UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31,
2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
001-31574
AMERIGROUP
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
4425 Corporation Lane, Virginia Beach, Virginia
(Address of principal
executive offices)
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54-1739323
(I.R.S. Employer
Identification No.)
23462
(Zip
Code)
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Registrants telephone number, including area code:
(757) 490-6900
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $.01 par value
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New York Stock Exchange
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
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 the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o (Do
not check if smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2009 the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $1,440,271,080.
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at February 19, 2010
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Common Stock, $.01 par value
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51,089,296
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Documents
Incorporated by Reference
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Document
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Parts Into Which Incorporated
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Proxy Statement for the Annual Meeting of Stockholders
to be held May 13, 2010 (Proxy Statement)
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Part III
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Forward-looking
Statements
This Annual Report on
Form 10-K,
and other information we provide from
time-to-time,
contains certain forward-looking statements as that
term is defined by Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act).
All statements regarding our expected future financial position,
membership, results of operations or cash flows, our continued
performance improvements, our ability to service our debt
obligations and refinance our debt obligations, our ability to
finance growth opportunities, our ability to respond to changes
in government regulations and similar statements including,
without limitation, those containing words such as
believes, anticipates,
expects, may, will,
should, estimates, intends,
plans and other similar expressions are
forward-looking statements.
Forward-looking statements involve known and unknown risks and
uncertainties that may cause our actual results in future
periods to differ materially from those projected or
contemplated in the forward-looking statements as a result of,
but not limited to, the following factors:
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our inability to manage medical costs;
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our inability to operate new products and markets at expected
levels, including, but not limited to, profitability, membership
and targeted service standards;
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local, state and national economic conditions, including their
effect on the premium rate increase process and timing of
payments;
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the effect of government regulations and changes in regulations
governing the healthcare industry;
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changes in Medicaid and Medicare payment levels and
methodologies;
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increased use of services, increased cost of individual
services, pandemics, epidemics, the introduction of new or
costly treatments and technology, new mandated benefits, insured
population characteristics and seasonal changes in the level of
healthcare use;
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our ability to maintain and increase membership levels;
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our ability to enter into new markets or remain in our existing
markets;
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changes in market interest rates or any disruptions in the
credit markets;
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our ability to maintain compliance with all minimum capital
requirements;
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liabilities and other claims asserted against us;
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demographic changes;
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the competitive environment in which we operate;
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the availability and terms of capital to fund acquisitions,
capital improvements and maintain capitalization levels required
by regulatory agencies;
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our ability to attract and retain qualified personnel;
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the unfavorable resolution of new or pending litigation; and
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catastrophes, including acts of terrorism or severe weather.
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Investors should also refer to Item 1A. entitled
Risk Factors for a discussion of risk
factors. Given these risks and uncertainties, we can give no
assurances that any forward-looking statements will, in fact,
transpire and, therefore, caution investors not to place undue
reliance on them.
2
PART I.
Overview
We are a multi-state managed healthcare company focused on
serving people who receive healthcare benefits through publicly
sponsored programs, including Medicaid, Childrens Health
Insurance Program (CHIP), Medicaid expansion
programs and Medicare Advantage. We believe that we are better
qualified and positioned than many of our competitors to meet
the unique needs of our members and the government agencies with
whom we contract because of our focus solely on recipients of
publicly sponsored healthcare, medical management programs and
community-based education and outreach programs. We design our
programs to address the particular needs of our members, for
whom we facilitate access to healthcare benefits pursuant to
agreements with applicable state and Federal government
agencies. We combine medical, social and behavioral health
services to help our members obtain quality healthcare in an
efficient manner. Our success in establishing and maintaining
strong relationships with government agencies, healthcare
providers and our members has enabled us to retain existing
contracts, obtain new contracts and establish and maintain a
leading market position in many of the markets we serve. We
continue to believe that managed healthcare remains the only
proven mechanism that improves health outcomes for our members
while helping our government customers manage the fiscal
viability of their healthcare programs.
We were incorporated in Delaware on December 9, 1994 as
AMERICAID Community Care. Since 1994, we have expanded through
developing new products, entering new markets, negotiating
contracts with various state governments and through the
acquisition of health plans. As of December 31, 2009, we
provided an array of products to approximately 1,788,000 members
in Texas, Georgia, Florida, Tennessee, Maryland, New Jersey,
New York, Nevada, Ohio, Virginia and New Mexico.
Background
Publicly
Sponsored Healthcare in the United States Today
Based on U.S. Census Bureau data and estimates from the
Congressional Budget Office, it is estimated that in 2009 the
United States had a population of approximately 307 million
and approximately $2.5 trillion was spent on healthcare. Of the
total population, approximately 104 million people were
covered by publicly sponsored healthcare programs, with
approximately 45 million people covered by the Federally
funded Medicare program and approximately 59 million people
covered by the joint state and Federally funded Medicaid
program. In 2009, estimated Medicare spending was
$507 billion and estimated Medicaid spending was
$378 billion. Over half of Medicaid funding comes from the
Federal government, with the remainder coming from state
governments. Approximately 46 million Americans were
uninsured in 2008, as of the most recent census data.
According to the Centers for Medicare and Medicaid Services
(CMS), by 2014, Medicaid spending is anticipated to
be approximately $552 billion at its current rate of
growth, with an expectation that spending under the current
programs will approach $1 trillion by 2022. Medicaid continues
to be one of the fastest-growing and largest components of
states budgets. Medicaid spending currently represents
more than 21%, on average, of a states budget and is
growing at an average rate of 8% per year. Medicaid spending has
long surpassed other important state budget line items,
including education, transportation and criminal justice.
Forty-eight states have balanced budget requirements, which
means expenditures cannot exceed revenues. The current
macroeconomic conditions have, and are expected to continue to,
put pressure on state budgets as tax and other revenues decrease
while the Medicaid eligible population increases creating more
need for funding. Funding from the Federal government is subject
to similar budget constraints and therefore any significant
decreases or increases in Federal funding of the Medicaid
program directly impacts state budgets. As Medicaid consumes
more and more of the states limited dollars, states must
either increase their tax revenues or reduce their total costs.
States are limited in their ability to increase their tax
revenues pointing to cost reduction as the more attainable
option. To reduce costs, states can either reduce funds allotted
for Medicaid or spend less on other programs, such as education
or transportation. As the need for these programs has not
abated, state governments must find ways to control rising
Medicaid costs. We believe that the most effective way to
control rising Medicaid costs is through managed care.
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Changing
Dynamics in Medicaid
Historically, traditional Medicaid programs made payments
directly to providers after delivery of care. Under this
approach, recipients received care from disparate sources, as
opposed to being cared for in a systematic way. As a result,
care for routine needs was often accessed through emergency
rooms or not at all.
The delivery of episodic healthcare under the traditional
Medicaid program limited the ability of states to provide
quality care, implement preventive measures and control
healthcare costs. Over the past decade, in response to rising
healthcare costs and in an effort to ensure quality healthcare,
the Federal government has expanded the ability of state
Medicaid agencies to explore, and, in some cases, mandate the
use of managed care for Medicaid beneficiaries. If Medicaid
managed care is not mandatory, individuals entitled to Medicaid
may choose either the traditional Medicaid program or a managed
care plan, if available. According to information published by
CMS, managed care enrollment among Medicaid beneficiaries in
2008 increased to more than 70% of all enrollees. All the
markets in which we currently operate have some form of
state-mandated Medicaid managed care programs in place.
Currently, we believe that there are three continuing trends in
Medicaid. First, certain states have major initiatives underway
in our core business areas reprocurement of the
Temporary Assistance for Needy Families (TANF)
populations currently in managed care, expansions of coverage,
and moving existing populations into managed care for the first
time.
Second, many states are moving to bring the aged, blind and
disabled (ABD) population into managed care. This
population represents approximately 25% of all Medicaid
beneficiaries and approximately 68% of all costs. The majority
of the ABD population is not currently covered by managed care
programs and this population represents significant potential
for managed care growth as states continue to explore how best
to provide health benefits to this population in the most cost
effective manner.
Third, both state and Federal governments are addressing
Medicaid and healthcare reform in an effort to provide coverage
to those who are currently uninsured. As the state and Federal
governments continue to explore solutions for this population,
the opportunity for growth under managed care may be significant.
During 2009, the United States Congress considered a variety of
healthcare reform bills, largely focused on the uninsured. Other
topics of discussion included restrictions and requirements for
health insurance policies, expansion of benefits and the
introduction of maximum lifetime
out-of-pocket
costs for beneficiaries. These proposals have been subject to
extensive debate and identifying funding for any expansion of
benefits through publicly-sponsored programs has proven to be a
challenge. Though we cannot predict the outcome of potential
legislation, if any, we anticipate the subject of healthcare
reform will continue to be debated and that any changes to
existing Medicaid and Medicare programs could have a significant
impact on our business.
Medicaid
Program
Medicaid was established by the 1965 amendments to the Social
Security Act of 1935. The amendments, known collectively as the
Social Security Act of 1965, created a joint Federal-state
program. Medicaid policies for eligibility, services, rates and
payment are complex and vary considerably among states, and the
state policies may change from
time-to-time.
States are also permitted by the Federal government to seek
waivers from certain requirements of the Social Security Act of
1965. Partly due to advances in the commercial healthcare field,
states have been increasingly interested in experimenting with
pilot projects and statewide initiatives to control costs and
expand coverage and have done so under waivers authorized by the
Social Security Act of 1965 and with the approval of the Federal
government. The waivers most relevant to us are the
Section 1915(b) freedom of choice waivers that enable:
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mandating Medicaid enrollment into managed care,
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utilizing a central broker for enrollment into plans,
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using cost savings to provide additional services, and
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limiting the number of providers for additional services.
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Waivers are approved generally for two-year periods and can be
renewed on an ongoing basis if the state applies. A 1915(b)
waiver cannot negatively impact beneficiary access or quality of
care and must be cost-effective. Managed care initiatives may be
state-wide and required for all classes of Medicaid eligible
recipients, or may be limited to service areas and classes of
recipients. All jurisdictions in which we operate have some form
of state-mandated Medicaid managed care programs in place.
However, under the waivers pursuant to which the mandatory
programs have been implemented, there must be at least two
managed care plans from which Medicaid eligible recipients may
choose.
Many states operate under a Section 1115 demonstration
waiver rather than a 1915(b) waiver. This is a more expansive
form of waiver that enables the state to have a Medicaid program
that is broader than typically permitted under the Social
Security Act of 1965. For example, Marylands 1115 waiver
allows it to include more individuals in its managed care
program than is typically allowed under Medicaid.
Medicaid,
CHIP and FamilyCare Eligibles
Medicaid makes Federal matching funds available to all states
for the delivery of healthcare benefits to eligible individuals,
principally those with incomes below specified levels who meet
other state-specified requirements. Medicaid is structured to
allow each state to establish its own eligibility standards,
benefits package, payment rates and program administration under
broad Federal guidelines.
Most states determine Medicaid eligibility thresholds by
reference to other Federal financial assistance programs,
including TANF and Supplementary Security Income
(SSI).
TANF provides assistance to low-income families with children
and was adopted to replace the Aid to Families with Dependent
Children program, more commonly known as welfare. Under the
Personal Responsibility and Work Opportunity Reconciliation Act
of 1996, Medicaid benefits were provided to recipients of TANF
during the duration of their enrollment, with one additional
year of coverage.
SSI is a Federal income supplement program that provides
assistance to ABD individuals who have little or no income.
However, states can broaden eligibility criteria. The ABD
population is approximately 25% of the eligible Medicaid
population. For ease of reference, throughout this
Form 10-K,
we refer to those members who are aged, blind or disabled as
ABD, as a number of states use ABD or SSI interchangeably.
CHIP, created by Federal legislation in 1997 and previously
referred to as SCHIP, is a state and Federally funded program
that provides healthcare coverage to children not otherwise
covered by Medicaid or other insurance programs. CHIP enables a
segment of the large uninsured population in the U.S. to
receive healthcare benefits. States have the option of
administering CHIP as a Medicaid expansion program, or
administratively through their Medicaid programs, or as a
freestanding program. Current enrollment in this non-entitlement
program is approximately seven million children nationwide. The
President signed a bill on February 4, 2009 to reauthorize
and expand the CHIP program. The expanded program is expected to
cover up to an additional eleven million children by 2011 and
provide an additional $32.8 billion in funding over a four
and a half year period ending in 2013. The increase is paid for
by a nearly 62 cent increase in the tax levied on cigarettes and
allows states to expand coverage up to 300 percent of the
Federal poverty level (FPL) and grandfathers those
states that are currently above 300 percent of the FPL. For
states that want to expand their CHIP programs above
300 percent of the FPL, those states will be reimbursed at
the Medicaid rate for children for amounts exceeding
300 percent of the FPL. The bill also allows the states an
option for legal immigrant children to be covered under CHIP.
The prior law required legal immigrant children to be in the
country for at least five years before becoming eligible for
Federal programs. CHIP will continue to be funded at an enhanced
match, with the minimum Federal amount being 65 percent.
FamilyCare is a Medicaid expansion program that has been
developed in several states. For example, New Jerseys
FamilyCare program is a voluntary state and Federally funded
Medicaid expansion health insurance program created to help low
income uninsured families, single adults and couples without
dependent children obtain affordable healthcare coverage.
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Medicare
Advantage
Medicare also was created by the Social Security Act of 1965 and
provides healthcare coverage primarily to Americas elderly
population. Unlike the Federal-state partnership of Medicaid,
Medicare is solely a Federal program. Under the Medicare
Modernization Act of 2003, the Federal government expanded
managed care for publicly sponsored programs by allowing the
establishment of Medicare Advantage plans which provide
coordinated care options for Medicare beneficiaries. Medicare
Advantage plans provide benefits at least comparable to those
offered under the traditional
fee-for-service
Medicare program in exchange for a fixed monthly premium payment
per member from CMS. Some Medicare Advantage plans focus on
Medicare beneficiaries with special needs that fall into three
subgroups: those who are institutionalized in long-term care
facilities; dual eligibles (those who are eligible for both
Medicare and Medicaid benefits); or individuals with chronic
conditions. We began serving dual eligibles in our Texas markets
in 2006 through a Medicare Advantage plan and have since
expanded to other markets for both dual eligibles and
traditional Medicare beneficiaries. We believe that the
coordination of care offered by managing both the Medicare and
Medicaid benefits brings better integration of services for
members and significant cost savings with increased
accountability for patient care.
Medicaid
Funding
The Federal government pays a share of the medical assistance
expenditures under each states Medicaid program. That
share, known as the Federal Medical Assistance Percentage
(FMAP), is determined annually by a formula that
compares the states average per capita income level with
the national average per capita income level. Thus, states with
higher per capita income levels are reimbursed a smaller share
of their costs than states with lower per capita income levels.
The Federal government also matches administrative costs,
generally about 50%, although higher percentages are paid for
certain activities and functions, such as development of
automated claims processing systems. Federal payments have no
set limits (other than for CHIP programs), but rather are made
on a matching basis. State governments pay the share of Medicaid
and CHIP costs not paid by the Federal government. Some states
require counties to pay part of the states share of
Medicaid costs.
As part of the American Recovery and Reinvestment Act of 2009
(the ARRA), enacted on February 12, 2009,
states are receiving approximately $87 billion in
assistance for their Medicaid programs through a temporary
increase in the FMAP match rate. The funding became effective
retroactively to October 1, 2008 and continues through
December 31, 2010. In order to receive this additional FMAP
increase, states may not reduce Medicaid eligibility levels
below the eligibility levels that were in place on July 1,
2008. Furthermore, states cannot put into place procedures that
make it more difficult to enroll than the procedures that were
in place on July 1, 2008.
Under the ARRA, every state received a minimum FMAP increase of
6.2 percent. The balance of funding is based on
unemployment rates in the states. For states that have
experienced an unemployment increase of 1.5 percent to
2.5 percent, the FMAP increase is 5.5 percent above
the base state rate. For states that have experienced an
unemployment increase greater than 2.5 percent up to
3.5 percent, the FMAP increase is 8.5 percent above
the base state rate. For states that have experienced an
unemployment increase greater than 3.5 percent, the FMAP
increase is 11.5 percent above state base rate.
Further, under the ARRA, if a states unemployment rate
increases during the period in which the FMAP increase is in
place, a states FMAP could potentially increase. All
eleven states in which we offer healthcare services received
adjustments in their FMAP rate in 2009, with some states
receiving multiple adjustments as the year progressed. If a
states unemployment rate decreases during this period
however, the FMAP increase will not be reduced before
July 1, 2010. Additionally, states will be held harmless
from any decreases in the Federal Medicaid match rates
previously scheduled to take effect. Recently, legislation has
been considered as part of the many proposals under healthcare
reform and unless further legislation is enacted prior to
December 31, 2010, FMAP funding will revert to previous
levels. Depending on the financial position of the states in
which we do business at that time, this reduction could place
additional pressure on already stressed state budgets.
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During fiscal year 2009, the Federal government is estimated to
have spent approximately $215 billion on Medicaid with a
corresponding state spending of approximately $163 billion,
and an additional $10 billion in Federal funds spent on
CHIP programs. Key factors driving Medicaid spending include:
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number of eligible individuals who enroll,
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price of medical and long-term care services,
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use of covered services,
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state decisions regarding optional services and optional
eligibility groups, and
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effectiveness of programs to reduce costs of providing benefits,
including managed care.
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Federal law establishes general rules governing how states
administer their Medicaid and CHIP programs. Within those rules,
states have considerable flexibility with respect to provider
reimbursement and service utilization controls. Generally, state
Medicaid budgets are developed and approved annually by the
states governors and legislatures. Medicaid expenditures
are monitored during the year against budgeted amounts.
Medicare
Funding
The Medicare program is administered by CMS and represents
approximately 13% of the annual budget of the Federal
government. Rising healthcare costs and increasing Medicare
eligible populations require continual examination of available
funding which may cause changes in eligibility requirements and
covered benefits.
Prior to 1997, CMS reimbursed health plans participating in the
Medicare program primarily on the basis of the demographic data
of the plans members. One of the primary directives of CMS
in establishing the Medicare Advantage program was to make it
more attractive to managed care plans to enroll members with
higher intensity illnesses. To accomplish this, CMS implemented
a risk adjusted payment system for Medicare health plans in 1997
pursuant to the Balanced Budget Act of 1997. This payment system
was further modified pursuant to the Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000. To
implement the risk adjusted payment system, CMS requires that
all managed care companies capture, collect, and report the
diagnosis code information associated with healthcare services
received by beneficiaries to CMS on a regular basis. As of 2007,
CMS had fully phased in this risk adjusted payment methodology
with a model that bases the total CMS reimbursement payments on
various clinical and demographic factors, including hospital
inpatient diagnoses, additional diagnosis data from ambulatory
treatment settings, hospital outpatient department and physician
visits, gender, age, and eligibility status. As the Federal
government continues to examine healthcare reform proposals,
funding for Medicare Advantage may be impacted which could have
a significant affect on the Medicare Advantage program.
Regulation
Our healthcare operations are regulated by numerous local, state
and Federal laws and regulations. Government regulation of the
provision of healthcare products and services varies from
jurisdiction to jurisdiction. Regulatory agencies generally have
discretion to issue regulations and interpret and enforce these
rules. Changes in applicable state and Federal laws and
corresponding rules may also occur periodically.
State
Insurance Holding Company Regulations
Our health plan subsidiaries are generally licensed to operate
as Health Maintenance Organizations (HMOs), except
our Ohio subsidiary which is licensed as a health insuring
corporation (HIC), and our New York subsidiary which
is licensed as a Prepaid Health Services Plan
(PHSP). In each of the jurisdictions in which our
subsidiaries operate, they are regulated by the applicable
health, insurance
and/or human
services departments that oversee the activities of HMOs, HICs,
and PHSPs that provide or arrange for the provision of services
to healthcare beneficiaries.
The process for obtaining the authorization to operate as an
HMO, HIC or PHSP is lengthy and complex and requires
demonstration to the regulators of the adequacy of the health
plans organizational structure, financial resources,
utilization review, quality assurance programs and complaint
procedures. Each of our health plan
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subsidiaries must comply with applicable state financial
requirements with respect to net worth, deposits, and reserves,
among others. Under state HMO, HIC and PHSP statutes and state
insurance laws, our health plan subsidiaries are required to
file periodic financial reports and other reports about
operations, including inter-company transactions. These are
transactions between the regulated entity and its affiliates,
including persons or entities that control the regulated entity.
The regulated entity and the corporations or persons that
control it constitute an insurance holding company system.
We are registered under such laws as an insurance holding
company system in all of the jurisdictions in which we do
business. Most states, including states in which our
subsidiaries are domiciled, have laws and regulations that
require regulatory approval of a change in control of an insurer
or an insurers holding company. Where such laws and
regulations apply to us and our subsidiaries, there can be no
effective change in control of the Company unless the person
seeking to acquire control has filed a statement containing
specified information with the insurance regulators and has
obtained prior approval for the proposed change from such
regulators. The usual measure for a presumptive change of
control pursuant to these laws is, with some variation, the
acquisition of 10% or more of the voting stock of an insurance
company or its parent. These laws may discourage potential
acquisition proposals and may delay, deter, or prevent a change
in control of the Company, including through transactions, and
in particular unsolicited transactions, that some or all of our
stockholders might consider to be desirable. Our health
plans compliance with state insurance holding company
system requirements are subject to monitoring by state
departments of insurance. Each of our health plans is subject to
periodic comprehensive audits by these departments.
In addition, such laws and regulations restrict the amount of
dividends that may be paid to the Company by its subsidiaries.
Such laws and regulations also require prior approval by the
state regulators of certain material transactions with
affiliates within the holding company system, including the
sale, purchase, or other transfer of assets, loans, guarantees,
agreements or investments, as well as certain material
transactions with persons who are not affiliates within the
holding company system if the transaction exceeds regulatory
thresholds.
Each of our health plans must also meet numerous criteria to
secure the approval of state regulatory authorities before
implementing operational changes, including the development of
new product offerings and, in some states, the expansion of
service areas.
In addition to regulation as an insurance holding company
system, our business operations must comply with the other state
laws and regulations that apply to HMOs, HICs and PHSPs
respectively in the states in which we operate, and with laws,
regulations and contractual provisions governing the respective
state or Federal managed care programs, which are discussed
below.
Contractual
and Regulatory Compliance
Medicaid
In all the states in which we operate, we must enter into a
contract with the states Medicaid agency in order to offer
managed care benefits to Medicaid eligible recipients. States
generally use either a formal proposal process, reviewing many
bidders, or award individual contracts to qualified applicants
that apply for entry to the program. Currently Texas, Georgia,
Tennessee, Nevada, Ohio and New Mexico all use competitive
bidding processes, and other states have done so in the past and
may do so in the future.
The contractual relationship with the state is generally for a
period of one to two years and renewable on an annual or
biannual basis. The contracts with the states and regulatory
provisions applicable to us generally set forth in great detail
the requirements for operating in the Medicaid sector including
provisions relating to: eligibility; enrollment and
disenrollment processes; covered services; eligible providers;
subcontractors; record-keeping and record retention; periodic
financial and informational reporting; quality assurance;
marketing; financial standards; timeliness of claims payments;
health education, wellness and prevention programs; safeguarding
of member information; fraud and abuse detection and reporting;
grievance procedures; and organization and administrative
systems.
A health plans compliance with these requirements is
subject to monitoring by state regulators. A health plan is
subject to periodic comprehensive quality assurance evaluation
by a third-party reviewing organization and
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generally by the insurance department of the jurisdiction that
licenses the health plan. Most health plans must also submit
quarterly and annual statutory financial statements and
utilization reports, as well as many other reports in accordance
with individual state requirements.
Medicare
Our health plans in Florida, Maryland, New Jersey, New Mexico,
New York, Tennessee, and Texas operate Medicare Advantage plans
for which they contract with CMS on a calendar year basis. These
contracts renew annually, and most recently were renewed for the
2010 plan year.
CMS requires that each Medicare Advantage plan meet the
regulatory requirements set forth at 42 CFR 422 and the
operational requirements described in the Medicare Managed Care
(MMC) Manual. The MMC Manual provides the detailed
requirements that apply to our Medicare line of business
including provisions related to: enrollment and disenrollment;
marketing; benefits and beneficiary protections; quality
assessment; relationships with providers; payment from CMS;
premiums and cost-sharing; our contract with CMS; the effect of
a change of ownership during the contract period; and
beneficiary grievances, organization determinations, and appeals.
All of our Medicare Advantage plans include Medicare Part D
prescription drug coverage; therefore, our health plans that
operate Medicare Advantage plans also have Part D contracts
with CMS. As Medicare Advantage Prescription Drug Plan
contractors, we are also obligated to meet the requirements set
forth in 42 CFR 423 and the Prescription Drug Benefit
(PDB) Manual. The PDB Manual provides the detailed
requirements that apply specifically to the prescription drug
benefits portion of our Medicare line of business. The PDB
provides detailed requirements related to: benefits and
beneficiary protections; Part D drugs and formulary
requirements; marketing (included in the MMC Manual); enrollment
and disenrollment guidance; quality improvement and medication
therapy management; fraud, waste and abuse; coordination of
benefits; and Part D grievances, coverage determinations,
and appeals.
In addition to the requirements outlined above, CMS requires
that each Medicare Advantage plan conduct ongoing monitoring of
its internal compliance with the requirements as well as
oversight of any delegated vendors.
Fraud
and Abuse Laws
Our operations are subject to various state and Federal
healthcare laws commonly referred to as fraud and
abuse laws. Investigating and prosecuting healthcare fraud
and abuse has become a top priority for state and Federal law
enforcement entities. The funding of such law enforcement
efforts has increased in the past few years and these increases
are expected to continue. The focus of these efforts has been
directed at participants in government funded healthcare
programs such as Medicaid and Medicare. These regulations, and
contractual requirements applicable to participants in these
programs, are complex and changing.
The Health Insurance Portability and Accountability Act of 1996
(HIPAA) broadened the scope of fraud and abuse laws
applicable to healthcare companies. HIPAA created civil
penalties for, among other things, billing for medically
unnecessary goods or services. HIPAA establishes new enforcement
mechanisms to combat fraud and abuse, including a whistleblower
program. Further, HIPAA imposes civil and criminal penalties for
failure to comply with the privacy and security standards set
forth in the regulation.
The Health Information Technology for Economic and Clinical
Health Act (HITECH Act), a part of the ARRA,
modified certain provisions of HIPAA by, among other things,
extending the privacy and security provisions to business
associates, mandating new regulations around electronic medical
records, expanding enforcement mechanisms, allowing the state
Attorneys General to bring enforcement actions and increasing
penalties for violations. The U.S. Department of Health and
Human Services, as required by the HITECH Act, has issued
interim final rules that set forth the breach notification
obligations applicable to covered entities and their business
associates (the HHS Breach Notification Rule). The
various requirements of the HITECH Act and the HHS Breach
Notification Rule have different compliance dates, some of which
have passed and some of which will occur in the future. With
respect to those requirements whose compliance dates have
passed, we believe that we are in compliance with these
provisions. With respect to those requirements whose compliance
dates are in the future, we are reviewing our current practices
and identifying those which may be impacted by upcoming
regulations. It is our intention to implement these new
requirements on or before the applicable compliance dates.
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Violations of certain fraud and abuse laws applicable to us
could result in civil monetary penalties, criminal fines and
imprisonment,
and/or
exclusion from participation in Medicaid, Medicare, other
Federal healthcare programs and Federally funded state health
programs. These laws include the Federal False Claims Act which
prohibits the knowing filing of a false claim or the knowing use
of false statements to obtain payment from the Federal
government. Many states have false claim act statutes that
closely resemble the Federal False Claims Act. If an entity is
determined to have violated the False Claims Act, it must pay
three times the actual damages sustained by the government, plus
mandatory civil penalties between $5,500 and $11,000 for each
separate false claim. Suits filed under the Federal False Claims
Act, known as qui tam actions, can be brought
by any individual on behalf of the government and such
individuals (known as relators or, more commonly, as
whistleblowers) may share in any amounts paid by the
entity to the government in fines or settlement. Qui tam
actions have increased significantly in recent years,
causing greater numbers of healthcare companies to have to
defend a false claim action, pay fines or be excluded from the
Medicaid, Medicare or other state or Federal healthcare programs
as a result of an investigation arising out of such action. In
addition, the Deficit Reduction Action of 2005 (DRA)
encourages states to enact state-versions of the False Claims
Act that establish liability to the state for false and
fraudulent Medicaid claims and that provide for, among other
things, claims to be filed by qui tam relators.
We are currently unaware of any pending or filed but unsealed
qui tam actions against us.
In recent years, we enhanced the regulatory compliance efforts
of our operations. However, with the highly technical regulatory
environment and ongoing vigorous law enforcement, our compliance
efforts in this area will continue to require substantial
resources.
Our
Approach
Unlike many managed care organizations that attempt to serve
multiple populations, we currently focus on serving people who
receive healthcare benefits through publicly sponsored programs.
We primarily serve Medicaid populations, and the Medicare
population through our Medicare Advantage product. Our success
in establishing and maintaining strong relationships with
governments, providers and members has enabled us to obtain new
contracts and to establish a strong market position in the
markets we serve. We have been able to accomplish this by
operating programs that address the various needs of these
constituent groups.
Government
Agencies
We have been successful in bidding for contracts and
implementing new products, primarily due to our ability to
facilitate access to quality healthcare services as well as
manage and reduce costs. Our education and outreach programs,
our disease and medical management programs and our information
systems benefit the individuals and communities we serve while
providing the government with predictable costs. Our education
and outreach programs are designed to decrease the use of
emergency care services as the primary venue for access to
healthcare through the provision of certain programs such as
member health education seminars and system-wide,
24-hour
on-call nurses. Our information systems are designed to measure
and track our performance, enabling us to demonstrate the
effectiveness of our programs to government agencies. While we
highlight these programs and services in applying for new
contracts or seeking to add new products, we believe that our
ability to obtain additional contracts and expand our service
areas within a state results primarily from our ability to
facilitate access to quality care, while managing and reducing
costs, and our customer-focused approach to working with
government agencies. We believe we will also benefit from this
experience when bidding for and acquiring contracts in new state
markets and in future Medicare Advantage applications.
Providers
Our healthcare providers include hospitals, physicians and
ancillary providers that provide covered medical and
healthcare-related services to our members. In each of the
communities in which we operate, we have established extensive
provider networks and have been successful in continuing to
establish new provider relationships. We have accomplished this
by working closely with physicians to help them operate
efficiently, and by providing physician and patient educational
programs, disease and medical management programs and other
relevant information. In addition, as our membership increases
within each market, we provide our physicians with
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a growing base of potential patients in the markets they serve.
This network of providers and relationships assists us in
implementing preventive care methods, managing costs and
improving access to healthcare for members. We believe that our
experience working and contracting with Medicaid and Medicare
providers will give us a competitive advantage in entering new
markets. While we only directly market to or through our
providers, to the extent expressly permitted by applicable law,
they are important in helping us attract new members and retain
existing members.
Nationally, approximately 65% of Medicaid spending is directed
toward hospital, physician and other acute care services, and
the remaining 35% is for nursing home and other long-term care.
In general, inpatient and emergency room utilization tends to be
higher within the unmanaged Medicaid eligible population than
among the general population because of the inability to access
a primary care physician (PCP), leading to the
postponement of treatment until acute care is required. Through
our health plans, we aim to improve access to PCPs and encourage
preventive care and early diagnosis and treatments, reducing
inpatient and emergency room usage and thereby decreasing the
total cost of care.
Members
In both enrolling new members and retaining existing members, we
focus on understanding the unique needs of the Medicaid, CHIP,
Medicaid expansion and Medicare Advantage populations. We have
developed a system that provides our members with appropriate
access to care. We supplement this care with community-based
education and outreach programs designed to improve the
well-being of our members. These programs not only help our
members control and manage their medical care, but also have
been proven to decrease the incidence of emergency room care,
which can be traumatic, or at a minimum, disruptive for the
individual and expensive and inefficient for the healthcare
system. We also help our members access prenatal care which
improves outcomes for our members and is less costly than the
potential consequences associated with inadequate prenatal care.
As our presence in a market matures, these programs and other
value-added services help us build and maintain membership
levels.
Communities
We focus on the members we serve and the communities in which
they live. Many of our employees, including our outreach staff,
are a part of the communities we serve. We are active in our
members communities through education and outreach
programs. We often provide programs in our members
physician offices, places of worship and community centers. Upon
entering a new market, we use these programs and advertising to
create brand awareness and loyalty in the community.
We believe community focus and understanding are important to
attracting and retaining members. To assist in establishing our
community presence in a new market, we seek to establish
relationships with prestigious medical centers, childrens
hospitals, Federally qualified health centers, community based
organizations and advocacy groups to offer our products and
programs.
Competition
Our principal competition consists of the following:
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Traditional
Fee-for-Service
Original unmanaged provider payment system whereby state
governments pay providers directly for services provided to
Medicaid and Medicare eligible beneficiaries.
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Primary Care Case Management Programs Programs
established by the states through contracts with physicians to
provide primary care services to Medicaid recipients, as well as
provide limited oversight over other services.
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Administrative Services Only Health Plans Health
plans that contract with the states to provide administrative
services only (ASO) for the traditional
fee-for-service
Medicaid program.
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Multi-line Commercial Health Plans National and
regional commercial managed care organizations that have
Medicaid and Medicare members in addition to members in private
commercial plans.
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Medicaid Health Plans Managed care organizations
that focus solely on serving people who receive healthcare
benefits through Medicaid.
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Medicare Health Plans Managed care organizations
that focus solely on serving people who receive healthcare
benefits through Medicare. These plans also may include Medicare
Part D prescription coverage.
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Medicare Prescription Drug Plans These plans offer
Medicare beneficiaries Part D prescription drug coverage
only, while members of these plans receive their medical
benefits from Medicare
Fee-For-Service.
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We will continue to face varying levels of competition as we
expand in our existing service areas and enter new markets.
Changes in the business climate, such as healthcare reform
proposals, may cause a number of commercial managed care
organizations already in our service areas to decide to enter or
exit the publicly sponsored healthcare market. Some of these
managed care organizations have substantially larger
enrollments, greater financial and other resources and offer a
broader scope of products than we do.
We compete with other managed care organizations to obtain state
contracts, as well as to attract new members and retain existing
members. States generally use either a formal procurement
process reviewing many bidders or award individual contracts to
qualified applicants that apply for entry to the program. In
order to be awarded a state contract, state governments consider
many factors, which include providing quality care, satisfying
financial requirements, demonstrating an ability to deliver
services, and establishing networks and infrastructure. People
who wish to enroll in a managed healthcare plan or to change
healthcare plans typically choose a plan based on the services
offered, ease of access to services, a specific provider being
part of the network and the availability of supplemental
benefits.
In addition to competing for members, we compete with other
managed care organizations to enter into contracts with
independent physicians, physician groups and other providers. We
believe the factors that providers consider in deciding whether
to contract with us include potential member volume,
reimbursement rates, our medical management programs, timeliness
of reimbursement and administrative service capabilities.
Products
We offer a range of healthcare products through publicly
sponsored programs within a care model that integrates physical
and behavioral health. These products are also community-based
and seek to address the social and economic issues faced by the
populations we serve. The average premiums for our products vary
significantly due to differences in the benefits offered and
underlying medical conditions of the populations covered.
The following table sets forth the approximate number of our
members who receive benefits under our products as of
December 31, 2009, 2008 and 2007. Because we receive two
premiums for members that are in both the Medicare Advantage and
Medicaid products, these members have been counted in each
product.
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December 31,
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Product
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2009
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2008
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2007
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TANF
(Medicaid)(1)(2)
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1,255,000
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1,095,000
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1,217,000
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CHIP(2)
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259,000
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253,000
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231,000
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ABD
(Medicaid)(3)
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196,000
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182,000
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216,000
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Family Care (Medicaid)
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63,000
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40,000
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42,000
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Medicare Advantage
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15,000
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9,000
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5,000
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Total
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1,788,000
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1,579,000
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1,711,000
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Membership includes approximately 129,000 members under an ASO
contract in Tennessee in 2007. This contract terminated
October 31, 2008. |
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Reflects a reclassification in 2008 and 2007 from CHIP to TANF
to coincide with state classifications and current year
presentation. |
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(3) |
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Membership includes approximately 13,000 members each in 2009
and 2007 under ASO contracts in Texas; and approximately 41,000
members under an ASO contract in Tennessee in 2007 that
terminated October 31, 2008. There were no ASO contracts in
effect as of December 31, 2008. |
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Medical
and Quality Management Programs
We provide specific disease and medical management programs
designed to meet the special healthcare needs of our members
with chronic illnesses and medical conditions, to manage
excessive costs, and to improve the overall health of our
members. We integrate our members behavioral healthcare
with their physical healthcare utilizing our integrated medical
management model. Members are systematically contacted and
screened utilizing standardized processes. Members are
stratified based on their physical, behavioral, and social needs
and grouped for care management. We offer a continuum of care
management including disease management, pharmacy integration,
centralized telephonic case management, case management at the
health plans, and field-based case management for some of our
higher-risk members. These programs focus on preventing acute
occurrences associated with chronic conditions by identifying
at-risk members, monitoring their conditions and proactively
managing their care. These disease management programs also
facilitate members in the self-management of chronic disease and
include asthma, chronic obstructive pulmonary disease, coronary
artery disease, congestive heart failure, diabetes, depression,
schizophrenia, and HIV/AIDS. These disease management programs
attained National Committee for Quality Assurance
(NCQA) reaccreditation in 2009.
