOs are groups of hospitals, physicians and other health care providers
that offer services through companies like ours, at pre-negotiated rates to
various payors, including employee groups, workers' compensation payors or
other payors such as auto liability. PPO networks offer an additional means
of managing health care costs by reducing the per-unit price of medical
services provided.
Established in 1983, our national PPO network, known as the First Health[R]
Network, incorporates both group health and workers' compensation medical
providers. This is the core of our Commercial business, providing the
foundation for all other products and services.
As of December 31, 2003, our hospital network included approximately 4,300
hospitals in 50 states, the District of Columbia and Puerto Rico. In most
cases, rates are individually negotiated for the full range of hospital
services, including hospital inpatient and outpatient services. In addition,
we have established an outpatient care network (OCN) comprising
approximately 450,000 physicians, clinical laboratories, surgery centers,
radiology facilities and other providers in 50 states, the District of
Columbia and Puerto Rico.
In the last several years, we have incurred substantial expense
(approximately $25 million annually) in expanding our PPO network. We have
increased both the number of health care providers with whom we contract
within existing geographical markets and the number of geographical areas we
serve. We have expanded the number of contract hospitals not only in major
metropolitan markets, but also in targeted secondary and rural markets. Many
of the hospital and OCN providers that we have added to our network in
recent years are located in those secondary and rural markets.
As health care costs continue to increase, we expect to invest in continued
development of subset "specialty networks" for high cost and/or high
volume illness/procedures. Specialty networks are designed to improve
predictability of costs and produce the best possible patient and financial
outcomes. We have already developed a number of such networks, including a
national transplant network, the First Health[R] National Transplant
Program. This program is designed to facilitate the cost-effective use of
high quality transplant services through a fully integrated system, whereby
case management coordinates the transplant process from pre-transplant
evaluation through the one-year anniversary of the transplant. Similar
networks have also been developed for point-of-entry workers' compensation
providers and physical therapy providers.
As health care costs continue to rise, we are approaching network
development with strategies to attain the best possible outcomes at the most
cost-effective rate. For example, bariatric surgery is a procedure that is
becoming commonplace, yet it produces a wide variance in outcomes. First
Health has developed a system that offers the most experienced surgeons who
have documented superior outcomes and who perform the procedure at the most
cost-effective hospitals.
The following table sets forth information with respect to the approximate
number of participating providers in The First Health[R] Network at the end
of each of the past five years:
December 31
--------------------------------------
1999 2000 2001 2002 2003
------ ------ ------ ------ ------
Number of Hospitals in Network 3,510 3,700 4,100 4,200 4,300
Outpatient Care Network Providers 321,000 348,000 390,000 412,000 450,000
The First Health[R] Network was developed in response to the needs of our
national client base which is composed of a diverse group of health care
payors, such as group health and workers' compensation insurance carriers,
third party administrators, HMOs, self-insured employers, union trusts and
government employee plans. The breadth and depth of our client base allows
us to negotiate favorable rates for all payors with current and prospective
healthcare providers throughout the country.
Approach to Network Development. Our strategy is to create a selective
network of individual providers from within The First Health[R] Network to
meet the medical, financial, geographic and quality needs of individual
clients and plan participants. We attempt to contract directly with each
hospital and generally do not contract with groups of hospitals or provider
networks established by other organizations. We believe that this provides
maximum control over the composition and rates in the network and ensures
provider stability in The First Health[R] Network. To further promote
stability and savings in the network, when possible, we enter into multi-
year agreements with our providers with nominal annual rate increases.
The First Health[R] Network consists of a full array of providers, including
hospitals and outpatient providers, such as physicians, laboratories,
radiological facilities, outpatient surgical centers, mental health
providers, physical therapists, chiropractors, and other ancillary
providers. By establishing contractual relationships with the complete range
of providers, we are able to impact the vast majority of our clients' health
care costs and facilitate referrals within the network for all needed care.
Network providers benefit from their participation in the First Health[R]
Network through increased patient volume as patients are directed to them
through health benefit plans maintained by our clients and other channeling
mechanisms, such as our clinical and care support services and on-line
provider directories.
Our rate structure maximizes the savings for the client and gives incentives
to providers to deliver cost-effective care. Unlike many other PPOs that
negotiate price discounts or separate rates for intensive care and other
specialty units, we strive to negotiate a single, all-inclusive, per diem
rate for medical/surgical and intensive care unit days in hospitals. The
majority of our hospital PPO contracts have such an all-inclusive rate
structure. We also control the charges for hospital outpatient care through
the use of reimbursement caps. These negotiated rates have resulted in
typical savings from so-called "rack rates" of approximately 40% on
inpatient hospital costs and 35% for physician and outpatient costs.
We have utilized these negotiated rates to develop the First Health[R]
Network U&C, a usual and customary schedule for non-network services. The
First Health[R] Network U&C applies when non-network physicians or hospitals
are used and yields plan savings equivalent to the average network rate
within each geographic area. The schedule is possible because of our
national network, direct provider contracts and transactional capabilities.
We have established an extensive provider relations program in order to
promote ongoing and long-term positive business relationships with network
providers. Dedicated staff perform a variety of activities including
responding to claims inquiries and conducting site visits. Due in part to
the effectiveness of the provider relations program, our retention rate has
been more than 99% for hospitals and more than 96% for physicians and other
outpatient providers.
PPO Quality Assessment. Quality assessment of network providers is a
critical component in the selection and retention process. We have
established an intensive program whereby we can evaluate each individual
provider against standards set for various quality indicators. Provider
evaluation begins prior to selection and continues as long as the provider
remains in the network.
Quality assessment activities include:
* Physician credentialing
* Peer review of applications when credentialing criteria are not met
* Physician recredentialing on at least a biennial basis
* Claims profiling
* Hospital profiling and credentialing
* Ongoing monitoring based on external data and information gathered
through interaction with providers
* Quality investigations
First Health is currently seeking PPO accreditation through the URAC
(Utilization Review Accreditation Commission) on a state-by-state basis. Our
first state, Virginia, accredited us in January, 2003. In December, 2003, we
received provider credentialing accreditation in Georgia and North Carolina.
We are targeting other states for accreditations in 2004.
PPO Acquisition Philosophy. Over the course of the last few years, the
Company has made selective acquisitions that have increased the Company's
client base and providers under contract.
CCN. Our acquisition of CCN in August 2001 has expanded our position in
the group health TPA and insurance company sectors. The addition of CCN
network providers has added to the national reach of our network and offers
our clients and their employees more choices for their provider selection.
