8 — Click here to easily navigate through this document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10–K
þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common Stock purchase rights
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 þ NO¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S–K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K. ¨
The aggregate market value of the registrant’s voting Common Stock held by non–affiliates of the registrant as of February 28, 2002 (computed by reference to the closing sales price of such stock on the NYSE® stock market on such date) was $ 1,353,197,834.36
As of February 28, 2002, there were 58,681,606 shares of the registrant’s voting Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant’s Proxy Statement for its 2002 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 13 of Part III hereof.
| PART I | |||
| Item 1: | Business | 3 | |
| Item 2: | Properties | 18 | |
| Item 3: | Legal Proceedings | 18 | |
| Item 4: | Submission of Matters to a Vote of Security Holders | 19 | |
| PART II | |||
| Item 5: | Market for the Registrant’s Common Equity and Related Stockholder Matters | 20 | |
| Item 6: | Selected Consolidated Financial Data | 21 | |
| Item 7: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | |
| Item 7A: | Quantitative and Qualitative Disclosures of Market Risk | 41 | |
| Item 8: | Financial Statements and Supplementary Data | 42 | |
| Item 9: | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 63 | |
| PART III | |||
| Item 10: | Directors and Executive Officers of the Registrant | 64 | |
| Item 11: | Executive Compensation | 64 | |
| Item 12: | Security Ownership of Certain Beneficial Owners and Management | 64 | |
| Item 13: | Certain Relationships and Related Transactions | 64 | |
| PART IV | |||
| Item 14: | Exhibits, Financial Statement Schedules and Reports on Form 8–K | 65 | |
| SIGNATURES | 70 | ||
| INDEX TO EXHIBITS | 73 | ||
2
The statements contained in this Form 10–K that are not historical are forward–looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. Forward–looking statements, which are based on assumptions and estimates and describe our future plans, strategies and expectations, are generally identifiable by the use of words “anticipate,” “will,” “believe,” “estimate,” “expect,” “intend,” “seek,” or similar expressions. These forward–looking statements include all statements that are not statements of historical fact as well as those regarding Coventry’s intent, belief or expectations including, but not limited to, the discussions of our operating and growth strategy, projections of revenue, income or loss and future operations.
These forward–looking statements may be affected by a number of factors, including, but not limited to, the “Risk Factors” contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 are increases in medical costs, difficulties in increasing premiums due to competitive pressures, price restrictions under Medicaid and Medicare, issues relating to marketing of products or accreditation or certification of our products by private or governmental bodies and imposition of regulatory restrictions, cost, or penalties. Other factors that may materially affect the Company’s business include issues related to difficulties in obtaining or maintaining favorable contracts with health care providers, credit risks on global capitation arrangements, financing costs and contingencies, the ability to increase membership and premium rates, issues relating to continued growth through acquisitions, and litigation risk. Unless this Form 10–K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “our Company,” “the Company” or “us” as used in this Form 10–K refer to Coventry Health Care, Inc. and its subsidiaries.
We are a leading publicly traded managed health care company with approximately 1.84 million members operating health plans under the names Coventry Health Care, Coventry Health and Life, Carelink Health Plans, Group Health Plan, HealthAmerica, HealthAssurance, HealthCare USA, Southern Health, and WellPath. We operate a diversified portfolio of local market health plans serving 14 states, primarily in the Mid–Atlantic, Midwest and Southeast regions. Our health plans generally are located in small to mid–sized metropolitan areas. 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. On May 16, 2001, we began trading on the New York Stock Exchange® under the new ticker symbol “CVH.” Previously, we had been trading on the Nasdaq® stock market under the ticker symbol “CVTY.”
We operate our health plans with a local focus and the management expertise, resources and economies of scale of a large, well–established and well–capitalized company. We believe the delivery of health care benefits and services is best managed on a market–by–market basis. Each of our health plans operates under its local market name and has local management, sales and marketing, medical management, contracting and provider relations personnel that design and manage health benefits to meet the needs of our individual markets. We believe that our local focus enables us to adapt our products and services to the needs of individual markets, react quickly to changes in our markets and maintain strong relationships with our employer customers, members and health care providers. We operate four regional service centers that perform claims processing, premium billing and collection, enrollment and customer service functions for our plans. Our regional service centers enable us to take advantage of economies of scale, implement standardized management practices at each of our plans and capitalize on the benefits of our integrated information technology systems. We centralize the underwriting and product pricing functions for our health plans at the corporate level, which allows us to utilize our underwriting expertise and a disciplined pricing strategy at each of our plans. We believe our centralization of certain administrative functions at the corporate and regional levels gives us a competitive advantage over local market health plans that lack our resources.
3
We offer employers a broad range of commercial managed care products that vary with respect to the level of benefits provided, the costs paid by employers and members, and our members’ access to providers without referral or preauthorization requirements. We offer underwritten or “risk” products, including health maintenance organizations (“HMO”s), preferred provider organizations (“PPO”s) and point of service (“POS”) plans. In addition, we recently began offering defined contribution health plans. Our risk products also include state–sponsored managed Medicaid programs and Medicare+Choice programs in selected markets where we believe we can achieve profitable growth based upon favorable reimbursement levels, provider costs and regulatory climates. For our risk products, we receive premiums in exchange for assuming underwriting risks and performing sales, marketing and administrative functions. We also offer “non–risk” products to employers that self–insure employee health benefits. The management services we provide typically include provider contracting, claims processing, utilization review and quality assurance. For our non–risk products, we receive fees for access to our provider networks and the management services we provide, but we do not have underwriting risk.
We operate health plans with strong competitive positions in most of our markets. Based on the number of HMO members enrolled in our health plans as of January 1, 2001, we believe our health plans rank among the top two in six of our 12 markets and among the top three in eight of our markets. We believe our local focus enables us to compete effectively with large national competitors that operate in the markets we serve, and our management expertise, resources and economies of scale give us a competitive advantage over small, local market health plans. We believe the combination of our local strengths and our resources as a large company makes our plans attractive to employers and members, and thereby enhances our competitive positions in the markets in which we operate. We believe our strong market positions enable us to negotiate competitive contracts with providers and realize operating efficiencies.
The managed care industry continues to be highly fragmented, with approximately 560 health plans in operation in the United States during 2000. Our strategy is to acquire plans that we believe will benefit from our management expertise and provide opportunities for improved operations and cost savings through our management practices and economies of scale. During the last several years, we have acquired under–performing plans at attractive valuations relative to plans with superior operating performance. We believe that there will be additional acquisition opportunities in the future as a result of the continued consolidation of the managed care industry and the increasing difficulties that small, local plans will face in competing with larger companies that have greater access to capital, superior information systems, lower administrative costs and more effective medical management techniques and management practices. We intend to continue to pursue acquisitions in our existing markets and in new markets as attractive opportunities arise.