Our Maternal-Child Services program provides health promotion,
advocacy and care management for pregnant women and their
newborns. Our Taking Care of Baby and
Me®
case management service has a major focus on the earliest
identification of pregnant women, screening for risk factors,
mentoring and advocating for evidenced based clinical practices.
We work with our members and providers to improve the outcomes
of pregnancy through the promotion of reproductive health,
access to prenatal care, access to quality care for a healthy
pregnancy and delivery as well as the post-partum period and
newborn care. Case managers facilitate members with access to
benefits for transportation, prenatal vitamins, smoking
cessation, breastfeeding support, the
24-hour
nurse call line as well as referral to community based home
visitor programs. Essential to the success of the program is the
predictive risk screening tool and survey process where members
are stratified by risk grouping and begin engagement in the
program.
We have a comprehensive quality management plan designed to
improve access to cost-effective quality care. We have developed
policies and procedures to ensure that the healthcare services
arranged by our health plans meet the professional standards of
care established by the industry and the medical community.
These procedures include:
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Analysis of healthcare utilization data We analyze
the healthcare utilization data of the PCPs in our network in
order to identify PCPs who either over utilize or under utilize
healthcare services. We do this by comparing their utilization
patterns against benchmarks based upon the utilization data of
their peers. If a PCPs utilization rates vary
significantly from the norm, either above or below, we meet with
the provider to discuss and understand their utilization
patterns, suggest opportunities for improvement and implement an
ongoing monitoring program.
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Medical care satisfaction studies We evaluate the
quality and appropriateness of care provided to our health plan
members by reviewing healthcare utilization data and responses
to member and physician questionnaires and grievances.
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Clinical care oversight Each of our health plans has
a medical advisory committee comprised of physician
representatives and chaired by the plans medical director.
This committee approves clinical protocols and practice
guidelines. Based on regular reviews, the medical directors who
head these committees develop recommendations for improvements
in the delivery of medical care.
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Quality improvement plan A quality improvement plan
is implemented in each of our health plans and is governed by a
quality management committee, which is either chaired or
co-chaired by the medical director of the health plan. The
quality management committee is comprised of senior management
at our health plans, who review and evaluate the quality of our
healthcare services and are responsible for the development of
quality improvement plans spanning both clinical quality and
customer service quality. These plans are developed from
provider and membership feedback, satisfaction surveys and
results of action plans. Our corporate quality improvement
council oversees and meets regularly with our health plan
quality management committees to help ensure that we have a
coordinated, quality-focused approach relating to our members
and providers.
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Provider
Network
We facilitate access to healthcare services for our members
through mutually non-exclusive contracts with PCPs, specialists,
hospitals and ancillary providers. Either prior to or concurrent
with being awarded a new contract, we establish a provider
network in the applicable service area. As of December 31,
2009, our provider networks included approximately 103,000
physicians, including PCPs, specialists and ancillary providers,
and approximately 700 hospitals.
The PCP is a critical component in care delivery, the management
of costs and the attraction and retention of members. PCPs
include family and general practitioners, pediatricians,
internal medicine physicians, and may include obstetricians and
gynecologists. These physicians provide preventive and routine
healthcare services and are responsible for making referrals to
specialists, hospitals and other providers. Healthcare services
provided directly by PCPs include the treatment of illnesses not
requiring referrals, periodic physician examinations, routine
immunizations, well-child care and other preventive healthcare
services. Specialists with whom we contract provide a broad
range of physician services. While referral for these specialist
services is not generally required prior to care delivery, the
PCP continues to be integral to the coordination of care. Our
contracts with both the PCPs and specialists usually are for
two-year periods and automatically renew for successive one-year
periods subject to termination by either party with or without
cause upon 90 to 120 days prior written notice.
Our contracts with hospitals are usually for one- to two-year
periods and automatically renew for successive one-year periods.
Generally, our hospital contracts may be terminated by either
party with or without cause upon 90 to 120 days prior
written notice. Pursuant to their contracts, each hospital is
paid for all medically necessary inpatient and outpatient
services and all covered emergency and medical screening
services provided to members. With the exception of emergency
services, most inpatient hospital services require advance
approval from our medical management department. We require
hospitals in our network to participate in utilization review
and quality assurance programs.
We have also contracted with other ancillary providers for
physical therapy, mental health and chemical dependency care,
home healthcare, nursing home care, home-based community
services, vision care, diagnostic laboratory tests, x-ray
examinations, ambulance services and durable medical equipment.
Additionally, we have contracted with dental vendors that
provide routine dental care in markets where routine dental care
is a covered benefit and with a national pharmacy benefit
manager that provides a local pharmacy network in our markets
where prescription drugs are a covered benefit.
In order to ensure the quality of our medical care providers, we
credential and re-credential our providers using standards that
are supported by the NCQA. As part of the credentialing review,
we ensure that each provider in our network is eligible to
participate in publicly sponsored healthcare programs.
Additionally, we provide feedback and evaluations on quality and
medical management to them in order to improve the quality of
care provided, increase their support of our programs and
enhance our ability to attract and retain providers.
Provider
Payment Methods
We periodically review the fees paid to providers and make
adjustments as necessary. Generally, the contracts with
providers do not allow for automatic annual increases in
reimbursement levels. Among the factors generally considered in
adjustments are changes to state Medicaid or Medicare fee
schedules, competitive environment, current market conditions,
anticipated utilization patterns and projected medical expenses.
Some provider contracts are directly tied to state Medicaid or
Medicare fee schedules, in which case reimbursement levels will
be adjusted up or down, generally on a prospective basis, based
on adjustments made by the state or CMS to the appropriate fee
schedule.
The following are the various provider payment methods in place
as of December 31, 2009:
Fee-for-Service. This
is a reimbursement mechanism that pays providers based upon
services performed. For the year ended December 31, 2009,
approximately 97% of our expenses for direct health benefits
were on a
fee-for-service
reimbursement basis, including fees paid to third-party vendors
for ancillary services such as pharmacy, mental health, dental
and vision benefits. The primary
fee-for-service
arrangements are on a maximum
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allowable fee schedule, per diem, case rates, percent of charges
or any combination thereof. The following is a description of
each of these mechanisms:
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Maximum Allowable Fee Schedule Providers are paid
the lesser of billed charges or a specified fixed payment for a
covered service. The maximum allowable fee schedule is developed
using, among other indicators, the state
fee-for-service
Medicaid program fee schedule, Medicare fee schedules, medical
costs trends and market conditions.
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Per Diem and Case Rates Hospital facility costs are
typically reimbursed at negotiated per diem or case rates, which
vary by level of care within the hospital setting. Lower rates
are paid for lower intensity services, such as the delivery of a
baby without complication, compared to higher rates for a
neonatal intensive care unit stay for a baby born with severe
developmental disabilities.
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Percent of Charges Providers are paid an
agreed-upon
percent of their standard charges for covered services.
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We generally pay
out-of-network
providers based on a state-mandated
out-of-network
reimbursement methodology, or in states where no such rates are
mandated, based on our Company standard
out-of-network
fee schedule. We do not rely on databases that attempt to
calculate the prevailing or usual customary
and reasonable charge for services rendered to our members.
Capitation. Some of our PCPs and specialists
are paid on a fixed-fee per member basis, also known as
capitation. Our arrangements with ancillary providers for
vision, dental, home health, laboratory and durable medical
equipment may also be capitated.
Risk-sharing arrangements. A small number of
primary care arrangements also include a risk-sharing component,
in which the provider takes on some financial risk for the care
of the member. Under a risk-sharing arrangement, the parties
conduct periodic reconciliations, generally quarterly, based on
which the provider may receive a portion of the surplus, or pay
a portion of the deficit, relating to the total cost of care of
its assigned members. Risk-sharing arrangements may be subject
to state
and/or
Federal regulatory requirements to ensure the financial solvency
of the provider and to protect the member against reduced care
for medically necessary services.
Incentive arrangements. A small number of
arrangements, mainly relating to primary care or coordinated
care for members with chronic conditions, include an incentive
component in which the provider may receive a financial
incentive for achieving certain performance standards relating
to quality of care and cost containment. Similar to risk-sharing
arrangements, incentive arrangements may be subject to state
and/or
Federal regulatory requirements to protect the member against
reduced care for medically necessary services.
Outreach
and Educational Programs
An important aspect of our comprehensive approach to healthcare
delivery is our outreach and educational programs, which we
administer system-wide for our providers and members. We also
provide education through outreach and educational programs in
churches and community centers. The programs we have developed
are specifically designed to increase awareness of various
diseases, conditions and methods of prevention in a manner that
supports the providers, while meeting the unique needs of our
members. For example, we conduct health promotion events in
physicians offices. Direct provider outreach is supported
by traditional methods such as direct mail, telemarketing,
television, radio and cooperative advertising with participating
medical groups.
We believe that we can also increase and retain membership
through outreach and education initiatives. We have a dedicated
staff that actively supports and educates prospective and
existing members and community organizations. Through programs
such as PowerZone, a program that address childhood obesity, and
Taking Care of Baby and
Me®,
a prenatal program for pregnant mothers, we promote a healthy
lifestyle, safety and good nutrition to our members. In several
markets, we provide value-added benefits as a means to attract
and retain members. These benefits may include such things as
vouchers for
over-the-counter
medications or free memberships to the local Boys and Girls
Clubs.
We have developed specific strategies for building relationships
with key community organizations, which help enhance community
support for our products and improve service to our members. We
regularly participate in
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local events and festivals and organize community health fairs
to promote healthy lifestyle practices. Equally as important,
our employees help support community groups by serving as board
members and volunteers. In the aggregate, these activities serve
to act not only as a referral channel, but also reinforce the
Company brand and foster member loyalty.
Information
Technology Services
The ability to capture, process, and enable local access to data
and translate it into meaningful information is essential to our
ability to operate across a multi-state service area in a
cost-effective manner. We deployed an integrated system strategy
for our financial, claims, care management, encounter management
and sales/marketing systems to avoid the costs associated with
supporting multiple versions of similar systems and improve
productivity. This approach helps to assure that consistent
sources of financial, claim, provider, member and clinical
information are provided across all of our health plans. We
utilize our integrated system for billing, claims and encounter
processing, utilization management, marketing and sales
tracking, financial and management accounting, medical cost
trending, reporting, planning and analysis. This system also
supports our internal member and provider service functions and
we provide access to this information through our provider and
member portals to enable self-service capabilities for our
customers. Our system is scalable, both vertically and
horizontally, and we believe it will meet our software needs to
support our long-term growth strategies. In addition, we have a
robust business continuity plan and disaster recovery site in
case we encounter a disruptive event.
Our
Health Plans
We currently have eleven active health plan subsidiaries
offering healthcare services. All of our contracts, except those
in Georgia, New Jersey and New York, contain provisions for
termination by us without cause generally upon written notice
with a 30 to 180 day notification period. Our state
customers also have the right to terminate these contracts. The
states termination rights vary from
contract-to-contract
and may include the right to terminate for convenience, upon the
occurrence of an event of default, upon the occurrence of a
significant change in circumstances or as a result of inadequate
funding.
We serve members who receive healthcare benefits through our
contracts with the regulatory entities in the jurisdictions in
which we operate. For the year ended December 31, 2009, our
Texas contract represented 25% of our premium revenues and our
Maryland, Tennessee, Georgia and Florida contracts individually
accounted for over 10% of our premium revenues. The following
table sets forth the approximate number of members we served in
each state as of December 31, 2009, 2008 and 2007. Because
we receive two premiums for members that are in both
16
the Medicare Advantage and Medicaid products, these members have
been counted twice in the states in which we operate Medicare
Advantage plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Market
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Texas(1)
|
|
|
505,000
|
|
|
|
455,000
|
|
|
|
460,000
|
|
Georgia
|
|
|
249,000
|
|
|
|
206,000
|
|
|
|
211,000
|
|
Florida
|
|
|
236,000
|
|
|
|
237,000
|
|
|
|
206,000
|
|
Tennessee(2)
|
|
|
195,000
|
|
|
|
187,000
|
|
|
|
356,000
|
|
Maryland
|
|
|
194,000
|
|
|
|
169,000
|
|
|
|
152,000
|
|
New Jersey
|
|
|
118,000
|
|
|
|
105,000
|
|
|
|
98,000
|
|
New York
|
|
|
114,000
|
|
|
|
110,000
|
|
|
|
112,000
|
|
Nevada
|
|
|
62,000
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
|
60,000
|
|
|
|
58,000
|
|
|
|
54,000
|
|
Virginia
|
|
|
35,000
|
|
|
|
25,000
|
|
|
|
24,000
|
|
New Mexico
|
|
|
20,000
|
|
|
|
11,000
|
|
|
|
|
|
South
Carolina(3)
|
|
|
|
|
|
|
16,000
|
|
|
|
|
|
District of
Columbia(4)
|
|
|
|
|
|
|
|
|
|
|
38,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,788,000
|
|
|
|
1,579,000
|
|
|
|
1,711,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Membership includes approximately 13,000 members each in 2009
and 2007 under ASO contracts. There were no ASO contracts in
effect as of December 31, 2008. |
|
(2) |
|
Membership includes approximately 170,000 members under an ASO
contract in 2007. This contract terminated October 31, 2008. |
|
(3) |
|
The contract with South Carolina terminated March 1, 2009
concurrent with the sale of our rights under the contract. |
|
(4) |
|
The contract with the District of Columbia terminated
June 30, 2008. |
As of December 31, 2009, each of our health plans provided
managed care services through one or more of our products, as
set forth below:
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
Market
|
|
TANF
|
|
|
CHIP
|
|
|
ABD
|
|
|
FamilyCare
|
|
|
Advantage
|
|
|
Texas
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
|
|
|
|
ü
|
|
Florida
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
|
|
|
|
ü
|
|
Georgia
|
|
|
ü
|
|
|
|
ü
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tennessee
|
|
|
ü
|
|
|
|
|
|
|
|
ü
|
|
|
|
|
|
|
|
ü
|
|
Maryland
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
New York
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
New Jersey
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
Ohio(1)
|
|
|
ü
|
|
|
|
|
|
|
|
ü
|
|
|
|
|
|
|
|
|
|
Virginia
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
|
|
|
|
|
|
Nevada
|
|
|
ü
|
|
|
|
ü
|
|
|
|
|
|
|
|
ü
|
|
|
|
|
|
New Mexico
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
|
|
|
|
|
|
ü
|
|
|
|
|
(1) |
|
Our Ohio health plan terminated its ABD contract effective
February 1, 2010. We served approximately 6,000 members in
Ohio under the ABD contract as of December 31, 2009. |
17
Texas
Our Texas subsidiary, AMERIGROUP Texas, Inc., is licensed as an
HMO and became operational in September 1996. Our current
service areas include the cities of Austin, Corpus Christi,
Dallas, Fort Worth, Houston and San Antonio and the
surrounding counties. Our joint TANF, CHIP and ABD contract is
effective through August 31, 2010, with the States
option to renew annually through the contract year ending
August 31, 2014. Effective January 1, 2006, AMERIGROUP
Texas, Inc. began operations as a Medicare Advantage plan to
offer Medicare benefits to dual eligibles that live in and
around Houston, Texas. AMERIGROUP Texas, Inc. already served
these members through the Texas Medicaid STAR+PLUS program and
now offers these members Medicare Parts A & B benefits
and the Part D drug benefit under this contract that renews
annually. Effective January 1, 2008, AMERIGROUP Texas, Inc.
expanded its Medicare Advantage offerings to the Houston
contiguous counties and San Antonio service areas. Each of
these contracts renew annually and were most recently renewed
effective for the 2010 plan year.
As of December 31, 2009, we had approximately 505,000
members in Texas. We believe that we have the largest Medicaid
health plan membership of the three health plans in our
Fort Worth market, the second largest Medicaid health plan
membership of the three health plans in our Austin, Dallas and
San Antonio markets, the second largest Medicaid health
plan membership of the six health plans in our Houston market
and the third largest Medicaid health plan membership of the
three health plans in our Corpus Christi market.
Georgia
Our Georgia subsidiary, AMGP Georgia Managed Care Company, Inc.,
is licensed as an HMO and became operational in June 2006 in the
Atlanta region, and in the North, East and Southeast regions in
September 2006. Our TANF and CHIP contract with the State of
Georgia expires June 30, 2010, with the States option
to renew the contract for two additional one-year terms. We
anticipate that the State will renew our contract effective
July 1, 2010.
As of December 31, 2009, we had approximately 249,000
members in Georgia. We believe we have the second largest
Medicaid health plan membership of the three health plans in the
regions of Georgia in which we operate.
Florida
Our Florida subsidiary, AMERIGROUP Florida, Inc., is licensed as
an HMO and became operational in January 2003. The TANF contract
expires August 31, 2012 and can be terminated by the health
plan upon 120 days notice. Effective November 1, 2009
and effective December 1, 2009, we terminated our agreement
and ceased participation in Lee County and Broward County,
respectively, under our contract with the Florida Agency for
Health Care Administration (AHCA). The decision to
exit these counties was made due to the inability to obtain
adequate premium rates. The exit from these counties is not
expected to be material to our results of operations, financial
position or cash flows in future periods. Our Long-Term Care
contract was renewed on September 1, 2009 and expires
August 31, 2010. However, either party can terminate the
contract upon 60 days notice. Currently, we are in good
standing with the Department of Elder Affairs, the agency with
regulatory oversight of the Long-Term Care program, and have no
reason to believe that the contract will not be renewed. Our
CHIP contract, executed in October 2009 extends through
September 30, 2010 with the state agencys option to
extend the contract term for additional one-year periods for a
maximum extension of two additional years. Additionally,
effective January 1, 2008, AMERIGROUP Florida, Inc. began
operating a Medicare Advantage plan for eligible beneficiaries
in Florida under a contract that renews annually and was most
recently renewed for the 2010 plan year.
As of December 31, 2009, we had approximately 236,000
members in Florida. Our current service areas include the
metropolitan areas of Miami/Fort Lauderdale, Orlando and
Tampa covering 29 counties in Florida. We believe that we have
the largest Medicaid health plan membership of the eight health
plans in our Tampa market, the second largest Medicaid health
plan membership of the five health plans in our Orlando market
and the fourth largest Medicaid health plan membership of the
fifteen health plans in our Miami/Fort Lauderdale markets.
18
Tennessee
Our Tennessee subsidiary, AMERIGROUP Tennessee, Inc., is
licensed as an HMO and became operational in April 2007. Our
risk contract with the State of Tennessee expires June 30,
2010, with the States option to extend the contract on an
annual basis through an executed contract amendment for a total
term of no more than five years. We anticipate that the State
will extend our contract effective July 1, 2010. Effective
January 1, 2008, AMERIGROUP Tennessee, Inc. began operating
a Medicare Advantage plan for eligible beneficiaries in
Tennessee under a contract that renews annually and was most
recently renewed for the 2010 plan year. The State of Tennessee
received approval from CMS to expand its Medicaid managed care
program to long-term care recipients. The expansion program is
offered through amendments to existing Medicaid managed care
contracts and is effective March 1, 2010. We can make no
assurance that the entry into this business will be favorable to
our results of operations, financial position or cash flows in
future periods.
As of December 31, 2009, we had approximately 195,000
members in Tennessee. We are one of two health plans in our
Tennessee market each of which covers approximately half of the
members in the Middle Tennessee region in which we operate.
Maryland
Our Maryland subsidiary, AMERIGROUP Maryland, Inc., is licensed
as an HMO in Maryland and became operational in June 1999. Our
contract with the State of Maryland does not have a set term. We
can terminate our contract with Maryland by providing the State
90 days prior written notice. Effective January 1,
2007, we began operations as a Medicare Advantage plan for
eligible beneficiaries in Maryland, which we expanded as of
January 1, 2008 under a contract that renews annually and
was most recently renewed for the 2010 plan year.
Our current service areas include 22 of the 24 counties in
Maryland. Effective May 1, 2009, we expanded our product
line offering to include the Primary Adult Care Program, a basic
healthcare service for low income adults. As of
December 31, 2009, we had approximately 194,000 members in
Maryland. We believe that we have the largest Medicaid health
plan membership of the seven health plans in our Maryland
service areas.
New
Jersey
Our New Jersey subsidiary, AMERIGROUP New Jersey, Inc., is
licensed as an HMO and became operational in February 1996. Our
contract with the State of New Jersey expires June 30,
2010, with the States option to extend the contract on an
annual basis through an executed contract amendment. We
anticipate that the State will renew our contract effective
July 1, 2010. Additionally, effective January 1, 2008,
AMERIGROUP New Jersey, Inc. began operating a Medicare Advantage
plan for eligible beneficiaries in New Jersey under a contract
that renews annually and was most recently renewed for the 2010
plan year.
Our current service areas include 20 of the 21 counties in New
Jersey. As of December 31, 2009, we had approximately
118,000 members in our New Jersey service areas. We believe that
we have the third largest Medicaid health plan membership of the
six health plans in our New Jersey service areas.
On October 23, 2009, AMERIGROUP Corporation and AMERIGROUP
New Jersey, Inc. settled litigation with Centene Corporation
(Centene) and its wholly-owned subsidiary,
University Health Plans, Inc. (UHP), regarding
AMERIGROUP New Jersey, Inc.s termination of an agreement
to purchase certain assets of UHP. Pursuant to the terms of the
confidential settlement, the parties dismissed the litigation
with prejudice and the amended and modified asset purchase
agreement was reinstated. The parties will move forward with the
transaction contemplated by the asset purchase agreement, as
modified in connection with the settlement, and expect the
transaction, which is subject to regulatory approval and other
closing conditions, to close in the early part of 2010. Costs
associated with the transaction are not expected to be material
to our results of operations, financial position or cash flows.
We can make no assurance that entry into such business will be
favorable to our results of operations, financial position or
cash flows in future periods.
19
New
York
Our New York subsidiary, AMERIGROUP New York, LLC, formerly
known as CarePlus, LLC, is licensed as a PHSP in New York. We
acquired this health plan on January 1, 2005. Our current
service areas include New York City, within the boroughs of
Brooklyn, Manhattan, Queens, the Bronx and Staten Island, and
Putnam County. The State TANF, ABD and Medicaid expansion
contracts had an initial term of three years (through
September 30, 2008) and the State Department of Health
exercised its option to extend for an additional two-year term
(through September 30, 2010). The Citys TANF contract
with the City Department of Health has also been extended
through September 30, 2010. Our CHIP contract with the
State has been continued through the issuance of a five-year
contract dated January 1, 2008. Our contract with the
Department of Health under the Managed Long-Term Care
Demonstration project was renewed for a three-year term through
December 31, 2009, with the Department exercising its
option to extend the contract through December 31, 2010.
Additionally, effective January 1, 2008, AMERIGROUP New
York, LLC began operating a Medicare Advantage plan for eligible
beneficiaries in New York under a contract that renews annually
and was most recently renewed for the 2010 plan year.
As of December 31, 2009, we had approximately 114,000
members in New York. We believe we have the ninth largest
Medicaid health plan membership of the twenty-three health plans
in our New York service areas.
Nevada
Our Nevada subsidiary, AMERIGROUP Nevada, Inc., began serving
TANF and CHIP members in February 2009 under a contract to
provide Medicaid managed care services through June 30,
2012 in the urban service areas of Washoe and Clark counties. As
of December 31, 2009, AMERIGROUP Nevada, Inc. served
approximately 62,000 members in Nevada. We believe we have the
second largest Medicaid health plan membership of the two health
plans in our Nevada service areas.
Ohio
Our Ohio subsidiary, AMERIGROUP Ohio, Inc., is licensed as a HIC
and began operations in September 2005 in the Cincinnati service
area. Through a reprocurement process in early 2006, we were
successful in retaining our Cincinnati service area and
expanding to the Dayton service area, thereby serving a total of
16 counties in Ohio. In October 2009, AMERIGROUP Ohio, Inc.
provided notice of intent to exit the ABD program in the
Southeast Region due to the inability to obtain adequate premium
rates in that product. The termination was effective as of
February 1, 2010. The exit from this program is not
expected to be material to our results of operations, financial
position or cash flows in future periods. AMERIGROUP Ohio, Inc.
will continue to provide services to members in the Southwest
and West Central regions for the TANF Medicaid population.
As of December 31, 2009, we had approximately 60,000
members in Ohio, including approximately 6,000 ABD members
under a contract which terminated, at our election, effective
February 1, 2010. We believe we have the second largest
Medicaid health plan membership of the four health plans in our
Ohio service areas. Our contract with the State of Ohio expires
on June 30, 2010. We anticipate the State will renew our
contract effective July 1, 2010.
Virginia
Our Virginia subsidiary, AMERIGROUP Virginia, Inc., is licensed
as an HMO and began operations in September 2005 serving 14
counties and independent cities in Northern Virginia. Our TANF
and ABD contract and our CHIP contract, both with the
Commonwealth of Virginia, expire on June 30, 2010. We
anticipate the Commonwealth of Virginia will renew our contracts
effective July 1, 2010. As of December 31, 2009, we
had approximately 35,000 members in Virginia. We believe we have
the second largest Medicaid health plan membership of the two
health plans in our Northern Virginia service area.
New
Mexico
Our New Mexico subsidiary, AMERIGROUP Community Care of New
Mexico, Inc., is licensed as an HMO and began operations in
January 2008 as a Medicare Advantage plan for eligible
beneficiaries in New Mexico. The
20
Medicare Advantage contract with CMS renews annually and was
most recently renewed effective for the 2010 plan year. In
August 2008, we began serving individuals in New Mexicos
Coordination of Long-Term Services (CoLTS) program.
The CoLTS contract with the State of New Mexico expires
June 30, 2012. Our statewide service area is inclusive of
33 counties organized into five service regions. As of
December 31, 2009, we served approximately 20,000 members
in New Mexico. We believe we have the largest Medicaid health
plan membership of the two health plans in our New Mexico
service areas.
South
Carolina
Our South Carolina subsidiary, AMERIGROUP Community Care of
South Carolina, Inc., was licensed as an HMO and became
operational in November 2007 with the TANF population, followed
by a separate CHIP contract in May 2008. On March 1, 2009,
we sold our rights to serve Medicaid members pursuant to the
contract with the State of South Carolina and, as a result, our
South Carolina subsidiary does not currently serve any members.
Employees
As of December 31, 2009, we had approximately
4,000 employees. Our employees are not represented by a
union and we have never experienced any work stoppages since our
inception. We believe our overall relations with our employees
are generally good.
Available
Information
We file annual, quarterly and current reports, proxy statements
and all amendments to these reports and other information with
the U.S. Securities and Exchange Commission
(SEC). You may read and copy any materials we file
with the SEC at the SECs Public Reference Room at
100 F Street, NE., Washington, DC 20549. You may
obtain information on the operation of the Public Reference Room
by calling the SEC at
1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy
and information statements, and other information regarding
issuers that file electronically with the SEC and the address of
that site is
(http://www.sec.gov).
We make available free of charge on or through our website at
www.amerigroupcorp.com our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the SEC, as well as, among other things, our
Corporate Governance Principles, our Audit, Compensation and
Nominating and Corporate Governance charters and our Code of
Business Conduct and Ethics. Further, we will provide without
charge, upon written request, a copy of our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and all amendments to those reports. Requests for copies should
be addressed to Investor Relations, AMERIGROUP Corporation, 4425
Corporation Lane, Virginia Beach, VA 23462.
In accordance with New York Stock Exchange (NYSE)
Rules, on May 22, 2009, we filed the annual certification
by our Chief Executive Officer certifying that he was unaware of
any violation by us of the NYSEs corporate governance
listing standards at the time of the certification.
21
RISK
FACTORS
Risks
related to our business
Our
inability to manage medical costs effectively could reduce our
profitability.
Our profitability depends, to a significant degree, on our
ability to predict and effectively manage medical costs. Changes
in healthcare regulations and practices, level of use of
healthcare services, hospital costs, pharmaceutical costs, major
epidemics, pandemics, such as the H1N1 virus, new medical
technologies and other external factors, including general
economic conditions such as inflation levels or natural
disasters, are beyond our control and could reduce our ability
to predict and effectively control the costs of healthcare
services. Although we attempt to manage medical costs through a
variety of techniques, including various payment methods to PCPs
and other providers, advance approval for hospital services and
referral requirements, medical management and quality management
programs, and our information systems and reinsurance
arrangements, we may not be able to manage costs effectively in
the future. In addition, new products or new markets, such as
the CoLTS program in New Mexico, Nevada and Tennessee long-term
care could pose new and unexpected challenges to effectively
manage medical costs. It is possible that there could be an
increase in the volume or value of appeals for claims previously
denied and claims previously paid to
out-of-network
providers could be appealed and subsequently reprocessed at
higher amounts. This would result in an adjustment to health
benefits expense. If our costs for medical services increase,
our profits could be reduced, or we may not remain profitable.
We maintain reinsurance to help protect us against individually
severe or catastrophic medical claims, but we can provide no
assurance that such reinsurance coverage will be adequate or
available to us in the future or that the cost of such
reinsurance will not limit our ability to obtain appropriate
levels of coverage.
Our
limited ability to accurately predict our incurred but not
reported medical expenses has in the past and could in the
future materially impact our reported results.
Our health benefits expense includes estimates of the cost of
claims for services rendered to our members that are yet to be
received, or incurred but not reported (IBNR). We
estimate our IBNR health benefits expense based on a number of
factors, including authorization data, prior claims experience,
maturity of markets, complexity and mix of products and
stability of provider networks. Adjustments, if necessary, are
made to health benefits expense in the period during which the
actual claim costs are ultimately determined or when underlying
assumptions or factors used to estimate IBNR change. We cannot
be sure that our current or future IBNR estimates are adequate
or that any further adjustments to such IBNR estimates will not
significantly harm or benefit our results of operations.
Further, our inability to accurately estimate IBNR may also
affect our ability to take timely corrective actions, further
exacerbating the extent of the impact on our results of
operations. Though we employ substantial efforts to estimate our
IBNR at each reporting date, we can give no assurance that the
ultimate results will not materially differ from our estimates
resulting in a material increase or decrease in our health
benefits expense in the period such difference is determined.
New products or new markets, such as New Mexico, Nevada and
Tennessee long-term care or significant volatility in membership
enrollment and healthcare service utilization patterns such as
we have experienced in 2009 could pose new and unexpected
challenges to effectively predict health benefits expense.
We
derive a majority of our premium revenues and net income from a
small number of states, in particular, the State of Texas, and
if we fail to retain our contracts in those states, or if the
conditions in those states change, our business and results of
operations may suffer.
We earn substantially all of our revenues by serving members who
receive healthcare benefits through contracts with the
regulatory entities in the jurisdictions in which we operate.
For the year ended December 31, 2009, our Texas contract
represented approximately 25% of our premium revenues and a
significantly higher percentage of our net income. Our Maryland,
Tennessee, Georgia and Florida contracts individually accounted
for over 10% of our premium revenues. Our reliance on operations
in a limited number of states could cause our revenue and
profitability to change suddenly and unexpectedly as a result of
significant premium rate reductions, a
22
loss of a material contract, legislative actions, changes in
Medicaid eligibility methodologies, catastrophic claims, an
epidemic or pandemic, or an unexpected increase in utilization,
general economic conditions and similar factors in those states.
Our inability to continue to operate in any of the states in
which we currently operate, or a significant change in the
nature of our existing operations, could adversely affect our
business, financial condition, or results of operations.
Some of our contracts are subject to a re-bidding or
re-application process. For example, our Texas markets are
re-bid every eight years (and were last re-bid in 2006). If we
lost a contract through the re-bidding process, or if an
increased number of competitors were awarded contracts in a
specific market, our operating results could be materially and
adversely affected.
Changes
in the number of Medicaid eligible beneficiaries, or benefits
provided to Medicaid eligible beneficiaries or a change in mix
of Medicaid eligible beneficiaries could cause our operating
results to suffer.
Historically, the number of persons eligible to receive Medicaid
benefits has increased more rapidly during periods of rising
unemployment, corresponding to less favorable general economic
conditions such as those we are experiencing in the current
economic recession. This pattern has proven consistent with our
experience of significant membership growth during 2009.
However, during such economic downturns, state budgets can and
have decreased, causing states to attempt to cut healthcare
programs, benefits and rates. If this were to happen while our
membership was increasing, our results of operations could
suffer. The current macroeconomic conditions have resulted in
such budget challenges in the states in which we operate,
placing pressures on the rate-setting process. Conversely, the
number of persons eligible to receive Medicaid benefits may grow
more slowly or even decline as economic conditions improve,
thereby causing our operating results to suffer. In either case,
in the event that the Company experiences a change in product
mix to less profitable product lines, our profitability could be
negatively impacted.
Receipt
of inadequate or significantly delayed premiums could negatively
impact our revenues, profitability and cash flows.
Most of our revenues are generated by premiums consisting of
fixed monthly payments per member. These premiums are fixed by
contract and we are obligated during the contract period to
facilitate access to healthcare services as established by the
state governments. We have less control over costs related to
the provision of healthcare services than we do over our
selling, general and administrative expenses. Historically, our
reported expenses related to health benefits as a percentage of
premium revenue have fluctuated. For example, our expenses
related to health benefits were 85.4% of our premium revenue for
the year ended December 31, 2009, 82.9% of our premium
revenue in 2008, and 83.9% of our premium revenue in 2007. If
health benefits expense increases at a higher rate than premium
increases, our results of operations would be impacted
negatively. In addition, if there is a significant delay in our
premium rate increases to offset previously incurred health
benefits expense increases, our earnings could be negatively
impacted.
Premiums are contractually payable to us before or during the
month for which we are obligated to provide services to our
members. Our cash flow would be negatively impacted if premium
payments are not made according to contract terms.
As
participants in state and Federal healthcare programs, we are
subject to extensive fraud and abuse laws which may give rise to
frequent lawsuits and claims against us, and the outcome of
these lawsuits and claims may have a material adverse effect on
our financial position, results of operations and
liquidity.
Our operations are subject to various state and Federal
healthcare laws commonly referred to as fraud and
abuse laws, including the Federal False Claims Act. Many
states have false claims act statutes which mirror the
provisions of the Federal act. The Federal False Claims Act
prohibits any person from knowingly presenting, or causing to be
presented to the Federal government, a false or fraudulent claim
for payment. Suits filed under the False Claims Act, known as
qui tam actions, can be brought by any
individual (known as a relator or, more
23
commonly, whistleblower) on behalf of the
government. Qui tam actions have increased significantly
in recent years, causing greater numbers of healthcare companies
to have to defend a false claim action, pay fines or be excluded
from the Medicaid, Medicare or other state or Federal healthcare
programs as a result of an investigation arising out of such
action. In addition, the DRA encourages states to enact
state-versions of the False Claims Act that establish liability
to the state for false and fraudulent Medicaid claims and that
provide for, among other things, claims to be filed by qui
tam relators.
In 2002, a former employee of our former Illinois subsidiary
filed a qui tam action alleging that the subsidiary had
submitted false claims under the Medicaid program by maintaining
a scheme to discourage or avoid the enrollment into the health
plan of pregnant women and other recipients with special needs.
Subsequently, the State of Illinois and the United States of
America intervened and the Company was added as a defendant. On
October 30, 2006, a jury returned a verdict against the
Company and the subsidiary in the amount of $48.0 million
which under applicable law was trebled to $144.0 million
plus penalties, and attorneys fees, costs and expenses.
The jury also found that there were 18,130 false claims. In
March 2007, the court entered a judgment against us and the
subsidiary in the amount of approximately $334.0 million
which included $144.0 million of damages and approximately
$190.0 million in false claim penalties. In August 2008, we
settled this matter and paid the aggregate amount of
$225.0 million as a settlement plus approximately
$9.2 million to the former employee for legal fees.
Although we believe we are in substantial compliance with the
healthcare laws applicable to our Company, we can give no
assurances that we will not be subject to additional False
Claims Act suits in the future. Any violations of any applicable
fraud and abuse laws or any False Claims Act suit against us
could have a material adverse effect on our financial position,
results of operations and cash flows.
Failure
to comply with the terms of our government contracts could
negatively impact our profitability and subject us to fines,
penalties and liquidated damages.
We contract with various state governmental agencies to provide
managed healthcare services. These contracts contain certain
provisions regarding data submission, provider network
maintenance, quality measures, continuity of care, call center
performance and other requirements specific to state and program
regulations. If we fail to comply with these requirements, we
may be subject to fines, penalties and liquidated damages that
could impact our profitability. Additionally, we could be
required to file a corrective plan of action with the state and
we could be subject to fines, penalties and liquidated damages
and additional corrective action measures if we did not comply
with the corrective plan of action. Our failure to comply could
also affect future membership enrollment levels. These
limitations could negatively impact our revenues and operating
results.
Under the terms of our contracts with state governmental
agencies, we are subject to various reviews, audits and
investigations to verify our compliance with the contracts and
applicable laws and regulations. Any adverse review, audit or
investigation could result in any of the following: refunds to
state government agencies of premiums we have been paid pursuant
to our contracts; imposition of fines, penalties and other
sanctions; loss of our right to participate in various markets;
or loss of one or more of our licenses. Any such finding could
negatively impact our revenues and operating results.