Healthcare Value Management (HCVM). Our acquisition of HCVM in May 2002
expanded the scope and depth of our network in New England. HCVM is
headquartered in Boston.
PPO Oklahoma. On October 31, 2003 the Company completed the acquisition of
PPO Oklahoma. PPO Oklahoma operates almost exclusively in the state of
Oklahoma. We expect to substantially improve The First Health[R] Network in
Oklahoma as a result.
Health Net Employer Services, Inc. On October 31, 2003, the Company
completed the acquisition of Health Net Employer Services, Inc., which
brings additional workers' compensation providers to the First Health[R]
Network and additional products and services to the First Health workers'
compensation portfolio.
Clinical Programs
-----------------
We provide clinical programs, including utilization review, case management,
medication compliance and disease management through an internal staff
consisting primarily of allied health professionals, registered nurses and
physicians. This staff is supplemented by a nationwide network of consulting
physicians with a full range of specialties. Our in-house physician staff is
a resource for development of our programs, as well as clinical policies and
guidelines. Our staff includes experienced, board-certified physicians in
such specialties as internal medicine, obstetrics and gynecology,
psychiatry, pediatrics and occupational medicine. Our staff is crucial to
the development and maintenance of evidence-based medical necessity
guidelines and our network quality assessment efforts.
Our approach to clinical management is patient-centered, which means that we
provide the level of support required to manage both costs and outcomes at
an individual level. Our program focuses on proper management of illnesses
and chronic conditions through early identification, intervention and
education. Because we own and operate the program, we are able to aggregate
data to identify at-risk members at an early stage and to monitor individual
claims data to identify high-risk patients. We connect these patients with
network providers and set appointments to facilitate compliance. We then
work with the patients and their providers to identify and implement cost-
effective treatment alternatives. In all cases, the decision to proceed with
these alternatives is made by the patient and the physician.
We have formal, clinical protocols for chronic disease management, supported
by health status assessments and educational materials. We currently have
models for the following conditions:
* Asthma * Arial fibrillation
* Congestive heart failure * Post myocardial infarction
* Diabetes * HIV
* Hepatitis C * Organ transplantation
* Depression * High risk maternity
In addition to these conditions, we also proactively manage other high cost
cases such as accidents requiring extensive rehabilitation.
Once a case is identified, the case manager continues with periodic follow-
up contacts to assess the patient's knowledge of and compliance with the
treatment plan. These interactions enhance our ability to assess and
appropriately impact:
* The patient's compliance with the treatment plan
* Progress in achieving treatment goals
* Return to optimal functioning
* The overall cost to the plan and the patient
Medical Claims Administration and Health Plan Services
------------------------------------------------------
We provide comprehensive claims administration to group health clients who
purchase our managed care services, including the First Health[R] Network.
We provide clients with an integrated package of health care benefits
administration, including:
* Managed care administration
* Medical, dental and vision claims processing
* Prescription drug plan administration
* Flexible spending account administration
* Health care reimbursement account administration
* COBRA administration
* Health savings account and administration
* Subrogation
* Access to member services representatives 24-hours-a-day, 7-days-a-week
We have been using our proprietary claims administration system, the First
Claim[R] system, for 20 years. Because we developed the system, we have the
flexibility to support business functions in an efficient, effective manner.
We have completed system upgrades incrementally so we do not expose our
clients to the high risk of large-scale conversions. Because we control the
system, we can offer maximum flexibility for clients who require a variety
of benefit plan options or who wish to implement a customized benefit plan.
Virtually all of First Health's clients have benefit plans that are unique
to them and their business.
Because we provide a single source environment, plan participants have just
one number to call for all health benefits information. Our claims process
is virtually paperless, particularly when a network provider is used. The
system automatically calculates benefits and issues checks, letters and
explanations of benefits to plan participants and providers.
We use our imaging and indexing capabilities to increase the timeliness and
accuracy of our claims processing. When we receive paper claims, they are
immediately scanned into First Claim[R] and electronically date-stamped.
Once the claim is scanned into the system, it is electronically routed to
begin the indexing process, which populates the vital information needed to
adjudicate the claim. The claim is then electronically routed to the proper
claims office for adjudication and is also available for member services
staff to respond to inquiries. Plan members are able to view the status of
their claim online throughout the entire process, from indexing to
completion.
Pharmacy Benefits Management (PBM)
----------------------------------
We offer a comprehensive pharmacy program, including:
* A national, proprietary, point-of-sale, pharmacy network,
consisting of more than 51,000 chain and independent pharmacies
* Formulary management
* Mail-order service
* Prospective drug utilization review
* Online prescription claim adjudication
The single source combination of pharmacy benefits management and medical
management is critical to managing and assessing the total medical cost.
Pharmacy data sources are linked with other data sources to internally
identify at-risk members for disease management.
Stop-Loss Insurance
-------------------
Our stop-loss insurance capabilities enable us to serve as an integrated,
single source for the managed care needs of our clients who are self-insured
employers. Because our stop-loss rates are based on the savings and value
generated through our various services, we are able to offer competitive
rates and policies and multiple-year rate guarantees. These guarantees
include fixed-percent increases and are based upon loss results. Stop-loss
policies are written through our wholly owned insurance subsidiaries and can
be written for specific and/or aggregate stop-loss insurance. This is the
primary insurance product that is emphasized in our sales efforts.
Bill Review
-----------
The First Health[R] Bill Review system offers national and multi-regional
clients a single system to integrate and manage their workers' compensation
medical data. This means that our clients can implement their managed care
strategies on a national basis. With our bill review system, our clients
capture data from multiple sources, analyze the information and use it to
implement advanced managed care strategies.
First Health[R] Bill Review provides our clients a completely automated,
accurate and consistent application of state fee schedule pricing, including
applicable rules, regulations and clinical guidelines. The system features
full integration with The First Health[R] Network and provides a seamless
process for determining contracted rates. As part of the bill adjudication
process, First Health subjects bills to a sophisticated, proprietary process
to detect duplicate bills and correct billing irregularities and
inappropriate billing practices. These billing edits represent additional
bill review savings. First Health maintains and supports virtually all
aspects of the system. Therefore, clients gain efficiencies in using our
integrated services by decreasing the staff previously required to support
client billing systems. We have the capability to program and implement
client-specific enhancements, which provides truly customized bill review
systems for our clients.
The system supports a number of electronic data interchanges from front-end
systems, including claim systems and bill entry systems. The system also
supports EDI output to populate back-end systems such as payment systems,
claims systems, explanation of review production and data warehousing.