We typically have acquired health plans with poor operating performance. Following each acquisition, we undertake an extensive review of the rates, cost structure, provider arrangements and medical management practices of the acquired plan. Generally, we have been able to improve the operating margins of our acquired plans within six to 24 months after we have completed the acquisition through strict pricing discipline, improved provider arrangements, more effective medical management techniques and reductions in overhead costs resulting from operating efficiencies and our economies of scale. We believe that we can continue to improve the operating margins at our recently acquired plans as well as our other plans through continued pricing discipline, improvements in medical management techniques and additional operating efficiencies and economies of scale.
4
As of December 31, 2001, we had 1,522,198 members for whom we assume underwriting risk (“risk members”) and 318,528 members of self–insured employers for whom we provide management services but do not assume underwriting risk (“non–risk members”). The following tables show the total number of members as of December 31, 2001 and 2000 and the percentage change in membership between these dates.
| December 31, | Percent | ||
| 2001 | 2000 | Change | |
| Membership by market: | |||
| Carolinas | 97,508 | 170,706 | (42.9%) |
| Delaware | 156,547 | 144,130 | 8.6% |
| Georgia | 55,188 | 46,774 | 18.0% |
| Iowa | 90,741 | 84,834 | 7.0% |
| Kansas City | 144,210 | 85,934 | 67.8% |
| Louisiana | 59,529 | 59,903 | (0.6%) |
| Nebraska | 43,466 | 36,713 | 18.4% |
| Pennsylvania | 516,755 | 502,621 | 2.8% |
| St. Louis | 382,712 | 368,684 | 3.8% |
| Virginia | 162,159 | 58,688 | 176.3% |
| West Virginia | 88,990 | 110,289 | (19.3%) |
| Wichita | 42,921 | 43,758 | (1.9%) |
| Total membership | 1,840,726 | 1,713,034 | 7.5% |
| December 31, | Percent | ||
| 2001 | 2000 | Change | |
| Risk membership: | |||
| Commercial | 1,210,739 | 1,170,239 | 3.5% |
| Medicare | 53,543 | 71,967 | (25.6%) |
| Medicaid | 257,916 | 194,412 | 32.7% |
| Total risk membership | 1,522,198 | 1,436,618 | 6.0% |
| Non–risk membership | 318,528 | 276,416 | 15.2% |
| Total membership | 1,840,726 | 1,713,034 | 7.5% |
5
We offer employers a full range of commercial risk products, including HMO, PPO and POS products. Recently, we also began offering defined contribution health plans pursuant to which employers pay for all or a portion of the health care plan premiums and contribute a fixed amount toward the employee’s out–of–pocket health benefit costs. The employee can use the employer contribution to pay copayments, deductibles or the cost of certain non–covered benefits.
We design our products to meet the needs and objectives of a wide range of employers and members and to comply with the regulatory requirements in the markets in which we operate. Our products vary with respect to the level of benefits provided, the costs to be paid by employers and members, including deductibles and copayments, and our members’ access to providers without referral or preauthorization requirements. We had 1,210,739 commercial members that accounted for $2.3 billion in annual revenue, as of December 31, 2001.
Our HMO products provide comprehensive health care benefits to members, including ambulatory and inpatient physician services, hospitalization, pharmacy, dental, optical, mental health, and ancillary diagnostic and therapeutic services. In general, a fixed monthly membership fee covers all HMO services although some benefit plans require co–payments or deductibles in addition to the basic membership fee. 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.
Our PPO and POS products also provide comprehensive managed health care benefits to members, but allow members to choose their health care providers at the time medical services are required and allow members to use providers that do not participate in our managed care networks. If a member chooses a non–participating provider, deductibles, copayments and other out–of–pocket costs to the member generally are higher than if the member chooses a participating provider. 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.
We had six Medicare+Choice contracts in seven states covering 53,543 members, and accounting for $352.1 million in annual revenue, as of December 31, 2001. Under the Medicare+Choice contracts the Company receives a county–specific fixed premium per member per month from the Centers for Medicare and Medicaid Services, formerly known as the U.S. Health Care Financing Administration. This premium reflects certain county–specific demographics of the Medicare population of each region. Ten percent of the Centers for Medicare and Medicaid Services’ premium is based on individually determined health risk adjusters in 2001 and again in 2002. The average rate of increase in the Centers for Medicare and Medicaid Services’ rates in 2001 was 3.0%. This includes a 2.0% statutory increase as of January 1, 2001 and an additional 1.0% increase in March 2001 under the Benefit Improvement and Protection Act of 2000. The Benefit Improvement and Protection Act increase was used to improve benefits and stabilize the Company’s provider contracts.
During 2001, we significantly increased member premiums in the St. Louis market, which was the primary reason for a 54.7% membership loss in that market. In February 2001, we sold our Louisiana Medicare business with approximately 800 members. In April 2001, we acquired approximately 5,000 members in our Kansas City market through the acquisition of Kaiser – KC. Effective December 31, 2000, we closed our Iowa Medicare Cost contract and withdrew from the Iowa market.
6
We offer health care coverage to Medicaid recipients in seven states covering 257,916 members, and accounting for $383.1 million in annual revenue, as of December 31, 2001. The Medicaid Management Care agreement is a contract with each individual state. 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.
During 2001, our Medicaid membership grew 32.7% and revenue increased 30.4%. Medicaid members in the St. Louis, Delaware and Pennsylvania markets represent 85.1% of the total Medicaid membership.
We offer management services and access to our provider networks to employers that self–insure their employee health benefits. These management services accounted for $64.4 million for the year ended December 31, 2001. The management services we provide typically include provider contracting, claims processing, utilization review and quality assurance. We typically provide these management services for a fixed fee, but certain of our management services contracts provide that our fees are based, in part, upon certain performance and utilization management standards. We also offer a product to third–party payors under which we provide access to our provider networks for their employees, as well as the benefits of our provider pricing arrangements and claims repricing and utilization review services. We do not have any underwriting risk for these services.
Our health plans maintain provider networks that furnish health care services through contractual arrangements with physicians, hospitals and other health care providers, rather than providing reimbursement to the member for the charges of such providers. Because the health plans receive the same amount of revenue from their members regardless of the cost of healthcare services provided, they must manage both the utilization of services and the unit cost of the services.
All of our health plans currently offer an open panel delivery system. In an open panel structure, 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.
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 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 agreements 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. To the extent that the respective provider organization faces financial difficulties or otherwise is unable to perform its obligations under the global capitation agreements, we, who are responsible for the coverage of our members pursuant to our customer agreements, will be required to perform such obligations, and may have to incur costs in doing so in excess of the amounts we would otherwise have to pay under the global capitation agreements.