Changes
in Medicaid or Medicare funding by the states or the Federal
government could substantially reduce our
profitability.
Most of our revenues come from state government Medicaid
premiums. The base premium rate paid by each state differs
depending on a combination of various factors such as defined
upper payment limits, a members health status, age,
gender, county or region, benefit mix and member eligibility
category. Future levels of Medicaid premium rates may be
affected by continued government efforts to contain medical
costs and may further be affected by state and Federal budgetary
constraints. Changes to Medicaid programs could reduce the
number of persons enrolled or eligible, reduce the amount of
reimbursement or payment levels, or increase our administrative
or healthcare costs under such programs. States periodically
consider reducing or reallocating the amount of money they spend
for Medicaid. We believe that additional reductions in Medicaid
payments could substantially reduce our profitability. Further,
our contracts with the states are subject to cancellation in the
event of the unavailability of
24
state funds. In some jurisdictions, such cancellation may be
immediate and in other jurisdictions a notice period is required.
State governments generally are experiencing tight budgetary
conditions within their Medicaid programs. The current
macroeconomic conditions have, and are expected to continue to,
put pressure on state budgets as tax and other state revenues
decrease while the Medicaid eligible population increases,
creating the need for more funding. We anticipate this will
require government agencies with whom we contract to find
funding alternatives, which may result in reductions in funding
for current programs and program expansions, contraction of
covered benefits, limited or no premium rate increases or
premium decreases. If any state in which we operate were to
decrease premiums paid to us, or pay us less than the amount
necessary to keep pace with our cost trends, it could have a
material adverse effect on our revenues and operating results.
Additionally, a portion of our premium revenues comes from CMS
through our Medicare Advantage contracts. As a consequence, our
Medicare Advantage plans are dependent on Federal government
funding levels. The premium rates paid to Medicare health plans
are established by contract, although the rates differ depending
on a combination of factors, including upper payment limits
established by CMS, a members health profile and status,
age, gender, county or region, benefit mix, member eligibility
categories, and the members risk scores. Some members of
Congress have proposed significant cuts in payments to Medicare
Advantage plans. In addition, continuing government efforts to
contain healthcare related expenditures, including prescription
drug costs, and other Federal budgetary constraints that result
in changes in the Medicare program, including with respect to
funding, could lead to reductions in the amount of
reimbursement, elimination of coverage for certain benefits or
mandate additional benefits, and reductions in the number of
persons enrolled in or eligible for Medicare, which in turn
could reduce the number of beneficiaries enrolled in our health
plans and have a material adverse effect on our revenues and
operating results.
Delays
in program expansions or contract changes could negatively
impact our business.
In any program
start-up,
expansion, or re-bid, the states ability to manage the
implementation as designed may be affected by factors beyond our
control. These include political considerations, network
development, contract appeals, membership assignment (allocation
for members who do not self-select) and errors in the bidding
process, as well as difficulties experienced by other private
vendors involved in the implementation, such as enrollment
brokers. Our business, particularly plans for expansion or
increased membership levels, could be negatively impacted by
these delays or changes.
If a
state fails to renew its Federal waiver application for mandated
Medicaid enrollment into managed care or such application is
denied, our membership in that state will likely
decrease.
States may only mandate Medicaid enrollment into managed care
under Federal waivers or demonstrations. Waivers and programs
under demonstrations are approved for two-year periods and can
be renewed on an ongoing basis if the state applies. We have no
control over this renewal process. If a state does not renew its
mandated program or the Federal government denies the
states application for renewal, our business could suffer
as a result of a likely decrease in membership.
We
rely on the accuracy of eligibility lists provided by state
governments, and in the case of our Medicare Advantage members,
by the Federal government. Inaccuracies in those lists could
negatively affect our results of operations.
Premium payments to us are based upon eligibility lists produced
by government enrollment data. From
time-to-time,
governments require us to reimburse them for premiums paid to us
based on an eligibility list that a government later determines
contains individuals who were not in fact eligible for a
government sponsored program, were enrolled twice in the same
program or were eligible for a different premium category or a
different program. Alternatively, a government could fail to pay
us for members for whom we are entitled to receive payment. Our
results of operations could be adversely affected as a result of
such reimbursement to the government or inability to receive
payments we are due if we had made related payments to providers
and were unable to recoup such payments from the providers.
25
Our
inability to operate new business opportunities at underwritten
levels could have a material adverse effect on our
business.
In underwriting new business opportunities we must estimate
future health benefits expense. We utilize a range of
information and develop numerous assumptions. The information we
use can often include, but is not limited to, historical cost
data, population demographics, experience from other markets,
trend assumptions and other general underwriting factors. The
information we utilize may be inadequate or not applicable and
our assumptions may be incorrect. If our underwriting estimates
are incorrect, our cost experience could be materially different
than expected. If costs are higher than expected, our operating
results could be adversely affected.
Our
inability to maintain good relations with providers could harm
our profitability or subject us to material fines, penalties or
sanctions.
We contract with providers as a means to assure access to
healthcare services for our members, to manage healthcare costs
and utilization, and to better monitor the quality of care being
delivered. In any particular market, providers could refuse to
contract with us, demand higher payments, or take other actions
which could result in higher healthcare costs, disruption to
provider access for current members, or difficulty in meeting
regulatory or accreditation requirements.
Our profitability depends, in large part, upon our ability to
contract on favorable terms with hospitals, physicians and other
healthcare providers. Our provider arrangements with our primary
care physicians and specialists usually are for two-year periods
and automatically renew for successive one-year terms, subject
to termination by us for cause based on provider conduct or
other appropriate reasons. The contracts generally may be
canceled by either party without cause upon 90 to 120 days
prior written notice. Our contracts with hospitals are usually
for one- to two-year periods and automatically renew for
successive one-year periods, subject to termination for cause
due to provider misconduct or other appropriate reasons.
Generally, our hospital contracts may be canceled by either
party without cause on 90 to 120 days prior written notice.
There can be no assurance that we will be able to continue to
renew such contracts or enter into new contracts enabling us to
service our members profitably. We will be required to establish
acceptable provider networks prior to entering new markets.
Although we have established long-term relationships with many
of our providers, we may be unable to enter into agreements with
providers in new markets on a timely basis or under favorable
terms. If we are unable to retain our current provider contracts
or enter into new provider contracts timely or on favorable
terms, our profitability could be adversely affected. In some
markets, certain providers, particularly hospitals,
physician/hospital organizations and some specialists, may have
significant market positions. If these providers refuse to
contract with us or utilize their market position to negotiate
favorable contracts to themselves, our profitability could be
adversely affected.
Some providers that render services to our members are not
contracted with our health plans
(out-of-network
providers). In those cases, there is no pre-established
understanding between the
non-network
provider and the health plan about the amount of compensation
that is due to the provider. In some states, with respect to
certain services, the amount that the health plan must pay to
out-of-network
providers for services provided to our members is defined by law
or regulation, but in certain instances it is either not defined
or it is established by a standard that is not clearly
translatable into dollar terms. In such instances, we generally
pay
out-of-network
providers based on our Companys standard
out-of-network
fee schedule.
Out-of-network
providers may believe they are underpaid for their services and
may either litigate or arbitrate their dispute with the health
plan. The uncertainty of the amount to pay and the possibility
of subsequent adjustment of the payment could adversely affect
our financial position, results of operations or cash flows.
We are required to establish acceptable provider networks prior
to entering new markets and to maintain such networks as a
condition to continued operation in those markets. If we are
unable to retain our current provider networks or establish
provider networks in new markets in a timely manner or on
favorable terms, our profitability could be harmed. Further if
we are unable to retain our current provider networks, we may be
subject to material fines, penalties or sanctions from state or
Federal regulatory authorities.
26
Our
inability to integrate, manage and grow our information systems
effectively could disrupt our operations.
Our operations are significantly dependent on effective
information systems. The information gathered and processed by
our information systems assists us in, among other things,
monitoring utilization and other cost factors, processing
provider claims and providing data to our regulators. Our
providers also depend upon our information systems for
membership verifications, claims status and other information.
We operate our markets through integrated information-technology
systems for our financial, claims, care management, encounter
management and sales/marketing systems. The ability to capture,
process, enable local access to data and translate it into
meaningful information is essential to our ability to operate
across a multi-state service area in a cost efficient manner.
Our information systems and applications require continual
maintenance, upgrading and enhancement to meet our operational
needs. Moreover, any acquisition activity requires transitions
to or from, and the integration of, various information systems.
We are continually upgrading and expanding our information
systems capabilities. If we experience difficulties with the
transition to or from information systems or are unable to
properly maintain or expand our information systems, we could
suffer, among other things, from operational disruptions, loss
of existing members and difficulty in attracting new members,
regulatory problems and increases in administrative expenses.
Failure
of a business in a new state or market could negatively impact
our results of operations.
Start-up
costs associated with a new business can be substantial. For
example, in order to obtain a certificate of authority and
obtain a state contract in most jurisdictions, we must first
establish a provider network, have systems in place and
demonstrate our ability to process claims. If we are
unsuccessful in obtaining the necessary license, winning the bid
to provide service or attracting members in numbers sufficient
to cover our costs, the new business would fail. We also could
be obligated by the state to continue to provide services for
some period of time without sufficient revenue to cover our
ongoing costs or recover
start-up
costs. The costs associated with starting up the business could
have a significant impact on our results of operations. In
addition, if the new business does not operate at underwritten
levels, our profitability could be adversely affected.
Difficulties
in executing our acquisition strategy or integrating acquired
business could adversely affect our business.
Historically, acquisitions, including the acquisition of
publicly sponsored program contract rights and related assets of
other health plans, both in our existing service areas and in
new markets, have been a significant factor in our growth.
Although we cannot predict our rate of growth as the result of
acquisitions with complete accuracy, we believe that
acquisitions similar in nature to those we have historically
executed, or other acquisitions we may consider, will continue
to contribute to our growth strategy. Many of the other
potential purchasers of these assets have greater financial
resources than we have. Furthermore, many of the sellers are
interested in either (i) selling, along with their publicly
sponsored program assets, other assets in which we do not have
an interest; or (ii) selling their companies, including
their liabilities, as opposed to just the assets of the ongoing
business. Therefore, we cannot be sure that we will be able to
complete acquisitions on terms favorable to us or that we can
obtain the necessary financing for these acquisitions,
particularly if the credit environment were to experience
similar volatility and disruption to that over the last several
years.
We are generally required to obtain regulatory approval from one
or more state agencies when making these acquisitions. In the
case of an acquisition of a business located in a state in which
we do not currently operate, we would be required to obtain the
necessary licenses to operate in that state. In addition,
although we may already operate in a state in which we acquire
new business, we would be required to obtain additional
regulatory approval if, as a result of the acquisition, we will
operate in an area of the state in which we did not operate
previously. There can be no assurance that we would be able to
comply with these regulatory requirements for an acquisition in
a timely manner, or at all.
27
In addition to the difficulties we may face in identifying and
consummating acquisitions, we will also be required to integrate
our acquisitions with our existing operations. This may include
the integration of:
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additional employees who are not familiar with our operations,
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existing provider networks, which may operate on different terms
than our existing networks,
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existing members, who may decide to switch to another healthcare
provider, and
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disparate information and record keeping systems.
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We may be unable to successfully identify, consummate and
integrate future acquisitions, including integrating the
acquired businesses on to our technology platform, or to
implement our operations strategy in order to operate acquired
businesses profitably. There can be no assurance that incurring
expenses to acquire a business will result in the acquisition
being consummated. These expenses could impact our selling,
general and administrative expense ratio. If we are unable to
effectively execute our acquisition strategy or integrate
acquired businesses, our future growth will suffer and our
results of operations could be harmed.
We are
subject to competition that impacts our ability to increase our
penetration of the markets that we serve.
We compete for members principally on the basis of size and
quality of provider network, benefits provided and quality of
service. We compete with numerous types of competitors,
including other health plans and traditional
fee-for-service
programs, primary care case management programs and other
commercial Medicaid or Medicare only health plans. Some of the
health plans with which we compete have substantially larger
enrollments, greater financial and other resources and offer a
broader scope of products than we do.
While many states mandate health plan enrollment for Medicaid
eligible participants, including all of those in which we do
business, the programs are voluntary in other states. Subject to
limited exceptions by Federally approved state applications, the
Federal government requires that there be a choice for Medicaid
recipients among managed care programs. Voluntary programs and
mandated competition will impact our ability to increase our
market share.
In addition, in most states in which we operate we are not
allowed to market directly to potential members, and therefore,
we rely on creating name brand recognition through our
community-based programs. Where we have only recently entered a
market or compete with health plans much larger than we are, we
may be at a competitive disadvantage unless and until our
community-based programs and other promotional activities create
brand awareness.
Negative
publicity regarding the managed care industry may harm our
business and operating results.
In the past, the managed care industry and the health insurance
industry in general have received negative publicity. This
publicity has led to increased legislation, regulation, review
of industry practices and private litigation in the commercial
sector. These factors may adversely affect our ability to market
our services, require us to change our services and increase the
regulatory burdens under which we operate, further increasing
the costs of doing business and adversely affecting our
operating results.
We may
be subject to claims relating to professional liability, which
could cause us to incur significant expenses.
Our providers and employees involved in medical care decisions
may be exposed to the risk of professional liability claims.
Some states have passed, or may consider passing in the future,
legislation that exposes managed care organizations to liability
for negligent treatment decisions by providers or benefits
coverage determinations
and/or
legislation that eliminates the requirement that certain
providers carry a minimum amount of professional liability
insurance. This kind of legislation has the effect of shifting
the liability for medical decisions or adverse outcomes to the
managed care organization. This could result in substantial
damage awards against us and our providers that could exceed the
limits of any applicable insurance coverage. Therefore,
successful professional
28
liability claims asserted against us, our providers or our
employees could adversely affect our financial condition and
results of operations.
In addition, we may be subject to other litigation that may
adversely affect our business or results of operations. We
maintain errors and omissions insurance and such other lines of
coverage as we believe are reasonable in light of our experience
to date. However, this insurance may not be sufficient or
available at a reasonable cost to protect us from liabilities
that might adversely affect our business or results of
operations. Even if any claims brought against us were
unsuccessful or without merit, we would still have to defend
ourselves against such claims. Any such defenses may be
time-consuming and costly, and may distract our
managements attention. As a result, we may incur
significant expenses and may be unable to effectively operate
our business.
An
unauthorized disclosure of sensitive or confidential member
information could have an adverse effect on our business,
reputation and profitability.
As part of our normal operations, we collect, process and retain
confidential member information. We are subject to various state
and Federal laws and rules regarding the use and disclosure of
confidential member information, including HIPAA and the
Gramm-Leach-Bliley Act. Despite the security measures we have in
place to ensure compliance with applicable laws and rules, our
facilities and systems, and those of our third party service
providers, may be vulnerable to security breaches, acts of
vandalism, computer viruses, misplaced or lost data, programming
and/or human
errors or other similar events. Any security breach involving
the misappropriation, loss or other unauthorized disclosure or
use of confidential member information, whether by us or a third
party, could have a material adverse effect on our business,
reputation and results of operations.
We are
currently involved in litigation, and may become involved in
future litigation, which may result in substantial expense and
may divert our attention from our business.
In the normal course of business, we are involved in legal
proceedings and, from
time-to-time,
we may be subject to additional legal claims of a non-routine
nature. We may suffer an unfavorable outcome as a result of one
or more claims, resulting in the depletion of capital to pay
defense costs or the costs associated with any resolution of
such matters. Depending on the costs of litigation and the
amount and timing of any unfavorable resolution of claims
against us, our financial position, results of operations or
cash flows could be materially adversely affected.
In addition, we may be subject to securities class action
litigation from
time-to-time
due to, among other things, the volatility of our stock price.
When the market price of a stock has been volatile, regardless
of whether such fluctuations are related to the operating
performance of a particular company, holders of that stock have
sometimes initiated securities class action litigation against
such company. Any class action litigation against us could cause
us to incur substantial costs, divert the time and attention of
our management and other resources, or otherwise harm our
business.
Acts
of terrorism, natural disasters and medical epidemics could
cause our business to suffer.
Our profitability depends, to a significant degree, on our
ability to predict and effectively manage health benefits
expense. If an act or acts of terrorism or a natural disaster
(such as a major hurricane) or a medical epidemic, such as the
H1N1 pandemic in 2009, were to occur in markets in which we
operate, our business could suffer. The results of terrorist
acts or natural disasters could lead to higher than expected
medical costs, network and information technology disruptions,
and other related factors beyond our control, which would cause
our business to suffer. A widespread epidemic or pandemic in a
market could cause a breakdown in the medical care delivery
system which could cause our business to suffer.
29
Risks
related to being a regulated entity
Changes
in government regulations designed to protect providers and
members could force us to change how we operate and could harm
our business and results of operations.
Our business is extensively regulated by the states in which we
operate and by the Federal government. These laws and
regulations are generally intended to benefit and protect
providers and health plan members rather than us and our
stockholders. Changes in existing laws and rules, the enactment
of new laws and rules and changing interpretations of these laws
and rules could, among other things:
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force us to change how we do business,
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restrict revenue and enrollment growth,
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increase our health benefits and administrative costs,
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impose additional capital requirements, and
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increase or change our claims liability.
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Regulations
could limit our profits as a percentage of
revenues.
Our New Jersey and Maryland subsidiaries, as well as our CHIP
product in Florida, are subject to minimum medical expense
levels as a percentage of premium revenue. Our Florida
subsidiary is subject to minimum behavioral health expense
levels as a percentage of behavioral health premium revenues. In
New Jersey, Maryland and Florida, premium revenue recoupment may
occur if these levels are not met. In addition, our Ohio
subsidiary is subject to certain limits on administrative costs
and our Virginia subsidiary is subject to a limit on profits.
These regulatory requirements, changes in these requirements and
additional requirements by our other regulators could limit our
ability to increase or maintain our overall profits as a
percentage of revenues, which could harm our operating results.
We have been required, and may in the future be required, to
make payments to the states as a result of not meeting these
expense levels.
Additionally, we could be required to file a corrective plan of
action with the states and we could be subject to fines and
additional corrective action measures if we did not comply with
the corrective plan of action. Our failure to comply could also
affect future rate determinations and membership enrollment
levels. These limitations could negatively impact our revenues
and operating results.
Our Texas health plan is required to pay an experience rebate to
the State of Texas in the event profits exceed established
levels. We file experience rebate calculation reports with the
State of Texas for this purpose. These reports are subject to
audits and if the audit results in unfavorable adjustments to
our filed reports, our financial position, results of operations
or cash flows could be negatively impacted.
Changes
in healthcare laws could reduce our profitability.
Numerous proposals relating to changes in healthcare law have
been introduced, some of which have been passed by Congress and
the states in which we operate or may operate in the future.
These include mandated medical loss ratio thresholds, Medicaid
reform initiatives in Florida, as well as waivers requested by
states for various elements of their programs. Changes in
applicable laws and regulations are continually being considered
and interpretations of existing laws and rules may also change
from
time-to-time.
We are unable to predict what regulatory changes may occur or
what effect any particular change may have on our business and
results of operations. Although some changes in government
regulations, such as the removal of the requirements on the
enrollment mix between commercial and public sector membership,
have encouraged managed care participation in public sector
programs, we are unable to predict whether new laws or proposals
will continue to favor or hinder the growth of managed
healthcare.
We cannot predict the outcome of these legislative or regulatory
proposals, nor the effect which they might have on us.
Legislation or regulations that require us to change our current
manner of operation, provide additional benefits or change our
contract arrangements could seriously harm our operations and
financial results.
30
If
state regulators do not approve payments of dividends,
distributions or administrative fees by our subsidiaries to us,
it could negatively affect our business strategy and
liquidity.
We principally operate through our health plan subsidiaries.
These subsidiaries are subject to state insurance holding
company system and other regulations that limit the amount of
dividends and distributions that can be paid to us without prior
approval of, or notification to, state regulators. We also have
administrative services agreements with our subsidiaries in
which we agree to provide them with services and benefits (both
tangible and intangible) in exchange for the payment of a fee.
Some states limit the administrative fees which our subsidiaries
may pay. For example, Ohio limits administrative fees paid to an
affiliate to the cost of providing the services. If the
regulators were to deny our subsidiaries requests to pay
dividends to us or restrict or disallow the payment of the
administrative fee or not allow us to recover the costs of
providing the services under our administrative services
agreement or require a significant change in the timing or
manner in which we recover those costs, the funds available to
our Company as a whole would be limited, which could harm our
ability to implement our business strategy, expand our
infrastructure, improve our information technology systems, make
needed capital expenditures and service our debt as well as
negatively impact our liquidity.
If
state regulatory agencies require a statutory capital level
higher than the state regulations we may be required to make
additional capital contributions.
Our operations are conducted through our wholly-owned
subsidiaries, which include HMOs, one HIC and one PHSP. HMOs,
HICs, and PHSPs are subject to state regulations that, among
other things, require the maintenance of minimum levels of
statutory capital and the maintenance of certain financial
ratios (which are referred to as risk based capital
requirements), as defined by each state. Certain states also
require performance bonds or letters of credit from our
subsidiaries. Additionally, state regulatory agencies may
require, at their discretion, individual regulated entities to
maintain statutory capital levels higher than the state
regulations. If this were to occur or other requirements change
for one of our subsidiaries, we may be required to make
additional capital contributions to the affected subsidiary. Any
additional capital contribution made to one of the affected
subsidiaries could have a material adverse effect on our
liquidity and our ability to grow.
Failure
to comply with government laws and regulations could subject us
to civil and criminal penalties and limitations on our
profitability.
We are subject to numerous local, state and Federal laws and
regulations. Violation of the laws or regulations governing our
operations could result in the imposition of sanctions, the
cancellation of our contracts to provide services, or in the
extreme case, the suspension or revocation of our licenses
and/or
exclusion from participation in state or Federal healthcare
programs. We can give no assurance that the terms of our
contracts with the states or the manner in which we are directed
to comply with our state contracts is in accordance with the CMS
regulations.
We may be subject to material fines or other sanctions in the
future. If we became subject to material fines or if other
sanctions or other corrective actions were imposed upon us, our
ability to continue to operate our business could be materially
and adversely affected. From
time-to-time
we have been subject to sanctions as a result of violations of
marketing regulations. Although we train our employees with
respect to compliance with local, state and Federal laws of each
of the states in which we do business, no assurance can be given
that violations will not occur.
We are, or may become subject to, various state and Federal laws
designed to address healthcare fraud and abuse, including false
claims laws. State and Federal laws prohibit the submission of
false claims and other acts that are considered fraudulent or
abusive. The submission of claims to a state or Federal
healthcare program for items and services that are determined to
be not provided as claimed may lead to the
imposition of civil monetary penalties, criminal fines and
imprisonment,
and/or
exclusion from participation in state and Federal funded
healthcare programs, including the Medicaid and Medicare
programs.
The DRA requires all entities that receive $5.0 million or
more in annual Medicaid funds to establish specific written
policies for their employees, contractors, and agents regarding
various false claims-related laws and whistleblower protections
under such laws as well as provisions regarding their policies
and procedures for detecting and preventing fraud, waste and
abuse. These requirements are conditions of receiving all future
payments
31
under the Medicaid program. Entities were required to comply
with the compliance related provisions of the DRA by
January 1, 2007. We believe that we have made appropriate
efforts to meet the requirements of the compliance provisions of
the DRA. However, if it is determined that we have not met the
requirements appropriately, we could be subject to civil
penalties
and/or be
barred from receiving future payments under the Medicaid
programs in the states in which we operate thereby materially
adversely affecting our business, results of operation and
financial condition.
HIPAA broadened the scope of fraud and abuse laws applicable to
healthcare companies. HIPAA created civil penalties for, among
other things, billing for medically unnecessary goods or
services. HIPAA establishes new enforcement mechanisms to combat
fraud and abuse, including a whistleblower program. Further,
HIPAA imposes civil and criminal penalties for failure to comply
with the privacy and security standards set forth in the
regulation.
The HITECH Act, one part of the ARRA, modified certain
provisions of HIPAA by, among other things, extending the
privacy and security provisions to business associates,
mandating new regulations around electronic medical records,
expanding enforcement mechanisms, allowing the state Attorneys
General to bring enforcement actions and increasing penalties
for violations. The U.S. Department of Health and Human
Services, as required by the HITECH Act, has issued the HHS
Breach Notification Rule. The various requirements of the HITECH
Act and the HHS Breach Notification Rule have different
compliance dates, some of which have passed and some of which
will occur in the future. With respect to those requirements
whose compliance dates have passed, we believe that we are in
compliance with these provisions. With respect to those
requirements whose compliance dates are in the future, we are
reviewing our current practices and identifying those which may
be impacted by upcoming regulations. It is our intention to
implement these new requirements on or before the applicable
compliance dates.
The Federal and state governments have and continue to enact
other fraud and abuse laws as well. Our failure to comply with
HIPAA or these other laws could result in criminal or civil
penalties and exclusion from Medicaid or other governmental
healthcare programs and could lead to the revocation of our
licenses. These penalties or exclusions, were they to occur,
would negatively impact our ability to operate our business.
Compliance
with the terms and conditions of our Corporate Integrity
Agreement requires significant resources and, if we fail to
comply, we could be subject to penalties or excluded from
participation in government healthcare programs, which could
seriously harm our results of operations, liquidity and
financial results.
In August 2008, in connection with the settlement of a qui
tam action, we voluntarily entered into a five-year
Corporate Integrity Agreement with the Office of Inspector
General of the United States Department of Health and Human
Services (OIG). The Corporate Integrity Agreement
provides that we shall, among other things, keep in place and
continue our current compliance program, including a corporate
compliance officer and compliance officers at our health plans,
a corporate compliance committee and compliance committees at
our health plans, a compliance committee of our Board of
Directors, a code of conduct, comprehensive compliance policies,
training and monitoring, a compliance hotline, an open door
policy and a disciplinary process for compliance violations. The
Corporate Integrity Agreement further provides that we shall
provide periodic reports to the OIG, appoint a benefits rights
ombudsman responsible for addressing concerns raised by health
plan members and potential enrollees and engage an independent
review organization to assist us in assessing and evaluating our
compliance with the requirements of the Federal healthcare
programs and other obligations under the Corporate Integrity
Agreement and retain a compliance expert to provide independent
compliance counsel to our Board of Directors.
Maintaining the broad array of processes, policies, and
procedures necessary to comply with the Corporate Integrity
Agreement is expected to continue to require a significant
portion of managements attention as well as the
application of significant resources. Failing to meet the
Corporate Integrity Agreement obligations could have material
adverse consequences for us including monetary penalties for
each instance of non-compliance. In addition, in the event of an
uncured material breach or deliberate violation of the Corporate
Integrity Agreement, we could be excluded from participation in
Federal healthcare programs
and/or
subject to prosecution, which could seriously harm our results
of operations, liquidity and financial results.
32
Risks
related to our financial condition
Ineffective
management of rapid growth or our inability to grow could
negatively affect our results of operations, financial condition
and business.
We have experienced rapid growth. In 1999, we had
$390.3 million of premium revenue. In 2009, we had
$5.2 billion in premium revenue. This increase represents a
compounded annual growth rate of 29.5%. Depending on
acquisitions and other opportunities, as well as macroeconomic
conditions that affect membership such as those conditions
experienced recently, we expect to continue to grow rapidly.
Continued growth could place a significant strain on our
management and on other resources. We anticipate that continued
growth, if any, will require us to continue to recruit, hire,
train and retain a substantial number of new and highly skilled
medical, administrative, information technology, finance and
other support personnel. Our ability to compete effectively
depends upon our ability to implement and improve operational,
financial and management information systems on a timely basis
and to expand, train, motivate and manage our work force. If we
continue to experience rapid growth, our personnel, systems,
procedures and controls may be inadequate to support our
operations, and our management may fail to anticipate adequately
all demands that growth will place on our resources. In
addition, due to the initial costs incurred upon the acquisition
of new businesses, rapid growth could adversely affect our
short-term profitability. Our inability to manage growth
effectively or our inability to grow could have a negative
impact on our business, operating results and financial
condition.
Our
debt service obligations may adversely affect our cash flows and
our increased leverage as a result of our 2.0% Convertible
Senior Notes may harm our financial condition and results of
operations.
As of December 31, 2009, we had $260.0 million
outstanding in aggregate principal amount of
2.0% Convertible Senior Notes due May 15, 2012
(2.0% Convertible Senior Notes). Our debt
service obligation on our 2.0% Convertible Senior Notes is
approximately $5.2 million per year in cash interest
payments. If we are unable to generate sufficient cash to meet
our obligations and must instead use our existing cash or
investments, we may have to reduce, curtail or terminate other
activities of our business.
We intend to fulfill our debt service obligations from cash
generated by our operations, if any, and from our existing cash
and investments. We anticipate that the principal of our
2.0% Convertible Senior Notes, which is due in May 2012,
will be repaid with available cash on hand or with proceeds from
debt or equity financing, or a combination thereof. If we
determine that debt or equity financing is appropriate, our
operations at the time we enter the credit or equity markets
cannot be predicted and may cause our access to these markets to
be limited. Additionally, any disruptions in the credit markets
similar to that of the last several years could further limit
our flexibility in refinancing our 2.0% Convertible Senior
Notes, planning for, or reacting to, changes in our business and
industry and addressing our future capital requirements.
Our operations may not generate sufficient cash and we may be
unable to access financing to enable us to service our debt. If
we fail to make a debt service obligation payment, we could be
in default under our 2.0% Convertible Senior Notes.
Our
investments in auction rate securities are subject to risks that
may cause losses and have a material adverse effect on our
liquidity
As of December 31, 2009, $56.8 million of our
investments were comprised of securities with an auction reset
feature (auction rate securities) issued by student
loan corporations which are public, non-profit entities
established by various state governments. As of
December 31, 2009, our investments in auction rate
securities had a weighted-average rating of AA+. Liquidity for
these auction rate securities historically was provided by an
auction process which allowed holders to sell their notes and
the interest rate was reset at pre-determined intervals, usually
every 28 or 35 days. Since early 2008, auctions for these
auction rate securities have failed and there is no assurance
that auctions for these securities will succeed in the future.
An auction failure means that the parties wishing to sell their
securities could not be matched with an adequate volume of
buyers. In the event that there is a failed auction, the
indenture governing the security requires the issuer to pay
interest at a contractually defined rate. The securities for
which auctions have failed will continue to accrue interest at
the contractual rate and be auctioned
33
every 28 or 35 days until the auction succeeds, the issuer
calls the securities, or they mature. As a result, our ability
to liquidate and fully recover the carrying value of our auction
rate securities in the near term may be limited or not exist. As
we cannot predict the timing of future successful auctions, if
any, our auction rate securities are classified as long-term
investments.
As of December 31, 2009, auction rate securities we hold as
available-for-sale
are recorded at a temporary unrealized loss of approximately
$4.1 million. We currently believe that the temporary
decline in fair values is primarily due to liquidity concerns,
because the underlying assets for the majority of these
securities are student loans supported and guaranteed by the
United States Department of Education. In addition, our holdings
of auction rate securities represented less than four percent of
our total cash, cash equivalent, and investment balance at
December 31, 2009, which we believe allows us sufficient
time for the securities to return to full value. Because we
believe that the current decline in fair value is temporary and
based primarily on liquidity issues in the credit markets, any
difference between our estimate and an estimate that would be
arrived at by another party would have no impact on our
earnings, since such difference would also be recorded to
accumulated other comprehensive income. We will re-evaluate each
of these factors as market conditions change in subsequent
periods.
If the credit ratings of the issuers of these auction rate
securities deteriorate, we may in the future be required to
record an additional impairment charge on these investments. We
may be required to wait until market stability is restored for
these instruments or until the final maturity of the underlying
notes (up to 31 years) to realize our investments
recorded value. Further, if we are unable to hold these
instruments to maturity or other factors occur causing our
assessment of impairment to change such that the impairment is
deemed to be
other-than-temporary,
we may be required to record an impairment charge to earnings in
future periods which could be significant.
Our
investment portfolio may suffer losses from reductions in market
interest rates and fluctuations in fixed income securities which
could materially adversely affect our results of operations or
liquidity.
As of December 31, 2009, we had total cash and investments
of $1.5 billion. The following table shows the types,
percentages and average Standard and Poors ratings of our
holdings within our investment portfolio at December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average S&P
|
|
|
|
%
|
|
|
Rating
|
|
|
Auction rate securities
|
|
|
3.9
|
%
|
|
|
AA+
|
|
Cash, bank deposits and commercial paper
|
|
|
2.8
|
%
|
|
|
A1+
|
|
Certificates of deposit
|
|
|
6.6
|
%
|
|
|
AAA
|
|
Corporate bonds
|
|
|
14.5
|
%
|
|
|
A+
|
|
Debt obligations of government sponsored entities, Federally
insured corporate bonds, municipal bonds and U.S. Treasury
securities
|
|
|
43.9
|
%
|
|
|
AAA
|
|
Money market funds
|
|
|
28.3
|
%
|
|
|
AAA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
AA+
|
|
|
|
|
|
|
|
|
|
|
Our investment portfolio generated approximately
$22.4 million, $50.9 million and $68.7 million of
pre-tax income for the years ended December 31, 2009, 2008
and 2007, respectively. The performance of our investment
portfolio is interest rate driven, and consequently, changes in
interest rates affect our returns on, and the fair value of our
portfolio. This factor or any disruptions in the credit markets
could materially adversely affect our financial position,
results of operations or cash flows in future periods.
The
value of our investments is influenced by varying economic and
market conditions, and a decrease in value could have an adverse
effect on our financial position, results of operations, or cash
flows.
Our investment portfolio is comprised primarily of investments
classified as
available-for-sale.
The balance of our portfolio is held in our trading investment
securities.
Available-for-sale
investments are carried at fair value, and the unrealized gains
or losses are included in accumulated other comprehensive income
as a separate component of stockholders equity. Trading
securities are carried at fair value and any realized gains or
losses are included as a component of earnings. For our
available-for-sale
investments, if we experience a decline in value and we intend
to
34
sell such security prior to maturity, or if it is likely that we
will be required to sell such security prior to maturity, the
security is deemed to be
other-than-temporarily
impaired and it is written down to fair value through a charge
to earnings.
In accordance with applicable accounting standards, we review
our investment securities to determine if declines in fair value
below cost are
other-than-temporary.
This review is subjective and requires a high degree of
judgment. We conduct this review on a quarterly basis, using
both quantitative and qualitative factors, to determine whether
a decline in value is
other-than-temporary.
Such factors considered include, the length of time and the
extent to which market value has been less than cost, financial
condition and near term prospects of the issuer, recommendations
of investment advisors and forecasts of economic, market or
industry trends. This review process also entails an evaluation
of the likelihood that we will hold individual securities until
they mature or full cost can be recovered.
The current economic environment and recent volatility of the
securities markets increase the difficulty of assessing
investment impairment and the same influences tend to increase
the risk of potential impairment of these assets. During the
year ended December 31, 2009, we did not record any charges
for
other-than-temporary
impairment of our
available-for-sale
securities. Over time, the economic and market environment may
further deteriorate or provide additional insight regarding the
fair value of certain securities, which could change our
judgment regarding impairment. This could result in realized
losses relating to
other-than-temporary
declines or losses related to our trading securities to be
recorded as an expense. Given the current market conditions and
the significant judgments involved, there is continuing risk
that further declines in fair value may occur and material
other-than-temporary
impairments or trading security losses may result in realized
losses in future periods which could have an adverse effect on
our financial position, results of operations, or cash flows.
Adverse
credit market conditions may have a material adverse affect on
our liquidity or our ability to obtain credit on acceptable
terms.
The securities and credit markets have experienced periods of
extreme volatility and disruption over the last several years.
Future volatility and disruption is possible and unpredictable.
In the event we need access to additional capital to pay our
operating expenses, make payments on our indebtedness, such as
the principal of our 2.0% Convertible Senior Notes, pay
capital expenditures or fund acquisitions, our ability to obtain
such capital may be limited and the cost of any such capital may
be significantly higher than in past periods depending on the
market conditions and our financial position at the time we
pursue additional financing.
Our access to additional financing will depend on a variety of
factors such as market conditions, the general availability of
credit, the overall availability of credit to our industry, our
credit ratings and credit capacity, as well as the possibility
that lenders could develop a negative perception of our long- or
short-term financial prospects. Similarly, our access to funds
may be impaired if regulatory authorities or rating agencies
take negative actions against us. If a combination of these
factors were to occur, our internal sources of liquidity may
prove to be insufficient, and in such case, we may not be able
to successfully obtain additional financing on favorable terms.
This could restrict our ability to (i) acquire new business
or enter new markets, (ii) service or refinance our
existing debt, (iii) make necessary capital investments,
(iv) maintain statutory net worth requirements and
(v) make other expenditures necessary for the ongoing
conduct of our business.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We do not own any real property. We lease office space in
Virginia Beach, Virginia, where our primary headquarters, call,
claims and data centers are located. We also lease real property
in each of our health plan locations. We are obligated by
various insurance and Medicaid regulatory authorities to have
offices in the service areas where we provide managed care
services.