In addition, our bill review system has a comprehensive reporting database
that produces a standard set of client savings and management reports.
Clients who lease the First Health[R] Bill Review system have online access
to their data and are able to create numerous reports, supported by a vast
database, at their desktop. They also have online access to production and
inventory reports. Through our Reporting and Evaluation Department, ad hoc
and custom reports can be produced to meet ongoing needs or one-time
analysis.
First Report of Injury
----------------------
Early intervention is the key to achieving optimal outcomes in workers'
compensation cases. Prompt notification and initiation of medical management
helps ensure that injured persons receive appropriate treatment and
expedites their recovery and return to work.
First Health [R] First Report of Injury system is a quick and easy-to-use
service that greatly simplifies the reporting process for workplace
injuries, as well as non-occupational disability, property and general
liability claims. First Health [R] First Report of Injury service promotes
immediate intervention after such occurrences. This service can be accessed
telephonically or via the Internet. The system can transmit a first report
to a designated representative within 4 hours of notification. In addition
to expediting reporting, our system can serve as a gateway to medical
management services, including channeling patients to the First Health[R]
Network or setting an appointment with a network provider.
Other Services
--------------
Data Analysis
-------------
We provide clients with in-depth, customized information concerning cost
and utilization experience. We analyze our clients' health care claims
information and benefit plans and suggest appropriate plan design
modifications and cost management programs. We are able to predict how
changes in plan structure can affect the overall cost of a benefit program.
For workers' compensation analysis, clients can customize, schedule and run
their own reports through access to our web-reporting tool. Clients can
quickly access more than 250 data elements and up to 36 months of paid
history to produce their own reports. Users are able to produce a virtually
unlimited number of reports, each with same-day turnaround. Reports can be
pre-scheduled to run on specified dates and times and users can specify that
their customized pre-scheduled reports be delivered via e-mail.
Internet Applications/Services
------------------------------
First Health provides the following Internet services for members:
Customized Member Portal (My First Health[R] Website):
* Members can access the following personal information on "My Account"
through a secured connection by entering their username and password:
o Benefit plan summaries
o Eligibility view capability for members and dependents
o History of past year's medical, dental, pharmacy and
vision claims, and status of current claims in-house
o Ability for member to resolve pended claims
o Current status of accumulator balances for medical
expenses and flexible spending account balances
General Benefit Information:
* Electronic provider directory with mapping functionality (location,
mileage from specific locations, etc.) for our medical, pharmacy and
dental networks and detailed provider information, such as specialty
descriptions and quality indicators
* E-mail connections with our Member Services Online Department for
various communications, such as claims and benefit plan inquiries,
case management, pre-determination of benefits and claims appeals
* E-mail communications with a First Health Medical Director (as part of
First Health [R] Medical Director Q & A ) to ask questions regarding
general health-related issues
* Online chat service enables direct, interactive communication between
members and our member services representatives
Managing Care:
* Disease management program registration and ability to find condition-
specific information
* Online general health and pharmacy information
* Online health risk assessments
* Average network provider fee lookup application to determine the
approximate costs of selected standard health care services prior
to an office visit
* Hospital comparison tool that includes procedure volumes and other
quality information regarding hospitals in the First Health[R] Network.
* Formulary lookup (i.e. which pharmaceuticals are covered by the plan)
* Side-by-side comparison of the price of highly utilized brand name
drugs versus their generic equivalents
* Ability to fill mail-order prescriptions
* Internet visits with network providers for members participating in the
First Health[R] Care Support Program
Online Enrollment:
* Ability to enroll directly online, thereby eliminating the need to
submit benefit choices via paper
First Health provides the following Internet services for clients:
* Network information tools:
o Electronic directory - search for a network medical, dental or
pharmacy provider
o Directory maker - create a customized provider directory by
state/county/city or zip
o Worksite posters (workers' compensation use only) - generally
occupational providers that are in close proximity to workplace
* View eligibility with add/edit/delete capability
* Full summary of medical plan documents online
* Online reporting with view, download and manipulation capabilities
* Member marketing and enrollment information
* E-mail connections with Client Services and Account Management
departments
* Claims Inventory Log, including total number of claims processed
and the number of claims remaining to be processed
* Ability to print temporary ID cards for members
* Access to PBM formulary
First Health provides the following Internet services for providers:
* Administrative network guidelines and protocol
* Referral directories
* Client lists and inquiries
* Hospital and related pre-certification submission
* Claims submission
* Ability to update "Practice Profiles" online. In addition to the standard
name, address and hospital affiliation information, the profile may
contain information about the providers, such as Web address, languages
spoken and whether they are accepting new patients
* E-mail connections with our Provider Relations Department and clinical
staff for various communications, such as contract submission, claims
appeals, care support guidelines and predetermination of benefits
Compensation - Commercial Products and Services. First Health generally
enters into pricing agreements where the amount of the fee varies depending
on a number of factors, including number of participants, length of contract
and products and services purchased. To a lesser extent, our revenue from
pricing agreements is based upon a percentage of savings realized. In
addition, we collect premiums from our employer stop-loss business and our
small group insurance business, including a New England Financial block of
business for which we bear 20% of the financial risk.
Public Sector
-------------
The Company believes it is one of the few health benefit services companies
that provides a comprehensive solution to states which enables them to
control their rising health care costs, including: pharmacy benefit
management services, medical management services and fiscal agent services.
Pharmacy Benefit Management (PBM)
---------------------------------
First Health Services' PBM program manages pharmacy benefit plans for
Medicaid programs, state senior drug programs and state-funded specialty
programs. Our PBM program is one of the largest of its kind in the country
and provides a full range of services, including:
* Pharmacy point-of-sale eligibility verification and claims processing
* Provider network development and management
* Case management programs
* Prospective and retrospective drug utilization reviews ("DUR")
* Prescriber and provider profiling
* Prescriber education, preferred drug list development and
manufacturers' rebate contracting and administration
* Prior authorization of pharmaceutical use
* First IQ[TM], a proprietary database and decision support system
for pharmacy utilization monitoring and plan management
PBM services are increasingly required by both public and private third-
party payors as prescription drug expenses grow. We believe our role as an
independent provider of PBM services gives us a distinct competitive
advantage in the growing sector of state government plans, where clinical
autonomy is often a requirement. Our PBM business model is completely
transparent so the benefit of all rebates and network discounts is passed
directly and totally to the client. Furthermore, we believe that First
Health Services is a national leader in this area with substantial
experience managing pharmacy plans for Medicaid and state pharmaceutical
assistance programs. This clinical and management expertise gives us a
competitive advantage in the rapidly growing market of managed care
organizations serving the public sector on a non-risk, fee basis.