Most contracted primary care and specialist physicians are compensated under a discounted fee–for–service arrangement. The majority of our contracts with hospitals provide for inpatient per diem or per case hospital rates. Outpatient services are contracted on a discounted fee–for–service or a per case basis. We pay ancillary providers on a fixed fee schedule or a capitation basis. Prescription drug benefits are provided through a formulary comprised of an extensive list of drugs. Drug prices are negotiated through a national network of pharmacies at discounted rates.
7
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 providing appropriate care for their members and improving patient outcomes in a cost efficient manner. Our corporate office monitors the medical management policies of our plans and assists our plans in implementing disease management programs, quality assurance programs and other medical management tools. In addition, our health plans 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 review all new medical technologies in advance to ensure that only safe and effective new medical procedures are used. We regularly conduct studies to discover possible adverse medical outcomes for both quality and risk management purposes.
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, help to ensure compliance with recommended therapies and 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.
Each of our health plans either employs or contracts with physicians as medical directors who oversee the delivery of medical services. The medical directors supervise medical managers who review and approve 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 review 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 by each health plan and presented to the health plan’s physicians. The medical directors monitor these results in an attempt to ensure the use of cost–effective, medically appropriate services.
We also focus on the satisfaction of our members. We monitor appointment availability, member–waiting times, provider environments and overall member satisfaction. Our health plans continually conduct membership surveys of both existing and former members concerning the quality of services furnished and suggestions for improvement.
We believe that integrated and reliable information technology systems are critical to our success. We use our information systems to improve the operating efficiency of our health plans, collect data that we use in connection with medical management, underwriting and quality assurance decisions and improve communication with our employer customers, members and providers. We use standardized information systems at each of our health plans for processing eligibility, enrollment, premium billing and claims data and for general ledger, financial reporting and human resources functions. We have dedicated in–house teams that convert acquired health plans to our information systems as soon as possible following the closing of the acquisition.
We operate a main data center in Cranberry, Pennsylvania that houses all of our mainframe and network servers. Our data center collects information from our health plans that we use in medical management and to make decisions regarding underwriting, product pricing, quality assurance, sales and marketing and contracting functions.
8
Our information technology systems also enable us to use the Internet and electronic commerce to communicate with members, providers and employers. We provide on–line health care directory services that make information about our health plan providers available to all members. In addition, we currently are completing the rollout of a secure web–based transaction services system for our health plans that will enable members to:
These services are available seven days a week, twenty–four hours a day and enable members to more easily handle many issues that we have historically managed via telephone or written communication. Our website also provides links to other health care and medical information. We also provide a list of approved pharmaceuticals on–line and intend to install a searchable pharmacy locator.
We currently are implementing web–based services to manage the electronic submission and processing of eligibility determination, authorization submission and status, claims submission and status and reporting. We expect to achieve some administrative savings from expanded real–time transaction processing, as well as enhanced communication with our providers and increased provider satisfaction. We currently provide these services in five of our largest markets and expect to provide these services in our remaining markets in the remainder of 2002.
We also are continuing to automate the sales and enrollment process for our small group insurance market. We are implementing a web–based application that streamlines the end–to–end process of quoting, enrollment, underwriting, processing member data and renewal for employee benefits providers, their sales representatives, agents and customers. We currently provide this product in three of our largest markets and expect to begin making it available in our remaining markets in the remainder of 2002. We also provide employer services that enable employers to view roster, billing and eligibility information on–line. This service enables them to reconcile billing statements and verify eligibility without a telephone call.
The Health Insurance Portability and Accountability Act of 1996 imposes new requirements relating to, among other things, the standardization of certain electronic codes and provider identifiers. We have completed a company–wide assessment of our information technology systems and the flow of health care data and information within our company. We have also reviewed the ways that information is accessed by or shared with third parties. We are updating our information technology systems and organizational practices, and we expect our systems and processes to be compliant with the new requirements by the mandatory compliance date.
Our health plans market commercial HMO, POS and PPO products to employer group purchasers on both a fully insured and self–funded basis. Among small and medium size employers, our commercial products are most commonly offered on an exclusive basis. In the large group segment, our products may be made available to employees as one option among multiple carriers. In all size segments, employers generally pay all or part of their employees’ health care premiums, and virtually all employer group contracts renew annually.
To respond to market demand in all size segments, our health plans have expanded the number of lower cost product options made available to group purchasers. We have also launched a consumer–directed care program, HealthAssurance Flex, a product that promotes increased employee cost sharing and choice, and features a pre–funded debit card to help pay for eligible health care expenses.
We market our managed care products and services through our own direct sales staff of approximately 400 employees and a network of more than 2,400 independent brokers and agents. Our local direct sales staff and independent brokers and agents market our health plans to recruit new employer customers and members and retain our existing employer customers and members. We compensate our direct sales staff through a combination of base salary and incentive arrangements. We compensate our independent brokers and agents on a commission basis.
9
Our direct sales staff and independent brokers and agents typically market our managed care products and services to employers in a two–step process in which presentations are made first to employers to secure contracts to provide health benefits. Once selected by an employer, our direct sales staff solicits members from the employee base during periodic “open enrollments” during which employees are permitted to change health care programs. We use workplace presentations, direct mail and radio and television advertisements to contact prospective members.
Our Medicaid products are marketed to Medicaid recipients by state Medicaid authorities. We market our Medicare+Choice products to both individuals and retirees of employer groups that provide benefits to retirees through television, radio, newspaper and billboard advertising and direct mail. Our Medicaid and Medicare+Choice contracts are renewable annually. Medicare enrollees may disenroll monthly. Medicaid enrollees may disenroll monthly or annually, depending on the jurisdiction.
Our commercial business is diversified across a large customer base and there are no commercial groups that make up 10% or more of our consolidated revenue. We received 11.4% of our consolidated revenues in 2001 from our Medicare programs throughout our various markets.
The managed care industry is highly competitive, both nationally and in the individual markets we serve. Generally, we compete against Blue Cross Blue Shield affiliated health plans, locally–owned plans and provider sponsored plans. In certain markets, we also compete with national health plans. We compete for members primarily on the basis of the price of the benefit plans offered, locations of the health care providers, reputation for quality care, 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 maintain an active presence in the communities served by our health plans through participation in health fairs, special children’s programs and other community activities, which we believe enhances our visibility and reputation in the communities we serve.
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.
The states served by our health plans provide the principal legal and regulatory framework for the commercial risk products offered by our insurance company and HMO subsidiaries. Our insurance company subsidiary, 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 offer traditional indemnity insurance.