35
|
|
Item 3.
|
Legal
Proceedings
|
Risk
Sharing Receivable
AMERIGROUP Texas, Inc. had an exclusive risk-sharing arrangement
in the Fort Worth service area with Cook Childrens
Health Care Network (CCHCN) and Cook Childrens
Physician Network (CCPN), which includes Cook
Childrens Medical Center, that expired by its own terms as
of August 31, 2005. Under this risk-sharing arrangement,
the parties performed annual reconciliations and settlements of
the risk pool for each contract year. The contract with CCHCN
prescribed reconciliation procedures all of which were completed
without agreement on amounts owed under the risk-sharing
arrangement. On August 27, 2008, AMERIGROUP Texas, Inc.
filed suit against CCHCN and CCPN in the District Court for the
153rd Judicial District in Tarrant County, Texas, Case
No. 153-232258-08.
The amended petition asserted a breach of contract claim and
sought compensatory damages in the amount of $11.3 million
plus pre- and post-judgment interest, attorneys fees and
costs. CCHCN and CCPN filed an amended counterclaim against
AMERIGROUP Texas, Inc. seeking an amount to be determined at
trial plus pre- and post-judgment interest and attorneys
fees and costs. On December 22, 2009, AMERIGROUP
Corporation, AMERIGROUP Texas, Inc., CCHCN and CCPN entered into
a confidential Settlement Agreement and Release resolving all
claims related to the amended petition and counterclaim. The
effect of this Settlement Agreement was not material to our
results of operations.
Memorial
Hermann Litigation
On November 21, 2007, Memorial Hermann Hospital System
(Memorial Hermann) filed an Original Petition in the
District Court of Harris County, Texas against AMERIGROUP Texas,
Inc. alleging, inter alia, that AMERIGROUP Texas, Inc.
failed to pay claims for healthcare services rendered to members
in accordance with the terms set forth in the contract between
the parties. The Original Petition asserted a breach of contract
claim and requested damages in the principal amount of $723,000,
plus interest, punitive damages, attorneys fees, costs,
and other relief. On December 3, 2009, Memorial Hermann
filed a Second Amended Petition asserting claims for breach of
contract and quantum meruit and requesting damages in the
principal amount of $38.4 million, plus pre-judgment and
post-judgment interest, statutory damages, attorneys fees,
and costs. AMERIGROUP Texas has denied that it is indebted to
Memorial Hermann as alleged in the petitions. The case is
currently scheduled for trial on August 23, 2010.
We believe that AMERIGROUP Texas, Inc. has substantial defenses
to the claims asserted by Memorial Hermann and we intend to
vigorously contest their claims. Although it is possible that
the ultimate outcome of this litigation may not be favorable to
us, the amount of loss, if any, is uncertain. Accordingly, we
have not recorded any amounts in the Consolidated Financial
Statements for unfavorable outcomes, if any, as a result of this
litigation. There can be no assurances that the ultimate outcome
of this litigation will not have a material adverse effect on
our financial position, results of operations or cash flows.
Purchase
Agreement Litigation
On October 23, 2009, AMERIGROUP Corporation and AMERIGROUP
New Jersey, Inc. settled litigation with Centene and its
wholly-owned subsidiary, UHP, regarding AMERIGROUP New Jersey,
Inc.s termination of an agreement to purchase certain
assets of UHP. Pursuant to the terms of the confidential
settlement, the parties dismissed the litigation with prejudice
and an amended and modified asset purchase agreement was
reinstated. The parties will move forward with the transaction
contemplated by the amended and modified asset purchase
agreement, as modified in connection with the settlement, and
expect the transaction, which is subject to regulatory approval
and other closing conditions, to close in the early part of
2010. Costs associated with the transaction and the effect of
this settlement are not expected to be material to our results
of operations, financial position or cash flows. We can make no
assurance that entry into such business will be favorable to our
results of operations, financial position or cash flows in
future periods.
Other
Litigation
Additionally, we are involved in various other legal proceedings
in the normal course of business. Based upon our evaluation of
the information currently available, we believe that the
ultimate resolution of any such
36
proceedings will not have a material adverse effect, either
individually or in the aggregate, on our financial position,
results of operations or cash flows.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
Executive
Officers of the Company
Our executive officers, their ages and positions as of
February 22, 2010, are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
James G. Carlson
|
|
|
57
|
|
|
Chairman, President and Chief Executive Officer
|
James W. Truess
|
|
|
44
|
|
|
Executive Vice President and Chief Financial Officer
|
Richard C. Zoretic
|
|
|
51
|
|
|
Executive Vice President and Chief Operating Officer
|
Stanley F. Baldwin
|
|
|
61
|
|
|
Executive Vice President, General Counsel and Secretary
|
John E. Littel
|
|
|
45
|
|
|
Executive Vice President, External Relations
|
Mary T. McCluskey, M.D.
|
|
|
51
|
|
|
Executive Vice President and Chief Medical Officer
|
Margaret M. Roomsburg
|
|
|
50
|
|
|
Senior Vice President and Chief Accounting Officer
|
Leon A. Root, Jr.
|
|
|
56
|
|
|
Executive Vice President and Chief Information Officer
|
Linda K. Whitley-Taylor
|
|
|
46
|
|
|
Executive Vice President, Human Resources
|
James G. Carlson joined us in April of 2003 and
serves as our Chairman, President and Chief Executive Officer.
From April 2003 to August 2007, Mr. Carlson was our
President and Chief Operating Officer. He has served on our
Board of Directors since July 2007. Mr. Carlson has
30 years of experience in health insurance, including
having served as an Executive Vice President of UnitedHealth
Group and President of its UnitedHealthcare business unit, which
served more than 10 million members in HMO and preferred
provider organization plans nationwide. Mr. Carlson also
held a series of positions with increasing responsibility over
17 years with Prudential Financial, Inc.
James W. Truess joined us in July 2006 as
Executive Vice President and Chief Financial Officer.
Mr. Truess has worked more than 20 years in the
managed care industry, including the last 12 years as a
chief financial officer. Prior to joining us, from 1997 to 2006,
Mr. Truess served as Chief Financial Officer and Treasurer
of Group Health Cooperative, a vertically integrated healthcare
system, that coordinates care and coverage to residents of
Washington State and North Idaho. Mr. Truess is a CFA
charterholder.
Richard C. Zoretic joined us in September of 2003
and serves as our Executive Vice President and Chief Operating
Officer. From November 2005 to August 2007, he served as
Executive Vice President, Health Plan Operations; and from
September 2003 to November 2005, Mr. Zoretic was our Chief
Marketing Officer. Mr. Zoretic has more than 29 years
experience in healthcare and insurance, having served as Senior
Vice President of Network Operations and Distributions at CIGNA
Dental Health. Previously, he served in a variety of leadership
positions at UnitedHealthcare, including Regional Operating
President of Uniteds Mid-Atlantic operations and Senior
Vice President of Corporate Sales and Marketing.
Mr. Zoretic also held a series of positions with increased
responsibilities over 13 years with MetLife, Inc.
Stanley F. Baldwin joined us in 1997 and serves as
our Executive Vice President, General Counsel and Secretary.
Mr. Baldwin is licensed to practice law in Virginia,
Tennessee and Texas. Mr. Baldwin has more than
28 years of experience representing healthcare companies,
25 of which have been devoted to managed care. Prior to joining
the Company, Mr. Baldwin served as a senior officer and
general counsel of Epic Holdings, Inc., EQUICOR
Equitable HCA Corporation and CIGNA Healthplans, Inc. On
August 4, 2009, Mr. Baldwin announced his retirement
to be effective on December 31, 2010.
John E. Littel joined us in 2001 and serves as our
Executive Vice President, External Relations. Mr. Littel
has worked in a variety of positions within state and Federal
governments, as well as for non-profit organizations and
political campaigns. Mr. Littel served as the Deputy
Secretary of Health and Human Resources for the Commonwealth of
Virginia. On the Federal level, he served as the director of
intergovernmental affairs for The White
37
Houses Office of National Drug Control Policy.
Mr. Littel also held the position of Associate Dean and
Associate Professor of Law and Government at Regent University.
Mr. Littel is licensed to practice law in the State of
Pennsylvania.
Mary T. McCluskey, M.D. joined us in
September 2007 as Executive Vice President and Chief Medical
Officer. From 1999 to 2007, Dr. McCluskey served in a
variety of senior medical positions with increasing
responsibility for Aetna Inc., a leading diversified healthcare
benefits company, most recently as Chief Medical Officer,
Northeast Region. Her previous positions at Aetna, Inc. included
National Medical Director/Head of Clinical Cost Management and
Senior Regional Medical Director, Southeast Region
Dr. McCluskey received her Doctorate of Internal Medicine
from St. Louis University School of Medicine in 1986 and
conducted her residency at the Jewish Hospital/Washington
University in St. Louis. She is board certified in Internal
Medicine with active licenses in the states of Florida and
Missouri.
Margaret M. Roomsburg joined us in 1996 and has
served as our Senior Vice President and Chief Accounting Officer
since February 1, 2007. Previously, Ms. Roomsburg
served as our Controller. Ms. Roomsburg has over
29 years of experience in Accounting and Finance. Prior to
joining us, Ms. Roomsburg was the Director of Finance for
Value Options, Inc. Ms. Roomsburg is a certified public
accountant.
Leon A. Root, Jr. joined us in May 2002 as
our Senior Vice President and Chief Technology Officer and has
served as our Executive Vice President and Chief Information
Officer since June 2003. Prior to joining us, Mr. Root
served as Chief Information Officer at Medunite, Inc., a private
e-commerce
company founded by Aetna Inc., Cigna Corp., PacifiCare Health
Systems and five other national managed care companies.
Mr. Root has over 25 years of experience in
Information Technology.
Linda K. Whitley-Taylor joined us in January 2008
and serves as our Executive Vice President, Human Resources.
Prior to joining us, Ms. Whitley-Taylor was Senior Vice
President, Human Resources Operations with Genworth Financial, a
leading global financial security company and former division of
General Electric, where she was employed for 19 years.
38
PART II.
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is listed on the New York Stock Exchange
(NYSE) under the symbol AGP. The
following table sets forth the range of high and low sales
prices for our common stock for the period indicated.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
2009
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
31.50
|
|
|
$
|
22.26
|
|
Second quarter
|
|
|
32.40
|
|
|
|
25.56
|
|
Third quarter
|
|
|
29.01
|
|
|
|
21.34
|
|
Fourth quarter
|
|
|
27.49
|
|
|
|
20.87
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
41.00
|
|
|
$
|
25.83
|
|
Second quarter
|
|
|
29.51
|
|
|
|
20.77
|
|
Third quarter
|
|
|
28.51
|
|
|
|
19.92
|
|
Fourth quarter
|
|
|
29.68
|
|
|
|
16.02
|
|
On February 19, 2010, the last reported sales price of our
common stock was $26.93 per share as reported on the NYSE. As of
February 19, 2010, we had 60 shareholders of record.
We have never declared or paid any cash dividends on our common
stock. We currently anticipate that we will retain any future
earnings for the development and operation of our business and
do not anticipate declaring or paying any cash dividends in the
foreseeable future. In addition, our ability to pay dividends is
dependent on receiving cash dividends from our subsidiaries.
Generally, state insurance regulations limit the ability of our
subsidiaries to pay dividends to us.
Under the authorization of our Board of Directors, we maintain
an on-going share repurchase program that allows us to
repurchase up to $200.0 million of shares of the
Companys common stock. Pursuant to this on-going share
repurchase program, we repurchased 2,713,567 shares of our
common stock and placed them into treasury during the year ended
December 31, 2009 at an average per share cost of $25.70
and an aggregate cost of $69.8 million. As of
December 31, 2009, we had authorization to purchase up to
an additional $162.8 million of common stock under the
repurchase program. Stock repurchases may be made from time to
time in the open market or in privately negotiated transactions
and will be funded from unrestricted cash. We have adopted
written plans pursuant to
Rule 10b5-1
of the Exchange Act to effect the repurchase of a portion of
shares authorized. The number of shares repurchased and the
timing of the repurchases are based on the level of available
cash and other factors, including market conditions, the terms
of any applicable
Rule 10b5-1
plans, and self-imposed blackout periods. There can be no
assurances as to the exact number or aggregate value of shares
that will be repurchased. The repurchase program may be
suspended or discontinued at any time or from
time-to-time
without prior notice.
39
Performance
Graph
The following line graph compares the cumulative total
stockholder return on our common stock against the cumulative
total return of the Standard & Poors Corporation
Composite 500 Index (the S&P 500) and a peer
group index for the period from December 31, 2004 to
December 31, 2009. The graph assumes an initial investment
of $100.00 in the Companys common stock and in each of the
indices and includes the reinvestment of dividends paid, if any.
The peer group index consists of Aetna Inc. (AET), Centene Corp.
(CNC), Cigna Corp. (CI), Coventry Health Care Inc. (CVH), Health
Net Inc. (HNT), HealthSpring Inc. (HS), Humana Inc. (HUM),
Magellan Health Services Inc. (MGLN), Molina Healthcare Inc.
(MOH), Unitedhealth Group Inc. (UNH), Wellcare Health Plans Inc.
(WCG), and WellPoint Inc. (WLP).
In calculating the cumulative total stockholder return of the
peer group index, the returns of each of the peer group
companies have been weighted according to their relative stock
market capitalizations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of $100 Invested Over Past 5 Years
|
|
|
|
12/31/04
|
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
12/31/09
|
AMERIGROUP Corporation
|
|
|
$
|
100.00
|
|
|
|
$
|
51.44
|
|
|
|
$
|
94.87
|
|
|
|
$
|
96.35
|
|
|
|
$
|
78.03
|
|
|
|
$
|
71.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Index
|
|
|
|
100.00
|
|
|
|
|
104.91
|
|
|
|
|
121.48
|
|
|
|
|
128.16
|
|
|
|
|
80.74
|
|
|
|
|
102.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peer Group
|
|
|
|
100.00
|
|
|
|
|
142.94
|
|
|
|
|
134.95
|
|
|
|
|
153.91
|
|
|
|
|
69.52
|
|
|
|
|
89.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Proceeds
of Equity Securities by the Issuer and Affiliated
Purchasers
Set forth below is information regarding the Companys
stock repurchases during the three months ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Total number of
|
|
|
Dollar Value of
|
|
|
|
|
|
|
Average
|
|
|
Shares (or Units)
|
|
|
Shares (or Units)
|
|
|
|
Total Number of
|
|
|
Price Paid
|
|
|
Purchased as Part of
|
|
|
that May Yet Be
|
|
|
|
Shares (or Units)
|
|
|
per Share
|
|
|
Publicly Announced
|
|
|
Purchased Under the
|
|
Period
|
|
Purchased
|
|
|
(or Unit)
|
|
|
Plans or Programs
|
|
|
Plans or
Programs(2)
|
|
|
October 1 October 31, 2009
|
|
|
105,990
|
|
|
$
|
22.42
|
|
|
|
105,990
|
|
|
|
167,394,031
|
|
November 1 November 30,
2009(1)
|
|
|
95,436
|
|
|
|
22.81
|
|
|
|
94,381
|
|
|
|
165,240,247
|
|
December 1 December 31, 2009
|
|
|
94,844
|
|
|
|
25.24
|
|
|
|
94,844
|
|
|
|
162,846,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
296,270
|
|
|
$
|
23.45
|
|
|
|
295,215
|
|
|
|
162,846,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our 2009 Equity Incentive Plan allows, upon approval by the plan
administrator, stock option recipients to deliver shares of
unrestricted Company common stock held by the participant as
payment of the exercise price and applicable withholding taxes
upon the exercise of stock options or vesting of restricted
stock. During November 2009, certain employees elected to tender
1,055 shares to the Company in payment of related
withholding taxes upon vesting of restricted stock. |
|
(2) |
|
On August 5, 2009, the Board authorized an increase to our
on-going share repurchase program allowing us to repurchase up
to $200.0 million of shares of our common stock. No duration has
been placed on the repurchase program and we reserve the right
to discontinue the repurchase program at any time. |
41
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read in conjunction with the Consolidated Financial Statements
and accompanying notes thereto and Managements Discussion
and Analysis of Financial Condition and Results of Operations
appearing elsewhere in this
Form 10-K.
Selected financial data as of and for each of the years in the
five-year period ended December 31, 2009 has been adjusted
to reflect the changes resulting from adoption of new guidance
related to convertible debt instruments effective
January 1, 2009 and are derived from our Consolidated
Financial Statements, which have been audited by KPMG LLP,
independent registered public accounting firm. (See
Note 2(q) to our audited Consolidated Financial Statements
as of and for the year ended December 31, 2009 included in
Item 8. of this
Form 10-K.)
Reclassifications
To improve presentation and comparability, we have made certain
reclassifications to our statement of operations format. Amounts
previously reported in the selected financial data as of and for
each of the years in the five-year period ended
December 31, 2009 have been reclassified to conform to the
current-year presentation.
|
|
|
|
|
The experience rebate under our contract with the State of Texas
has been reclassified out of selling, general and administrative
expenses and is now reflected as a reduction to premium revenue.
|
|
|
|
Premium tax has been reclassified out of selling, general and
administrative expenses and is now reported on a separate line
following selling, general and administrative expenses and
before depreciation and amortization. By isolating premium tax,
the impacts of changing business volumes on premium tax expense
will become more apparent.
|
We believe this new presentation is more useful to the readers
of our financial statements as the remaining selling, general
and administrative expenses are more reflective of core
operating expenses. These reclassifications had no affect on net
income for current or prior periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$
|
5,158,989
|
|
|
$
|
4,366,359
|
|
|
$
|
3,835,454
|
|
|
$
|
2,788,642
|
|
|
$
|
2,305,962
|
|
Investment income and other
|
|
|
29,081
|
|
|
|
71,383
|
|
|
|
73,320
|
|
|
|
39,279
|
|
|
|
18,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
5,188,070
|
|
|
|
4,437,742
|
|
|
|
3,908,774
|
|
|
|
2,827,921
|
|
|
|
2,324,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health benefits
|
|
|
4,407,273
|
|
|
|
3,618,261
|
|
|
|
3,216,070
|
|
|
|
2,266,017
|
|
|
|
1,957,196
|
|
Selling, general and administrative
|
|
|
394,089
|
|
|
|
435,876
|
|
|
|
377,026
|
|
|
|
315,628
|
|
|
|
226,906
|
|
Premium tax
|
|
|
134,277
|
|
|
|
93,757
|
|
|
|
85,218
|
|
|
|
47,100
|
|
|
|
25,903
|
|
Depreciation and amortization
|
|
|
34,746
|
|
|
|
37,385
|
|
|
|
31,604
|
|
|
|
25,486
|
|
|
|
26,948
|
|
Litigation settlement
|
|
|
|
|
|
|
234,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
16,266
|
|
|
|
20,514
|
|
|
|
18,962
|
|
|
|
608
|
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,986,651
|
|
|
|
4,439,998
|
|
|
|
3,728,880
|
|
|
|
2,654,839
|
|
|
|
2,237,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
201,419
|
|
|
|
(2,256
|
)
|
|
|
179,894
|
|
|
|
173,082
|
|
|
|
86,711
|
|
Income tax expense
|
|
|
52,140
|
|
|
|
54,350
|
|
|
|
67,667
|
|
|
|
65,976
|
|
|
|
33,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
149,279
|
|
|
$
|
(56,606
|
)
|
|
$
|
112,227
|
|
|
$
|
107,106
|
|
|
$
|
53,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
2.89
|
|
|
$
|
(1.07
|
)
|
|
$
|
2.13
|
|
|
$
|
2.07
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
51,647,267
|
|
|
|
52,816,674
|
|
|
|
52,595,503
|
|
|
|
51,863,999
|
|
|
|
51,213,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
2.85
|
|
|
$
|
(1.07
|
)
|
|
$
|
2.08
|
|
|
$
|
2.02
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and dilutive potential
common shares outstanding
|
|
|
52,309,268
|
|
|
|
52,816,674
|
|
|
|
53,845,829
|
|
|
|
53,082,933
|
|
|
|
52,857,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
(Dollars in thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and short- and long-term investments
|
|
$
|
1,354,634
|
|
|
$
|
1,337,423
|
|
|
$
|
1,067,294
|
|
|
$
|
776,273
|
|
|
$
|
587,106
|
|
Total assets
|
|
|
1,999,634
|
|
|
|
1,955,667
|
|
|
|
2,076,546
|
|
|
|
1,345,695
|
|
|
|
1,093,588
|
|
Long-term debt, less current portion
|
|
|
235,104
|
|
|
|
268,956
|
|
|
|
317,244
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,015,190
|
|
|
|
1,083,008
|
|
|
|
1,134,652
|
|
|
|
577,110
|
|
|
|
452,034
|
|
Stockholders equity
|
|
|
984,444
|
|
|
|
872,659
|
|
|
|
941,894
|
|
|
|
768,585
|
|
|
|
641,554
|
|
43
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a multi-state managed healthcare company focused on
serving people who receive healthcare benefits through publicly
sponsored programs, including Medicaid, CHIP, Medicaid expansion
programs and Medicare Advantage. We operate in one business
segment with a single line of business. We were founded in
December 1994 with the objective of becoming the leading managed
care organization in the U.S. focused on serving people who
receive these types of benefits. We believe that we are better
qualified and positioned than many of our competitors to meet
the unique needs of our members and the government agencies with
whom we contract because of our focus solely on recipients of
publicly sponsored healthcare, our medical management programs
and community-based education and outreach programs. We design
our programs to address the particular needs of our members, for
whom we facilitate access to healthcare benefits pursuant to
agreements with applicable state and Federal government
agencies. We combine medical, social and behavioral health
services to help our members obtain quality healthcare in an
efficient manner. Our success in establishing and maintaining
strong relationships with government agencies, providers and
members has enabled us to obtain new contracts and to establish
and maintain a leading market position in many of the markets we
serve. We continue to believe that managed healthcare remains
the only proven mechanism that improves health outcomes for our
members while helping our government customers manage the fiscal
viability of their healthcare programs.
Summary
Highlights for the Year Ended December 31,
2009
|
|
|
|
|
Total revenues increased to $5.2 billion, or 16.9%, over
the year ended December 31, 2008;
|
|
|
|
Risk membership increased to 1,775,000, or 12.4%, compared to
that as of December 31, 2008;
|
|
|
|
HBR of 85.4% compared to 82.9% for the year ended
December 31, 2008.
|
|
|
|
Began providing Medicaid managed care services to TANF and CHIP
populations in Nevada effective February 1, 2009;
|
|
|
|
Closed the transaction to sell the contract rights of the
Companys South Carolina health plan on March 1, 2009;
|
|
|
|
Completed the statewide rollout to individuals of New
Mexicos Coordination of Long-Term Services
(CoLTS) program in April 2009. This program
constitutes one of the Nations first comprehensive
programs to coordinate long-term care for individuals. We are
one of two organizations that provide coverage to New
Mexicos approximately 38,000 CoLTS members;
|
|
|
|
Repaid the outstanding debt and terminated our Credit and
Guaranty Agreement (the Credit Agreement),
decreasing our debt to total capital ratio to 19.3%; and
|
|
|
|
Recorded a one-time tax benefit of $22.4 million, or $0.43
per diluted share, pursuant to a pre-filing agreement with the
Internal Revenue Service (IRS) related to the tax
treatment of the previously recorded qui tam litigation
settlement relating to certain marketing practices of our former
Illinois subsidiary.
|
Our financial results for 2009 have been significantly impacted
by several factors, including increased membership and elevated
medical costs. Membership has increased over the prior
comparable periods as a result of our entry into new markets and
growth in existing markets. Much of this increased membership
has come from growth in the Medicaid eligible populations.
Our medical costs have been elevated over the prior comparable
period in excess of our growth in premium revenues thereby
increasing our health benefits ratio over such periods. The
elevated costs are primarily due to increases in outpatient
services, for both new and existing members. Increased costs for
emergency room services, ambulatory surgery and physician
services as well as an early onset of a severe flu season
related to the H1N1 virus have been the most significant drivers
of increased outpatient services. The cost for healthcare
benefits has also increased due in part to a larger proportion
of new members who historically utilize more services during the
first two quarters of membership. The rate of increase in health
benefits expense as it compares to premium revenue has
44
been higher than our experience in recent years. As such, it is
difficult to predict at this time whether outpatient costs will
continue to increase at the current rate or abate in 2010.
We are continually evaluating our operations and contracting
arrangements with our providers in order to more effectively
manage medical costs and we are working with the government
agencies with which we contract to pursue appropriate premium
rate increases when possible. Our ability to obtain adequate
rate increases to match the increases in our medical costs is
likely to be challenging in the near term because the government
agencies with whom we contract continue to face potential
budgetary shortfalls and there can be no assurance that we will
obtain adequate premium rate increases.
Though we cannot predict the outcomes of potential legislation,
if any, we anticipate the subject of healthcare reform will
continue to be debated by the United States Congress and that
any changes to existing Medicaid and Medicare programs could
have significant impacts on our business.
Investment income on our fixed-income securities portfolio has
been significantly impacted by decreased investment yields over
the past year. Investment income is a significant component of
our operating results and fluctuations in investment yields such
as that we have experienced can have and have had a material
adverse affect on our results of operations. We do not
anticipate a return of investment yields to normalized levels in
the near term.
Our SG&A ratio decreased due to administrative efficiencies
gained through the management of costs, increased premium
revenue and decreased levels of variable compensation accruals
due to our financial performance.
Business
Strategy
We have a disciplined approach to evaluating the operating
performance of our existing markets to determine whether to exit
or continue operating in each market. As a result, in the past
we have and may in the future decide to exit certain markets if
they do not meet our long-term business goals. We also
periodically evaluate acquisition opportunities to determine if
they align with our business strategy. We continue to believe
acquisitions can be an important part of our long-term growth
strategy.
Opportunities
for Future Membership Growth
Texas
In November 2009, the Texas Health and Human Services Commission
(HHSC) issued a request for proposal to provide
managed care services for ABD clients in the Dallas and Tarrant
Service Areas under the Texas Medicaid STAR+PLUS program. HHSC
intends to select no less than four managed care organizations
(two per service area) to serve approximately 77,000 eligibles.
We submitted a bid to the HHSC on February 11, 2010. We
anticipate a contract start date in May 2010 and an operational
start date in early 2011. We can make no assurance that we will
be awarded this contract or that such business will be favorable
to our results of operations, financial position or cash flows
in future periods.
Tennessee
The State of Tennessee received approval from the CMS to expand
its Medicaid managed care program to long-term care recipients.
The expansion program is offered through amendments to existing
Medicaid managed care contracts and is effective March 1,
2010. We can make no assurance that our entry into this business
will be favorable to our results of operations, financial
position or cash flows in future periods.
New
Jersey
On October 23, 2009, AMERIGROUP Corporation and AMERIGROUP
New Jersey, Inc. settled litigation with Centene and its
wholly-owned subsidiary, UHP, regarding AMERIGROUP New Jersey,
Inc.s termination of an agreement to purchase certain
assets of UHP. Pursuant to the terms of the confidential
settlement, the parties dismissed the litigation with prejudice
and an amended and modified asset purchase agreement was
reinstated. The
45
parties will move forward with the transaction contemplated by
the amended and modified asset purchase agreement, as modified
in connection with the settlement, and expect the transaction,
which is subject to regulatory approval and other closing
conditions, to close in the early part of 2010. Costs associated
with the transaction are not expected to be material to our
results of operations, financial position or cash flows. We can
make no assurance that entry into such business will be
favorable to our results of operations, financial position or
cash flows in future periods.
Other
Market Updates
Florida
Effective November 1, 2009 and December 1, 2009, our
Florida subsidiary, AMERIGROUP Florida, Inc., terminated its
agreement and ceased participation in Lee County and Broward
County, respectively, under the Companys contract with
AHCA. The decision to exit these counties was made due to the
inability to obtain adequate premium rates. The exit from these
counties is not expected to be material to our results of
operations, financial position or cash flows in future periods.
Ohio
On October 15, 2009, our Ohio subsidiary, AMERIGROUP Ohio,
Inc., notified the State of Ohio of its intent to exit the ABD
program in the Southwest Region due to the inability to obtain
adequate premium rates for this product. The termination was
effective as of February 1, 2010. AMERIGROUP Ohio, Inc.
will continue to provide services to members in the Southwest
and West Central regions for the TANF Medicaid population. The
exit from this program is not expected to be material to our
results of operations, financial position or cash flows in
future periods.
South
Carolina
On March 1, 2009, our South Carolina subsidiary, AMERIGROUP
Community Care of South Carolina, Inc., sold its rights to serve
Medicaid members pursuant to the contract with the State of
South Carolina for $5.8 million, or $0.07 per diluted
share, and recorded a gain, which is included in investment
income and other revenues in the accompanying Consolidated
Statements of Operations, for the year ended December 31,
2009. As a result of this transaction, our South Carolina
subsidiary does not currently serve any members. Certain claims
run-out and transition obligations exist that will continue into
2010. Additional costs recorded and to be recorded to
discontinue operations in South Carolina are not expected to be
material.
Nevada
On February 1, 2009, our Nevada subsidiary, AMERIGROUP
Nevada, Inc., began serving TANF and CHIP members under a
contract to provide Medicaid managed care services through
June 30, 2011. AMERIGROUP Nevada, Inc. is one of two
organizations that provide managed care services across the
urban service areas of Washoe and Clark counties. As of
December 31, 2009, AMERIGROUP Nevada, Inc. served
approximately 62,000 members in Nevada.
New
Mexico
On August 1, 2008, our New Mexico subsidiary, AMERIGROUP
New Mexico, Inc., began serving individuals in New Mexicos
CoLTS program in six counties in the Metro/Central region. In
November 2008, the second phase expanded coverage to include the
Southwest region. In January 2009, the third phase expanded
coverage to include the Northwest region and in April 2009 the
final phase of the statewide rollout was completed to include
the Southeast and Northeast regions. AMERIGROUP New Mexico, Inc.
is one of two organizations that provide coverage to New
Mexicos approximately 38,000 CoLTS members. As of
December 31, 2009, AMERIGROUP New Mexico, Inc. served
approximately 20,000 members in New Mexico.
46
Contingencies
Florida
Medicaid Contract Dispute
Under the terms of the contract between AMERIGROUP Florida, Inc.
and AHCA, AMERIGROUP Florida, Inc. is required to have a process
to identify members who are pregnant or newborn members so that
the newborn can be enrolled as a member of the health plan as
soon as possible after birth. This process is referred to as the
Unborn Activation Process.
Beginning in July 2008, AMERIGROUP Florida, Inc. received a
series of letters from the Florida Office of the Inspector
General (IG) and AHCA stating that AMERIGROUP
Florida, Inc. had failed to comply with the Unborn Activation
Process and, as a result, AHCA had paid approximately
$10.6 million in Medicaid
fee-for-service
claims that should have been paid by AMERIGROUP Florida, Inc.
The letters requested that AMERIGROUP Florida, Inc. provide
documentation to evidence its compliance with the terms of
the contract with AHCA with respect to the Unborn Activation
Process. It is our belief that AHCA and the IG sent similar
letters to the other Florida Medicaid managed care organizations
during this time period.
In October 2008, we submitted our response to the letters. In
July 2009, we received another series of letters from the IG and
AHCA stating that, based on a review of our response, they had
determined that AMERIGROUP Florida, Inc. did not comply with the
Unborn Activation Process and assessed a penalty against
AMERIGROUP Florida, Inc. in the amount of $2,500 per newborn for
an aggregate amount of approximately $6.0 million. The
letters further reserved AHCAs right to pursue collection
of the amount paid for the
fee-for-service
claims. AMERIGROUP Florida, Inc. appealed these findings and
submitted documentation to evidence its compliance with, and
performance under, the Unborn Activation Process requirements of
the contract. On January 14, 2010 AMERIGROUP Florida,
Inc. appealed AHCAs contract interpretation that anything
less than 100% compliance with the Unborn Activation Process
could result in sanctions. This appeal is pending.
We believe that AMERIGROUP Florida, Inc. has substantial
defenses to the claims asserted by AHCA and will defend against
the claims vigorously. However, there can be no assurances that
the ultimate outcome of this matter will not have a material
adverse effect on our financial position, results of operations
or liquidity.
Georgia
Letter of Credit
Effective July 1, 2009, we have caused to be issued a
collateralized irrevocable standby letter of credit in an
aggregate principal amount of approximately $17.4 million
to meet certain obligations under our Medicaid contract in the
State of Georgia through our Georgia subsidiary, AMGP Georgia
Managed Care Company, Inc. The letter of credit is
collateralized through cash held by AMGP Georgia Managed Care
Company, Inc.
Legal
Proceedings
We are involved in various legal proceedings in the normal
course of business. Based upon our evaluation of the information
currently available, we believe that the ultimate resolution of
any such proceedings will not have a material adverse effect,
either individually or in the aggregate, on our financial
position, results of operations or cash flows. Additionally, we
have been involved in specific litigation in the current year,
the details of which are disclosed in Part I, Item 3.
entitled Legal Proceedings.
Discussion
of Critical Accounting Policies
In the ordinary course of business, we make a number of
estimates and assumptions relating to the reporting of results
of operations and financial condition in the preparation of our
Consolidated Financial Statements in conformity with
U.S. generally accepted accounting principles. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. Actual results could differ from those estimates
and the differences could be significant. We believe that the
following discussion addresses our critical accounting policies,
which are those that are most important to the portrayal of our
financial condition and results of operations and require
managements most difficult, subjective and complex
judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain.
47
Revenue
Recognition
We generate revenues primarily from premiums and ASO fees we
receive from the states in which we operate to arrange for
healthcare services for our TANF, CHIP, ABD and FamilyCare
members. We receive premiums from CMS for our Medicare Advantage
members. We recognize premium and ASO fee revenue during the
period in which we are obligated to provide services to our
members. A fixed amount per member per month (PMPM)
is paid to us to arrange for healthcare services for our members
pursuant to our contracts in each of our markets. These premium
payments are based upon eligibility lists produced by the
government agencies with whom we contract. Errors in this
eligibility determination on which we rely can result in
positive and negative revenue adjustments to the extent this
information is adjusted by the state. Adjustments to eligibility
data received from these government agencies result from
retroactive application of enrollment or disenrollment of
members or classification changes of members between rate
categories that were not known by us in previous months due to
timing of the receipt of data or errors in processing by the
government agencies. These changes, while common, are not
generally large. Retroactive adjustments to revenue for
corrections in eligibility data are recorded in the period in
which the information becomes known. We estimate the amount of
outstanding retroactivity each period and adjust premium revenue
accordingly, if appropriate.
In all of the states in which we operate, with the exceptions of
Florida, New Mexico, Tennessee and Virginia, we are eligible to
receive supplemental payments to offset the health benefits
expense associated with the birth of a baby. Each state contract
is specific as to what is required before payments are
collectible. Upon delivery of a baby, each state is notified in
accordance with contract terms. Revenue is recognized in the
period that the delivery occurs and the related services are
provided to our member based on our authorization system for
those services. Changes in authorization and claims data used to
estimate supplemental revenues can occur as a result of changes
in eligibility noted above or corrections of errors in the
underlying data. Adjustments to revenue for corrections to
authorization and claims data are recorded in the period in
which the corrections become known.
Historically, the impact of adjustments from retroactivity,
changes in authorizations and changes in claims data used to
estimate supplemental revenues has represented less than 1.0% of
annual revenue. This results in a negligible impact on annual
earnings as changes in revenue are typically accompanied by
corresponding changes in the related health benefits expense. We
believe this historical experience represents what is reasonably
likely to occur in future periods.
Additionally, delays in annual premium rate changes require that
we defer the recognition of any increases to the period in which
the premium rates become final. The time lag between the
effective date of the premium rate increase and the final
contract can and has been delayed one quarter or more. The value
of the impact can be significant in the period in which it is
recognized dependent on the magnitude of the premium rate
change, the membership to which it applies and the length of the
delay between the effective date and the final contract date.
Estimating
Health Benefits Expense and Claims Payable
The most judgmental accounting estimate in our Consolidated
Financial Statements is our liability for medical claims
payable. At December 31, 2009, this liability was
$529.0 million and represented 52.1% of our total
consolidated liabilities. Included in this liability and the
corresponding health benefits expense for IBNR claims are the
estimated costs of processing such claims. Health benefits
expense has two main components: direct medical expenses and
medically-related administrative costs. Direct medical expenses
include amounts paid to hospitals, physicians and providers of
ancillary services, such as laboratories and pharmacies.
Medically-related administrative costs include items such as
case and disease management, utilization review services,
quality assurance and on-call nurses.
We have used a consistent methodology for estimating our medical
expenses and medical claims payable since inception, and have
refined our assumptions to take into account our maturing
claims, product and market experience. Our reserving practice is
to consistently recognize the actuarial best point estimate
within a level of confidence required by actuarial standards.
Actuarial standards of practice generally require a level of
confidence such that the liabilities established for IBNR have a
greater probability of being adequate versus being insufficient,
or such that the liabilities established for IBNR are sufficient
to cover obligations under an assumption of moderately adverse
conditions. Adverse conditions are situations in which the
actual claims are expected to be
48
higher than the otherwise estimated value of such claims at the
time of the estimate. Therefore, in many situations, the claim
amounts ultimately settled will be less than the estimate that
satisfies the actuarial standards of practice.