First Health Services also offers clinical management programs (CMP) to
assist physicians and network pharmacies in the appropriate management of
patients using pharmaceuticals. This program provides physicians with
reviews of treatment appropriateness and preferred drug guidelines which
have been developed by nationally recognized clinicians and medical
authorities. First Health Services' CMP focuses on those patients who
experience preventable therapeutic problems such as non-compliance,
inappropriate therapy and adverse drug reactions. The program includes prior
authorization initiatives, prospective DUR, retrospective DUR and
educational intervention initiatives, known as concurrent DUR and prescriber
education.
Compensation. In exchange for providing our PBM services, we receive a
predetermined, contractual fee that is based upon the number of transactions
processed plus added fees for additional time and materials and for change
orders. First Health Services neither derives any revenue from drug
manufacturers or the pharmacy network contracts, nor does it provide any
mail order services.
Health Care Management
----------------------
First Health Services' Health Care Management program provides external
quality of care evaluation, utilization review and long-term care review
services to Medicaid programs, state mental health agencies and other public
sector health care programs desiring to improve quality of care, contain
costs, ensure appropriate care and measure outcomes.
The utilization review services cover a variety of medical, surgical and
behavioral health programs, including acute and chronic inpatient and
outpatient treatment of children, adult and geriatric populations,
residential services and other alternative services. The Health Care
Management program also provides on-site quality reviews and inspection of
care for community mental health centers, residential treatment centers and
inpatient psychiatric programs. As state Medicaid programs and state
departments of mental health spend increasing proportions of public funds on
treatment for Medicaid and other needy populations, the need for utilization
review services is increasing. Some states are moving toward capitated
contracts with private sector firms to help manage this problem. However,
many states are opting to contract for utilization review services on a fee-
for-service basis to ensure appropriate health care while containing costs.
Under the long-term care review services, we provide level-of-care
determinations as well as pre-admission screenings and annual resident
reviews to determine the need for specialized services for mental illness,
mental retardation or related conditions.
Compensation. As a fee for providing our health care management services,
we receive fees on a transactional, or "per review" basis, and on a time and
material basis.
Fiscal Agent
------------
First Health Services' Fiscal Agent program administers state Medicaid
health plans and other state-funded health care programs by providing
clients with full fiscal agent operations and systems maintenance and
enhancement. Under this product line, we provide:
* Medicaid management information systems installation, maintenance and
enhancement
* Enrollment services
* Eligibility verification and ID card issuance
* Health care claims receipt, resolution, processing and payment
* Provider relations
* Third party liability processing
* Financial reconciliation functions
* Client reporting
Our customers include state Medicaid agencies, state departments of human
services and departments of health serving Medicaid populations and other
public assistance health benefit programs. Public sector clients may also
procure fiscal agent services to support other government programs, such as
state employee benefit plans, early intervention programs or other health
care initiatives. Typically, fiscal agent systems are modified to meet a
specific state's program policy and administration requirements so that
services are offered for all claim types. We are one of four major
competitors in the Medicaid fiscal agent field.
First Health Services has developed and operates a Center of
Medicaid/Medicare Services (CMS) certified information system for each
client. These systems are utilized to process and adjudicate eligibility,
health care claims and encounters, pay providers under a full range of
reimbursement methods and generate reports for use in managing the program.
There are several additional benefits that First Health Services receives
from operating the fiscal agent business:
* System development is principally funded by new state contract awards
* The expertise, capabilities and systems developed from these contracts
have provided a platform for expansion into other products, services
and customer segments, and
* Customer relationships with the states have proven valuable in
developing other business in the PBM and Health Care Management
programs
Compensation. As a fee for providing our fiscal agent services, we receive
a flat fee per transaction and other predetermined, contractual fees that
are based upon the volume of transactions processed, as well as fees for
additional time and materials and for change orders. Fees for software
development contracts are recognized as milestones are met and customer
acknowledgement of such achievement of milestones is received.
Clients and Marketing
We primarily market our services to national, multi-site direct
accounts, including self-insured employers, government employee groups and
multi-employer trusts with greater than 1,000 employees or members. During
2003, one client (Mail Handlers Benefit Plan), for which we provided PPO
services and claims administration services, accounted for 27% of our total
revenues. No other client represents more than 4% of revenue. In addition,
we market our services to and through group health and workers' compensation
insurance carriers. The following are representative clients of First
Health:
Commercial Clients
Agilent Technologies, Inc. Health Net, Inc.
Albertson's, Inc. Liberty Mutual Insurance Company
Boilermakers National Health McDonald's Corporation
and Welfare Fund
ConAgra Foods, Inc. National Association of Letter Carriers
Crawford and Company Radio Shack Corporation
Eaton Corporation The Sherwin-Williams Company
HCA Inc. Travelers Property and Casualty
Hartford Financial Services, Inc Watson Pharmaceuticals, Inc.
Public Sector Clients
Alaska Div of Medical Assistance Ohio Medicaid
Elderly Pharmaceutical Pennsylvania Dept of Aging
Insurance Coverage
Florida Agency of Healthcare State of Maryland
Nevada Dept of Health State of Michigan
New Jersey Medicaid Virginia-Dept of Medical
Assistant Services
We presently have approximately 110 group health and workers'
compensation insurance carrier clients. Typically, we enter into a master
service agreement with an insurance carrier under which we agree to provide
our cost management services to health care plans maintained by the
carrier's policyholders. Our services are offered not only to new
policyholders, but also to existing policyholders at the time their policies
are renewed. The insurance carrier's sales and marketing staff ordinarily
has the responsibility for offering our services to its policyholders,
relieving us of a significant marketing expense.
In 2002, we launched a national consumer advertising campaign to
include print and television. We continued to use consumer advertising as a
means of raising awareness with end-user customers in 2003.
We typically enter into standardized service contracts with our direct
accounts and master service agreements with our insurance carrier and
third party administrator clients. These contracts and agreements have
automatically renewable successive terms of between one and three years, and
are generally terminable upon notice given one to six months prior to
expiration. While these contracts are generally exclusive as to a client's
ability to use other PPO companies in identified geographic areas, they are
generally non-exclusive with respect to a client's right to provide in-house
medical review services.