CH&L and the HMO subsidiaries are required by state law to file periodic reports and meet certain minimum capital and deposit and/or reserve requirements and may be restricted from paying dividends or making other distributions or payments under certain circumstances. They also are required to provide their members with certain mandated benefits. The 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. Several states impose requirements with respect to the prompt payment of claims and provider selection permitting “any willing provider” to join our network. Compliance with “any willing provider” laws could increase our costs of assembling and administering provider networks.
10
We also are subject to the insurance holding company regulations in the states in which the insurance company and HMO 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 or to guarantee the solvency of such subsidiaries.
Most states now impose risk–based or other net worth–based capital requirements on our insurance company and HMO subsidiaries. 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.
The Health Insurance Portability and Accountability Act of 1996 imposes new requirements relating to a variety of issues that affect the Company’s business, including the privacy of medical information, limits on exclusions based on preexisting conditions for certain plans, guaranteed renewability of health care coverage for most employers and individuals and administrative simplification procedures involving the standardization of transactions and the establishment of uniform health care provider, payor and employer identifiers. Various agencies of the federal government have issued regulations to implement certain sections of this act. This law is far reaching and complex, and proper interpretation and practice under the law continues to evolve. Because the rules implementing this law are still evolving, we cannot assure you that the costs of compliance with this law will not adversely affect our results of operations or cause us to significantly change the way we operate our business.
On December 20, 2000, the Department of Health and Human Services released a final rule regarding standards for privacy of individually identifiable health information. The primary purposes of the final rule are to protect and enhance the rights of consumers by providing them access to their health information and controlling the inappropriate use of that information, and to improve the efficiency and effectiveness of health care delivery by creating a national framework for health privacy protection that builds on efforts by states, health systems, individual organizations and individuals. The final rule was effective April 2001. Health plans, providers and health care clearinghouses have until April 14, 2003 to come into compliance with the final rule. We have instituted a process to ensure our compliance with the final rule by that date.
The Department of Health and Human Services published a proposed rule containing security standards in August 1998. A final security rule has not been published, but the proposed rule would require health plans, providers and health care clearinghouses to implement organizational and technical practices to protect the security of electronically maintained or transmitted health–related information. We cannot predict the final form that the security rule will take or the impact that the final rule will have on us.
The Department of Health and Human Services also released its final rule for electronic data standards under the Health Insurance Portability and Accountability Act of 1996 on August 17, 2000, effective October 17, 2000. This rule establishes the standard data content and format for the electronic submission of claims and other administrative health transactions. Compliance with these regulations is required by October 16, 2002. Recently enacted legislation would extend the compliance date until October 16, 2003 for entities that file a plan with the Department of Health and Human Services that demonstrates how they intend to comply with the regulations by the extended deadline. We have instituted a process to ensure our compliance with the final rule by the mandatory compliance date.
11
On January 5, 2001, the U.S. Department of Labor’s Pension and Welfare Benefits Administration, the Internal Revenue Service and the Department of Health and Human Services issued two regulations that provide guidance on the nondiscrimination provisions under the Health Insurance Portability and Accountability Act of 1996 as they relate to health factors and wellness programs. These nondiscrimination provisions prohibit a group health plan or group health insurance issuer from denying an individual eligibility for benefits or charging an individual a higher premium based on a health factor. We currently do not believe that these regulations will have a material adverse effect on our business.
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. 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.
On November 21, 2000, the U.S. Department of Labor issued a final rule relating to benefit claims and appeal procedures for plans under ERISA, disability plans and other employee benefit plans. The rule shortens the time allowed for health and disability plans to respond to claims and appeals, establishes new requirements for plan responses to appeals and expands required disclosures to participants and beneficiaries. The rule applies to claims filed under a group health plan on or after the first day of the first plan year beginning on or after July 1, 2002 and not later than January 1, 2003. We have instituted a process to ensure our compliance with the rule by the mandatory compliance date. We currently do not believe that the rule will have a material adverse effect on our business.
Some of our HMOs contract with the Centers for Medicare and Medicaid Services to provide services to Medicare beneficiaries pursuant to the Medicare+Choice program. Some of our HMOs also contract with states to provide health benefits to Medicaid recipients. As a result, we are subject to extensive federal and state regulation. The Centers for Medicare and Medicaid Services may audit any health plan operating under a Medicare+Choice contract to determine the plan’s compliance with federal regulations and contractual obligations. In addition, we must file cost reimbursement reports for the Medicare cost contracts, which are subject to audit and revision.
As a result of the Medicare+Choice and Medicaid products we offer, we are subject to regulatory and legislative changes in those two government programs. The Balanced Budget Refinement Act of 1999 was enacted on November 29, 1999. This law modifies the Balanced Budget Act of 1997, which had made substantial revisions to the Medicare and Medicaid programs. Specifically, the Balanced Budget Refinement Act of 1999 revised the enrollment rules and risk adjustment methodology of the Medicare+Choice Program. Additionally, this law offers limited incentives to health plans to offer Medicare+Choice plans in areas which currently do not have Medicare+Choice plans. The Balanced Budget Refinement Act of 1999 also allows Medicare+Choice plans greater flexibility in structuring benefit packages for enrollees in the same service area. At this time, we do not believe that the Balanced Budget Refinement Act of 1999 will have a material effect on our operations.
The United States Congress enacted the Benefit Improvement and Protection Act of 2000 in December 2000. This law increases Medicare and Medicaid provider payments and enhances the benefit package for Medicare beneficiaries. The increased payment amounts were effective March 1, 2001. These amounts may only be used by Medicare+Choice plans to increase funds to reduce beneficiary premiums or copayments, enhance benefits, stabilize or widen the network of health care providers available to beneficiaries or reserve funds to help offset premium increases or reduced benefits in the future. At this time, management does not believe that the Benefit Improvement and Protection Act of 2000 will have a material effect on our operations.
12
The Centers for Medicare and Medicaid Services and the appropriate state regulatory agency have the right to audit any health plan operating under a Medicaid managed care contract to determine the plan’s compliance with state and federal law. In some instances, states engage peer review organizations to perform quality assurance and utilization review oversight of Medicaid managed care plans. Our HMOs are required to abide by the peer review organizations standards.
The Centers for Medicare and Medicaid Services issued a final Medicaid managed care rule on January 19, 2001. The final rule includes strengthened beneficiary protections and new provisions designed to protect the rights of participants in the Medicaid program. Specifically, the final rule requires states to assure continuous access to care for beneficiaries with ongoing health care needs who transfer from one health plan to another. The new rule also requires states and plans to identify enrollees with special health care needs and to assess the quality and appropriateness of their care. We currently do not believe that the rule will have a material adverse effect on our business.
The Social Security Act 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 Federal Employees Health Benefits Programs (“FEHBP”). 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 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.