In developing our medical claims payable estimates, we apply
different estimation methods depending on the month for which
incurred claims are being estimated. For mature incurred months
(generally the months prior to the most recent three months), we
calculate completion factors using an analysis of claim
adjudication patterns over the most recent
12-month
period. A completion factor is an actuarial estimate, based upon
historical experience, of the percentage of incurred claims
during a given period that have been adjudicated as of the date
of estimation. We apply the completion factors to actual claims
adjudicated-to-date
in order to estimate the expected amount of ultimate incurred
claims for those months.
We do not believe that completion factors are fully credible for
estimating claims incurred for the most recent
two-to-three
months which constitute the majority of the amount of the
medical claims payable. Accordingly, we estimate health benefits
expense incurred by applying observed medical cost trend factors
to the average PMPM medical costs incurred in a more complete
time period. Medical cost trend factors are developed through a
comprehensive analysis of claims incurred in prior months for
which more complete claim data is available. The average PMPM is
also adjusted for known changes in hospital authorization data,
provider contracting changes, changes in benefit levels, age and
gender mix of members, and seasonality. The incurred estimates
resulting from the analysis of completion factors, medical cost
trend factors and other known changes are weighted together
using actuarial judgment.
Many aspects of the managed care business are not predictable
with consistency. These aspects include the incidences of
illness or disease state (such as cardiac heart failure cases,
cases of upper respiratory illness, the length and severity of
the flu season, new flu strains, diabetes, the number of
full-term versus premature births and the number of neonatal
intensive care babies). Therefore, we must rely upon our
historical experience, as continually monitored, to reflect the
ever-changing mix, needs and growth of our members in our
assumptions. Among the factors considered by management are
changes in the level of benefits provided to members, seasonal
variations in utilization, identified industry trends and
changes in provider reimbursement arrangements, including
changes in the percentage of reimbursements made on a capitated,
as opposed to a
fee-for-service,
basis. These considerations are aggregated in the medical cost
trend. Other external factors that may impact medical cost
trends include factors such as government-mandated benefits or
other regulatory changes; catastrophes and epidemics, such as
the H1N1 pandemic; or increases in membership that contribute to
an increase in outpatient costs. Other internal factors such as
system conversions and claims processing interruptions may
impact our ability to accurately establish estimates of
historical completion factors or medical cost trends. Medical
cost trends are potentially more volatile than other segments of
the economy. Management is required to use considerable judgment
in the selection of health benefits expense trends and other
actuarial model inputs.
49
Completion factors are the most significant factors we use in
developing our medical claims payable estimates for mature
incurred months. The following table illustrates the sensitivity
of these factors and the estimated potential impact on our
medical claims payable estimates for those periods as of
December 31, 2009:
|
|
|
|
|
Completion Factor
|
|
Increase (Decrease) in
|
(Decrease) Increase in Factor
|
|
Medical Claims
Payable(1)
|
|
|
(In millions)
|
|
(0.75)%
|
|
$
|
78.0
|
|
(0.50)%
|
|
$
|
52.0
|
|
(0.25)%
|
|
$
|
26.0
|
|
0.25%
|
|
$
|
(26.0
|
)
|
0.50%
|
|
$
|
(52.0
|
)
|
0.75%
|
|
$
|
(78.0
|
)
|
|
|
|
(1) |
|
Reflects estimated potential changes in health benefits expense
and medical claims payable caused by changes in completion
factors used in developing medical claims payable estimates for
older periods, generally periods prior to the most recent three
months. |
Medical cost PMPM trend factors are generally the most
significant factors we use in estimating our medical claims
payable for the most recent three months. The following table
illustrates the sensitivity of these factors and the estimated
potential impact on our medical claims payable estimates for the
most recent three months as of December 31, 2009:
|
|
|
|
|
Medical Cost PMPM Trend
|
|
Increase (Decrease) in
|
Increase (Decrease) in Factor
|
|
Medical Claims
Payable(1)
|
|
|
(In millions)
|
|
10.0%
|
|
$
|
14.0
|
|
5.0%
|
|
$
|
7.0
|
|
2.5%
|
|
$
|
3.5
|
|
(2.5)%
|
|
$
|
(3.5
|
)
|
(5.0)%
|
|
$
|
(7.0
|
)
|
(10.0)%
|
|
$
|
(14.0
|
)
|
|
|
|
(1) |
|
Reflects estimated potential changes in health benefits expense
and medical claims payable caused by changes in medical costs
PMPM trend data used in developing medical claims payable
estimates for the most recent three months. |
The analyses above include those outcomes that are considered
reasonably likely based on our historical experience in
estimating our medical claims payable.
Changes in estimates of medical claims payable are primarily the
result of obtaining more complete claims information that
directly correlates with the claims and provider reimbursement
trends. Volatility in members needs for medical services,
provider claims submission and our payment processes often
results in identifiable patterns emerging several months after
the causes of deviations from assumed trends. Since our
estimates are based upon PMPM claims experience, changes cannot
typically be explained by any single factor, but are the result
of a number of interrelated variables, all influencing the
resulting experienced medical cost trend. Deviations, whether
positive or negative, between actual experience and estimates
used to establish the liability are recorded in the period known.
We continually monitor and adjust the medical claims payable and
health benefits expense based on subsequent paid claims
activity. If it is determined that our assumptions regarding
medical cost trends and utilization are significantly different
than actual results, our results of operations, financial
position and liquidity could be impacted in future periods.
Adjustments of prior year estimates may result in additional
health benefits expense or a reduction of health benefits
expense in the period an adjustment is made. Further, due to the
considerable variability of healthcare costs, adjustments to
medical claims payable occur each quarter and are sometimes
significant as compared to the net income recorded in that
quarter. Prior period development is
50
recognized immediately upon the actuaries judgment that a
portion of the prior period liability is no longer needed or
that an additional liability should have been accrued.
The following table presents the components of the change in
medical claims payable for the three years ended December 31 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Medical claims payable as of January 1
|
|
$
|
536,107
|
|
|
$
|
541,173
|
|
|
$
|
385,204
|
|
Health benefits expense incurred during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to current year
|
|
|
4,492,590
|
|
|
|
3,679,107
|
|
|
|
3,284,302
|
|
Related to prior years
|
|
|
(85,317
|
)
|
|
|
(60,846
|
)
|
|
|
(68,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
4,407,273
|
|
|
|
3,618,261
|
|
|
|
3,216,070
|
|
Health benefits payments during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to current year
|
|
|
4,007,789
|
|
|
|
3,197,732
|
|
|
|
2,769,331
|
|
Related to prior years
|
|
|
406,555
|
|
|
|
425,595
|
|
|
|
290,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
4,414,344
|
|
|
|
3,623,327
|
|
|
|
3,060,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims payable as of December 31
|
|
$
|
529,036
|
|
|
$
|
536,107
|
|
|
$
|
541,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year medical claims paid as a percent of current year
health benefits expense incurred
|
|
|
89.2
|
%
|
|
|
86.9
|
%
|
|
|
84.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health benefits expense incurred related to prior years as a
percent of prior year medical claims payable as of December 31
|
|
|
(15.9
|
)%
|
|
|
(11.2
|
)%
|
|
|
(17.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health benefits expense incurred related to prior years as a
percent of the prior years health benefits expense related
to current year
|
|
|
(2.3
|
)%
|
|
|
(1.9
|
)%
|
|
|
(2.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health benefits expense incurred during the year, was reduced by
approximately $85.3 million, $60.8 million and
$68.2 million in the years ended December 31, 2009,
2008 and 2007, respectively, for amounts related to prior years.
As noted above, the actuarial standards of practice generally
require that the liabilities established for IBNR be sufficient
to cover obligations under an assumption of moderately adverse
conditions. We did not experience moderately adverse conditions
in any of these periods. Therefore included in the amounts
related to prior years are approximately $34.4 million,
$37.3 million and $30.4 million for the years ended
December 31, 2009, 2008 and 2007, respectively, related to
amounts included in the medical claims payable as of January 1
of each respective year in order to establish the liability at a
level adequate for moderately adverse conditions.
The remaining reduction in health benefits expense incurred
during the year, related to prior years, of approximately
$50.9 million, $23.5 million and $37.8 million
for the years ended December 31, 2009, 2008 and 2007,
respectively, primarily resulted from obtaining more complete
claims information for claims incurred for dates of service in
the prior years. We refer to these amounts as net reserve
development. We experienced lower medical trend than originally
estimated in part due to claims processing initiatives that
yielded increased claim payment recoveries and coordination of
benefits in 2009, 2008 and 2007 related to prior year dates of
services for all periods. These recoveries also caused our
actuarial estimates to include faster completion factors than
were originally established. The faster completion factors
contributed to the net favorable reserve development in each
respective period.
Establishing the liabilities for IBNR associated with health
benefits expense incurred during a year related to that current
year, at a level sufficient to cover obligations under an
assumption of moderately adverse conditions, will cause incurred
health benefits expense for that current year to be higher than
if IBNR was established without sufficiency for moderately
adverse conditions. In the above table, the health benefits
expense incurred during the year related to the current year
include an assumption to cover moderately adverse conditions.
Also included in medical claims payable are estimates for
provider settlements due to clarification of contract terms,
out-of-network
reimbursement and claims payment differences, as well as amounts
due to contracted providers under risk-sharing arrangements.
51
Premium
Deficiency Reserves
In addition to incurred but not paid claims, the liability for
medical claims payable includes reserves for premium
deficiencies, if appropriate. We review each state Medicaid and
Federal Medicare contract under which we operate on a quarterly
basis for any apparent premium deficiency. In doing so, we
evaluate current medical cost trends, expected premium rate
changes and termination clauses to determine our exposure to
future losses, if any. Premium deficiencies are recognized when
it is probable that expected claims and administrative expenses
will exceed future premiums and investment income on existing
medical insurance contracts. For purposes of premium
deficiencies, contracts are grouped in a manner consistent with
our method of acquiring, servicing and measuring the
profitability of such contracts. We did not have any premium
deficiency reserves at December 31, 2009.
Income
Taxes
We account for income taxes in accordance with current
accounting guidance as prescribed under U.S. generally
accepted accounting principles. On a quarterly basis, we
estimate our required tax liability based on enacted tax rates,
estimates of book to tax differences in income, and projections
of income that will be earned in each taxing jurisdiction.
Deferred tax assets and liabilities representing the tax effect
of temporary differences between financial reporting net income
and taxable income are measured at the tax rates enacted at the
time the deferred tax asset or liability is recorded.
After tax returns for the applicable year are filed, the
estimated tax liability is adjusted to the actual liability per
the filed state and Federal tax returns. Historically, we have
not experienced significant differences between our estimates of
tax liability and our actual tax liability.
Similar to other companies, we sometimes face challenges from
the tax authorities regarding the amount of taxes due. Positions
taken on our tax returns are evaluated and benefits are
recognized only if it is more likely than not that our position
will be sustained on audit. Based on our evaluation of tax
positions, we believe that we have appropriately accounted for
potential tax exposures.
In addition, we are periodically audited by state and Federal
taxing authorities and these audits can result in proposed
assessments. We believe that our tax positions comply with
applicable tax law and, as such, will vigorously defend these
positions on audit. We believe that we have adequately provided
for any reasonable foreseeable outcome related to these matters.
Although the ultimate resolution of these audits may require
additional tax payments, we do not anticipate any material
impact to earnings.
The qui tam litigation settlement payment in 2008 had a
significant impact on tax expense and the effective tax rates
for 2008 and 2009 due to the fact that a portion of the
settlement payment is not deductible for income tax purposes. At
December 31, 2008, the estimated tax benefit associated
with the qui tam litigation settlement payment was
approximately $34.6 million. In June 2009, we recorded an
additional $22.4 million tax benefit regarding the tax
treatment of the qui tam litigation settlement under an
agreement in principle with the IRS which was formalized through
a pre-filing agreement with the IRS in September 2009. The
pre-filing agreement program permits taxpayers to resolve tax
issues in advance of filing their corporate income tax returns.
We do not anticipate that there will be any further material
changes to the tax benefit associated with this litigation
settlement in future periods.
For further information, please reference Note 8 to our
audited Consolidated Financial Statements as of and for the year
ended December 31, 2009 included in Item 8. of this
Form 10-K.
Investments
As of December 31, 2009, we had investments with a carrying
value of $1.5 billion, primarily held in marketable debt
securities. Our investments are principally classified as
available-for-sale
and are recorded at fair value. We exclude gross unrealized
gains and losses on
available-for-sale
investments from earnings and report net unrealized gains or
losses, net of income tax effects, as a separate component in
shareholders equity. We continually monitor the difference
between the cost and fair value of our investments. As of
December 31, 2009, our investments had gross unrealized
gains of $6.6 million and gross unrealized losses of
$4.4 million. We evaluate investments for impairment
considering the length of time and extent to which market value
has been less than cost, the financial condition and near-term
prospects of the issuer as well as specific events or
circumstances that may
52
influence the operations of the issuer and our intent to sell
the security or the likelihood that we will be required to sell
the security before recovery of the entire amortized cost. For
debt securities, if we intend to either sell or determine that
we will more likely than not be required to sell a debt security
before recovery of the entire amortized cost basis or maturity
of the debt security, we recognize the entire impairment in
earnings. If we do not intend to sell the debt security and we
determine that we will not more likely than not be required to
sell the debt security but we do not expect to recover the
entire amortized cost basis, the impairment is bifurcated into
the amount attributed to the credit loss, which is recognized in
earnings, and all other causes, which are recognized in other
comprehensive income. New information and the passage of time
can change these judgments. We manage our investment portfolio
to limit our exposure to any one issuer or market sector, and
largely limit our investments to U.S. government and agency
securities; state and municipal securities; and corporate debt
obligations, substantially all of investment grade quality.
Goodwill
and Intangible Assets
The valuation of goodwill and intangible assets at acquisition
requires assumptions regarding estimated discounted cash flows
and market analyses. These assumptions contain uncertainties
because they require management to use judgment in selecting the
assumptions and applying the market analyses to the individual
acquisitions. Additionally, impairment evaluations require
management to use judgment to determine if impairment of
goodwill and intangible assets is apparent. We have applied a
consistent methodology in both the original valuation and
subsequent impairment evaluations for all goodwill and
intangible assets. We do not anticipate any changes to that
methodology, nor has any impairment loss resulted from our
analyses other than that recognized in connection with
discontinued operations in West Tennessee and the District of
Columbia in the prior year. Based on our analysis, we have
concluded that a margin of 152.0% in fair value in excess of the
carrying value of goodwill and other intangibles exists as of
December 31, 2009. If the assumptions used to evaluate the
value of goodwill and intangible assets change in the future, an
impairment loss may be recorded and it could be material to our
results of operations in the period in which the impairment loss
occurs.
Recent
Accounting Standards
In May 2008, the Financial Accounting Standards Board issued new
guidance related to convertible debt instruments which requires
the proceeds from the issuance of convertible debt instruments
that may be settled wholly or partially in cash upon conversion
to be allocated between a liability component and an equity
component in a manner reflective of the issuers
nonconvertible debt borrowing rate. The amount allocated to the
equity component represents a discount to the debt, which is
amortized over the period the convertible debt is expected to be
outstanding as additional non-cash interest expense. The
adoption of this new guidance on January 1, 2009, with
retrospective application to prior periods, changed the
accounting treatment for our 2.0% Convertible Senior Notes,
which were issued effective March 28, 2007 (See
Note 2(q) to our audited Consolidated Financial Statements
as of and for the year ended December 31, 2009 included in
Item 8. of this
Form 10-K).
To adopt the provisions of this new guidance, the fair value of
the 2.0% Convertible Senior Notes was estimated, as of the
date of issuance, as if they were issued without the conversion
options. The difference between the fair value and the principal
amounts of the 2.0% Convertible Senior Notes was
$50.9 million. This amount was retrospectively applied to
the financial statements from the issuance date of the
2.0% Convertible Senior Notes in 2007, and was
retrospectively recorded as a debt discount and as a component
of equity. The discount is being amortized over the expected
five-year life of the 2.0% Convertible Senior Notes
resulting in a non-cash increase to interest expense in
historical and future periods.
The retrospective adoption of the provisions of this new
guidance resulted in an increase to interest expense for the
years ended December 31, 2008 and 2007, of
$9.3 million and $6.7 million, respectively,
representing the non-cash interest expense related to the
amortization of the debt discount, which is in addition to
$5.2 million and $3.9 million, respectively,
representing cash interest expense related to the contractual
coupon rate incurred in the periods. The impact, net of the
related tax effects, was $0.11 and $0.08 per diluted share for
the years ended December 31, 2008 and 2007, respectively.
53
Results
of Operations
The following table sets forth selected operating ratios for the
years ended December 31, 2009, 2008 and 2007. All ratios,
with the exception of the health benefits ratio, are shown as a
percentage of total revenues.
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Years Ended December 31,
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2009
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2008
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2007
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Premium revenue
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99.4
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%
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98.4
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%
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98.1
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%
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Investment income and other
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0.6
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1.6
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1.9
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Total revenues
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100.0
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%
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100.0
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%
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100.0
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%
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Health
benefits(1)
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85.4
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%
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82.9
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%
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83.9
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%
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Selling, general and administrative expenses
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7.6
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%
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9.8
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%
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9.6
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%
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Income (loss) before income taxes
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3.9
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%
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(0.1)
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%
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4.6
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%
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Net income (loss)
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2.9
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%
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(1.3)
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%
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2.9
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%
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(1) |
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The health benefits ratio is shown as a percentage of premium
revenue because there is a direct relationship between the
premium received and the health benefits provided. |
Summarized comparative financial information for the years
ending December 31, 2009, 2008 and 2007 are as follows
(dollars in millions, except per share data); (totals in the
table below may not equal the sum of individual line items as
all line items have been rounded to the nearest decimal):
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Years Ended December 31,
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Years Ended December 31,
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% Change
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% Change
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2009
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2008
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2009-2008
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2008
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2007
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2008-2007
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Revenues:
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Premium
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$
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5,159.0
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$
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4,366.4
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18.2
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%
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$
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4,366.4
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$
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3,835.5
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13.8
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%
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Investment income and other
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29.1
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71.4
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(59.3)
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%
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71.4
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73.3
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(2.6)
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%
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Total revenues
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5,188.1
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4,437.7
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16.9
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%
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4,437.7
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3,908.8
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13.5
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%
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Expenses:
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Health benefits
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4,407.3
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3,618.3
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21.8
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%
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3,618.3
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3,216.1
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12.5
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%
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Selling, general and administrative
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394.1
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435.9
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(9.6)
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%
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435.9
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377.0
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15.6
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%
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Premium tax
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134.3
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93.8
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43.2
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%
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93.8
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85.2
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10.0
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%
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Depreciation and amortization
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34.7
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37.4
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(7.1)
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%
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37.4
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31.6
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18.3
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%
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Litigation settlement
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234.2
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*
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234.2
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*
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Interest
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16.3
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20.5
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(20.7)
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%
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20.5
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19.0
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8.2
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%
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Total expenses
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4,986.7
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4,440.0
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12.3
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%
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4,440.0
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3,728.9
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19.1
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%
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Income (loss) before income taxes
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201.4
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(2.3
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)
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*
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(2.3
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)
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179.9
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|
*
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Income tax expense
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52.1
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54.4
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(4.1)
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%
|
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|
54.4
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|
67.7
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(19.7)
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%
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Net income (loss)
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$
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149.3
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|
$
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(56.6
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)
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*
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$
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(56.6
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)
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$
|
112.2
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|
*
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|
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|
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Diluted net income (loss) per common share
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|
$
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2.85
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|
$
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(1.07
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)
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*
|
|
|
$
|
(1.07
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)
|
|
$
|
2.08
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|
*
|
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Revenues
Premium revenue for the year ended December 31, 2009
increased $792.6 million, or 18.2%. The increase was
primarily due to two factors: (1) entry into new markets
including the New Mexico market under the CoLTS
54
program commencing with six counties in August 2008 and
completing a full statewide rollout in April 2009 and entry into
the Nevada market in February 2009; and (2) significant
increases in full-risk membership driven by a surge in Medicaid
eligibility in our existing products and markets partially due
to the increase in unemployment as a result of current
macroeconomic conditions. We expect membership increases to
continue into 2010.
Premium revenue for the year ended December 31, 2008
increased $530.9 million, or 13.8%. The increase was
primarily due to the full year impact of operations in Tennessee
which commenced in April 2007 as well as premium rate and yield
increases in that market and entry into the New Mexico market
under the CoLTS program beginning in August 2008. The remaining
growth in 2008 is a result of premium rate increases and yield
increases resulting from changes in membership mix across many
of our markets. Lastly, in 2008 both the Tennessee and Georgia
markets benefited from retroactive premium rate adjustments
related to operations in 2007 of approximately
$35.5 million and $10.4 million, respectively.
The following table sets forth the approximate number of members
we served in each state as of December 31, 2009, 2008 and
2007. Because we receive two premiums for members that are in
both the Medicare Advantage and Medicaid products, these members
have been counted twice in the states where we operate Medicare
Advantage plans.
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December 31,
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Market
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2009
|
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2008
|
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2007
|
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Texas(1)
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505,000
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455,000
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|
|
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460,000
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Georgia
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249,000
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|
|
|
206,000
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|
|
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211,000
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Florida
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|
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236,000
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237,000
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|
206,000
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Tennessee(2)
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|
195,000
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187,000
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356,000
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Maryland
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194,000
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169,000
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|
152,000
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New Jersey
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118,000
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|
105,000
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|
98,000
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New York
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|
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114,000
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|
|
110,000
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|
|
|
112,000
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Nevada
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|
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62,000
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|
|
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Ohio
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|
60,000
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|
|
|
58,000
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|
|
54,000
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Virginia
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|
35,000
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|
|
|
25,000
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|
|
24,000
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|
New Mexico
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|
|
20,000
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|
|
11,000
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|
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|
South
Carolina(3)
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|
|
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|
16,000
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|
|
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|
District of
Columbia(4)
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|
|
|
|
|
|
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|
|
|
38,000
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
|
|
|
1,788,000
|
|
|
|
1,579,000
|
|
|
|
1,711,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Membership includes approximately 13,000 members each in 2009
and 2007 under ASO contracts. There were no ASO contracts in
effect as of December 31, 2008. |
|
(2) |
|
Membership includes approximately 170,000 members under an ASO
contract in 2007. This contract terminated October 31, 2008. |
|
(3) |
|
The contract with South Carolina terminated March 1, 2009
concurrent with the sale of our rights under the contract. |
|
(4) |
|
The contract with the District of Columbia terminated
June 30, 2008. |
As of December 31, 2009, our total membership increased by
209,000 members, or 13.2%, to 1,788,000 members from 1,579,000
as of December 31, 2008. Our risk membership increased to
1,775,000, or 12.4%, as of December 31, 2009 compared to
1,579,000 as of December 31, 2008. The increase is
primarily a result of membership growth in the majority of our
products and markets driven by a surge in Medicaid eligibility,
which we believe was driven by high unemployment and general
adverse economic conditions. Additionally, our entry into the
Nevada market in February 2009 and the commencement of the CoLTS
program in New Mexico in August 2008 contributed to our
membership growth.
55
At December 31, 2009, we served members who received
healthcare benefits through contracts with the regulatory
entities in the jurisdictions in which we operate. For the year
ended December 31, 2009, the Texas contract represented
approximately 25.0% of premium revenues and a significantly
higher percentage of our net income. The Maryland, Tennessee,
Georgia and Florida contracts individually accounted for over
10.0% of premium revenues. Our state contracts have terms that
are generally one-to-two-years in length, some of which contain
optional renewal periods at the discretion of the individual
states. Some contracts also contain a termination clause with
notification periods ranging from 30 to 180 days. At the
termination of these contracts,
re-negotiation
of terms or the requirement to enter into a
re-bidding
or re-procurement process is required to execute a new contract.
If these contracts were not renewed on favorable terms to us,
our financial position, results of operations or cash flows
could be materially adversely affected.
Our investment portfolio generated approximately
$22.4 million in pre-tax income for the year ended
December 31, 2009 compared to $50.9 million in 2008.
The decrease is primarily a result of decreased rates of return
on fixed income securities due to current market interest rates.
We anticipate that our effective yield will remain at or below
the current rate as of December 31, 2009 for the
foreseeable future, which will result in similar or reduced
returns on our investment portfolio in future periods. The
performance of our investment portfolio is interest rate driven
and, consequently, changes in interest rates affect our returns
on, and the fair value of, our portfolio which could materially
adversely affect our results of operations or liquidity in
future periods.
Other revenue for the year ended December 31, 2009,
decreased $13.8 million to $6.7 million compared to
$20.5 million for the year ended December 31, 2008.
Included in other revenue for the year ended December 31,
2009 is the approximate $5.8 million gain on the sale of
the South Carolina contract rights. Included in other revenue
for the year ended December 31, 2008 is the ASO revenue
from the West Tennessee contract which concluded on
October 31, 2008. Revenues from this contract totaled
approximately $19.3 million for the year ended
December 31, 2008.
Health
Benefits Expense
Expenses relating to health benefits for the year ended
December 31, 2009, increased $789.0 million, or 21.8%,
to $4.4 billion compared to $3.6 billion for the year
ended December 31, 2008. HBR increased to 85.4% for the
year ended December 31, 2009 compared to 82.9% for the
prior year. The increase in health benefits expense as it
compares to premium revenue for the year ended December 31,
2009 resulted primarily from increased outpatient costs
experienced across the majority of our markets and membership
base. We believe these increased outpatient costs are related to
increased utilization and intensity of services. The primary
drivers of the increase in outpatient costs were emergency room
services, ambulatory surgery and physician services. While
health benefits expense increased commensurate with the
significant increase in our membership, it was further increased
by the larger proportion of new members. Historical experience
indicates that new members generally utilize more services
during the first two quarters of enrollment. Additionally, our
2009 results reflect a significant increase in flu-related
costs. We believe this increase is directly related to the onset
of a severe off-season flu outbreak associated with the H1N1
virus, which has been noted to be particularly virulent among
children, pregnant women, and other high-risk populations, all
of whom together represent a significant portion of our
membership. Additionally, our entry into the New Mexico market,
with a higher HBR due to the benefit structure of the CoLTS
program, contributed to the increase in HBR overall. In total,
the increases in health benefits expense exceeded growth in
premium revenues, thereby negatively impacting HBR for the year
ended December 31, 2009.
Expenses relating to health benefits for the year ended
December 31, 2008 increased $402.2 million, or 12.5%.
The HBR for the year ended December 31, 2008 was 82.9%
compared to 83.9% in 2007. Our 2008 results compared to 2007
reflect a decrease in the HBR primarily as a result of
retroactive premium rate adjustments in Tennessee and Georgia,
totaling approximately $45.9 million, in addition to
premium rate increases and yield increases in our other markets.
Selling,
General and Administrative Expenses
(SG&A)
SG&A decreased $41.8 million, or 9.6%, to
$394.1 million for the year ended December 31, 2009
compared to $435.9 million for the year ended
December 31, 2008. Our SG&A as a percentage of total
revenues for the year
56
ended December 31, 2009 was 7.6% compared to 9.8% in 2008.
The decrease in the SG&A ratio is primarily a result of
reductions in salary and benefits expenses. In 2009, variable
compensation was lower due to decreases in our variable
compensation accruals related to our operating results. The
decrease in the SG&A ratio was also the result of leverage
gained through an increase in premium revenue through new market
expansion and existing market growth and the termination of our
ASO contract in West Tennessee October 1, 2008.
SG&A increased $58.9 million, or 15.6%, for the year
ended December 31, 2008 compared to 2007. Our SG&A
ratio for the year ended December 31, 2008 was 9.8%
compared to 9.6% in 2007. The increase in SG&A was
primarily due to an increase in salaries and benefits primarily
due to wage rate increases, increases in employee healthcare
benefit expenses, and increased earnings-based compensation as a
result of favorable operating performance as well as the
write-off of goodwill related to our market exits in West
Tennessee and the District of Columbia.
Premium
Tax Expense
Premium taxes were $134.3 million, $93.8 million and
$85.2 million for the years ended December 31, 2009,
2008 and 2007, respectively. The increase in premium tax expense
in 2009 compared to 2008 is a result of the commencement of the
CoLTS program in New Mexico in August 2008, entry into Nevada in
February 2009, adoption of premium tax in the State of New York
effective January 2009, a premium tax rate increase in Tennessee
effective July 2009 and growth in premium revenues across all
markets where premium tax is levied. These increases were
partially offset by the termination of premium tax in the State
of Georgia in October 2009. The increase in premium tax expense
in 2008 compared to 2007 is a result of our entry into New
Mexico in August 2008 and growth in premium revenues in the
markets where premium tax is levied.
Depreciation
and Amortization Expense
Depreciation and amortization expense was $34.7 million,
$37.4 million and $31.6 million for the years ended
December 31, 2009, 2008 and 2007, respectively. The
decrease from 2008 to 2009 is primarily a result of decreased
amortization of debt issuance costs relating to the term loan
repaid in July 2009. The increase in depreciation and
amortization expense in 2008 compared to 2007 was a result of an
increase in fixed assets and accelerated amortization of debt
issuance costs due to significant principal payments on the term
loan in 2008.
Litigation
Settlement
On August 13, 2008, we settled a qui tam litigation
relating to certain marketing practices of our former Illinois
health plan for a cash payment of $225.0 million without
any admission of wrong-doing by us or our subsidiaries or
affiliates. We also paid approximately $9.2 million to the
relator for legal fees. Both payments were made during the three
months ended September 30, 2008. As a result, we recorded a
one-time expense in the amount of $234.2 million, or
$199.6 million net of the related tax effects, in the year
ended December 31, 2008 and reported a net loss. In June
2009, we recorded a $22.4 million tax benefit regarding the
tax treatment of the settlement under an agreement in principle
with the IRS which was formalized through a pre-filing agreement
with the IRS in September 2009. The pre-filing agreement program
permits taxpayers to resolve tax issues in advance of filing
their corporate income tax returns. We do not anticipate that
there will be any further material changes to the tax benefit
associated with this settlement in future periods.
Interest
Expense
Interest expense was $16.3 million, $20.5 million and
$19.0 million for the years ended December 31, 2009,
2008 and 2007, respectively. The decrease in interest expense in
2009 compared to 2008 is a result of scheduled and voluntary
payments resulting in payment in full of all outstanding
balances under our Credit Agreement as of July 2009, as well as
fluctuating interest rates for previous borrowings under the
Credit Agreement. The decrease in interest expense in 2008
compared to 2007 is a result of decreased interest rates in 2008
compared to 2007 and principal payments on outstanding
borrowings under the Credit Agreement reducing the balance on
which interest was paid.
57
Provision
for Income Taxes
Income tax expense for 2009 and 2008 was $52.1 million and
$54.4 million, respectively. The effective tax rate for the
year ended December 31, 2009 was significantly decreased
due to a pre-filing agreement reached with the IRS in 2009
regarding the tax treatment of the 2008 qui tam
litigation settlement payment resulting in an additional tax
benefit of $22.4 million over what was recorded in 2008.
Additionally, the effective tax rate excluding this benefit
decreased due to the decrease in the blended state income tax
rate compared to 2008.
The effective tax rate for the year ended December 31, 2008
was significantly impacted by the non-deductible portion of the
qui tam litigation settlement payment.
Income tax expense for 2007 was $67.7 million with an
effective tax rate of 37.6%.
Net
Income (Loss)
Net income for 2009 was $149.3 million, or $2.85 per
diluted share, compared to a net loss of $56.6 million, or
$1.07 per diluted share in 2008. Net income for 2007 was
$112.2 million or $2.08 per diluted share. Net income
increased from 2008 to 2009 and decreased from 2007 to 2008
primarily as a result of the one-time expense recorded in 2008
in connection with the settlement of the qui tam
litigation equal to $234.2 million before the related
tax benefit. The trend in earnings of the underlying business
reflects a higher HBR due to increased outpatient costs,
flu-related costs as well as increased utilization and intensity
of services for the year ended December 31, 2009 compared
to December 31, 2008. For the year ended December 31,
2008 compared to December 31, 2007, the impact of the
litigation settlement was mitigated in part by a lower HBR due
to retroactive premium adjustments.
Liquidity
and Capital Resources
We manage our cash, investments and capital structure so we are
able to meet the short- and long-term obligations of our
business while maintaining financial flexibility and liquidity.
We forecast, analyze and monitor our cash flows to enable
prudent investment management and financing within the confines
of our financial strategy.
Our primary sources of liquidity are cash and cash equivalents,
short- and long-term investments, and cash flows from
operations. As of December 31, 2009, we had cash and cash
equivalents of $505.9 million, short- and long-term
investments of $848.7 million and restricted investments on
deposit for licensure of $102.8 million. Cash, cash
equivalents, and investments which are unregulated totaled
$232.0 million at December 31, 2009.
Financing
Activities
Credit
Agreement
We previously maintained a Credit Agreement that provided both a
secured term loan and a senior secured revolving credit
facility. On July 31, 2009, we paid the remaining balance
of the secured term loan. Effective August 21, 2009, we
terminated the Credit Agreement and related Pledge and Security
Agreement. We had no outstanding borrowings under the Credit
Agreement as of the effective date of termination.
Convertible
Senior Notes
As of December 31, 2009, we had $260.0 million
outstanding in aggregate principal amount of
2.0% Convertible Senior Notes due May 15, 2012. In May
2007, we filed an automatic shelf registration statement on
Form S-3
with the SEC covering the resale of the 2.0% Convertible
Senior Notes and common stock issuable upon conversion. The
2.0% Convertible Senior Notes are governed by an Indenture
dated as of March 28, 2007 (the Indenture). The
2.0% Convertible Senior Notes are senior unsecured
obligations of the Company and rank equally with all of our
existing and future senior debt and senior to all of our
subordinated debt. The 2.0% Convertible Senior Notes are
effectively subordinated to all existing and future liabilities
of our subsidiaries and to any existing and future secured
indebtedness. The 2.0% Convertible Senior Notes bear
interest at a rate of 2.0% per year, payable semiannually in
arrears in cash on May 15 and November 15 of each year,
beginning on May 15, 2007. The
58
2.0% Convertible Senior Notes mature on May 15, 2012,
unless earlier repurchased or converted in accordance with the
Indenture.
Upon conversion of the 2.0% Convertible Senior Notes, we
will pay cash up to the principal amount of the
2.0% Convertible Senior Notes converted. With respect to
any conversion value in excess of the principal amount, we have
the option to settle the excess with cash, shares of our common
stock, or a combination thereof based on a daily conversion
value, as defined in the Indenture. The initial conversion rate
for the 2.0% Convertible Senior Notes will be
23.5114 shares of common stock per one thousand dollars of
principal amount of 2.0% Convertible Senior Notes, which
represents a 32.5% conversion premium based on the closing price
of $32.10 per share of our common stock on March 22, 2007
and is equivalent to a conversion price of approximately $42.53
per share of common stock. The conversion rate is subject to
adjustment in some events but will not be adjusted for accrued
interest. In addition, if a fundamental change
occurs prior to the maturity date, we will in some cases
increase the conversion rate for a holder of
2.0% Convertible Senior Notes that elects to convert their
2.0% Convertible Senior Notes in connection with such
fundamental change.
Concurrent with the issuance of the 2.0% Convertible Senior
Notes, we purchased convertible note hedges covering, subject to
customary anti-dilution adjustments, 6,112,964 shares of
our common stock. The convertible note hedges allow us to
receive shares of our common stock
and/or cash
equal to the amounts of common stock
and/or cash
related to the excess conversion value that we would pay to the
holders of the 2.0% Convertible Senior Notes upon
conversion. These convertible note hedges will terminate at the
earlier of the maturity date of the 2.0% Convertible Senior
Notes or the first day on which none of the
2.0% Convertible Senior Notes remain outstanding due to
conversion or otherwise.
The convertible note hedges are expected to reduce the potential
dilution upon conversion of the 2.0% Convertible Senior
Notes in the event that the market value per share of our common
stock, as measured under the convertible note hedges, at the
time of exercise is greater than the strike price of the
convertible note hedges, which corresponds to the initial
conversion price of the 2.0% Convertible Senior Notes and
is subject to certain customary adjustments. If, however, the
market value per share of our common stock exceeds the strike
price of the warrants (discussed below) when such warrants are
exercised, we will be required to issue common stock. Both the
convertible note hedges and warrants provide for net-share
settlement at the time of any exercise for the amount that the
market value of our common stock exceeds the applicable strike
price.
Also concurrent with the issuance of the 2.0% Convertible
Senior Notes, we sold warrants to acquire, subject to customary
anti-dilution adjustments, 6,112,964 shares of our common
stock at an exercise price of $53.77 per share. If the average
price of our common stock during a defined period ending on or
about the settlement date exceeds the exercise price of the
warrants, the warrants will be settled, at our option, in cash
or shares of our common stock.
The convertible note hedges and warrants are separate
transactions which will not affect holders rights under
the 2.0% Convertible Senior Notes.
Universal
Automatic Shelf Registration
On December 15, 2008, we filed a universal automatic shelf
registration statement with the SEC which enables us to sell, in
one or more public offerings, common stock, preferred stock,
debt securities and other securities at prices and on terms to
be determined at the time of the applicable offering. The shelf
registration provides us with the flexibility to publicly offer
and sell securities at times we believe market conditions make
such an offering attractive. Because we are a well-known
seasoned issuer, the shelf registration statement was effective
upon filing. No securities have been issued under the shelf
registration.