Competition
We compete in a highly fragmented market with national and local firms
specializing in utilization review and PPO cost management services and with
major insurance carriers and third party administrators that have
implemented their own internal cost management services. In addition, other
managed care programs, such as HMOs and group health insurers, compete for
the enrollment of benefit plan participants. We are subject to intense
competition in each market segment in which we compete and many of our
competitors have greater financial and marketing resources than we do. We
distinguish ourselves on the basis of the quality and cost-effectiveness of
our programs, our proprietary computer-based integrated information system,
our emphasis on commitment to service with a high degree of physician
involvement, the penetration of our network into secondary and tertiary
markets and our role as an integrated provider of PBM services.
The insured market for workers' compensation programs is somewhat
concentrated, with the top ten insurers controlling over 50% of the insured
market. We have focused our efforts on the top tier of the workers'
compensation market. The acquisition of Health Net, which traditionally has
sold services to smaller employers and payors, expands the market for our
services. Although we currently include several regional offices of six of
the top ten workers' compensation insurers among our clients, we compete
with a multitude of PPOs, technology companies that provide bill review
services, clinical case management companies and rehabilitation companies
for the business of these insurers. While experience differs with various
clients, obtaining a workers' compensation insurer as a new client typically
requires extended discussions and a significant investment of time. Given
these characteristics of the competitive landscape, client relationships are
critical to the success of our workers' compensation products.
Employees
As of December 31, 2003, we had approximately 6,000 employees,
including approximately 2,300 employees involved in claims processing and
related activities, 900 employees directly administering the Mail Handlers
Benefit Plan, 700 employees in information systems, 500 employees in various
clinical management and quality assessment activities, 600 employees in PPO
development and operations, 600 employees in sales, account management and
marketing and the remainder involved with accounting, legal, human
resources, facilities, and other administrative, support and executive
functions. We also have a nationwide network of conferring physicians in
various specialties, most of whom are compensated on an hourly or per visit
basis when they are requested to render consulting services on our behalf.
None of our employees are presently covered by a collective bargaining
agreement and we consider our relations with our employees to be good.
Information Systems
First Health utilizes an enterprise system architecture that is structured
in three basic tiers. These layers consist of databases, middleware and
proprietary applications, all of which run on a clustered hardware platform.
The structure operates in a centralized manner enabling a consistent
national operation across all locations.
Hardware is clustered for scalability and flexible data storage. Multiple
clustered computers have controlled access to a set of shared peripherals
such as disk and tape devices. The computing power of our clusters can be
increased at any time by adding processor boards to one or more computers
and/or adding computers to the cluster. Our clusters also shift work to
other machines in the event of a system failure.
With a common storage area for VMS, Unix, NT and NetWare, First Health's
platform is compatible from the smallest Web server to the largest database
server. Our hardware set-up has enabled a doubling of power and storage
capacity annually. Storage capacity has increased more than 1,000 times over
a ten-year period. All of this is accomplished through upgrades rather than
conversions.
Middleware is used to deliver information from the databases to the various
applications. This transaction process system resides between the
application and databases. Using middleware allows multiple applications to
share common routines, promoting logical consistency and reducing
maintenance complexity. This tier also separates applications from database
changes and provides improved performance over the wide area network.
At the third level are the proprietary applications, which support all of
First Health's services. These applications are integrated through their
access to the centralized databases. First Health develops its applications
to allow for maximum customization and maintain its strict principles of
architectural integration. The portion of the application that controls user
interface runs on Intel Pentium workstations that are members of a Novell
NetWare local area network (LAN). A LAN at each corporate site is linked to
form a wide area network (WAN) so applications run at distributed locations,
but data they access is maintained centrally on our database servers in our
corporate data center.
First Health's data center in Scottsdale, Arizona is secured for physical or
electronic access and is protected from power failure by battery-operated,
uninterruptible power supplies backed up by natural gas generators. The
backup data center provides business continuity in an emergency. AlphaServer
systems and necessary storage capacity support critical applications. First
Health also avoids downtime due to single component failure through live,
redundant components.
Government Regulations
----------------------
Federal-Level Regulation
------------------------
Managed health care programs are subject to various federal laws and
regulations. Both the nature and degree of applicable government regulation
vary greatly depending upon the specific activities involved. Generally,
parties that actually provide or arrange for the provision of health care
services, assume financial risk related to the provision of those services,
or undertake direct responsibility for making payment or payment decisions
for those services, are subject to a number of complex regulatory schemes
that govern many aspects of their conduct and operations.
While our management and information services typically have not been the
subject of extensive regulation by the federal government, the last decade
has witnessed increased regulation of our industry. In particular, the
Health Insurance Portability and Accountability Act of 1996 (HIPAA) has
imposed obligations previously unknown to managed health care service
providers. HIPAA is designed to reduce the amount of administrative waste in
the health care industry and to protect the privacy of patients' medical
information. Among other things, HIPAA established new requirements for the
privacy of patient health information and standard formats for the secure
transmission of health care data among healthcare providers, payors and
plans. The regulations regarding the standard formats for the secure
transmission of health care information became effective in October 2003
(for 2005 compliance) and the regulations regarding privacy issues became
effective in April 2003.
We formed a corporate HIPAA Administrative Simplification Committee and
Workgroup to identify processes, systems or policies that will require
modification and to implement appropriate remediation and contingency plans
to avoid any adverse impact on our ability to perform services in accordance
with the applicable standards. We communicated with significant third-party
business partners to assess their readiness and the extent to which we will
need to modify our relationship with these third parties when conducting EDI
or e-commerce. We also formed a Security Committee and Workgroup to address
electronic security, specifically, HIPAA security requirements.
The cost of this compliance effort was approximately $5 million.
State-Level Regulation
----------------------
Our activities are subject to state regulations applicable to managed health
care service providers and as a licensed insurance carrier. We believe that
we are in compliance in all material respects with all current state
regulatory requirements applicable to our business as it is presently
conducted. However, changes in our business or in state regulations could
affect the level of services that we are required to provide or could affect
the rates we can charge for our health care products and services.
The workers' compensation segment of our business is more sensitive to state
governmental regulation. Historically, governmental strategies to contain
medical costs in the workers' compensation field have been limited to
legislation on a state-by-state basis. For example, 42 states 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. In addition to the laws governing workers' compensation in each
state, over 25 states have enacted specific managed care legislation. This
legislation creates additional opportunities to offer comprehensive managed
care programs.
Item 2. Properties
----------
We own seven office buildings consisting of an aggregate of
approximately 670,000 square feet of space. Our headquarters are located in
Downers Grove, Illinois and our other six offices are located in West
Sacramento and San Diego, California; Houston, Texas; Pittsburgh,
Pennsylvania; and Tucson and Scottsdale, Arizona. Additionally, we lease
significant office space in Salt Lake City, Utah; Rockville, Maryland;
Milwaukee, Wisconsin; Richmond, Virginia; Tampa, Florida; Boise, Idaho and
Irvine, CA. We also have numerous smaller leased facilities throughout the
nation.