In 1996, as part of the Health Insurance Portability and Accountability Act of 1996, Congress adopted a statutory exception for certain risk–sharing arrangements. The Office of the Inspector General has published two safe harbors addressing these risk–sharing arrangements. 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 HMOs to Medicare and Medicaid beneficiaries and the discounts our plans receive from contracting health care providers should satisfy the requirements of these safe harbor regulations. 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 arrangements do not violate the federal or similar state anti–kickback laws.
We contract with the United States Office of Personnel Management (“OPM”) to provide managed health care services under the FEHBP. These contracts with the OPM and applicable government regulations establish premium rating requirements for this program. The OPM conducts periodic audits of its contractors to, among other things, verify that the premiums established under its contracts are in compliance with the community rating and other requirements under the FEHBP. The OPM may seek premium refunds or institute other sanctions against health plans that participate in the program. As a result, these audits could result in material adjustments.
HealthAmerica Pennsylvania, Inc., our Pennsylvania HMO subsidiary, has received draft audit reports from the OPM that questioned subscription charges paid to HealthAmerica under the FEHBP. The draft audit reports questioned approximately $31.1 million of subscription charges paid to HealthAmerica with respect to contract years 1993 through 1999 as possibly constituting overcharges resulting from defective pricing in violation of HealthAmerica’s FEHBP contract. The reports also recommend that if these amounts are deemed to be due, approximately $5.5 million in lost investment income charges should also be recovered with respect to such overcharges, with additional interest continuing to accrue until repayment of the overcharged amounts. HealthAmerica responded to the draft audit reports in May 2000 and August 2000, accepting certain of the draft audit reports’ recommendations but disagreeing with others. In August 2001, the U.S. Attorney for the District of Columbia sent HealthAmerica a letter indicating that the audit reports had been referred to the Office of the U.S. Attorney for consideration of a possible civil action against HealthAmerica under the Federal False Claims Act with respect to the FEHBP contract years 1993 through 1997. The letter stated that HealthAmerica may have knowingly overcharged the FEHBP approximately $21.1 million as a result of alleged discounts provided to other groups that also should have been provided for the FEHBP. In the event of such an overcharging, the letter also stated that HealthAmerica would be responsible for an additional approximately $5.9 million in interest through December 31, 2000 with further interest accruing to the date of repayment. Violations of the Federal False Claims Act could subject HealthAmerica to liability for civil penalties and treble damages. Since receipt of the letter from the U.S. Attorney, HealthAmerica has responded to the letter and provided supplemental information in support of its position. The pending inquiry may be resolved by agreement with the Office of the U.S. Attorney or the OPM with a payment to the government. If an agreement is not reached, the U.S. Attorney or the OPM may commence a legal action against HealthAmerica. Although we cannot predict the ultimate outcome of the pending inquiry or any related litigation that may arise in this matter, management does not believe that the ultimate resolution of this matter will have a material adverse effect on our business or results of operations.
13
On August 8, 2001, the House of Representatives passed a version of the Patients’ Bill of Rights legislation (an amended version of the Ganske–Dingell bill) that would permit health plans to be sued in state court for coverage determinations. The current administration has indicated a willingness to pass some form of patient protection legislation which could adversely affect the health benefits business, and the bill adopted by the House was the result of a compromise reached by President Bush and Representative Charles Norwood of Georgia. Under the bill, a claim would be permitted for a wrongful coverage denial that is the proximate cause of personal injury to, or the death of, a patient. Medically reviewable claims against health insurers would be tried in state court but under federal law. Patients would be required to exhaust external review before filing suit. Patients who lose an external review decision would have to overcome a rebuttable presumption that the insurer made the correct decision. The bill caps non–economic damages at $1.5 million. Punitive damages would be available only if insurers do not follow an external review decision and would be capped at an additional $1.5 million. The bill also limits class action lawsuits (both future suits and pending suits where a class has not yet been certified) against health insurers under both ERISA and the Racketeer Influenced and Corrupt Organizations Act (“RICO”) to group health plans established by a single plan sponsor.
The Senate version of the Patients’ Bill of Rights legislation (the McCain–Edwards bill) was passed on June 29, 2001 and contains broader liability provisions than the House bill. The Senate bill would permit patients to sue health plans in state court over medical judgments or in federal court over contractual issues, and it would not cap damages in state courts. In federal court, punitive damages would be allowed, up to $5.0 million, and there would be no limit on economic and non–economic damages. President Bush has stated that he will veto any Patients’ Bill of Rights legislation that contains liability provisions similar to the Senate bill. The House and Senate versions of the bill are expected to be reconciled in the Conference Committee. We cannot predict the provisions of the Patients’ Rights legislation that may emerge from the Conference Committee, if any, and whether any Patients’ Bill of Rights legislation will be enacted into law. We also cannot predict what impact any Patients’ Bill of Rights or other federal legislation would have on our business and operations.
Numerous other proposals have been introduced in the United States Congress and various state legislatures relating to managed health care reform. The provisions of legislation that may be adopted at the state level cannot be accurately and completely predicted at this time, and we therefore cannot predict the effect on our operations of proposed legislation. On the federal level, we expect that some form of managed health care reform may be enacted. 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 the proposed legislation or any other legislation that may be adopted.
We maintain general liability and professional liability insurance coverage in amounts that we believe is appropriate. Until recently, we also maintained medical excess “stop–loss” reinsurance coverage covering a portion of the medical risk we had underwritten through our risk products. We no longer maintain “stop–loss” reinsurance coverage because we do not believe it is cost efficient to maintain it in light of current conditions in the insurance market.
At March 11, 2002, we employed approximately 3,242 persons, none of whom are covered by a collective bargaining agreement.
14
We began operations in 1987 with the acquisition of the American Service Companies entities, including Coventry Health and Life Insurance Company (“CH&L”). We have grown substantially through acquisitions. The table below summarizes all of our acquisitions. See Note B to the consolidated financial statements for additional information on the most recent acquisitions.