Stock
Repurchase Program
Under the authorization of our Board of Directors, we maintain
an on-going share repurchase program that allows us to
repurchase up to $200.0 million of shares of our common
stock from and after August 5, 2009. Pursuant to this
on-going share repurchase program, we repurchased
2,713,567 shares of our common stock at an average per
share cost of approximately $25.70 and an aggregate cost of
$69.8 million and placed them into treasury during the
59
year ended December 31, 2009. As of December 31, 2009,
we had authorization to purchase up to an additional
$162.8 million of common stock under the repurchase program.
Cash
and Investments
Cash from operations was $147.0 million for the year ended
December 31, 2009 compared to $74.3 million for the
year ended December 31, 2008. The increase in cash flows
was primarily due to cash flows generated by an increase in net
income as a result of the prior year litigation settlement
resulting in a net loss for the year ended December 31,
2008. Additionally, 2009 net income benefited from a tax
adjustment to decrease income tax related to a pre-filing
agreement reached in 2009 regarding the deductibility of the
2008 settlement.
This increase was offset in part by a decrease in cash flows
generated by working capital changes of $120.4 million.
Cash used in operating activities for working capital changes
was $55.7 million for the year ended December 31, 2009
compared to cash provided by operating activities for working
capital changes of $64.7 million for the year ended
December 31, 2008. The decrease in cash provided by working
capital changes primarily resulted from a net decrease in cash
provided through changes in accounts payable, accrued expenses
and other current liabilities of $49.3 million primarily
due to payments in 2009 of prior year variable compensation
accruals at amounts exceeding that accrued for the year ended
December 31, 2009 and changes in the experience rebate
accrual under our contract with the State of Texas.
Additionally, working capital changes attributable to changes in
prepaid expenses, provider and other receivables and other
current assets decreased $43.5 million primarily as a
result of the timing of tax payments
year-over-year
and the accrual of pharmacy rebates.
Cash used in investing activities was $296.6 million for
the year ended December 31, 2009 compared to cash provided
by investing activities of $307.2 million for the year
ended December 31, 2008. The change resulted primarily from
net purchases of investments during the year ended
December 31, 2009 compared to net proceeds from the release
of restricted investments held as collateral during the year
ended December 31, 2008. We currently anticipate total
capital expenditures for 2010 to be between approximately
$30.0 million and $40.0 million related primarily to
technological infrastructure development and enhancement of core
systems to increase scalability and efficiency.
Our investment policies are designed to preserve capital,
provide liquidity and maximize total return on invested assets.
As of December 31, 2009, our investment portfolio consisted
primarily of fixed-income securities. The weighted-average
maturity is approximately 25 months excluding our auction
rate securities which are discussed below. We utilize investment
vehicles such as auction rate securities, commercial paper,
certificates of deposit, corporate bonds, debt securities of
government sponsored entities, Federally insured corporate
bonds, money market funds, municipal bonds and
U.S. Treasury securities. The states in which we operate
prescribe the types of instruments in which our subsidiaries may
invest their funds. The weighted-average taxable equivalent
yield on consolidated investments as of December 31, 2009
was approximately 1.14%. As of December 31, 2009, we had
total cash and investments of approximately $1.5 billion.
The following table shows the types, percentages and average
Standard and Poors ratings of our holdings within our
investment portfolio at December 31, 2009:
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|
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|
|
|
|
|
|
|
|
|
|
|
Average S&P
|
|
|
|
%
|
|
|
Rating
|
|
|
Auction rate securities
|
|
|
3.9
|
%
|
|
|
AA+
|
|
Cash, bank deposits and commercial paper
|
|
|
2.8
|
%
|
|
|
A1+
|
|
Certificates of deposit
|
|
|
6.6
|
%
|
|
|
AAA
|
|
Corporate bonds
|
|
|
14.5
|
%
|
|
|
A+
|
|
Debt obligations of government sponsored entities, Federally
insured corporate bonds, municipal bonds and U.S. Treasury
securities
|
|
|
43.9
|
%
|
|
|
AAA
|
|
Money market funds
|
|
|
28.3
|
%
|
|
|
AAA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
AA+
|
|
|
|
|
|
|
|
|
|
|
60
Effective July 1, 2009, we began reporting all of the debt
securities in our investment portfolio as
available-for-sale,
other than certain auction rate securities subject to a forward
contract, discussed below, that continue to be classified as
trading securities. The change resulted in the transfer to
available-for-sale
of $397.4 million in
held-to-maturity
securities and $80.8 million in
held-to-maturity
investments-on-deposit,
with unrealized gains of $4.6 million and
$0.5 million, respectively and the transfer to
available-for-sale
of $26.9 million in
held-to-maturity
securities and $17.7 million in
held-to-maturity
investments-on-deposit,
with unrealized losses of $0.2 million and
$0.1 million, respectively. The unrealized gains and
losses, net of the related tax effects, were recorded to
accumulated other comprehensive income. The decision to
reclassify the securities as
available-for-sale
is intended to provide us with the opportunity to improve
liquidity and increase investment returns through prudent
investment management while providing financial flexibility in
determining whether to hold those securities to maturity.
As of December 31, 2009, $56.8 million of our
investments were comprised of auction rate securities issued by
student loan corporations which are public, non-profit entities
established by various state governments. Liquidity for these
auction rate securities historically was provided by an auction
process which allowed holders to sell their notes and the
interest rate was reset at pre-determined intervals, usually
every 28 or 35 days. Since early 2008, auctions for these
auction rate securities have failed and there is no assurance
that auctions for these securities will succeed in the future.
An auction failure means that the parties wishing to sell their
securities could not be matched with an adequate volume of
buyers. In the event that there is a failed auction, the
indenture governing the security requires the issuer to pay
interest at a contractually defined rate. The securities for
which auctions have failed will continue to accrue interest at
the contractual rate and be auctioned every 28 or 35 days
until the auction succeeds, the issuer calls the securities, or
they mature. As a result, our ability to liquidate and fully
recover the carrying value of our auction rate securities in the
near term may be limited or not exist. As we cannot predict the
timing of future successful auctions, if any, our auction rate
securities are classified as long-term investments. The
weighted-average life of our auction rate securities portfolio,
based on the final maturity, is approximately 23 years. We
currently have the intent to hold our auction rate securities to
maturity, if required, or if and when market stability is
restored with respect to these investments.
Our auction rate securities are classified as either
available-for-sale
or trading securities and reflected at fair value. In periods
prior to 2008, due to the auction process which took place every
28-35 days
for most securities, quoted market prices were readily
available, which would qualify as Level 1 under the current
guidance related to fair value measurements. However, the
auction events for these securities failed during early 2008 and
have not resumed. Observable and relevant market data for
valuing auction rate securities is limited at this time. Due to
these events, we reclassified these instruments as Level 3
during 2008 and recorded a temporary unrealized decline in fair
value to accumulated other comprehensive income of
$6.4 million at that time. For the year ended
December 31, 2009, we have recorded an unrealized gain of
$2.2 million to accumulated other comprehensive income as a
result of moderate recoveries in fair value for auction rate
securities classified as
available-for-sale.
We currently believe that the net unrealized loss position that
remains at December 31, 2009 is primarily due to liquidity
concerns and not the creditworthiness of the underlying issuers.
In addition, our holdings of auction rate securities represented
less than four percent of our total cash, cash equivalent, and
investment balance at December 31, 2009, which we believe
allows us sufficient time for the securities to return to full
value. Because we believe that the current decline in fair value
is temporary and based primarily on liquidity issues in the
credit markets, any difference between our fair value estimates
and an estimate that would be arrived at by another party would
have no impact on our earnings, since such difference would also
be recorded to accumulated other comprehensive income. We will
re-evaluate each of these factors as market conditions change in
subsequent periods.
During the fourth quarter of 2008, we entered into a forward
contract with a registered broker-dealer, at no cost to us, for
auction rate securities with a fair value of $10.8 million
as of December 31, 2009. This forward contract provides us
with the ability to sell these auction rate securities to the
registered broker-dealer at par within a defined timeframe,
beginning June 2010. These securities are classified as trading
securities because we do not intend to hold these securities
until final maturity. Trading securities are carried at fair
value with changes in fair value recorded in earnings. A
realized gain of $1.1 million was recorded to earnings for
the year ended December 31, 2009, related to these trading
securities. The value of the forward contract of
$1.2 million was estimated using a discounted cash flow
analysis taking into consideration the creditworthiness of the
counterparty to the agreement.
61
The forward contract is included in other long-term assets. As
the trading securities increased in value, a corresponding
decrease in fair value for the forward contract of
$0.8 million for the year ended December 31, 2009 was
recorded to earnings.
Cash used in financing activities was $107.7 million for
the year ended December 31, 2009 compared to
$105.8 million for the year ended December 31, 2008.
The increase in cash used in financing activities for the year
ended December 31, 2009 primarily related to an increase of
$39.1 million in funds used to repurchase our common stock
under our share repurchase program partially offset by a
$39.7 million decrease in repayments of borrowings under
our credit agreement, which was terminated effective
August 21, 2009.
We believe that existing cash and investment balances and cash
flow from operations will be sufficient to support continuing
operations, capital expenditures and our growth strategy for at
least 12 months. Our
debt-to-total
capital ratio at December 31, 2009 was 19.3%. The financial
markets have experienced periods of volatility and disruption
since 2008. Future volatility and disruption is possible and
unpredictable. In the event we need access to additional
capital, our ability to obtain such capital may be limited and
the cost of any such capital may be significantly higher than in
past periods depending on the market condition and our financial
position at the time we pursue additional financing.
The principal of our 2.0% Convertible Senior Notes may be
repaid with proceeds from debt or equity financing, existing
cash and investments, or a combination thereof. If we determine
that debt or equity financing is appropriate, our operations at
the time we enter the credit or equity markets cannot be
predicted and may cause our access to these markets to be
limited. Additionally, any disruptions in the credit markets
similar to that of the recent recession could further limit our
flexibility in planning for, or reacting to, changes in our
business and industry and addressing our future capital
requirements.
Our access to additional financing will depend on a variety of
factors such as market conditions, the general availability of
credit, the overall availability of credit to our industry, our
credit ratings and credit capacity, as well as the possibility
that lenders could develop a negative perception of our long- or
short-term financial prospects. Similarly, our access to funds
may be impaired if regulatory authorities or rating agencies
take negative actions against us. If a combination of these
factors were to occur, our internal sources of liquidity may
prove to be insufficient, and in such case, we may not be able
to successfully obtain additional financing on favorable terms.
This could restrict our ability to: (1) acquire new
businesses or enter new markets, (2) service or refinance
our existing debt, (3) make necessary capital investments,
(4) maintain statutory net worth requirements in the states
in which we do business, and (5) make other expenditures
necessary for the ongoing conduct of our business.
Regulatory
Capital and Dividend Restrictions
Our operations are conducted through our wholly-owned
subsidiaries, which include HMOs, one HIC and one PHSP. HMOs,
HICs and PHSPs are subject to state regulations that, among
other things, require the maintenance of minimum levels of
statutory capital, as defined by each state, and restrict the
timing, payment and amount of dividends and other distributions
that may be paid to their stockholders. Additionally, certain
state regulatory agencies may require individual regulated
entities to maintain statutory capital levels higher than the
state regulations. As of December 31, 2009, we believe our
subsidiaries are in compliance with all minimum statutory
capital requirements. The parent company may be required to fund
minimum net worth shortfalls during 2010 using unregulated cash,
cash equivalents and investments. We believe, as a result, that
we will continue to be in compliance with these requirements at
least through the end of 2010.
The National Association of Insurance Commissioners
(NAIC) has defined risk-based capital
(RBC) standards for HMOs and other entities bearing
risk for healthcare coverage that are designed to measure
capitalization levels by comparing each companys adjusted
surplus to its required surplus (RBC ratio). The RBC
ratio is designed to reflect the risk profile of HMOs. Within
certain ratio ranges, regulators have increasing authority to
take action as the RBC ratio decreases. There are four levels of
regulatory action, ranging from (a) requiring insurers to
submit a comprehensive plan to the state insurance commissioner
to (b) requiring the state insurance commissioner to place
the insurer under regulatory control. Eight of our eleven states
have adopted RBC as the measure of required surplus. At
December 31, 2009, our consolidated RBC ratio for these
states is estimated to be over 375% which compares to the
required level of 200%, the level at which regulatory action
would be
62
initiated. In the remaining states, we have approximately
3 times the state required surplus level. Although not all
states had adopted these rules at December 31, 2009, at
that date, each of our active health plans had a surplus that
exceeded either the applicable state net worth requirements or,
where adopted, the levels that would require regulatory action
under the NAICs RBC rules.
Contractual
Obligations
The following table summarizes our material contractual
obligations, including both on- and off-balance sheet
arrangements, and our commitments at December 31, 2009 (in
thousands):
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|
|
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Long-term obligations
|
|
$
|
273,000
|
|
|
$
|
5,200
|
|
|
$
|
5,200
|
|
|
$
|
262,600
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
84,130
|
|
|
|
14,944
|
|
|
|
14,173
|
|
|
|
13,205
|
|
|
|
8,560
|
|
|
|
6,648
|
|
|
|
26,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
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|
$
|
357,130
|
|
|
$
|
20,144
|
|
|
$
|
19,373
|
|
|
$
|
275,805
|
|
|
$
|
8,560
|
|
|
$
|
6,648
|
|
|
$
|
26,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations. Our operating
lease obligations are primarily for payments under
non-cancelable office space leases.
Long-term Obligations. Long-term obligations
include amounts due under our 2.0% Convertible Senior Notes
which mature May 15, 2012.
Off-Balance
Sheet Arrangements
We have no investments, loans or any other known contractual
arrangements with special-purpose entities, variable interest
entities or financial partnerships. Effective July 1, 2009,
we have caused to be issued a collateralized irrevocable standby
letter of credit in an aggregate principal amount of
approximately $17.4 million to meet certain obligations
under our Medicaid contract in the State of Georgia through our
Georgia subsidiary, AMGP Georgia Managed Care Company, Inc. The
letter of credit is collateralized through investments held by
AMGP Georgia Managed Care Company, Inc.
Commitments
As of December 31, 2009, the Company has no commitments.
Inflation
Although healthcare cost inflation has stabilized in recent
years, the national healthcare cost inflation rate still
significantly exceeds the general inflation rate. We use various
strategies to reduce the negative effects of healthcare cost
inflation. Specifically, our health plans try to control medical
and hospital costs through contracts with independent providers
of healthcare services. Through these contracted care providers,
our health plans emphasize preventive healthcare and appropriate
use of specialty and hospital services.
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|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Our Consolidated Financial Statements include a certain amount
of assets whose fair values are subject to market risk. Due to
our significant investment in fixed-maturity investments,
interest rate risk represents a market risk factor affecting our
consolidated financial position. Increases and decreases in
prevailing interest rates generally translate into decreases and
increases in fair values of those instruments. In addition, the
credit markets experienced significant disruptions in 2008 and
2009. Liquidity on many financial instruments contracted, the
creditworthiness of many issuers has fluctuated, and defaults
have increased, along with other disruptions. While we do not
believe we have experienced material adverse changes in the
value of our cash, cash equivalents and investments, further
disruptions could impact the value of these assets and other
financial assets we may hold in the future. There can be no
assurance that future changes in interest rates,
creditworthiness of issuers, prepayment activity, liquidity
available in the market and other general market conditions will
not have a material adverse impact on our results of operations,
liquidity, financial position or cash flows.
63
As of December 31, 2009, substantially all of our
investments were in high quality securities that have
historically exhibited good liquidity which include auction rate
securities, commercial paper, certificates of deposit, corporate
bonds, debt securities of government sponsored entities,
Federally insured corporate bonds, money market funds, municipal
bonds and U.S. Treasury securities.
The fair value of our fixed maturity investment portfolio is
exposed to interest rate risk the risk of loss in
fair value resulting from changes in prevailing market rates of
interest for similar financial instruments. However, we have the
ability to hold fixed maturity investments to maturity. We rely
on the experience and judgment of senior management to monitor
and mitigate the effects of market risk. The allocation among
various types of securities is adjusted from time to time based
on market conditions, credit conditions, tax policy,
fluctuations in interest rates and other factors. In addition,
we place the majority of our investments in high-quality, liquid
securities and limit the amount of credit exposure to any one
issuer. As of December 31, 2009, an increase of 1.0% in
interest rates on securities with maturities greater than one
year would reduce the fair value of our marketable securities
portfolio by approximately $8.8 million. Conversely, a
reduction of 1.0% in interest rates on securities with
maturities greater than one year would increase the fair value
of our marketable securities portfolio by approximately
$9.0 million. The above changes in fair value are impacted
by securities in our portfolio that have a call provision
feature. We believe this fair value presentation is indicative
of our market risk because it evaluates each investment based on
its individual characteristics. Consequently, the fair value
presentation does not assume that each investment reacts
identically based on a 1.0% change in interest rates.
64
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
AMERIGROUP Corporation:
We have audited the accompanying consolidated balance sheets of
AMERIGROUP Corporation and subsidiaries (the
Company) as of December 31, 2009 and 2008, and
the related consolidated statements of operations and
consolidated statements of stockholders equity and cash
flows for each of the years in the three-year period ended
December 31, 2009. These Consolidated Financial Statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of AMERIGROUP Corporation and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, the Company has changed its method of accounting for
convertible debt securities in 2009 due to the adoption of FASB
Staff Position APB
14-1
(included in FASB ASC
470-20-65-1)
and retrospectively adjusted previous financial statements and
has changed its method of recognizing and measuring uncertain
tax positions due to the adoption of FASB Interpretation
No. 48 (included in FASB ASC Topic 740), as of
January 1, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
AMERIGROUP Corporation and subsidiaries internal control
over financial reporting as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated February 22, 2010 expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
Norfolk, VA
February 22, 2010
65
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
AMERIGROUP
CORPORATION AND SUBSIDIARIES
(Dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
505,915
|
|
|
$
|
763,272
|
|
Short-term investments
|
|
|
137,523
|
|
|
|
97,466
|
|
Premium receivables
|
|
|
104,867
|
|
|
|
86,595
|
|
Deferred income taxes
|
|
|
26,361
|
|
|
|
25,347
|
|
Provider and other receivables
|
|
|
33,083
|
|
|
|
27,468
|
|
Prepaid expenses and other
|
|
|
14,233
|
|
|
|
14,813
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
821,982
|
|
|
|
1,014,961
|
|
Long-term investments
|
|
|
711,196
|
|
|
|
476,685
|
|
Investments on deposit for licensure
|
|
|
102,780
|
|
|
|
94,978
|
|
Property, equipment and software, net
|
|
|
101,002
|
|
|
|
103,747
|
|
Other long-term assets
|
|
|
13,398
|
|
|
|
15,949
|
|
Goodwill
|
|
|
249,276
|
|
|
|
249,347
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,999,634
|
|
|
$
|
1,955,667
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Claims payable
|
|
$
|
529,036
|
|
|
$
|
536,107
|
|
Accounts payable
|
|
|
4,685
|
|
|
|
6,810
|
|
Unearned revenue
|
|
|
98,298
|
|
|
|
82,588
|
|
Accrued payroll and related liabilities
|
|
|
37,311
|
|
|
|
62,469
|
|
Accrued expenses and other
|
|
|
89,967
|
|
|
|
108,342
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
759,297
|
|
|
|
796,822
|
|
Long-term convertible debt
|
|
|
235,104
|
|
|
|
225,130
|
|
Long-term debt, less current portion
|
|
|
|
|
|
|
43,826
|
|
Deferred income taxes
|
|
|
8,430
|
|
|
|
3,391
|
|
Other long-term liabilities
|
|
|
12,359
|
|
|
|
13,839
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,015,190
|
|
|
|
1,083,008
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized
100,000,000 shares; issued and outstanding 50,638,474 and
52,673,363 at December 31, 2009 and 2008, respectively
|
|
|
546
|
|
|
|
539
|
|
Additional paid-in capital
|
|
|
494,735
|
|
|
|
466,926
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,354
|
|
|
|
(4,022
|
)
|
Retained earnings
|
|
|
590,632
|
|
|
|
441,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,087,267
|
|
|
|
904,796
|
|
Less treasury stock at cost (3,956,560 and 1,207,510 shares
at December 31, 2009 and December 31, 2008,
respectively)
|
|
|
(102,823
|
)
|
|
|
(32,137
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
984,444
|
|
|
|
872,659
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,999,634
|
|
|
$
|
1,955,667
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
66
AMERIGROUP
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except for per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$
|
5,158,989
|
|
|
$
|
4,366,359
|
|
|
$
|
3,835,454
|
|
Investment income and other
|
|
|
29,081
|
|
|
|
71,383
|
|
|
|
73,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
5,188,070
|
|
|
|
4,437,742
|
|
|
|
3,908,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Health benefits
|
|
|
4,407,273
|
|
|
|
3,618,261
|
|
|
|
3,216,070
|
|
Selling, general and administrative
|
|
|
394,089
|
|
|
|
435,876
|
|
|
|
377,026
|
|
Premium tax
|
|
|
134,277
|
|
|
|
93,757
|
|
|
|
85,218
|
|
Depreciation and amortization
|
|
|
34,746
|
|
|
|
37,385
|
|
|
|
31,604
|
|
Litigation settlement
|
|
|
|
|
|
|
234,205
|
|
|
|
|
|
Interest
|
|
|
16,266
|
|
|
|
20,514
|
|
|
|
18,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,986,651
|
|
|
|
4,439,998
|
|
|
|
3,728,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
201,419
|
|
|
|
(2,256
|
)
|
|
|
179,894
|
|
Income tax expense
|
|
|
52,140
|
|
|
|
54,350
|
|
|
|
67,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
149,279
|
|
|
$
|
(56,606
|
)
|
|
$
|
112,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
2.89
|
|
|
$
|
(1.07
|
)
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
51,647,267
|
|
|
|
52,816,674
|
|
|
|
52,595,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
2.85
|
|
|
$
|
(1.07
|
)
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and dilutive potential
common shares outstanding
|
|
|
52,309,268
|
|
|
|
52,816,674
|
|
|
|
53,845,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
67
AMERIGROUP
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury Stock
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
|
(Dollars in thousands)
|
|
|
Balances at January 1, 2007
|
|
|
52,272,824
|
|
|
$
|
523
|
|
|
$
|
391,566
|
|
|
$
|
|
|
|
$
|
376,547
|
|
|
|
1,728
|
|
|
$
|
(51
|
)
|
|
$
|
768,585
|
|
Common stock issued upon exercise of stock options, vesting of
restricted stock grants, and purchases under the employee stock
purchase plan
|
|
|
881,089
|
|
|
|
9
|
|
|
|
11,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,662
|
|
Compensation expense related to share-based payments
|
|
|
|
|
|
|
|
|
|
|
11,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,879
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
4,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,664
|
|
Common stock redeemed for payment of employee taxes
|
|
|
(23,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,985
|
|
|
|
(821
|
)
|
|
|
(821
|
)
|
Purchase of convertible note hedge instruments
|
|
|
|
|
|
|
|
|
|
|
(52,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,702
|
)
|
Deferred tax asset related to convertible note hedge instruments
|
|
|
|
|
|
|
|
|
|
|
19,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,343
|
|
Sale of warrant instruments
|
|
|
|
|
|
|
|
|
|
|
25,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,662
|
|
Cumulative effect of adoption of guidance on accounting for
uncertainty in income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,185
|
|
|
|
|
|
|
|
|
|
|
|
9,185
|
|
Cumulative effect of adoption of guidance on accounting for
convertible debt instruments that may be settled in cash upon
conversion
|
|
|
|
|
|
|
|
|
|
|
32,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,210
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,227
|
|
|
|
|
|
|
|
|
|
|
|
112,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
53,129,928
|
|
|
|
532
|
|
|
|
444,275
|
|
|
|
|
|
|
|
497,959
|
|
|
|
25,713
|
|
|
|
(872
|
)
|
|
|
941,894
|
|
Common stock issued upon exercise of stock options, vesting of
restricted stock grants, and purchases under the employee stock
purchase plan
|
|
|
725,232
|
|
|
|
7
|
|
|
|
10,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,248
|
|
Compensation expense related to share-based payments
|
|
|
|
|
|
|
|
|
|
|
10,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,381
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
2,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,034
|
|
Common stock redeemed for payment of employee taxes
|
|
|
(18,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,770
|
|
|
|
(618
|
)
|
|
|
(618
|
)
|
Common stock repurchases
|
|
|
(1,163,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,163,027
|
|
|
|
(30,647
|
)
|
|
|
(30,647
|
)
|
Deferred tax asset related to convertible note hedge instruments
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Unrealized loss on
available-for-sale
securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,022
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,606
|
)
|
|
|
|
|
|
|
|
|
|
|
(56,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
52,673,363
|
|
|
|
539
|
|
|
|
466,926
|
|
|
|
(4,022
|
)
|
|
|
441,353
|
|
|
|
1,207,510
|
|
|
|
(32,137
|
)
|
|
|
872,659
|
|
Common stock issued upon exercise of stock options, vesting of
restricted stock grants, and purchases under the employee stock
purchase plan
|
|
|
714,161
|
|
|
|
7
|
|
|
|
11,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,041
|
|
Compensation expense related to share-based payments
|
|
|
|
|
|
|
|
|
|
|
15,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,936
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
842
|
|
Common stock redeemed for payment of employee taxes and stock
option exercises
|
|
|
(35,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,483
|
|
|
|
(935
|
)
|
|
|
(935
|
)
|
Common stock repurchases
|
|
|
(2,713,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,713,567
|
|
|
|
(69,751
|
)
|
|
|
(69,751
|
)
|
Deferred tax asset related to convertible note hedge instruments
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Unrealized gain on
held-to-maturity
investment portfolio at time of transfer to
available-for-sale,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,030
|
|
Unrealized gain on
available-for-sale
securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,346
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,279
|
|
|
|
|
|
|
|
|
|
|
|
149,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
50,638,474
|
|
|
$
|
546
|
|
|
$
|
494,735
|
|
|
$
|
1,354
|
|
|
$
|
590,632
|
|
|
|
3,956,560
|
|
|
$
|
(102,823
|
)
|
|
$
|
984,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
68
AMERIGROUP
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
149,279
|
|
|
$
|
(56,606
|
)
|
|
$
|
112,227
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
34,746
|
|
|
|
37,385
|
|
|
|
31,604
|
|
Loss on disposal or abandonment of property, equipment and
software
|
|
|
585
|
|
|
|
644
|
|
|
|
67
|
|
Deferred tax expense (benefit)
|
|
|
818
|
|
|
|
(288
|
)
|
|
|
(4,652
|
)
|
Compensation expense related to share-based payments
|
|
|
15,936
|
|
|
|
10,381
|
|
|
|
11,879
|
|
Convertible debt non-cash interest
|
|
|
9,974
|
|
|
|
9,344
|
|
|
|
6,671
|
|
Impairment of goodwill
|
|
|
|
|
|
|
8,808
|
|
|
|
|
|
Gain on sale of contract rights
|
|
|
(5,810
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(167
|
)
|
|
|
(441
|
)
|
|
|
|
|
Changes in assets and liabilities (decreasing) increasing cash
flows from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium receivables
|
|
|
(18,272
|
)
|
|
|
(3,655
|
)
|
|
|
(19,346
|
)
|
Prepaid expenses, provider and other receivables and other
current assets
|
|
|
(2,310
|
)
|
|
|
41,183
|
|
|
|
(18,499
|
)
|
Other assets
|
|
|
(1,146
|
)
|
|
|
788
|
|
|
|
(2,577
|
)
|
Claims payable
|
|
|
(7,071
|
)
|
|
|
(5,066
|
)
|
|
|
155,969
|
|
Accounts payable, accrued expenses, and other current liabilities
|
|
|
(43,758
|
)
|
|
|
5,557
|
|
|
|
39,464
|
|
Unearned revenue
|
|
|
15,710
|
|
|
|
26,651
|
|
|
|
29,821
|
|
Other long-term liabilities
|
|
|
(1,480
|
)
|
|
|
(409
|
)
|
|
|
8,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
147,034
|
|
|
|
74,276
|
|
|
|
350,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of trading securities
|
|
|
5,850
|
|
|
|
|
|
|
|
|
|
Purchase of trading securities
|
|
|
|
|
|
|
(17,850
|
)
|
|
|
|
|
Proceeds from sale of
available-for-sale
securities
|
|
|
299,239
|
|
|
|
121,039
|
|
|
|
683,740
|
|
Purchase of
available-for-sale
securities
|
|
|
(648,670
|
)
|
|
|
(78,864
|
)
|
|
|
(667,225
|
)
|
Proceeds from redemption of
held-to-maturity
securities
|
|
|
273,125
|
|
|
|
617,025
|
|
|
|
524,458
|
|
Purchase of
held-to-maturity
securities
|
|
|
(194,851
|
)
|
|
|
(644,431
|
)
|
|
|
(521,098
|
)
|
Purchase of property, equipment and software
|
|
|
(29,738
|
)
|
|
|
(37,034
|
)
|
|
|
(40,334
|
)
|
Proceeds from redemption of investments on deposit for licensure
|
|
|
72,164
|
|
|
|
68,404
|
|
|
|
63,339
|
|
Purchase of investments on deposit for licensure
|
|
|
(79,574
|
)
|
|
|
(73,897
|
)
|
|
|
(84,313
|
)
|
Proceeds from sale of contract rights
|
|
|
5,810
|
|
|
|
|
|
|
|
|
|
Purchase price adjustment received
|
|
|
|
|
|
|
1,500
|
|
|
|
|
|
Purchase of restricted investments held as collateral
|
|
|
|
|
|
|
|
|
|
|
(402,812
|
)
|
Release of restricted investments held as collateral
|
|
|
|
|
|
|
351,318
|
|
|
|
51,494
|
|
Purchase of convertible note hedge instruments
|
|
|
|
|
|
|
|
|
|
|
(52,702
|
)
|
Proceeds from sale of warrant instruments
|
|
|
|
|
|
|
|
|
|
|
25,662
|
|
Purchase of contract rights and related assets
|
|
|
|
|
|
|
|
|
|
|
(11,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(296,645
|
)
|
|
|
307,210
|
|
|
|
(431,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes
|
|
|
|
|
|
|
|
|
|
|
260,000
|
|
Borrowings under credit facility
|
|
|
|
|
|
|
|
|
|
|
351,318
|
|
Repayment of borrowings under credit facility
|
|
|
(44,318
|
)
|
|
|
(84,028
|
)
|
|
|
(222,293
|
)
|
Payment of debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(11,732
|
)
|
Net (decrease) increase in bank overdrafts
|
|
|
(2,492
|
)
|
|
|
2,192
|
|
|
|
(1,097
|
)
|
Payment of capital lease obligations
|
|
|
|
|
|
|
(368
|
)
|
|
|
(842
|
)
|
Customer funds administered
|
|
|
(2,725
|
)
|
|
|
(5,259
|
)
|
|
|
|
|
Proceeds from exercise of stock options and employee stock
purchases
|
|
|
10,698
|
|
|
|
10,248
|
|
|
|
11,662
|
|
Repurchase of common stock shares
|
|
|
(69,751
|
)
|
|
|
(30,647
|
)
|
|
|
|
|
Tax benefit related to exercise of stock options
|
|
|
842
|
|
|
|
2,034
|
|
|
|
4,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(107,746
|
)
|
|
|
(105,828
|
)
|
|
|
391,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(257,357
|
)
|
|
|
275,658
|
|
|
|
310,896
|
|
Cash and cash equivalents at beginning of year
|
|
|
763,272
|
|
|
|
487,614
|
|
|
|
176,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
505,915
|
|
|
$
|
763,272
|
|
|
$
|
487,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
69
AMERIGROUP
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
6,302
|
|
|
$
|
12,832
|
|
|
$
|
10,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
51,745
|
|
|
$
|
27,977
|
|
|
$
|
77,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures non-cash information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock redeemed for payment of employee taxes and stock
option exercises
|
|
$
|
(935
|
)
|
|
$
|
(618
|
)
|
|
$
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of
held-to-maturity
securities to
available-for-sale
securities
|
|
$
|
424,237
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of
held-to-maturity
investments on deposit to
available-for-sale
investments on deposit
|
|
$
|
98,458
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on
held-to-maturity
portfolio at time of transfer to
available-for-sale,
net of tax
|
|
$
|
3,030
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
available-for-sale
securities, net of tax
|
|
$
|
2,346
|
|
|
$
|
(4,022
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of guidance on accounting for
uncertainty in income taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of guidance on accounting for
convertible debt instruments that may be settled in cash upon
conversion
|
|
$
|
|
|
|
$
|
|
|
|
$
|
32,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset related to convertible note hedge instruments
|
|
$
|
(3
|
)
|
|
$
|
(5
|
)
|
|
$
|
19,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
70
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Dollars in thousands, except for per share data)
|
|
(1)
|
Corporate
Organization and Principles of Consolidation
|
|
|
(a)
|
Corporate
Organization
|
AMERIGROUP Corporation, a Delaware corporation, through its
wholly-owned subsidiaries, is a multi-state managed healthcare
company focused on serving people who receive healthcare
benefits through publicly sponsored programs, including
Medicaid, Childrens Health Insurance Program
(CHIP), Medicaid expansion and Medicare Advantage.
AMERIGROUP Corporation and subsidiaries are collectively
referred to as the Company.
AMERIGROUP Corporation was incorporated in 1994 and began
operations of its wholly owned subsidiaries to develop, own and
operate as managed healthcare companies. The Company operates in
one business segment with a single line of business.
|
|
(b)
|
Principles
of Consolidation
|
The Consolidated Financial Statements include the financial
statements of AMERIGROUP Corporation and its wholly-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
the Consolidated Financial Statements and the reported amounts
of revenues and expenses during the reporting period to prepare
these Consolidated Financial Statements in conformity with
U.S. generally accepted accounting principles. Actual
results could differ from those estimates. As discussed in Note
2 (m), these estimates and assumptions are particularly
sensitive when recording claims payable and health benefits.
To improve presentation and comparability, the Company has made
certain reclassifications to its Consolidated Statements of
Operations format and certain reclassifications to prior year
amounts to conform to the current year presentation.
|
|
|
|
|
The experience rebate related to a contract with the State of
Texas has been reclassified out of selling, general and
administrative expenses and is now reflected as a reduction to
premium revenue. The experience rebate amounts reflected as a
reduction to premium revenue were $51,727, $78,264, and $36,756,
respectively, for the years ended December 31, 2009, 2008
and 2007.
|
|
|
|
Premium tax has been reclassified out of selling, general and
administrative expenses and is now reported on a separate line
following selling, general and administrative expenses and
before depreciation and amortization. By isolating premium tax,
the impacts of changing business volumes on premium tax expense
will become more apparent.
|
The Company believes this new presentation is more useful to the
readers of its financial statements as the remaining selling,
general and administrative expenses are more reflective of core
operating expenses. These reclassifications had no affect on net
income for current or prior periods. Certain other
reclassifications have been made to prior year amounts to
conform to the current year presentation.
71
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(2)
|
Summary
of Significant Accounting Policies and Practices
|
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents. The Company had cash equivalents of $481,171 and
$711,826 at December 31, 2009 and 2008, respectively. Cash
equivalents at December 31, 2009 consisted of money market
funds, certificates of deposit, debt securities of government
sponsored entities, commercial paper, municipal bonds and
corporate bonds. Cash equivalents at December 31, 2008
consisted of commercial paper and money market funds.
|
|
(b)
|
Short
and Long-Term Investments and Investments on Deposit for
Licensure
|
Short and long-term investments and investments on deposit for
licensure at December 31, 2009 and 2008 consisted of
investment vehicles such as auction rate securities, commercial
paper, certificates of deposit, corporate bonds, debt securities
of government sponsored entities, Federally insured corporate
bonds, money market funds, municipal bonds and
U.S. Treasury securities. The Company considers all
investments with original maturities greater than three months
but less than or equal to twelve months to be short-term
investments. Debt securities are classified as either trading or
available-for-sale.
Trading securities are bought and held principally for the
purpose of selling them in the near term. Trading securities are
carried at fair value and changes in fair value are recorded in
earnings. All other securities not included in trading are
classified as
available-for-sale.
Available-for-sale
securities are carried at fair value with changes in fair value
reported in other comprehensive income until realized through
the sale or maturity of the security or at the time at which an
other-than-temporary-impairment
is determined. The states in which the Company operates
prescribe the types of instruments in which the Companys
subsidiaries may invest their funds.
Effective July 1, 2009, the Company began reporting all of
the debt securities in its investment portfolio as
available-for-sale,
other than certain auction rate securities subject to a forward
contract that continue to be classified as trading securities.
The decision to reclassify the securities as
available-for-sale
is intended to provide the Company with the opportunity to
improve liquidity and increase investment returns through
prudent investment management while providing financial
flexibility in determining whether to hold those securities to
maturity. Additional information regarding the reclassification
of debt securities is included in Note 4, Short and
Long-Term Investments and Investments on Deposit for
Licensure.
|
|
(c)
|
Fair
Value Measurements
|
The fair value of a financial instrument is the amount that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. The following methods and assumptions
were used to estimate the fair value of each class of financial
instruments:
Cash and cash equivalents, premium receivables, provider and
other receivables, prepaid expenses, other current assets,
claims payable, accounts payable, unearned revenue, accrued
payroll and related liabilities, and accrued expenses and other
current liabilities: These financial instruments
are carried at cost which approximates fair value because of the
short maturity of these items.