All of our buildings and equipment are being utilized, have been
maintained adequately and are in good operating condition. These assets,
together with planned capital expenditures, are expected to meet our
operating needs in the foreseeable future.
Item 3. Legal Proceedings
-----------------
The Company and its subsidiaries are subject to various claims arising
in the ordinary course of business and are parties to various legal
proceedings that constitute litigation incidental to the business of the
Company and its subsidiaries. The Company does not believe that the outcome
of such matters will have a material effect on the Company's financial
position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the year ended December 31, 2003.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
---------------------------------------------------------------------
Our common stock has been quoted on the Nasdaq National Market under the
symbol "FHCC" since our corporate name change on January 1, 1998 and prior
to that was quoted under the symbol "HCCC". Information concerning the range
of high and low sales prices of our common stock on the Nasdaq National
Market and the approximate number of holders of record of our common stock
is set forth under "Common Stock" in our 2003 Annual Report to Stockholders.
Information concerning our dividend policy is set forth under "Dividend
Policy" in our 2003 Annual Report to Stockholders. All such information is
incorporated herein by reference.
Item 6. Selected Financial Data.
------------------------
Selected financial data for each of our last five fiscal years is set
forth under "Selected Financial Data" in our 2003 Annual Report to
Stockholders. Such information is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operation.
---------------------
The information required by this item is set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
our 2003 Annual Report to Stockholders and is incorporated herein by
reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
The disclosures required by this item are contained in our 2003 Annual
Report under the caption "Market Risk" and are incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
The financial statements required by this item are contained in our 2003
Annual Report to Stockholders on the pages indicated below and are
incorporated herein by reference.
Financial Statements: Page No.
-------------------- -------
Report of Independent Auditors 57
Consolidated Balance Sheets as of
December 31, 2002 and 2003 60-63
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2002 and 2003 64-65
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2001, 2002 and 2003 66-67
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2001, 2002 and 2003 68-71
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2001, 2002 and 2003 72-75
Notes to Consolidated Financial Statements 76-111
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
Item 9a. Controls and Procedures
-----------------------
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Company's Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms and that such information is accumulated and
communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of December 31, 2003, the end of the quarter covered by this report,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on the foregoing, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective at the reasonable
assurance level.
There has been no change in the Company's internal controls over
financial reporting during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal controls over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
Executive Officers of the Company
Name Age Position
--------------------- ---- -------------------------------------------
James C. Smith 63 Chairman of the Board
Member of Board of Directors
Edward L. Wristen 52 President and Chief Executive Officer
Member of Board of Directors
A. Lee Dickerson 54 Executive Vice President
Patrick G. Dills 50 Executive Vice President and President, CCN
Susan Oberling 44 Senior Vice President, Operations
Joseph E. Whitters 45 Executive Vice President, Treasurer and
Chief Financial Officer
Susan Smith 53 Vice President, General Counsel and
Secretary
James C. Smith has served as Chairman of the Board since January 2001. He
had served as the Chief Executive Officer from January 1984 through December
2001.
Edward L. Wristen joined First Health in November 1990 as Director of
Strategic Planning. He served in various senior and executive level
positions from 1991 through August 1998. In September 1998, Mr. Wristen
became Chief Operating Officer. In January 2001, Mr. Wristen became
President of the Company. In January 2002, Mr. Wristen became Chief
Executive Officer of the Company. Mr. Wristen has over 25 years experience
in the health care industry.
A. Lee Dickerson joined First Health in 1988 as Regional Director,
Hospital Contracting. Mr. Dickerson was promoted into his current position
in November 1995. Previously he held various senior level positions in the
Company's Provider Networks area. Mr. Dickerson has over 25 years experience
in the health care industry.
Patrick G. Dills joined First Health in 1988 as Senior National Director,
Sales and Marketing. Mr. Dills was promoted to Executive Vice President,
Managed Care Sales in January 1994 and to Executive Vice President, Sales in
1998. He was appointed President of CCN in August 2001.
Susan Oberling joined First Health in 1987 in our Clinical Management
organization. Ms. Oberling was promoted into her current position in 2003.
She has previously held various senior level positions within the Company's
operations including our benefit administration and member services areas.
Joseph E. Whitters joined the Company as Controller in October 1986 and
has served as its Chief Financial Officer since March 1988. He was promoted
to Executive Vice President in 2003.
Susan T. Smith joined the Company as Director of the Legal Department in
1993. She was appointed Associate General Counsel in 1994 and assumed her
role as General Counsel in 1997. She was appointed Secretary of the Company
in 2000.
The Company's officers serve at the discretion of the Board of Directors.
Other information regarding our executive officers, as well as certain
information regarding First Health's directors, will be included in the
Proxy Statement for our Annual Meeting of Stockholders to be held on May 13,
2004 (the "Proxy Statement"), and such information is incorporated herein by
reference.
Item 11. Executive Compensation.
-----------------------
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference. However, the Report of
the Compensation Committee of the Board of Directors on Executive
Compensation contained in the Proxy Statement is not incorporated by
reference herein, in any of our previous filings under either the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
or in any of our future filings.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
--------------------------------------
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
----------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) The Index to Financial Statements is set forth on page 19 of
this report.
(2) Consolidated Financial Statements Schedules:
Schedule II - Valuation and Qualifying Accounts and Reserves.
Schedule IV - Reinsurance
(3) Exhibits
(b) Reports on Form 8-K:
The Company furnished a report on Form 8-K dated November 3, 2003
reporting under Item 12 the results of operations and financial
condition for the three and nine months ended September 30, 2003.
The Company filed a report on Form 8-K dated November 5, 2003
reporting under Item 5 announcing it had completed the acquisition
of the stock of Health Net Employer Services, Inc.
First Health Group Corp.