| Acquisition | Location | Type of Business | Year Acquired |
| American Service Company (“ASC”) entities | Multiple Markets | Multiple Products | 1987 |
| HealthAmerica Pennsylvania, Inc. (“HAPA”) | Pennsylvania | HMO | 1988 |
| Group Health Plan, Inc. (“GHP”) | St. Louis, Missouri | HMO | 1990 |
| Southern Health Services, Inc. (“SHS”) | Richmond, Virginia | HMO | 1994 |
| HealthCare USA, Inc. (“HCUSA”) | Multiple Markets | Medicaid | 1995 |
| Principal Health Care, Inc. (“PHC”) | Multiple Markets | HMO | 1998 |
| Carelink Health Plans (“Carelink”) | West Virginia | HMO | 1999 |
| Kaiser Foundation Health Plan of North Carolina (“Kaiser – NC”) | North Carolina | HMO | 1999 |
| PrimeONE, Inc. (“PrimeONE”) | West Virginia | HMO | 2000 |
| Maxicare Louisiana, Inc. (“Maxicare”) | Louisiana | HMO | 2000 |
| WellPath Community Health Plans (“WellPath”) | North Carolina | HMO | 2000 |
| Prudential Health Care Plan, Inc. (“Prudential”) | St. Louis, Missouri | Medicaid | 2000 |
| Blue Ridge Health Alliance, Inc. (“Blue Ridge”) | Charlottesville, Virginia | HMO | 2001 |
| Health Partners of the Midwest (“Health Partners”) | St. Louis, Missouri | HMO | 2001 |
| Kaiser Foundation Health Plan of Kansas City, Inc. (“Kaiser – KC”) | Kansas City, Missouri | HMO | 2001 |
We have the right in perpetuity to use the federally registered name “HealthAmerica” in Illinois, Missouri, Pennsylvania and West Virginia and “HealthCare USA” in Missouri, Illinois, Kansas and Florida. We have federal and/or state registered service marks for “Advantra,” “Carelink,” “Carelink Health Plans” logos, “CareNet,” “CarePlus,” “Coventry,” “Doc Bear,” “GHP,” “GHP” logo, “GHP Network Connection,” “HealthAssurance,” “HealthCare Preferred,” “It’s That Simple,” “Sensicare,” “SouthCare Medical Alliance” logo, sun design logo, “WellPath Select,” “WellPath 65,” “WellPath Community Health Plans” and for our torch logo design. We have pending applications for federal registration of the service marks “HealthAssurance FLEX,” “Coventry Healthy Choices Program,” “Senior Life Management,” “SouthCare,” and “NurseAccess.”
15
The following table sets forth information with respect to the current executive officers of our Company:
| Name | Age | Position |
| Allen F. Wise | 59 | President, Chief Executive Officer and Director |
| Thomas P. McDonough | 53 | Executive Vice President and Chief Operating Officer |
| Dale B. Wolf | 47 | Executive Vice President, Chief Financial Officer and Treasurer |
| Ronald M. Chaffin | 45 | Senior Vice President |
| Thomas A. Davis | 41 | Senior Vice President |
| Harvey C. DeMovick, Jr. | 55 | Senior Vice President, Customer Service Operations and Chief Information Officer |
| Davina C. Lane | 55 | Senior Vice President |
| J. Stewart Lavelle | 48 | Senior Vice President, Sales and Marketing |
| Bernard J. Mansheim, M.D. | 55 | Senior Vice President and Chief Medical Officer |
| James E. McGarry | 43 | Senior Vice President |
| John J. Ruhlmann | 39 | Vice President and Corporate Controller |
| Francis S. Soistman, Jr. | 45 | Senior Vice President |
| Janet M. Stallmeyer | 53 | Senior Vice President |
| Charles R. Stark | 57 | Senior Vice President |
| Thomas C. Zielinski | 51 | Senior Vice President and General Counsel |
Allen F. Wise has been a director and President and Chief Executive Officer of our Company since March 1998. He was a director and President and Chief Executive Officer of Coventry Corporation, our predecessor in interest, from October 1996 to June 2000. From October 1994 to October 1995, he was Executive Vice President of MetraHealth Companies, Inc., a managed health care company that was acquired by UnitedHealth Group, Incorporated in October 1995. From October 1995 to October 1996, he was Executive Vice President of UnitedHealth Group, Incorporated. From January 1994 to October 1994, he was President and Chief Executive Officer of Wise Health System, a health care investment company. From 1991 to 1994, Mr. Wise was President and Chief Executive Officer of Keystone Health Plan, a managed health care company, and also Chief Operating Officer of Independence Blue Cross, a health care insurance company. He is a director of NCO Group, Inc., a provider of accounts receivable management and other outsourced services.
Thomas P. McDonough was elected Executive Vice President of our Company in April 1998 and Chief Operating Officer in July 1998. Prior to joining us in April 1998, he was with Uniprise of UnitedHealth Group, Incorporated, and served as its Chief Executive Officer from November 1997 until he joined our company; Executive Vice President, Customer Services Group from February 1997 to November 1997; and Senior Vice President, Claim Services from August 1995 through February 1997. Prior to 1995, he was the President of Harrington Service Corporation, an insurance services company, and the Chief Operating Officer of Jardine Group Services Corporation, an insurance brokerage company and third party administrator.
Dale B. Wolf was elected Executive Vice President, Chief Financial Officer and Treasurer of our Company in April 1998. He was Senior Vice President, Chief Financial Officer and Treasurer of Coventry Corporation from December 1996 to June 2000. From August 1995 to December 1996, he was Executive Vice President of SpectraScan Health Services, Inc., a women’s health care services company. From January 1995 to August 1995, Mr. Wolf was Senior Vice President, Business Development of MetraHealth Companies, Inc. From August 1988 to December 1994, Mr. Wolf was Vice President, Specialty Operations of the Managed Care and Employee Benefits Operations of The Travelers, an insurance company.
16
Ronald M. Chaffin was elected Senior Vice President of our Company in April 1998 and President and Chief Executive Officer of Coventry Health Care of Delaware, Inc., our Delaware health plan, in December 1998. Prior to that time, he was a Regional Vice President of one of Principal’s subsidiaries from 1995 to April 1998. From 1994 to 1995, he was Executive Director of Principal Health Care of Nebraska, Inc., a wholly owned subsidiary of one of Principal’s subsidiaries. From 1992 to 1994, Mr. Chaffin was Vice President, Operations, of HealthMark Health Plan, a managed care company.
Thomas A. Davis was elected Senior Vice President of our Company in April 1998 and President and Chief Executive Officer of Coventry Health Care of Georgia, Inc., our Georgia health plan, in May 1998. Prior to that time, he was the Chief Executive Officer of UnitedHealth Group’s Utah operations from 1996 to 1998. From 1995 to 1996, Mr. Davis was Vice President, Operations, of MetraHealth Companies, Inc. From 1992 to 1994, he was Director, HMO Operations, of Prudential Health Care System. Prior to 1992, Mr. Davis held various positions in health care venture capital and management consulting firms.
Harvey C. DeMovick, Jr. was elected Senior Vice President of our Company in April 1998. He has served as our Chief Information Officer since April 2001 and as our Senior Vice President, Customer Service Operations since September 2001. From April 2001 to September 2001, he served as our Senior Vice President, Organizational Development, Human Resources and Compliance. From April 1998 to April 2001, he was Senior Vice President, Government Programs, Compliance, Information Systems and Human Resources of our Company. He was Senior Vice President, Medical and Government Programs of Coventry Corporation from July 1997 to April 1998. From October 1995 to July 1997, Mr. DeMovick was Senior Vice President, Customer Administrative Services, of UnitedHealth Group, Incorporated, and from October 1994 through October 1995 he was Vice President, Managed Care Operations, of MetraHealth Companies, Inc.