Short-term investments, long-term investments, investments on
deposit for licensure, cash surrender value of life insurance
policies (included in other long-term assets) and forward
contracts related to certain auction rate securities (included
in other long-term assets): Fair values for
these items are determined based on quoted market prices or
discounted cash flow analyses.
Convertible Senior Notes: The estimated fair
value of the Companys 2.0% Convertible Senior Notes
is determined based upon quoted market prices.
Additional information regarding fair value measurements is
included in Note 3, Fair Value Measurements.
72
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(d)
|
Property
and Equipment
|
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization
expense on property and equipment is calculated on the
straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized on the
straight-line method over the shorter of the lease term or
estimated useful lives of the assets. Depreciation and
amortization expense on property and equipment was $15,506,
$16,321 and $16,372 for the years ended December 31, 2009,
2008 and 2007, respectively. The estimated useful lives are as
follows:
|
|
|
|
|
Leasehold improvements
|
|
|
3-15 years
|
|
Furniture and fixtures
|
|
|
7 years
|
|
Equipment
|
|
|
3-5 years
|
|
Software is stated at cost less accumulated amortization.
Software is amortized over its estimated useful life of three to
ten years, using the straight-line method. Amortization expense
on software was $16,392, $14,255 and $9,543 for the years ended
December 31, 2009, 2008 and 2007, respectively.
|
|
(f)
|
Goodwill
and Other Intangibles
|
Goodwill represents the excess of cost over fair value of
businesses acquired. Goodwill and intangible assets acquired in
a business combination and determined to have indefinite useful
lives are not amortized, but instead tested for impairment at
least annually. The Company performs its annual impairment
review of goodwill and indefinite lived intangible assets at
December 31 and when a triggering event occurs between annual
impairment tests.
Other assets include cash on deposit for payment of claims under
administrative services only (ASO) arrangements,
deposits, debt issuance costs, cash surrender value of life
insurance policies, forward contract rights related to certain
auction rate securities and other amortizable intangible assets
acquired in a business combination. Intangible assets with
estimable useful lives are amortized over their respective
estimated useful lives to their estimated residual values and
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable.
Income taxes are accounted for in accordance with
U.S. generally accepted accounting principles. On a
quarterly basis, the tax liability is estimated based on enacted
tax rates, estimates of
book-to-tax
differences in income, and projections of income that will be
earned in each taxing jurisdiction. Deferred tax assets and
liabilities representing the tax effect of temporary differences
between financial reporting net income and taxable income are
measured at the tax rates enacted at the time the deferred tax
asset or liability is recorded.
After tax returns for the applicable year are filed, the
estimated tax liability is adjusted to the actual liability per
the filed state and Federal tax returns. Historically, the
Company has not experienced significant differences between its
estimates of tax liability and its actual tax liability.
Similar to other companies, the Company sometimes faces
challenges from the tax authorities regarding the amount of
taxes due. Positions taken on the tax returns are evaluated and
benefits are recognized only if it is more likely than not that
the position will be sustained on audit. Based on the
Companys evaluation of tax positions, it is believed that
potential tax exposures have been recorded appropriately.
In addition, the Company is periodically audited by state and
Federal taxing authorities and these audits can result in
proposed assessments. The Company believes that its tax
positions comply with applicable tax law and, as
73
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
such, will vigorously defend its positions on audit. The Company
believes that it has adequately provided for any reasonable
foreseeable outcome related to these matters. Although the
ultimate resolution of these audits may require additional tax
payments, it is not anticipated that any additional tax payments
would have a material impact to earnings.
The qui tam litigation settlement payment in 2008 (See
Note 8) had a significant impact on tax expense and
the effective tax rates for 2009 and 2008 due to the fact that a
portion of the settlement payment is not deductible for income
tax purposes. At December 31, 2008, the estimated tax
benefit associated with the qui tam settlement payment
was $34,566. In June 2009, the Company recorded an additional
$22,449 tax benefit under an agreement in principle with the
Internal Revenue Service (IRS) which was formalized
through a pre-filing agreement with the IRS in September 2009.
The pre-filing agreement program permits taxpayers to resolve
tax issues in advance of filing their corporate income tax
returns. The Company does not anticipate that there will be any
further material changes to the tax benefit associated with this
litigation settlement in future periods.
Taxes based on premium revenues are currently paid by all of the
Companys health plan subsidiaries except the states of
Georgia, Florida and Virginia. The State of Georgia repealed its
premium tax levy effective October 1, 2009. Prior to the
repeal of premium tax, our Georgia subsidiary was subject to
premium tax at 5.5% of revenue. As of December 31, 2009,
premium taxes range from 2.0% to 7.5% of revenue or are
calculated on a per member per month basis.
|
|
(j)
|
Stock-Based
Compensation
|
Stock-based compensation expense related to share-based payments
are recorded in accordance with U.S. generally accepted
accounting principles, whereby it is required to measure the
cost of employee services received in exchange for an award of
equity instruments based on the grant date fair value of the
award. The fair value of employee share options and similar
instruments is estimated using option-pricing models. That cost
is recognized over the period during which an employee is
required to provide service in exchange for the award, which is
generally quarterly over four years.
Premium revenue is recorded based on membership and premium
information from each government agency with whom the Company
contracts to provide services. Premiums are due monthly and are
recognized as revenue during the period in which the Company is
obligated to provide services to members. Premium payments from
contracted government agencies are based on eligibility lists
produced by the government agencies. Adjustments to eligibility
lists produced by the government agencies result from
retroactive application of enrollment or disenrollment of
members or classification changes between rate categories. The
Company estimates the amount of retroactive premium owed to or
from the government agencies each period and adjusts premium
revenue accordingly. In all of the states in which the Company
operates, except Florida, New Mexico, Tennessee and Virginia,
the Company is eligible to receive supplemental payments for
newborns
and/or
obstetric deliveries. Each state contract is specific as to what
is required before payments are generated. Upon delivery of a
newborn, each state is notified according to the contract.
Revenue is recognized in the period that the delivery occurs and
the related services are provided to the Companys member.
Additionally, in some states, supplemental payments are received
for certain services such as high cost drugs and early childhood
prevention screenings. Any amounts that have been earned and
have not been received from the state by the end of the period
are recorded on the balance sheet as premium receivables.
Additionally, delays in annual premium rate changes require that
the Company defer the recognition of any increases to the period
in which the premium rates become final. The time lag between
the effective date of the premium rate increase and the final
contract can and has been delayed one quarter or more. The value
of the impact
74
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
can be significant in the period in which it is recognized
dependent on the magnitude of the premium rate change, the
membership to which it applies and the length of the delay
between the effective date and the final contract date.
|
|
(l)
|
Experience
Rebate Payable
|
Experience rebate payable, included in accrued expenses and
other current liabilities, consists of estimates of amounts due
under contracts with the State of Texas. These amounts are
computed based on a percentage of the contract profits as
defined in the contract with the State. The profitability
computation includes premium revenue earned from the State less
paid medical and administrative costs incurred and estimated
unpaid claims payable for the applicable membership. The unpaid
claims payable estimates are based on historical payment
patterns using actuarial techniques. A final settlement is
generally made 334 days after the contract period ends
using paid claims data and is subject to audit by the State of
Texas any time thereafter. Any adjustment made to the experience
rebate payable as a result of final settlement is included in
current operations.
Accrued medical expenses for claims associated with the
provision of services to the Companys members (including
hospital inpatient and outpatient services, physician services,
pharmacy and other ancillary services) include amounts billed
and not paid and an estimate of costs incurred for unbilled
services provided. These estimates are principally based on
historical payment patterns while taking into consideration
variability in those patterns using actuarial techniques. In
addition, claims processing costs are accrued based on an
estimate of the costs necessary to process unpaid claims. Claims
payable are reviewed and adjusted periodically and, as
adjustments are made, differences are included in current
operations.
The following table presents the components of the change in
medical claims payable for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Medical claims payable as of January 1
|
|
$
|
536,107
|
|
|
$
|
541,173
|
|
|
$
|
385,204
|
|
Health benefits expense incurred during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to current year
|
|
|
4,492,590
|
|
|
|
3,679,107
|
|
|
|
3,284,302
|
|
Related to prior years
|
|
|
(85,317
|
)
|
|
|
(60,846
|
)
|
|
|
(68,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
4,407,273
|
|
|
|
3,618,261
|
|
|
|
3,216,070
|
|
Health benefits payments during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to current year
|
|
|
4,007,789
|
|
|
|
3,197,732
|
|
|
|
2,769,331
|
|
Related to prior years
|
|
|
406,555
|
|
|
|
425,595
|
|
|
|
290,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
4,414,344
|
|
|
|
3,623,327
|
|
|
|
3,060,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims payable as of December 31
|
|
$
|
529,036
|
|
|
$
|
536,107
|
|
|
$
|
541,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year medical claims paid as a percent of current year
health benefits expense incurred
|
|
|
89.2
|
%
|
|
|
86.9
|
%
|
|
|
84.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health benefits expense incurred related to prior years as a
percent of prior year medical claims payable as of December 31
|
|
|
(15.9
|
)%
|
|
|
(11.2
|
)%
|
|
|
(17.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health benefits expense incurred related to prior years as a
percent of the prior years health benefits expense related
to current year
|
|
|
(2.3
|
)%
|
|
|
(1.9
|
)%
|
|
|
(2.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health benefits expense incurred during the year was reduced by
approximately $85,300, $60,800 and $68,200 in the years ended
December 31, 2009, 2008 and 2007, respectively, for amounts
related to prior years. Actuarial
75
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
standards of practice generally require that the liabilities
established for accrued medical expenses be sufficient to cover
obligations under an assumption of moderately adverse
conditions. Moderately adverse conditions were not experienced
in any of these periods. Therefore included in the amounts
related to prior years are approximately $34,400, $37,300 and
$30,400 for the years ended December 31, 2009, 2008 and
2007, respectively, related to amounts included in the medical
claims payable as of January 1 of each respective year in order
to establish the liability at a level adequate for moderately
adverse conditions.
The remaining reduction in health benefits expense incurred
during the year, related to prior years, of approximately
$50,900, $23,500 and $37,800 for the years ended
December 31, 2009, 2008 and 2007, respectively, primarily
resulted from obtaining more complete claims information for
claims incurred for dates of service in the prior years. These
amounts are referred to as net reserve development. We
experienced lower medical trend than originally estimated in
part due to claims processing initiatives that yielded increased
claim payment recoveries and coordination of benefits in 2009,
2008 and 2007 related to prior year dates of services for all
periods. These recoveries also caused the actuarial estimates to
include faster completion factors than were originally
established. The faster completion factors contributed to the
net favorable reserve development in each respective period.
Stop-loss premiums, net of recoveries, are included in health
benefits expense in the accompanying Consolidated Statements of
Operations.
|
|
(o)
|
Impairment
of Long-Lived Assets
|
Long-lived assets, such as property and equipment and purchased
intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be
separately presented in the consolidated balance sheets and
reported at the lower of the carrying amount or fair value less
costs to sell, and would no longer be depreciated. The assets
and liabilities of a group classified as held for sale would be
presented separately in the appropriate asset and liability
sections of the consolidated balance sheet. No impairment of
long-lived assets was recorded in 2009, 2008 or 2007.
Goodwill is tested annually for impairment, and is tested for
impairment more frequently if events and circumstances indicate
that the asset might be impaired. An impairment loss is
recognized to the extent that the carrying amount exceeds the
assets fair value. This determination is made at the
reporting unit level and consists of two steps. First, the fair
value of a reporting unit is determined and compared to its
carrying amount. Second, if the carrying amount of a reporting
unit exceeds its fair value, an impairment loss is recognized
for any excess of the carrying amount of the reporting
units goodwill over the implied fair value of that
goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner
similar to a purchase price allocation on a business
acquisition. The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill. As a
result of the Companys exit from the West Tennessee and
District of Columbia markets in 2008, impairment losses of $71
and $8,808 were recorded during the years ended
December 31, 2009 and 2008, respectively, related to
goodwill. No impairment of goodwill was recorded in 2007.
|
|
(p)
|
Net
Income (Loss) Per Share
|
Basic net income (loss) per share has been computed by dividing
net income (loss) by the weighted average number of common
shares outstanding. Diluted net income (loss) per share reflects
the potential dilution that could occur assuming the inclusion
of dilutive potential common shares and has been computed by
dividing net income
76
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(loss) by the weighted average number of common shares and
dilutive potential common shares outstanding. Dilutive potential
common shares include all outstanding stock options, convertible
debt securities and warrants after applying the treasury stock
method to the extent the potential common shares are dilutive.
|
|
(q)
|
Recent
Accounting Standards
|
Codification
In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 168, The FASB Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162. Beginning in September 2009, all existing
accounting standard documents, excluding rules and interpretive
releases of the Securities and Exchange Commission
(SEC) considered authoritative Generally Accepted
Accounting Principles (GAAP) for SEC registrants,
were superseded and the FASB Accounting Standards
Codificationtm
(ASC) became the single source of authoritative GAAP
recognized by the FASB for nongovernmental entities. The FASB no
longer issues new standards in the form of Statements, FASB
Staff Positions or Emerging Issues Task Force Abstracts. FASB
accounting standard issuances are now issued as amendments to
the ASC and referred to as Accounting Standards Updates. The
adoption of the ASC had no impact on our financial position,
results of operations or cash flows.
Fair
Value
In April 2009, the FASB issued new guidance related to fair
value measurements and disclosures which provides additional
guidance for determining whether a market for a financial asset
or liability that historically was active is no longer active
and whether transactions or quoted prices may not be
determinative of fair value. This new guidance also provides
additional guidelines on the major categories for which equity
and debt securities disclosures are to be presented and amends
existing disclosure requirements to require disclosure in
interim and annual financial statements of the inputs and
valuation techniques used to measure fair value and a discussion
of changes in valuation techniques and related inputs, if any,
during the period. The adoption of this new guidance in 2009 did
not impact the Companys financial position, results of
operations or cash flows.
In April 2009, the FASB issued new guidance related to the
recognition and presentation of
other-than-temporary-impairments
(OTTI). This new guidance expands the disclosure
requirements in interim and annual financial statements for both
debt and equity securities to enable users of the financial
statements to understand the types of securities held, including
information about investments in an unrealized loss position,
the reasons that a portion of an OTTI of a debt security was not
recognized in earnings and the methodology and significant
inputs used to calculate the portion of the total OTTI that was
recognized in earnings. This new guidance requires that if an
entity intends to sell, or more likely than not will be required
to sell, a debt security before recovery of its amortized cost
basis, the OTTI shall be recognized in earnings. If neither of
these factors applies, the portion of the OTTI representing the
credit loss shall be recognized in earnings and the remaining
portion of the OTTI shall be recognized in other comprehensive
income. The adoption of this new guidance in 2009 did not impact
the Companys financial position, results of operations or
cash flows.
In October 2008, the FASB issued new guidance permitting the
deferral until fiscal years beginning after November 15,
2008 of applying previously issued fair value measurement
guidance to nonfinancial assets and nonfinancial liabilities
that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The application of the fair
value measurement guidance to nonrecurring nonfinancial assets
and nonrecurring nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a
nonrecurring basis as of January 1, 2009 did not impact the
Companys financial position, results of operations or cash
flows.
Convertible
Debt Instruments
In June 2008, the FASB issued new guidance for determining
whether an instrument (or an embedded feature) is indexed to an
entitys own stock. The new guidance provides that an
entity should use a two-step approach to
77
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including
evaluating the instruments contingent exercise and
settlement provisions. The adoption of this new guidance in 2009
did not impact the Companys financial position, results of
operations or cash flows.
In May 2008, the FASB issued new guidance related to convertible
debt instruments which requires the proceeds from the issuance
of convertible debt instruments that may be settled wholly or
partially in cash upon conversion to be allocated between a
liability component and an equity component in a manner
reflective of the issuers nonconvertible debt borrowing
rate. The amount allocated to the equity component represents a
discount to the debt, which is amortized over the period the
convertible debt is expected to be outstanding as additional
non-cash interest expense. The Companys adoption of this
new guidance on January 1, 2009, with retrospective
application to prior periods, changed the accounting treatment
for its 2.0% Convertible Senior Notes, which were issued
effective March 28, 2007 (See Note 9). To adopt the
provisions of this new guidance, the fair value of the
2.0% Convertible Senior Notes was estimated, as of the date
of issuance, as if they were issued without the conversion
options. The difference between the fair value and the principal
amounts of the 2.0% Convertible Senior Notes was $50,885.
This amount was retrospectively applied to the financial
statements from the issuance date of the 2.0% Convertible
Senior Notes in 2007, and recorded as a debt discount and as a
component of equity. The discount is being amortized over the
expected five-year life of the 2.0% Convertible Senior
Notes resulting in a non-cash increase to interest expense in
historical and future periods.
The retrospective adoption of the provisions of this new
guidance resulted in an increase to interest expense for the
years ended December 31, 2008 and 2007, of $9,344 and
$6,671, respectively, representing the non-cash interest expense
related to the amortization of the debt discount, which is in
addition to $5,200 and $3,900, respectively, representing cash
interest expense related to the contractual coupon rate incurred
in the periods.
The following table reflects the amortization of the debt
discount (non-cash interest) component and the contractual
interest (cash interest) component for the 2.0% Convertible
Senior Notes for each of the years presented subsequent to the
retrospective adoption of the provisions of the new guidance
described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash interest
|
|
$
|
9,974
|
|
|
$
|
9,344
|
|
|
$
|
6,671
|
|
Cash interest
|
|
|
5,200
|
|
|
|
5,200
|
|
|
|
3,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
15,174
|
|
|
$
|
14,544
|
|
|
$
|
10,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables reflect the Companys previously
reported amounts, along with the adjusted amounts as required by
the provisions of the new guidance described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
|
Effect of
|
|
|
As Reported
|
|
As Adjusted
|
|
Change
|
|
As Reported
|
|
As Adjusted
|
|
Change
|
|
Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
11,170
|
|
|
$
|
20,514
|
|
|
$
|
9,344
|
|
|
$
|
12,291
|
|
|
$
|
18,962
|
|
|
$
|
6,671
|
|
Income (loss) before income taxes
|
|
|
7,088
|
|
|
|
(2,256
|
)
|
|
|
(9,344
|
)
|
|
|
186,565
|
|
|
|
179,894
|
|
|
|
(6,671
|
)
|
Income tax expense
|
|
|
57,750
|
|
|
|
54,350
|
|
|
|
(3,400
|
)
|
|
|
70,115
|
|
|
|
67,667
|
|
|
|
(2,448
|
)
|
Net (loss) income
|
|
|
(50,662
|
)
|
|
|
(56,606
|
)
|
|
|
(5,944
|
)
|
|
|
116,450
|
|
|
|
112,227
|
|
|
|
(4,223
|
)
|
Basic net (loss) income per share
|
|
|
(0.96
|
)
|
|
|
(1.07
|
)
|
|
|
(0.11
|
)
|
|
|
2.21
|
|
|
|
2.13
|
|
|
|
(0.08
|
)
|
Diluted net (loss) income per share
|
|
|
(0.96
|
)
|
|
|
(1.07
|
)
|
|
|
(0.11
|
)
|
|
|
2.16
|
|
|
|
2.08
|
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Effect of
|
|
|
As Reported
|
|
As Adjusted
|
|
Change
|
|
Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
$
|
34,645
|
|
|
$
|
25,347
|
|
|
$
|
(9,298
|
)
|
Long-term convertible debt
|
|
|
260,000
|
|
|
|
225,130
|
|
|
|
(34,870
|
)
|
Deferred income tax liabilities
|
|
|
|
|
|
|
3,391
|
|
|
|
3,391
|
|
Additional paid-in capital
|
|
|
434,578
|
|
|
|
466,926
|
|
|
|
32,348
|
|
Retained earnings
|
|
|
451,520
|
|
|
|
441,353
|
|
|
|
(10,167
|
)
|
The following table provides additional information about the
2.0% Convertible Senior Notes as required by the provisions:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
Carrying amount of the equity component
|
|
$
|
50,885
|
|
|
$
|
50,885
|
|
Principal amount of the liability component
|
|
$
|
260,000
|
|
|
$
|
260,000
|
|
Unamortized discount of the liability component
|
|
$
|
24,896
|
|
|
$
|
34,870
|
|
Net carrying amount of the liability component
|
|
$
|
235,104
|
|
|
$
|
225,130
|
|
Remaining amortization period of discount
|
|
|
29 months
|
|
|
|
41 months
|
|
Conversion price per share
|
|
|
42.53
|
|
|
|
42.53
|
|
Number of shares to be issued upon conversion
|
|
|
6,112,964
|
|
|
|
6,112,964
|
|
Effective interest rate on liability component
|
|
|
6.74
|
%
|
|
|
6.74
|
%
|
Other
In May 2009, the FASB issued new guidance related to subsequent
events which establishes general standards of accounting for and
disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to
be issued. Entities are required to disclose the date through
which subsequent events were evaluated as well as the rationale
for why that date was selected. The adoption of this guidance in
2009 did not impact the Companys financial position,
results of operations or cash flows.
79
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2007, the FASB issued new guidance on business
combinations which establishes principles and requirements for
how an acquirer determines and recognizes in its financial
statements the identifiable assets acquired, the liabilities
assumed, any noncontrolling interest in the acquiree, the
goodwill acquired and disclosure requirements to enable the
evaluation of the nature and financial effects of the business
combination. In April 2009, the FASB issued additional guidance
requiring an acquirer to recognize at fair value an asset
acquired or a liability assumed in a business combination that
arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement
period. If the acquisition-date fair value cannot be determined
during the measurement period, then the acquirer follows the
recognition criteria in previously issued guidance on accounting
for contingencies to determine whether the contingency should be
recognized as of, or after, the acquisition date. The adoption
of this new guidance in 2009 did not impact the Companys
financial position, results of operations or cash flows;
however, future acquisitions will be accounted for under this
guidance.
|
|
(r)
|
Risks
and Uncertainties
|
The Companys profitability depends in large part on
accurately predicting and effectively managing health benefits
expense. Premium and benefit structure is continually reviewed
to reflect the underlying claims experience and revised
actuarial data; however, several factors could adversely affect
the health benefits expense. Certain of these factors, which
include changes in healthcare practices, cost trends, inflation,
new technologies, major epidemics or pandemics, natural
disasters and malpractice litigation, are beyond any health
plans control and could adversely affect the
Companys ability to accurately predict and effectively
control healthcare costs. Costs in excess of those anticipated
could have a material adverse effect on the Companys
results of operations.
At December 31, 2009, the Company served members who
received healthcare benefits through contracts with the
regulatory entities in the jurisdictions in which it operates.
For the year ended December 31, 2009, the Texas contract
represented approximately 25.0% of premium revenues and a
significantly higher percentage of our net income. The Maryland,
Tennessee, Georgia and Florida contracts individually accounted
for over 10.0% of premium revenues. The Companys state
contracts have terms that are generally
one-to-two-years
in length, some of which contain optional renewal periods at the
discretion of the individual state. Some contracts also contain
a termination clause with notification periods ranging from 30
to 180 days. At the termination of these contracts,
re-negotiation of terms or the requirement to enter into a
re-bidding or re-procurement process is required to execute a
new contract. If these contracts were not renewed on favorable
terms to the Company, the Companys financial position,
results of operations or cash flows could be materially
adversely affected.
During the first quarter of 2009, the Company established an
estimate for pharmacy rebates which the Company expects to
receive, associated with pharmaceuticals that have been
dispensed to members. Previously, the Company recognized
pharmacy rebates when payment was received. The receipt of
rebate payments generally lags the period in which the
pharmaceuticals were actually dispensed. With the more recent
availability of stable historical information, the Company
believes a reliable basis for estimation of the rebates exists.
This change resulted in a one-time reduction to health benefits
expense of approximately $8,000, or $0.10 per diluted share net
of the related tax effect.
The Company has evaluated subsequent events for potential
recognition
and/or
disclosure through February 22, 2010, the date the
Consolidated Financial Statements included in this Annual Report
on
Form 10-K
were filed with the SEC.
80
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(3)
|
Fair
Value Measurements
|
Assets and liabilities recorded at fair value in the
Consolidated Balance Sheets are categorized based upon a
three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1,
defined as observable inputs such as quoted prices in active
markets; Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in
which little or no market data exists, therefore requiring an
entity to develop its own assumptions.
Assets
The Companys assets measured at fair value on a recurring
basis at December 31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash equivalents
|
|
$
|
481,171
|
|
|
$
|
481,171
|
|
|
$
|
|
|
|
$
|
|
|
Trading securities
|
|
|
10,835
|
|
|
|
|
|
|
|
|
|
|
|
10,835
|
|
Auction rate securities
(available-for-sale)
|
|
|
46,003
|
|
|
|
|
|
|
|
|
|
|
|
46,003
|
|
Available-for-sale
securities
|
|
|
894,661
|
|
|
|
473,670
|
|
|
|
420,991
|
|
|
|
|
|
Forward contract related to auction rate securities
|
|
|
1,165
|
|
|
|
|
|
|
|
|
|
|
|
1,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
1,433,835
|
|
|
$
|
954,841
|
|
|
$
|
420,991
|
|
|
$
|
58,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash and cash equivalents
|
|
$
|
763,272
|
|
|
$
|
763,272
|
|
|
$
|
|
|
|
$
|
|
|
Auction rate securities
|
|
|
71,640
|
|
|
|
|
|
|
|
|
|
|
|
71,640
|
|
Forward contract related to auction rate securities
|
|
|
2,014
|
|
|
|
|
|
|
|
|
|
|
|
2,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
836,926
|
|
|
$
|
763,272
|
|
|
$
|
|
|
|
$
|
73,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the Companys assets measured
at fair value on a recurring basis using significant
unobservable inputs (Level 3), for the years ended
December, 31 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Auction
|
|
|
Auction
|
|
|
|
Rate
|
|
|
Rate
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Balance at beginning of period
|
|
$
|
73,654
|
|
|
$
|
|
|
Transfers to Level 3
|
|
|
|
|
|
|
92,550
|
|
Total net unrealized gains (losses) included in other
comprehensive income
|
|
|
2,225
|
|
|
|
(6,372
|
)
|
Total net realized gains (losses) included in earnings
|
|
|
224
|
|
|
|
(224
|
)
|
Settlements
|
|
|
(18,100
|
)
|
|
|
(12,300
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
58,003
|
|
|
$
|
73,654
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, the Company did not elect
the fair value option available under current guidance for any
financial assets and liabilities that were not required to be
measured at fair value.
The Company has invested in auction rate securities that are
classified as either
available-for-sale
or trading securities which are reflected at fair value and
included in long-term investments in the accompanying
Consolidated Balance Sheets. The auction rate securities held by
the Company at December 31, 2009 and 2008, totaling $56,838
and $71,640, respectively, were securities issued by student
loan corporations which are public, non-profit entities
established by various state governments. The majority of the
student loans backing these securities fall under the Federal
Family Education Loan program which is supported and guaranteed
by the United States Department of Education. For the years
ended December 31, 2009 and 2008, an unrealized gain of
$2,225 and an unrealized loss of $6,372, respectively, was
recorded to accumulated other comprehensive income and
accumulated other comprehensive loss, respectively as a result
of changes in fair value for auction rate securities classified
as
available-for-sale.
These securities, with a net unrealized loss of $4,147 at
December 31, 2009, continue to be held at fair values that
are below the purchased value of the investments due primarily
to the decreased liquidity of the investments and not as a
result of decreases in creditworthiness of the issuers. As the
Company does not intend to sell these securities prior to
maturity and as it is not likely that the Company will be
required to sell these securities, the net unrealized losses are
deemed temporary. Any future fluctuation in the fair value
related to these securities that the Company deems to be
temporary, including any additional recoveries of previous
write-downs, will be recorded to accumulated other comprehensive
income. If it is determined that any future valuation adjustment
is other than temporary and the Company continues to believe it
will hold the security to maturity, the amount of other than
temporary impairment related to credit losses will be recognized
in earnings.
The auction events for these securities failed during early 2008
and have not resumed. Therefore, the estimated fair values of
these securities have been determined utilizing a discounted
cash flow analysis as of December 31, 2009 and 2008. These
analyses consider, among other items, the creditworthiness of
the issuer, the timing of the expected future cash flows,
including the final maturity associated with the securities, and
an assumption of when the next time the security is expected to
have a successful auction. These securities were also compared,
when possible, to other observable and relevant market data. As
the timing of future successful auctions, if any, cannot be
predicted,
available-for-sale
auction rate securities are classified as long-term. During the
fourth quarter of 2008, the Company entered into a forward
contract with a registered broker dealer, at no cost, for
auction rate securities with a fair value of $10,835 and $15,612
as of December 31, 2009 and 2008, respectively. This
forward contract provides the Company with the ability to sell
these auction rate securities to the registered broker-dealer at
par within a defined timeframe, beginning June 2010. These
securities are classified as trading securities because the
Company does not intend to hold these securities until final
maturity. Trading securities are carried at fair value with
changes in fair value recorded in earnings. For the years ended
December 31, 2009 and 2008, a realized gain of $1,073 and a
realized loss of $2,238, respectively, was recorded to earnings
related to these trading securities. The value of the forward
contract at December 31, 2009 and 2008, of $1,165 and
$2,014, respectively, was estimated
82
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
using a discounted cash flow analysis taking into consideration
the creditworthiness of the counterparty to the agreement. The
forward contract is included in other long-term assets. As the
trading securities increased in value for the year ended
December 31, 2009, a corresponding decrease in fair value
of $849 for the forward contract was recorded to earnings. For
the year ended December 31, 2008, a gain in fair value of $2,014
was recorded to earnings related to the forward contract.
Liabilities
The estimated fair value of the Companys
2.0% Convertible Senior Notes is determined based upon
quoted market prices. As of December 31, 2009, the fair
value of the borrowings under the 2.0% Convertible Notes
was $246,025 compared to the face value of $260,000.
|
|
(4)
|
Short and
Long-Term Investments and Investments on Deposit for
Licensure
|
Effective July 1, 2009, the Company began reporting all of
the debt securities in its investment portfolio as
available-for-sale,
other than certain auction rate securities subject to a forward
contract that continue to be classified as trading securities.
The change resulted in the transfer to
available-for-sale
of $397,369 in
held-to-maturity
securities and $80,761 in
held-to-maturity
investments on deposit, with unrealized gains of $4,648 and
$464, respectively, and the transfer to available-for-sale of
$26,868 in
held-to-maturity
securities and $17,697 in
held-to-maturity
investments on deposit, with unrealized losses of $193 and $54,
respectively. The unrealized gains and losses, net of the
related tax effects, were recorded to accumulated other
comprehensive income.
The amortized cost, gross unrealized holding gains, gross
unrealized holding losses and fair value for
available-for-sale
and
held-to-maturity
short-term investments were as follows at December 31, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities (carried at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
25,000
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
25,005
|
|
Commercial paper
|
|
|
8,989
|
|
|
|
3
|
|
|
|
|
|
|
|
8,992
|
|
Corporate bonds
|
|
|
5,605
|
|
|
|
4
|
|
|
|
1
|
|
|
|
5,608
|
|
Debt securities of government sponsored entities
|
|
|
80,246
|
|
|
|
37
|
|
|
|
10
|
|
|
|
80,273
|
|
Municipal bonds
|
|
|
17,643
|
|
|
|
5
|
|
|
|
3
|
|
|
|
17,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
137,483
|
|
|
$
|
54
|
|
|
$
|
14
|
|
|
$
|
137,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
securities (carried at amortized cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
13,985
|
|
|
$
|
2
|
|
|
$
|
99
|
|
|
$
|
13,888
|
|
Debt securities of government sponsored entities
|
|
|
83,481
|
|
|
|
644
|
|
|
|
|
|
|
|
84,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
97,466
|
|
|
$
|
646
|
|
|
$
|
99
|
|
|
$
|
98,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost, gross unrealized holding gains, gross
unrealized holding losses and fair value for
available-for-sale
and
held-to-maturity
long-term investments were as follows at December 31, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities (carried at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities, maturing between one year and five years
|
|
$
|
4,000
|
|
|
$
|
|
|
|
$
|
231
|
|
|
$
|
3,769
|
|
Auction rate securities, maturing in greater than ten years
|
|
|
46,150
|
|
|
|
|
|
|
|
3,916
|
|
|
|
42,234
|
|
Corporate bonds, maturing within one year
|
|
|
40,117
|
|
|
|
623
|
|
|
|
|
|
|
|
40,740
|
|
Corporate bonds, maturing between one year and five years
|
|
|
162,017
|
|
|
|
1,898
|
|
|
|
99
|
|
|
|
163,816
|
|
Debt securities of government sponsored entities, maturing
within one year
|
|
|
87,000
|
|
|
|
831
|
|
|
|
11
|
|
|
|
87,820
|
|
Debt securities of government sponsored entities, maturing
between one year and five years
|
|
|
163,326
|
|
|
|
1,141
|
|
|
|
28
|
|
|
|
164,439
|
|
Federally insured corporate bonds, maturing within one year
|
|
|
22,040
|
|
|
|
316
|
|
|
|
|
|
|
|
22,356
|
|
Federally insured corporate bonds, maturing between one year and
five years
|
|
|
24,200
|
|
|
|
459
|
|
|
|
7
|
|
|
|
24,652
|
|
Municipal bonds, maturing within one year
|
|
|
4,969
|
|
|
|
13
|
|
|
|
|
|
|
|
4,982
|
|
Municipal bonds, maturing between one year and five years
|
|
|
15,271
|
|
|
|
138
|
|
|
|
6
|
|
|
|
15,403
|
|
Municipal bonds, maturing between five years and ten years
|
|
|
32,632
|
|
|
|
300
|
|
|
|
57
|
|
|
|
32,875
|
|
Municipal bonds, maturing in greater than ten years
|
|
|
94,366
|
|
|
|
415
|
|
|
|
5
|
|
|
|
94,776
|
|
U.S. Treasury securities, maturing between one years and five
years
|
|
|
2,499
|
|
|
|
|
|
|
|
|
|
|
|
2,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
$
|
698,587
|
|
|
$
|
6,134
|
|
|
$
|
4,360
|
|
|
$
|
700,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities (carried at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities, maturing between one year and five years
|
|
$
|
4,000
|
|
|
$
|
|
|
|
$
|
390
|
|
|
$
|
3,610
|
|
Auction rate securities, maturing in greater than ten years
|
|
|
58,400
|
|
|
|
|
|
|
|
5,982
|
|
|
|
52,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
long-term investments
|
|
$
|
62,400
|
|
|
$
|
|
|
|
$
|
6,372
|
|
|
$
|
56,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
securities (carried at amortized cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds, maturing within one year
|
|
$
|
20,962
|
|
|
$
|
|
|
|
$
|
1,115
|
|
|
$
|
19,847
|
|
Corporate bonds, maturing between one year and five years
|
|
|
26,602
|
|
|
|
8
|
|
|
|
326
|
|
|
|
26,284
|
|
Debt securities of government sponsored entities, maturing
within one year
|
|
|
17,212
|
|
|
|
255
|
|
|
|
|
|
|
|
17,467
|
|
Debt securities of government sponsored entities, maturing
between one year and five years
|
|
|
301,010
|
|
|
|
4,775
|
|
|
|
29
|
|
|
|
305,756
|
|
Federally insured corporate bonds, maturing between one year and
five years
|
|
|
39,259
|
|
|
|
731
|
|
|
|
|
|
|
|
39,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
long-term investments
|
|
$
|
405,045
|
|
|
$
|
5,769
|
|
|
$
|
1,470
|
|
|
$
|
409,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The purchase amount, realized gains, realized losses and fair
value for trading securities held at December 31, 2009 and
2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
Realized
|
|
|
Realized
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities (carried at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities, maturing in greater than ten years
|
|
$
|
12,000
|
|
|
$
|
|
|
|
$
|
1,165
|
|
|
$
|
10,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
Realized
|
|
|
Realized
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities (carried at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities, maturing in greater than ten years
|
|
$
|
17,850
|
|
|
$
|
|
|
|
$
|
2,238
|
|
|
$
|
15,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a condition for licensure by various state governments to
operate health maintenance organizations (HMOs),
health insuring corporations (HICs) or prepaid
health services plans (PHSPs), the Company is
required to maintain certain funds on deposit, in specific
dollar amounts based on either formulas or set amounts, with or
under the control of the various departments of insurance. The
Company purchases interest-based
85
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
investments with a fair value equal to or greater than the
required dollar amount. The interest that accrues on these
investments is not restricted and is available for withdrawal.