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 2003, 2002 and 2001
Balance at Additions Charged Adjustments Balance at
Beginning to Revenues or and End of
Description of Period Expenses Charge-offs Period
------------ ---------- ---------- ----------- ----------
Year Ended December 31, 2003
----------------------------
Allowance for Doubtful Accounts $14,782,000 $ 8,616,000(2) $(2,325,000) $21,073,000
========== ========== =========== ==========
Contractual Reserves (4) $41,227,000 $ 3,080,000 $(7,780,000) $36,527,000
========== ========== =========== ==========
Accrued Restructuring Expenses $11,393,000 $ 3,300,000(1) $(9,589,000) $ 5,104,000
========== ========== =========== ==========
Year Ended December 31, 2002:
----------------------------
Allowance for Doubtful Accounts $14,327,000 $ 600,000 $ (145,000)(2) $14,782,000
========== ========== =========== ==========
Contractual Reserves (4) $18,152,000 $23,893,000 $ (818,000) $41,227,000
========== ========== =========== ==========
Accrued Restructuring Expenses $36,475,000 $ 2,250,000(1) $(27,332,000)(3) $11,393,000
========== ========== =========== ==========
Year Ended December 31, 2001:
-----------------------------
Allowance for Doubtful Accounts $10,811,000 $ 4,003,000(2) $ (487,000) $14,327,000
========== ========== =========== ==========
Contractual Reserves (4) $23,401,000 $(4,435,000) $ (814,000) $18,152,000
========== ========== =========== ==========
Accrued Restructuring Expenses $ 4,249,000 $41,113,000(1) $ (8,887,000) $36,475,000
========== ========== =========== ==========
(1) Additions in 2001 represent accrued restructuring expenses that
were included in the purchase accounting adjustments related to the
acquisition of CCN Managed Care, Inc., not charged to expenses. In
2002, additions include accrued restructuring expenses that were
included in the purchase accounting adjustments related to the CAC
and HCVM acquisitions, not charged to expenses. In 2003, additions
include accrued restructuring expenses that were included in the
purchase accounting adjustments related to the Health Net and PPO
Oklahoma acquisitions, not charged to expenses.
(2) Additions in 2001 represent allowance for doubtful accounts that
were included in the purchase accounting adjustments related to the
acquisition of CCN Managed Care, Inc., not charged to expenses. In
2002, adjustments include a $3 million reduction related to the
true-up of the CCN allowance for doubtful accounts. In 2003,
additions include $6.4 million for the allowance for doubtful
accounts related to the Health Net and PPO Oklahoma acquisitions.
(3) Amount includes a reclass of $5.2 million of purchase accounting
reserves to deferred income tax liability. Amount also includes a
$14.4 million reduction to the CCN restructuring reserve for a
true up of the liability amounts.
(4) Contractual reserves represent reserves for items such as non-
covered services, ineligible members, other insurance, performance
guarantees, etc. These amounts are netted against gross accounts
receivable in the consolidated balance sheets. Beginning in 2002,
this also relates to reserves established for various contingencies
associated with potential disallowance of certain expenses charged
to the Mail Handlers Benefit Plan.
First Health Group Corp.
Schedule IV - Reinsurance
Years Ended December 31, 2003, 2002 and 2001
Percentage
Ceded Assumed of Amount
Direct to Other from Other Net Assumed
Amount Companies Companies Amount to Net
----------- -------------- ----------- ----------- ---
Year ended 12/31/03:
-------------------
Life insurance in force: $147,187,000 $ (140,133,000) $216,860,000 $223,914,000 97%
=========== ============== =========== =========== ===
Premiums:
Life insurance 1,725,000 (1,649,000) 318,000 394,000 81%
Accident and health
insurance 21,534,000 (26,535,000) 26,167,000 21,166,000 124%
----------- -------------- ----------- ----------- ---
Total premiums $ 23,259,000 $ (28,184,000) $ 26,485,000 $ 21,560,000 123%
=========== ============== =========== =========== ===
Year ended 12/31/02:
--------------------
Life insurance in force: $157,963,000 $ (150,501,000) $ 5,420,000 $ 12,882,000 42%
=========== ============== =========== =========== ===
Premiums:
Life insurance 1,813,000 (1,705,000) 32,000 140,000 23%
Accident and health
insurance 18,986,000 (4,142,000) 557,000 15,401,000 4%
----------- -------------- ----------- ----------- ---
Total premiums $ 20,799,000 $ (5,847,000) $ 589,000 $ 15,541,000 4%
=========== ============== =========== =========== ===
Year ended 12/31/01:
-------------------
Life insurance in force: $172,677,000 $ (163,781,000) $ -- $ 8,896,000 --%
=========== ============== =========== =========== ===
Premiums:
Life insurance 2,129,000 (2,032,000) 37,000 134,000 28%
Accident and health
insurance 16,491,000 (2,860,000) 907,000 14,538,000 6%
----------- -------------- ----------- ----------- ---
Total premiums $ 18,620,000 $ (4,892,000) $ 944,000 $ 14,672,000 6%
=========== ============== =========== =========== ===
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRST HEALTH GROUP CORP.
By: /s/Edward L. Wristen
----------------------------
Edward L. Wristen, President
and Chief Executive Officer
Date: March 11, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 11, 2004:
Signature Title
------------------------------ ------------------------------------
/s/James C. Smith Chairman of the Board
------------------------------ Director
James C. Smith
/s/Edward L. Wristen President and Chief Executive Officer
------------------------------ Director (Principal Executive Officer)
Edward L. Wristen
/s/Joseph E. Whitters Executive Vice President, Treasurer
------------------------------ and CFO (Principal Financial and
Joseph E. Whitters Accounting Officer)
/s/Michael J. Boskin Director
------------------------------
Michael J. Boskin
/s/Daniel Brunner Director
------------------------------
Daniel Brunner
/s/Raul Cesan Director
------------------------------
Raul Cesan
/s/Robert S. Colman Director
------------------------------
Robert S. Colman
/s/Ronald H. Galowich Director
------------------------------
Ronald H. Galowich
/s/Harold S. Handelsman Director
------------------------------
Harold S. Handelsman
/s/Don Logan Director
------------------------------
Don Logan
/s/William Mayer Director
------------------------------
William Mayer
/s/John C. Ryan Director
------------------------------
John C. Ryan
/s/David Simon Director
------------------------------
David Simon
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
First Health Group Corp.