Davina C. Lane was elected Senior Vice President of our Company in April 1999. She was elected President and Chief Executive Officer of HealthCare USA of Missouri, LLC, one of our Missouri health plans, in October 2001. She served as President and Chief Executive Officer of Group Health Plan, Inc., one of our Missouri health plans, from April 1999 to October 2001. She was Vice President of Coventry Corporation from July 1997 to April 1998. She was the President and Chief Executive Officer of HealthCare USA, Inc. and its subsidiaries, our Medicaid operations, from August 1996 to April 1999. From April 1993 to August 1996, she was Vice President of Marketing and Contracting of Healthcare Practice Enhancement Network, Inc., a company that provides services to payors and providers in the health care industry.
J. Stewart Lavelle was elected Senior Vice President, Sales and Marketing, of our Company in April 1998. He was the Chief Executive Officer of Southern Health Services, our Virginia health plan, from January 1998 to December 1999. From 1996 to November 1997, Mr. Lavelle was President of Riscorp Health Plans, a managed health care company. He joined U.S. Healthcare, Inc. in 1987 and served as Senior Vice President, General Manager of its New Jersey, Delaware, Maryland, Washington D.C. and Virginia operations from 1991 to 1996.
Bernard J. Mansheim, M.D. was elected Senior Vice President and Chief Medical Officer of our Company in April 1998. From August 1997 to April 1998, he was the Chief Operating Officer of United HealthCare of the Mid–Atlantic and, from August 1996 to July 1997, was its Chief Medical Officer. In April 1995, he became President and Chief Executive Officer of HealthSpring, Inc., a pre–paid, primary care group medical practice and subsidiary of MetraHealth Companies, Inc., and also served as National Medical Director for MetraHealth Companies, Inc. following the acquisition of MetraHealth Companies, Inc. by UnitedHealth Group, Incorporated in October 1995. Dr. Mansheim continued as the President and Chief Executive Officer of HealthSpring, Inc. until its divestiture in August 1996 and also served as National Medical Director of UnitedHealth Group, Incorporated. From July 1994 to April 1995, he was President and Chief Executive Officer of Triangle HealthCare Group and Medical Director of Prudential Health Care System of the Triangle in Raleigh–Durham–Chapel Hill, North Carolina.
17
James E. McGarry was elected Senior Vice President of our Company in July 1998. From November 1997 to July 1998, he was the Chief Operating Officer of Uniprise of UnitedHealth Group, Incorporated. From January 1995 to October 1997, he was Senior Vice President, Consumer Services Administration, of UnitedHealth Group, Incorporated. Prior to 1995, he was Vice President of Field Operations of MetraHealth Companies, Inc. and Vice President of Field Operations for The Travelers, an insurance company.
John J. Ruhlmann was elected Vice President and Corporate Controller of our Company in November 1999. From December 1993 to September 1999, Mr. Ruhlmann was Vice President of Accounting of Integrated Health Services, Inc., a national provider of health services that owns and manages hospitals, nursing homes and clinics.
Francis S. Soistman, Jr. was elected Senior Vice President of our Company in April 1998. He was named President and Chief Executive Officer of HealthAmerica Pennsylvania, Inc. and HealthAssurance Pennsylvania, Inc., our Pennsylvania subsidiaries, in May 1998 and July 2001, respectively. He was Regional Vice President of Principal Health Care, Inc., from December 1994 to March 1998. From April 1994 to December 1994, he was Executive Director of Principal Health Care of the Mid–Atlantic, Inc., a wholly owned managed health care subsidiary of one of Principal’s subsidiaries. From January 1983 until March 1994, Mr. Soistman held various positions with Blue Cross Blue Shield of Maryland and its subsidiary companies.
Janet M. Stallmeyer was elected Senior Vice President of our Company in March 1999. She has been the President and Chief Executive Officer of Coventry Health Care of Kansas, Inc., our Kansas health plan, since October 1998, and its Executive Director from January 1995 to October 1998. From October 1992 to December 1994, she was the Executive Director of our Louisiana health plan, Coventry Health Care of Louisiana, Inc.
Charles R. Stark was elected Senior Vice President of our Company in August 2001 and was named President and Chief Executive Officer of Group Health Plan, Inc., one of our Missouri health plans, in October 2001. He was President and Chief Executive Officer of HealthCare USA of Missouri, LLC, one of our Missouri health plans, from January 2001 to October 2001. From December 1996 to September 1999, he was the President and Chief Executive Officer of Antero Health Plans, a Colorado managed care company. From June 1992 to December 1996, he was President and Chief Executive Officer of Health Direct, an Illinois health care company.
Thomas C. Zielinski was elected Senior Vice President and General Counsel of our Company in August 2001. 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.
As of December 31, 2001, we leased approximately 83,000 square feet of space for our corporate office in Bethesda, Maryland, of which approximately 38% is subleased. We also leased approximately 797,000 aggregate square feet for office space, subsidiary operations and customer service centers in the various markets where our health plans operate, of which approximately 14% is subleased. Our leases expire at various dates from 2002 through 2012. We also own a building in Richmond, Virginia with approximately 45,000 square feet, which is used for administrative services related to our health plan in that market, of which approximately 46% is subleased. We believe that our facilities are adequate for our operations.
In the normal course of business, we have been named as a defendant in various legal actions such as actions seeking payments for claims denied by us, medical malpractice actions, 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, 2001 may result in the assertion of additional claims. With respect to medical malpractice, we carry professional malpractice and general liability insurance for each of our operations on a claims–made basis with varying deductibles for which we maintain reserves. In the opinion of management, the outcome of these actions should not have a material adverse effect on our financial position or results of operations.
18
On April 16, 2001, we were served with an Amended Complaint filed in the United States District Court for the Southern District of Florida, Miami Division, MDL No. 1334, styled In Re: Humana, Inc., Managed Care Litigation, Charles B. Shane, M.D., et al. vs. Humana, Inc., et al. This matter is a purported class action lawsuit filed by a group of health care providers against our Company and 11 other defendants in the managed care field. The lawsuit alleges multiple violations of RICO, violations of the “prompt pay” statutes in certain states and breaches of contract for failure to pay claims. The lawsuit seeks declaratory, injunctive, compensatory and equitable relief as well as restitution, costs, fees and interest payments. Although we cannot predict the outcome, we believe this suit is without merit and intend to defend our position vigorously.
We may be the target of other similar lawsuits involving RICO and the ERISA, generally claiming that managed care companies overcharge consumers and misrepresent that they deliver quality health care. Although we may be the target of other similar lawsuits, we believe there is no valid basis for such lawsuits.