Downers Grove, IL 60515
We have audited the consolidated financial statements of First Health Group
Corp. as of December 31, 2003 and 2002, and for each of the three years in
the period ended December 31, 2003 and have issued our report thereon, dated
March 8, 2004 (which expressed an unqualified opinion and included an
explanatory paragraph related to the adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"); such
consolidated financial statements and report are included in the Company's
2003 Annual Report to Stockholders and are incorporated herein by reference.
Our audits also included the consolidated financial statement schedules of
First Health Group Corp. listed in Item 15. These consolidated financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based upon our audits. In our
opinion, such consolidated financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 8, 2004
INDEX TO EXHIBITS
Exhibit No. Description
----------------------------------------------------------------------------
3.1. Restated Certificate of Incorporation of the Company.
{3.1} (1)
3.2. Amendment to Restated Certificate of Incorporation of the
Company. {3.2} (4)
3.3. Restated Certificate of Designation of Preferences, Rights
and Limitations. {3.3} (1)
3.4. Amended and Restated By-Laws of the Company. {3.4} (1)
3.5. Amendment, dated as of May 20, 1987, to Amended and
Restated By-Laws of the Company {3.5} (2)
3.6. Amendment to Amended and Restated By-Laws of the
Company.{3.6} (3)
3.7. Amendment to Amended and Restated By-Laws of the
Company.{3.7} (3)
4. Specimen of Stock Certificate for Common Stock. {4} (2)
10.1. Form of Consulting Physician Agreement, {10.1} (2)
10.2. Form of Consulting Specialist Agreement. {10.2} (2)
10.3. 1995 Employee Stock Option Plan. (10.3) (5)
10.4. Agreement dated as of September 1, 1995 between HealthCare
COMPARE Corp. and Electronic Data Systems. {10.4} (6)
10.5. Stock Purchase Agreement among HealthCare COMPARE Corp.,
First Financial Management Corporation and First Data
Corporation dated as of May 22, 1997, incorporated by
reference from the Company's Second Quarter 1997 Form
10-Q dated August 13, 1997. {10.5} (7)
10.6. 1998 Stock Option Plan {10.6} (8)
10.7. 1998 Directors Stock Option Plan {10.7} (9)
10.8. Shareholder Rights Agreement dated as of March 19, 1999
between First Health Group Corp., Illinois Stock Transfer
Company and LaSalle National Bank {10.8} (10)
10.9. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Ed Wristen. {10.9} (11)
10.10. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Susan T. Smith. {10.10} (11)
Exhibit No. Description
----------------------------------------------------------------------------
10.11. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and A. Lee Dickerson. {10.11} (11)
10.12. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Joseph E. Whitters. {10.12} (11)
10.13. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Patrick G. Dills. {10.13} (11)
10.14. Option Agreement dated as of May 18, 1999 by and between
the Company and James C. Smith {10.14} (12)
10.15. Option Agreement dated as of May 18, 1999 by and between
the Company and James C. Smith {10.15} (12)
10.16. 2000 Stock Option Plan {10.16} (13)
10.17. Option Agreements dated March 20, 2002 between First
Health Group Corp. and Edward L. Wristen. {10.17} (14)
10.18. Director's Stock Option Plan {10.18} (15)
10.19. 2001 Stock Option Plan {10.19} (16)
10.20. Stock Purchase Agreement dated as of May 18, 2002, among
the Company and HCA-the Healthcare Company and VH Holdings,
Inc. {10.20} (17)
10.21. Agreement and Acknowledgment with respect to the Stock
Purchase Agreement, dated as of August 16, 2002, among the
Company and HCA-the Healthcare Company and VH Holdings, Inc.
{10.21} (17)
10.22. Credit Agreement among the Company as borrower, Bank of
America, N.A. as administrative agent, certain subsidiaries
of the Company as guarantors; and other financial institutions
party thereto as lenders {10.22} (18)
10.23. Employment Agreement dated January 1, 2002, as amended on
September 17, 2002 between First Health Group Corp. and
James C. Smith. {10.23} (19)
10.24. 2002 Restatement of the First Health Group Corp.
Retirement Savings Plan. {10.24} (19)
10.25. First Amendment to the 2002 Restatement of the First
Health Group Corp. Retirement Savings Plan. {10.25} (19)
Exhibit No. Description
----------------------------------------------------------------------------
10.26. Second Amendment to the 2002 Restatement of the First
Health Group Corp. Retirement Savings Plan. {10.26} (19)
10.27. Health Benefits Services Agreement dated as of January 1,
2003, among the National Postal Mail Handlers Union and
First Health Group Corp. {10.27} (19)
10.28. Agreement dated as of April 15, 2002, among the National
Postal Mail Handlers Union, First Health Life and Health
Insurance Company, Cambridge Life Insurance Company and
Federal Employee Plans, Inc. {10.28} (19)
10.29. First Amendment to the Employment Agreement dated May 1,
1999 between First Health Group Corp. and Joseph E. Whitters.
10.30. First Amendment to the Employment Agreement dated January
1, 2001 between First Health Group Corp. and Edward L. Wristen
10.31. Second Amendment to the Employment Agreement dated May 1,
1999 between First Health Group Corp. and Patrick G. Dills.
11. Computation of Basic and Diluted Earnings Per Share.
13. 2003 Annual Report to Stockholders.
21. Subsidiaries of the Company.
23. Consent of Deloitte & Touche LLP
31.1. Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended.
31.2. Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended.
32.1. Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2. Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Exhibit No. Description
----------------------------------------------------------------------------
{ } Exhibits so marked have been previously filed with the
Securities and Exchange Commission as exhibits to the
filings shown below under the exhibit number indicated
following the respective document description and are
incorporated herein by reference.
(1) Registration Statement on Form S-1 ("Registration
Statement"), as filed with the Securities and Exchange
Commission on April 17, 1987.
(2) Amendment No. 2 to Registration Statement, as filed with
the Securities and Exchange Commission on May 22, 1987.
(3) Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission on July 12, 1988.
(4) Annual Report on Form 10-K for the year ended December 31,
1990, as filed with the Securities and Exchange Commission
on March 30, 1991.
(5) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on September 20, 1995.
(6) Annual Report on Form 10-K for the year ended December 31,
1996 as filed with the Securities and Exchange Commission
on March 27, 1997.
(7) Annual Report on Form 10-K for the year ended December 31,
1997 and filed with the Securities and Exchange Commission
on March 25, 1998.
(8) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on December 15, 1998.
(9) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on December 15, 1998.
(10) Current Report on Form 8-K as filed with the Security and
Exchange Commission on March 24, 1999.
(11) Annual Report on Form 10-K for the year ended December 31,
1999 and filed with the Securities and Exchange Commission
on March 24, 2001.
(12) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on March 19, 2002.
(13) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on March 19, 2002.
Exhibit No. Description
----------------------------------------------------------------------------
(14) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on August 15, 2002.
(15) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on August 15, 2002.
(16) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on August 15, 2002.
(17) Current Report on Form 8-K as filed with the Securities
and Exchange Commission on August 27, 2002.
(18) Quarterly Report on Form 10-Q as filed with the Securities
and Exchange Commission on May 13, 2002.
(19) Annual Report on Form 10-K for the year ended December 31,
2002 as filed with the Securities and Exchange Commission
on March 26, 2003.