Our industry is heavily regulated and the laws and rules governing the industry and interpretations of those laws and rules are subject to frequent change. Existing or future laws could have a significant effect on our operations.
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year 2001.
19
On May 16, 2001, we began trading our common stock on the national market of the New York Stock Exchange® (NYSE®) under the new ticker symbol “CVH.” Previously, we had been trading on the Nasdaq® stock market under the ticker symbol “CVTY.” The following table sets forth the quarterly range of the high and low closing sales prices of the common stock on the Nasdaq® and 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:
| 2001 | 2000 | |||
| High | Low | High | Low | |
| First Quarter | $ 24.13 | $ 13.75 | $ 9.06 | $ 6.94 |
| Second Quarter | 20.59 | 14.78 | 14.63 | 8.56 |
| Third Quarter | 25.38 | 18.08 | 17.63 | 12.75 |
| Fourth Quarter | 23.19 | 18.29 | 29.19 | 15.00 |
On February 28, 2002, we had approximately 348 shareholders of record, not including beneficial owners of shares held in nominee name. On February 28, 2002, our closing price was $23.06.
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. Our ability to pay dividends is also restricted by insurance regulations applicable to our subsidiaries. Subject to the terms of such insurance regulations, 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.”
20
| December 31, | |||||
| 2001 | 2000 | 1999 | 1998 | 1997 | |
| Operations Statement Data (1) | |||||
| Operating revenues | $ 3,147,245 | $ 2,604,910 | $ 2,162,372 | $ 2,110,383 | $ 1,228,351 |
| Operating earnings (loss) | 91,108 | 62,515 | 47,855 | (36,195) | 5,739 |
| Earnings (loss) before income taxes | 134,682 | 102,068 | 76,000 | (17,510) | 20,344 |
| Net earnings (loss) | 84,407 | 61,340 | 43,435 | (11,741) | 11,903 |
| Basic earnings (loss) per share | 1.30 | 1.03 | 0.74 | (0.22) | 0.36 |
| Diluted earnings (loss) per share | $ 1.24 | $ 0.93 | $ 0.69 | $ (0.22) | $ 0.35 |
| Balance Sheet Data (1) | |||||
| Cash and investments | $ 952,491 | $ 752,450 | $ 614,603 | $ 614,583 | $ 240,091 |
| Total assets | 1,451,273 | 1,239,036 | 1,081,583 | 1,091,228 | 487,182 |
| Medical claims liabilities | 522,854 | 444,887 | 362,786 | 403,822 | 118,022 |
| Long–term liabilities | 10,649 | 6,443 | 10,445 | 88,737 | 109,268 |
| Reedemable convertible preferred stock | — | — | 47,095 | — | — |
| Stockholders’ equity | $ 689,079 | $ 600,430 | $ 480,385 | $ 436,539 | $ 117,818 |
| Operating Data (1) | |||||
| Medical loss ratio (2) | 86.0% | 85.8% | 86.1% | 86.9% | 86.1% |
| Administrative expense ratio | 12.0% | 12.7% | 13.8% | 13.8% | 13.8% |
| Risk membership, continuing operations | 1,522,198 | 1,436,618 | 1,202,304 | 1,139,761 | 765,823 |
| Non–risk membership, continuing operations | 318,528 | 276,416 | 237,635 | 217,523 | 148,910 |
| Basic weighted average shares outstanding | 64,990 | 59,521 | 59,025 | 52,477 | 33,210 |
| Diluted weighted average shares outstanding | 67,875 | 65,757 | 64,159 | 52,477 | 33,912 |
| (1) | Operations Statement Data include the results of operations of acquisitions since the date of acquisition. Balance Sheet Data reflect acquisitions as of December 31, of the year of acquisition. See Note B to the consolidated financial statements for detail on our acquisitions and dispositions. |
| (2) | Medical loss ratio excludes charges and recoveries recorded in 1998, 1999 and 2000. See Note M to the consolidated financial statements for detail on these charges. |
21
The following is a summary of unaudited quarterly results of operations (in thousands, except per share data) for the years ended December 31, 2001 and 2000:
| Quarter Ended | ||||
| March 31, | June 30, | September 30, | December 31, | |
| 2001 (1) | 2001 | 2001 | 2001 | |
| Operating revenues | $ 751,411 | $ 786,699 | $ 794,682 | $ 814,453 |
| Operating earnings | 18,866 | 21,019 | 24,216 | 27,007 |
| Earnings before income taxes | 30,235 | 32,935 | 34,919 | 36,592 |
| Earnings before cumulative effect | 18,591 | 20,418 | 21,650 | 22,870 |
| Net earnings | 19,469 | 20,418 | 21,650 | 22,870 |
| Basic earnings per share before cumulative effect | 0.29 | 0.32 | 0.33 | 0.35 |
| Diluted earnings per share before cumulative effect | 0.27 | 0.30 | 0.32 | 0.34 |
| Basic earnings per share | 0.30 | 0.32 | 0.33 | 0.35 |
| Diluted earnings per share | $ 0.29 | $ 0.30 | $ 0.32 | $ 0.34 |
| Quarter Ended | ||||
| March 31, | June 30, | September 30, | December 31, | |
| 2000 | 2000 | 2000 | 2000 (2) | |
| Operating revenues | $ 617,410 | $ 621,194 | $ 647,617 | $ 718,689 |
| Operating earnings | 11,150 | 12,772 | 14,927 | 23,666 |
| Earnings before income taxes | 20,147 | 22,111 | 25,669 | 34,141 |
| Net earnings | 11,742 | 13,254 | 15,406 | 20,938 |
| Basic earnings per share | 0.20 | 0.23 | 0.26 | 0.34 |
| Diluted earnings per share | $ 0.18 | $ 0.21 | $ 0.23 | $ 0.31 |
| (1) | As a result of adopting SFAS No. 133, we recorded a gain of $0.9 million, net of tax, in the first quarter of 2001 related to one financial instrument classified as derivative in nature. The gain was shown separately as a cumulative effect of a change in accounting principle. |
| (2) | We recorded a gain in the fourth quarter of 2000, which included a $4.1 million settlement from AHERF’s bankruptcy proceedings and a $4.3 million release of our AHERF reserve. |
22
The following discussion should be read in conjunction with the accompanying audited consolidated financial statements and notes thereto.
We are a leading publicly traded managed health care company with approximately 1.84 million members. We operate a diversified portfolio of local market health plans serving 14 states, primarily in the Mid–Atlantic, Midwest and Southeast regions. We offer employers a broad range of commercial managed care products that vary with respect to the level of benefits provided, the costs paid by employers and members, and the extent to which members’ access to providers is subject to referral or preauthorization requirements. We offer underwritte