The amortized cost, gross unrealized holding gains, gross
unrealized holding losses and fair value for these
available-for-sale
and
held-to-maturity
securities were as follows at December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
414
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
414
|
|
Certificates of deposit, maturing within one year
|
|
|
11,150
|
|
|
|
|
|
|
|
|
|
|
|
11,150
|
|
Money market funds
|
|
|
21,978
|
|
|
|
|
|
|
|
|
|
|
|
21,978
|
|
Available-for-sale
securities (carried at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities of government sponsored entities, maturing
within one year
|
|
|
935
|
|
|
|
|
|
|
|
1
|
|
|
|
934
|
|
Debt securities of government sponsored entities, maturing
between one year and five years
|
|
|
49,262
|
|
|
|
285
|
|
|
|
38
|
|
|
|
49,509
|
|
U.S. Treasury securities, maturing within one year
|
|
|
16,189
|
|
|
|
8
|
|
|
|
13
|
|
|
|
16,184
|
|
U.S. Treasury securities, maturing between one year and five
years
|
|
|
2,460
|
|
|
|
151
|
|
|
|
|
|
|
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
102,388
|
|
|
$
|
444
|
|
|
$
|
52
|
|
|
$
|
102,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
479
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
479
|
|
Money market funds
|
|
|
39,924
|
|
|
|
|
|
|
|
|
|
|
|
39,924
|
|
Held-to-maturity
securities (carried at amortized cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities of government sponsored entities, maturing
within one year
|
|
|
937
|
|
|
|
13
|
|
|
|
|
|
|
|
950
|
|
Debt securities of government sponsored entities, maturing
between one year and five years
|
|
|
34,901
|
|
|
|
341
|
|
|
|
|
|
|
|
35,242
|
|
Debt securities of government sponsored entities, maturing
between five years and ten years
|
|
|
102
|
|
|
|
6
|
|
|
|
|
|
|
|
108
|
|
U.S. Treasury securities, maturing within one year
|
|
|
15,368
|
|
|
|
173
|
|
|
|
|
|
|
|
15,541
|
|
U.S. Treasury securities, maturing between one year and five
years
|
|
|
2,678
|
|
|
|
110
|
|
|
|
|
|
|
|
2,788
|
|
U.S. Treasury securities, maturing between five years and ten
years
|
|
|
589
|
|
|
|
11
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94,978
|
|
|
$
|
654
|
|
|
$
|
|
|
|
$
|
95,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows the fair value of the Companys
available-for-sale
and
held-to-maturity
securities with unrealized losses that are not deemed to be
other-than-temporarily
impaired, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized
loss position, at December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
|
|
|
Fair
|
|
|
Holding
|
|
|
Number of
|
|
|
Fair
|
|
|
Holding
|
|
|
Number of
|
|
|
|
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities (carried at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
46,003
|
|
|
$
|
4,147
|
|
|
|
13
|
|
|
|
|
|
Corporate bonds
|
|
|
40,971
|
|
|
|
100
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities of government sponsored entities
|
|
|
44,881
|
|
|
|
88
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federally insured corporate bond
|
|
|
4,076
|
|
|
|
7
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
17,771
|
|
|
|
71
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
9,420
|
|
|
|
13
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
117,119
|
|
|
$
|
279
|
|
|
|
55
|
|
|
$
|
46,003
|
|
|
$
|
4,147
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
|
|
|
Fair
|
|
|
Holding
|
|
|
Number of
|
|
|
Fair
|
|
|
Holding
|
|
|
Number of
|
|
|
|
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities (carried at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
56,028
|
|
|
$
|
6,372
|
|
|
|
17
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
securities (carried at amortized cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
54,579
|
|
|
|
1,540
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities of government sponsored entities
|
|
|
4,980
|
|
|
|
29
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
115,587
|
|
|
$
|
7,941
|
|
|
|
42
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The temporary declines in value at December 31, 2009 and
2008, are primarily due to fluctuations in short-term market
interest rates and the lack of liquidity of auction rate
securities. Auction rate securities that have been in an
unrealized loss position for greater than 12 months have
experienced losses due to the lack of liquidity for these
instruments, not as a result of impairment of the underlying
debt securities. Additionally, the Company does not intend to
sell these securities prior to maturity and it is not likely
that the Company will be required to sell these securities prior
to maturity; therefore, there is no indication of other than
temporary impairment for these securities.
87
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(5)
|
Property,
Equipment and Software, Net
|
Property, equipment and software, net at December 31, 2009
and 2008 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Leasehold improvements
|
|
$
|
33,799
|
|
|
$
|
33,134
|
|
Furniture and fixtures
|
|
|
21,169
|
|
|
|
21,791
|
|
Equipment
|
|
|
67,691
|
|
|
|
71,890
|
|
Software
|
|
|
135,036
|
|
|
|
117,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257,695
|
|
|
|
244,723
|
|
Less accumulated depreciation and amortization
|
|
|
(156,693
|
)
|
|
|
(140,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,002
|
|
|
$
|
103,747
|
|
|
|
|
|
|
|
|
|
|
On October 23, 2009, AMERIGROUP Corporation and AMERIGROUP
New Jersey, Inc. settled litigation with Centene Corporation
(Centene) and its wholly-owned subsidiary,
University Health Plans, Inc. (UHP), regarding
AMERIGROUP New Jersey, Inc.s termination of an agreement
to purchase certain assets of UHP. Pursuant to the terms of the
confidential settlement, the parties dismissed the litigation
with prejudice and an amended and modified asset purchase
agreement was reinstated. The parties will move forward with the
transaction contemplated by the asset purchase agreement, as
modified in connection with the settlement, and expect the
transaction, which is subject to regulatory approval and other
closing conditions, to close in the early part of 2010. Costs
associated with the transaction are not expected to be material
to the Companys results of operations, financial position
or cash flows.
AMERIGROUP Corporations South Carolina subsidiary,
AMERIGROUP Community Care of South Carolina, Inc. was licensed
as a HMO and became operational in November 2007 with the
Temporary Assistance for Needy Families population, followed by
a separate CHIP contract in May 2008. On March 1, 2009,
AMERIGROUP Community Care of South Carolina, Inc. sold its
rights to serve Medicaid members pursuant to the contract with
the State of South Carolina for $5,810, and recorded a gain,
which is included in investment income and other revenues for
the year ended December 31, 2009. As a result of this
transaction, the Companys South Carolina subsidiary does
not currently serve any members. Certain claims run-out and
transition obligations exist that will continue into 2010. Costs
recorded and additional costs to be recorded to discontinue
operations in South Carolina are not expected to be material to
the Companys results of operations, financial position or
cash flows in future periods.
On November 1, 2007, AMERIGROUP Corporations
Tennessee subsidiary, AMERIGROUP Tennessee, Inc., acquired the
contract rights and substantially all of the assets of Memphis
Managed Care Corporation (MMCC) including
substantially all of the assets of Midsouth Health Solutions,
Inc., a subsidiary of MMCC, for approximately $11,733. The
purchase price was financed through available unregulated cash.
The assets purchased consisted primarily of MMCCs rights
to provide services through an ASO contract to the State of
Tennessee for its TennCare members in the West Tennessee region.
Goodwill and other intangibles totaled $9,967, which included
$1,923 of specifically identifiable intangibles allocated to the
rights to the ASO contract, the provider network and trademarks.
88
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
AMERIGROUP Tennessee, Inc.s ASO contract for the West
Tennessee region terminated on October 31, 2008 pursuant to
its terms. The Company received a purchase price adjustment that
reduced the purchase price by $1,500 for early termination of
the ASO contract which was recorded as an adjustment to
goodwill. The remaining goodwill of $6,544, was written off to
selling, general and administrative expenses during the year
ended December 31, 2008.
On March 10, 2008, AMERIGROUP Corporations Maryland
subsidiary, AMERIGROUP Maryland, Inc. d/b/a AMERIGROUP Community
Care of the District of Columbia, was notified that it was one
of four successful bidders in the reprocurement of the District
of Columbias Medicaid managed care business for the
contract period beginning May 1, 2008. On April 2,
2008, AMERIGROUP Maryland, Inc. elected not to participate in
the Districts new contract due to premium rate and
programmatic concerns. Accordingly, its contract with the
District of Columbia, as amended, terminated on June 30,
2008. As a result of exiting this market, the Company wrote off
goodwill of $2,264 during the year ended December 31, 2008.
|
|
(7)
|
Summary
of Goodwill and Acquired Intangible Assets
|
The changes in the carrying amount of goodwill for the years
ended December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
Changes in the
|
|
|
|
Carrying
|
|
|
|
Amount of
|
|
|
|
Goodwill
|
|
|
Balance as of January 1, 2008:
|
|
|
|
|
Goodwill
|
|
$
|
259,655
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
259,655
|
|
|
|
|
|
|
Goodwill written off related to termination of West Tennessee
ASO contract
|
|
|
(6,544
|
)
|
Purchase price adjustment related to West Tennessee ASO contract
|
|
|
(1,500
|
)
|
Goodwill written off related to District of Columbia market exit
|
|
|
(2,264
|
)
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
249,347
|
|
|
|
|
|
|
Goodwill written off related to Midsouth Health Solutions,
Inc.
|
|
|
(71
|
)
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
249,276
|
|
|
|
|
|
|
Other acquired intangible assets for the years ended
December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Membership rights and provider contracts
|
|
$
|
25,971
|
|
|
$
|
(25,517
|
)
|
|
$
|
25,971
|
|
|
$
|
(25,113
|
)
|
Non-compete agreements and trademarks
|
|
|
1,596
|
|
|
|
(1,596
|
)
|
|
|
1,596
|
|
|
|
(1,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,567
|
|
|
$
|
(27,113
|
)
|
|
$
|
27,567
|
|
|
$
|
(26,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization expense for the years ended December 31, 2009,
2008 and 2007 was $404, $2,496 and $2,279, respectively, and the
estimated aggregate amortization expense for the five succeeding
years is as follows:
|
|
|
|
|
|
|
Estimated
|
|
|
amortization
|
|
|
expense
|
|
2010
|
|
$
|
199
|
|
2011
|
|
|
106
|
|
2012
|
|
|
65
|
|
2013
|
|
|
47
|
|
2014
|
|
|
37
|
|
Total income taxes for the years ended December 31, 2009,
2008 and 2007 were allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income taxes from continuing operations
|
|
$
|
52,140
|
|
|
$
|
54,350
|
|
|
$
|
67,667
|
|
Stockholders equity, tax benefit on exercise of stock
options
|
|
|
(842
|
)
|
|
|
(2,034
|
)
|
|
|
(4,664
|
)
|
Stockholders equity, tax expense related to unrealized
gain on
held-to-maturity
investment portfolio at time of transfer to
available-for-sale
|
|
|
1,835
|
|
|
|
|
|
|
|
|
|
Stockholders equity, tax expense (benefit) related to
unrealized gain (loss) on
available-for-sale
securities
|
|
|
1,369
|
|
|
|
(2,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,502
|
|
|
$
|
49,966
|
|
|
$
|
63,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) for the years ended
December 31, 2009, 2008 and 2007 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
48,532
|
|
|
$
|
86
|
|
|
$
|
48,618
|
|
State and local
|
|
|
2,790
|
|
|
|
732
|
|
|
|
3,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,322
|
|
|
$
|
818
|
|
|
$
|
52,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
46,445
|
|
|
$
|
(555
|
)
|
|
$
|
45,890
|
|
State and local
|
|
|
8,193
|
|
|
|
267
|
|
|
|
8,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,638
|
|
|
$
|
(288
|
)
|
|
$
|
54,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
64,771
|
|
|
$
|
(5,011
|
)
|
|
$
|
59,760
|
|
State and local
|
|
|
7,548
|
|
|
|
359
|
|
|
|
7,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,319
|
|
|
$
|
(4,652
|
)
|
|
$
|
67,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax expense differed from the amounts computed by
applying the statutory U.S. Federal income tax rate to
income before income taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Tax expense (benefit) at statutory rate
|
|
$
|
70,496
|
|
|
|
35.0
|
|
|
$
|
(789
|
)
|
|
|
35.0
|
|
|
$
|
62,963
|
|
|
|
35.0
|
|
Increase in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net of Federal income tax effect
|
|
|
2,549
|
|
|
|
1.3
|
|
|
|
5,620
|
|
|
|
(249.1
|
)
|
|
|
5,241
|
|
|
|
2.9
|
|
Qui tam settlement payment, net non-deductible amount
|
|
|
|
|
|
|
|
|
|
|
48,724
|
|
|
|
(2,160.0
|
)
|
|
|
|
|
|
|
|
|
Effect of nondeductible expenses and other, net
|
|
|
1,544
|
|
|
|
0.7
|
|
|
|
795
|
|
|
|
(35.3
|
)
|
|
|
(537
|
)
|
|
|
(0.3
|
)
|
Decrease in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRS pre-filing agreement on qui tam settlement
|
|
|
(22,449
|
)
|
|
|
(11.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
52,140
|
|
|
|
25.9
|
|
|
$
|
54,350
|
|
|
|
(2,409.4
|
)
|
|
$
|
67,667
|
|
|
|
37.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate is based on expected taxable income,
statutory tax rates, and estimated permanent book to tax
differences. Filed income tax returns are periodically audited
by state and Federal authorities for compliance with applicable
state and Federal tax laws. The effective tax rate is computed
taking into account changes in facts and circumstances,
including progress of audits, developments in case law and other
applicable authority, and emerging legislation. The increase in
non-deductible expenses for 2009 compared to 2008 and 2007 is
primarily attributable to a decrease in Federal tax exempt
interest income and an increase in expenses that are not
deductible for tax purposes.
91
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 2009 and 2008 are presented
below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Estimated claims incurred but not reported, a portion of which
is deductible as paid for tax purposes
|
|
$
|
4,867
|
|
|
$
|
7,209
|
|
Vacation, bonus, stock compensation and other accruals,
deductible as paid for tax purposes
|
|
|
25,093
|
|
|
|
22,567
|
|
Accounts receivable allowances, deductible as written off for
tax purposes
|
|
|
6,896
|
|
|
|
4,814
|
|
Start-up
costs, deductible in future periods for tax purposes
|
|
|
413
|
|
|
|
77
|
|
Unearned revenue, a portion of which is includible in income as
received for tax purposes
|
|
|
7,343
|
|
|
|
6,247
|
|
Convertible bonds
|
|
|
603
|
|
|
|
619
|
|
Unrealized losses on
available-for-sale
securities
|
|
|
|
|
|
|
2,350
|
|
Long term debt issuance costs, due to timing differences in book
and tax amortization
|
|
|
|
|
|
|
736
|
|
State net operating loss/credit carryforwards, deductible in
future periods for tax purposes
|
|
|
322
|
|
|
|
872
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
45,537
|
|
|
|
45,491
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill, due to tax amortization
|
|
|
(4,774
|
)
|
|
|
(3,590
|
)
|
Unrealized gains on investments
|
|
|
(854
|
)
|
|
|
|
|
Property and equipment, due to timing differences in book and
tax depreciation
|
|
|
(19,902
|
)
|
|
|
(17,864
|
)
|
Deductible prepaid expenses and other
|
|
|
(2,076
|
)
|
|
|
(2,081
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(27,606
|
)
|
|
|
(23,535
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
17,931
|
|
|
$
|
21,956
|
|
|
|
|
|
|
|
|
|
|
To assess the recoverability of deferred tax assets, the Company
considers whether it is more likely than not that deferred tax
assets will be realized. In making this determination, the
scheduled reversal of deferred tax liabilities and whether
projected future taxable income is sufficient to permit
deduction of the deferred tax assets are taken into account.
Based on the level of historical taxable income and projections
for future taxable income, the Company believes it is more
likely than not that it will fully realize the benefits of the
gross deferred tax assets of $45,537. State net operating loss
carryforwards that expire in 2027 through 2028 comprise $322 of
the gross deferred tax assets.
Income tax payable was $8,938 and $10,119 at December 31,
2009 and December 31, 2008, respectively, and is included
in accrued expenses and other current liabilities.
The Company is subject to U.S. Federal income tax, as well
as income taxes in multiple state jurisdictions. Substantially
all U.S. Federal income tax matters have been concluded for
years through 2005. Substantially all material state matters
have been concluded for years through 2005.
92
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents a reconciliation of the beginning
and ending amount of unrecognized tax benefits as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Balance at January 1, 2009
|
|
$
|
952
|
|
Additions based on tax positions for current year
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
56
|
|
Reductions for tax positions of prior years
|
|
|
(126
|
)
|
Settlements
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
882
|
|
|
|
|
|
|
Of the total $882 of unrecognized tax benefits, $593, net of the
Federal benefit on state issues, represents the total amount of
tax benefits that, if recognized, would reduce the annual
effective rate. The Company recognizes interest and any
penalties accrued related to unrecognized tax benefits in income
tax expense. Potential interest of $7 was accrued relating to
these unrecognized tax benefits during 2009. As of
December 31, 2009, the Company has recorded a liability for
potential gross interest of $317.
Our long-term debt consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2% Convertible Senior Notes due May 15, 2012, net of
discount
|
|
$
|
235,104
|
|
|
$
|
225,130
|
|
Credit and Guaranty Agreement
|
|
|
|
|
|
|
44,332
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
235,104
|
|
|
$
|
269,462
|
|
|
|
|
|
|
|
|
|
|
Convertible
Senior Notes
As of December 31, 2009, the Company had $260,000
outstanding in aggregate principal amount of
2.0% Convertible Senior Notes due May 15, 2012, the
carrying amount of which was $235,104. The unamortized discount
of $24,896 will continue to be amortized over the remaining
period until maturity. In May 2007, an automatic shelf
registration statement was filed on
Form S-3
with the SEC covering the resale of the 2.0% Convertible
Senior Notes and common stock issuable upon conversion. The
2.0% Convertible Senior Notes are governed by an Indenture
dated as of March 28, 2007 (the Indenture). The
2.0% Convertible Senior Notes are senior unsecured
obligations of the Company and rank equally with all of its
existing and future senior debt and senior to all of its
subordinated debt. The 2.0% Convertible Senior Notes are
effectively subordinated to all existing and future liabilities
of the Companys subsidiaries and to any existing and
future secured indebtedness. The 2.0% Convertible Senior
Notes bear interest at a rate of 2.0% per year, payable
semiannually in arrears in cash on May 15 and November 15 of
each year, beginning on May 15, 2007. The
2.0% Convertible Senior Notes mature on May 15, 2012,
unless earlier repurchased or converted in accordance with the
Indenture.
Upon conversion of the 2.0% Convertible Senior Notes, the
Company will pay cash up to the principal amount of the
2.0% Convertible Senior Notes converted. With respect to
any conversion value in excess of the principal amount, the
Company has the option to settle the excess with cash, shares of
its common stock, or a combination thereof based on a daily
conversion value, as defined in the Indenture. The initial
conversion rate for the 2.0% Convertible Senior Notes is
23.5114 shares of common stock per one thousand dollars of
principal amount of 2.0% Convertible Senior Notes, which
represents a 32.5% conversion premium based on the closing price
of $32.10 per share of the Companys common stock on
March 22, 2007 and is equivalent to a conversion price of
approximately $42.53 per share of common stock. The conversion
rate is subject to adjustment in some events but will not be
adjusted for accrued interest. In addition, if a
fundamental change occurs prior to the maturity
date, the
93
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company will in some cases increase the conversion rate for a
holder of the 2.0% Convertible Senior Notes that elects to
convert their 2.0% Convertible Senior Notes in connection
with such fundamental change.
Concurrent with the issuance of the 2.0% Convertible Senior
Notes, the Company purchased convertible note hedges covering,
subject to customary anti-dilution adjustments,
6,112,964 shares of its common stock. The convertible note
hedges allow the Company to receive shares of its common stock
and/or cash
equal to the amounts of common stock
and/or cash
related to the excess conversion value that the Company would
pay to the holders of the 2.0% Convertible Senior Notes
upon conversion. These convertible note hedges will terminate at
the earlier of the maturity date of the 2.0% Convertible
Senior Notes or the first day on which none of the
2.0% Convertible Senior Notes remain outstanding due to
conversion or otherwise.
The convertible note hedges are expected to reduce the potential
dilution upon conversion of the 2.0% Convertible Senior
Notes in the event that the market value per share of the
Companys common stock, as measured under the convertible
note hedges, at the time of exercise is greater than the strike
price of the convertible note hedges, which corresponds to the
initial conversion price of the 2.0% Convertible Senior
Notes and is subject to certain customary adjustments. If,
however, the market value per share of the Companys common
stock exceeds the strike price of the warrants (discussed below)
when such warrants are exercised, the Company will be required
to issue common stock. Both the convertible note hedges and
warrants provide for net-share settlement at the time of any
exercise for the amount that the market value of the common
stock exceeds the applicable strike price.
Also concurrent with the issuance of the 2.0% Convertible
Senior Notes, the Company sold warrants to acquire, subject to
customary anti-dilution adjustments, 6,112,964 shares of
its common stock at an exercise price of $53.77 per share. If
the average price of the Companys common stock during a
defined period ending on or about the settlement date exceeds
the exercise price of the warrants, the warrants will be
settled, at the Companys option, in cash or shares of its
common stock.
The convertible note hedges and warrants are separate
transactions which will not affect holders rights under
the 2.0% Convertible Senior Notes.
Credit
and Guaranty Agreement
The Company maintained a Credit and Guaranty Agreement (the
Credit Agreement) that provided both a secured term
loan and a senior secured revolving credit facility. On
July 31, 2009, the Company paid the remaining balance of
the secured term loan. Effective August 21, 2009, the
Company terminated the Credit Agreement and related Pledge and
Security Agreement. The Company had no outstanding borrowings
under the Credit Agreement as of the effective date of
termination.
Maturities
of Long-term Obligations
Maturities of long-term debt for future years ending December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
2010
|
|
$
|
|
|
|
$
|
5,200
|
|
|
$
|
5,200
|
|
2011
|
|
|
|
|
|
|
5,200
|
|
|
|
5,200
|
|
2012
|
|
|
260,000
|
|
|
|
2,600
|
|
|
|
262,600
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
260,000
|
|
|
$
|
13,000
|
|
|
$
|
273,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In May 2009, our shareholders adopted and approved our 2009
Equity Incentive Plan (2009 Plan), which provides
for the granting of stock options, restricted stock, restricted
stock units, stock appreciation rights, stock
94
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
bonuses and other stock-based awards to employees and directors.
We reserved for issuance a maximum of 3,635,000 shares of
common stock under the 2009 Plan. In addition, shares remaining
available for issuance under our previous plans will be
available under the 2009 Plan. Under all plans, an options
maximum term is ten years. As of December 31, 2009, we had
a total 4,200,022 shares available for issuance under our
2009 Plan.
Stock option activity during the year ended December 31,
2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Intrinsic
|
|
|
Contractual Term
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Value
|
|
|
(Years)
|
|
|
Outstanding at December 31, 2008
|
|
|
5,414,388
|
|
|
$
|
27.17
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
755,961
|
|
|
|
30.89
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(514,352
|
)
|
|
|
17.07
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(294,655
|
)
|
|
|
39.66
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(55,330
|
)
|
|
|
30.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
5,306,012
|
|
|
$
|
27.95
|
|
|
$
|
16,236
|
|
|
|
4.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2009
|
|
|
3,549,385
|
|
|
$
|
27.60
|
|
|
$
|
14,283
|
|
|
|
3.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes-Merton option pricing model with
the following weighted-average assumptions for the year ended
December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Expected volatility
|
|
47.28% - 48.94%
|
|
43.25% - 46.65%
|
|
43.50% - 44.31%
|
Weighted-average stock price volatility
|
|
48.89%
|
|
44.95%
|
|
43.99%
|
Expected option life
|
|
2.42 - 5.56 years
|
|
1.14 - 7.00 years
|
|
2.00 - 7.00 years
|
Risk-free interest rate
|
|
0.60% - 2.73%
|
|
1.67% - 3.36%
|
|
3.42% - 4.82%
|
Dividend yield
|
|
None
|
|
None
|
|
None
|
Assumptions used in estimating the fair value at date of grant
were based on the following:
|
|
|
|
i.
|
the expected life of each award granted was calculated using the
simplified method, which uses the vesting period,
generally quarterly over four years, and the option term,
generally seven years, to calculate the expected life of the
option;
|
|
|
ii.
|
expected volatility is based on historical volatility levels,
which we believe is indicative of future levels; and
|
|
|
iii.
|
the risk-free interest rate is based on the implied yield
currently available on U.S. Treasury zero coupon issues
with a remaining term equal to the expected life.
|
The Company employs the simplified method to estimate the
expected life of each award due to the significant volatility in
the market price of our stock which has created exercise
patterns that we do not believe are indicative of future
activity.
The weighted-average fair value per share of options granted
during the years ended December 31, 2009, 2008 and 2007 was
$13.80, $11.79 and $14.08, respectively. The total fair value of
options vested during the years ended
95
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2009, 2008 and 2007 was $8,148, $6,324 and
$8,526, respectively. The following table provides information
related to options exercised during the years ended
December 31, 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Cash received upon exercise of options
|
|
$
|
10,698
|
|
|
$
|
10,248
|
|
|
$
|
11,662
|
|
Related tax benefit realized
|
|
|
842
|
|
|
|
2,034
|
|
|
|
4,664
|
|
Total intrinsic value of options exercised was $5,036, $6,970
and $12,561, for the years ended December 31, 2009, 2008
and 2007, respectively.
Non-vested restricted stock for the twelve months ended
December 31, 2009 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Non-vested balance at December 31, 2008
|
|
|
350,349
|
|
|
$
|
28.26
|
|
Granted
|
|
|
328,852
|
|
|
|
31.15
|
|
Vested
|
|
|
(102,477
|
)
|
|
|
28.57
|
|
Forfeited
|
|
|
(43,706
|
)
|
|
|
29.43
|
|
|
|
|
|
|
|
|
|
|
Non-vested balance at December 31, 2009
|
|
|
533,018
|
|
|
|
29.89
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock includes grants conditioned upon
service
and/or
performance based vesting. Service-based awards generally vest
annually over a period of four years contingent only on the
employees continued employment. Performance based awards
vest annually over a period of four years from the date of grant
with an additional vesting condition and based upon the extent
of achievement of certain operating goals relating to the
Companys earnings per share, with up to 25% vesting on the
first anniversary of the grant date and up to an additional 25%
vesting on each of the second, third and fourth anniversaries of
the grant date. The shares in each of the respective four
tranches vest in full if earnings per share for each of the four
calendar years after the date of grant equals or exceeds 115% of
earnings per share for the preceding calendar year, as adjusted
for any changes in measurement methods; provided that 50% of
each tranche will vest if earnings per share for the year is
between 113.50% and 114.24% (inclusive) of adjusted earnings per
share for the preceding year, and 75% of each tranche will vest
if earnings per share for the year is between 114.25% and
114.99% (inclusive) of adjusted earnings per share for the
preceding year. Performance based awards represent
5,880 shares of outstanding non-vested restricted stock
awards.
As of December 31, 2009, there was $30,704 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements, which is expected to be recognized
over a weighted-average period of 1.54 years.
|
|
(11)
|
Employee
Stock Purchase Plan
|
On February 15, 2001, the Board of Directors approved and
we adopted an Employee Stock Purchase Plan. All employees are
eligible to participate except those employees who have been
employed by us less than 90 days, whose customary
employment is less than 20 hours per week or any employee
who owns five percent or more of our common stock. Eligible
employees may join the plan every six months. Purchases of
common stock are priced at the lower of the stock price less 15%
on the first day or the last day of the six-month period. We
have reserved for issuance 1,200,000 shares of common
stock. We issued 97,332, 104,238, and 88,277 shares under
the Employee Stock Purchase Plan in 2009, 2008, and 2007,
respectively. As of December 31, 2009 we had a total of
511,971 shares available for issuance under the Employee
Stock Purchase Plan.
96
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of the employees purchase rights granted in
each of the six month offering periods during 2009, 2008 and
2007 was estimated on the date of grant using the
Black-Scholes-Merton option-pricing model with the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Offering Periods Ending
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
Expected volatility
|
|
|
48.83
|
%
|
|
|
47.32
|
%
|
|
|
44.27
|
%
|
|
|
43.28
|
%
|
|
|
43.62
|
%
|
|
|
44.52
|
%
|
Expected term
|
|
|
6 months
|
|
|
|
6 months
|
|
|
|
6 months
|
|
|
|
6 months
|
|
|
|
6 months
|
|
|
|
6 months
|
|
Risk-free interest rate
|
|
|
0.35
|
%
|
|
|
0.27
|
%
|
|
|
2.17
|
%
|
|
|
3.49
|
%
|
|
|
4.95
|
%
|
|
|
5.07
|
%
|
Divided yield
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
The per share fair value of those purchase rights granted in
each of the six month offering periods during 2009, 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Offering Periods Ending
|
|
|
December 31,
|
|
June 30,
|
|
December 31,
|
|
June 30,
|
|
December 31,
|
|
June 30,
|
|
|
2009
|
|
2009
|
|
2008
|
|
2008
|
|
2007
|
|
2007
|
|
Grant-date fair value
|
|
$
|
7.71
|
|
|
$
|
8.36
|
|
|
$
|
5.74
|
|
|
$
|
10.00
|
|
|
$
|
6.58
|
|
|
$
|
10.01
|
|
|
|
(12)
|
Share
Repurchase Program
|
Under the authorization of our Board of Directors, the Company
maintains an on-going share repurchase program that allows it to
repurchase up to $200,000 of shares of its common stock from and
after August 5, 2009. Pursuant to this
on-going
share repurchase program, the Company repurchased
2,713,567 shares of its common stock and placed them into
treasury during the year ended December 31, 2009 for an
average per share cost of $25.70 and an aggregate cost of
$69,751. As of December 31, 2009, the Company had
authorization to purchase up to an additional $162,847 of common
stock under the share repurchase program.
97
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the calculation of basic and
diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
149,279
|
|
|
$
|
(56,606
|
)
|
|
$
|
112,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
51,647,267
|
|
|
|
52,816,674
|
|
|
|
52,595,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
2.89
|
|
|
$
|
(1.07
|
)
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
149,279
|
|
|
$
|
(56,606
|
)
|
|
$
|
112,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
51,647,267
|
|
|
|
52,816,674
|
|
|
|
52,595,503
|
|
Dilutive effect of stock options and non-vested stock awards (as
determined by applying the treasury stock method)
|
|
|
662,001
|
|
|
|
|
|
|
|
1,250,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares and dilutive potential
common shares outstanding
|
|
|
52,309,268
|
|
|
|
52,816,674
|
|
|
|
53,845,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
2.85
|
|
|
$
|
(1.07
|
)
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential common stock equivalents representing
2,676,447 shares, 3,351,807 shares, and
1,531,368 shares for the years ended December 31,
2009, 2008 and 2007, respectively, were not included in the
computation of diluted net income (loss) per share because to do
so would have been anti-dilutive.
The shares issuable upon the conversion of the Companys
2.0% Convertible Senior Notes due May 15, 2012, which
were issued effective March 28, 2007 in an aggregate
principle amount of $260,000 (See Note 9), were not
included in the computation of diluted net income (loss) per
share for the years ended December 31, 2009, 2008 and 2007
because to do so would have been anti-dilutive.
The Companys warrants to purchase shares of its common
stock, sold on March 28, 2007 and April 9, 2007 (See
Note 9), were not included in the computation of diluted
net income (loss) per share for the years ended
December 31, 2009, 2008 and 2007 because to do so would
have been anti-dilutive.
|
|
(14)
|
Commitments
and Contingencies
|
|
|
(a)
|
Minimum
Reserve Requirements
|
Regulations governing our managed care operations in each of our
licensed subsidiaries require the applicable subsidiaries to
meet certain minimum net worth requirements. Each subsidiary was
in compliance with its requirements at December 31, 2009.
|
|
(b)
|
Professional
Liability
|
We maintain professional liability coverage for certain claims
which is provided by independent carriers and is subject to
annual coverage limits. Professional liability policies are on a
claims-made basis and must be renewed or replaced with
equivalent insurance if claims incurred during its term, but
asserted after its expiration, are to be insured.
98
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We lease office space under operating leases which expire at
various dates through 2021. Future minimum payments by year and
in the aggregate under all non-cancelable leases are as follows
at December 31, 2009:
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
2010
|
|
$
|
14,944
|
|
2011
|
|
|
14,173
|
|
2012
|
|
|
13,205
|
|
2013
|
|
|
8,560
|
|
2014
|
|
|
6,648
|
|
Thereafter
|
|
|
26,600
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
84,130
|
|
|
|
|
|
|
These leases have various escalations, abatements and tenant
improvement allowances that have been included in the total cost
of each lease and amortized on a straight-line basis. Total rent
expense for all office space and office equipment under
non-cancelable operating leases was $18,246, $18,351 and $15,846
in 2009, 2008 and 2007, respectively, and is included in
selling, general and administrative expenses in the accompanying
consolidated statements of operations. The Company had no
capital leases obligations at December 31, 2009.
|
|
(d)
|
Deferred
Compensation Plans
|
The Companys employees have the option to participate in a
deferred compensation plan sponsored by the Company. All
full-time and most part-time employees of the Company and its
subsidiaries may elect to participate in this plan. This plan is
a defined contribution profit sharing plan under Section (401)k
of the Internal Revenue Code. Participants may contribute a
certain percentage of their compensation subject to maximum
Federal and plan limits. The Company may elect to match a
certain percentage of each employees contributions up to
specified limits. For the years ended December 31, 2009,
2008 and 2007, the matching contributions under the plan were
$4,486, $3,649 and $3,748, respectively.
Certain employees have the option to participate in a
non-qualified deferred compensation plan sponsored by the
Company. Participants may contribute a percentage of their
income subject to maximum plan limits. The Company does not
match any employee contributions; however, the Companys
obligation to the employee is equal to the employees
deferrals plus or minus any return on investment the employee
earns through self-selected investment allocations. Included in
other long-term liabilities at December 31, 2009 and 2008,
respectively was $6,178 and $4,526 related to this plan.
Certain employees are eligible for a long-term cash incentive
award designed to retain key executives. Each eligible
participant is assigned a cash target, the payment of which is
deferred for three years. The amount of the target is dependent
upon the participants performance against individual major
job objectives in the first year of the program. The target
award amount is funded over the three-year period, with the
funding at the discretion of the Compensation Committee of the
Board of Directors. An executive is eligible for payment of a
long-term incentive award earned in any one year only if the
executive remains employed with the Company and is in good
standing on the date the payment is made following the third
year of the three-year period. The expense recorded for the
long-term cash incentive awards was $3,192, $5,232 and $5,542 in
2009, 2008 and 2007, respectively. The related current portion
of the liability of $5,722 and $4,868 at December 31, 2009
and 2008, respectively, is included in accrued payroll and
related liabilities for the amounts due under the 2007 plan
payable in 2010. The related long-term portion of the liability
of $5,392 and $8,476 at December 31, 2009 and 2008,
respectively, is included in other long-term liabilities.
99
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(e)
|
Florida
Medicaid Contract Dispute
|
Under the terms of the contract between AMERIGROUP Florida, Inc.
and the Florida Agency for Healthcare Administration
(AHCA), AMERIGROUP Florida, Inc. is required to have
a process to identify members who are pregnant or newborn
members so that the newborn can be enrolled as a member of the
health plan as soon as possible after birth. This process is
referred to as the Unborn Activation Process.
Beginning in July 2008, AMERIGROUP Florida, Inc. received a
series of letters from the Florida Office of the Inspector
General (IG) and AHCA stating that AMERIGROUP
Florida, Inc. had failed to comply with the Unborn Activation
Process and, as a result, AHCA had paid approximately $10,600 in
Medicaid
fee-for-service
claims that should have been paid by AMERIGROUP Florida, Inc.
The letters requested that AMERIGROUP Florida, Inc. provide
documentation to evidence its compliance with the terms of
the contract with AHCA with respect to the Unborn Activation
Process.
In October 2008, the Company submitted its response to the
letters. In July 2009, The Company received another series of
letters from the IG and AHCA stating that, based on a review of
the Companys response, they had determined that AMERIGROUP
Florida, Inc. did not comply with the Unborn Activation Process
and assessed a penalty against AMERIGROUP Florida, Inc. in the
amount of two thousand, five hundred dollars per newborn for an
aggregate amount of approximately $6,000. The letters further
reserved AHCAs right to pursue collection of the amount
paid for the
fee-for-service
claims. AMERIGROUP Florida, Inc. appealed these findings and
submitted documentation to evidence its compliance with, and
performance under, the Unborn Activation Process requirements of
the contract. On January 14, 2010, AMERIGROUP Florida,
Inc. appealed AHCAs contract interpretation that anything
less than 100% compliance with the Unborn Activation Process
could result in sanctions. This appeal is pending.
The Company believes that AMERIGROUP Florida, Inc. has
substantial defenses to the claims asserted by AHCA and will
defend against the claims vigorously. However, there can be no
assurances that the ultimate outcome of this matter will not
have a material adverse effect on the Companys financial
position, results of operations or liquidity.
Effective July 1, 2009, the Company has caused to be issued
a collateralized irrevocable standby letter of credit in an
aggregate principal amount of approximately $17,400 to meet
certain obligations under its Medicaid contract in the State of
Georgia through its Georgia subsidiary, AMGP Georgia Managed
Care Company, Inc. The letter of credit is collateralized
through investments held by AMGP Georgia Managed Care Company,
Inc.
Risk
Sharing Receivable
AMERIGROUP Texas, Inc. had an exclusive risk-sharing arrangement
in the Fort Worth service area with Cook Childrens
Health Care Network (CCHCN) and Cook Childrens
Physician Network (CCPN), which includes Cook
Childrens Medical Center, that expired by its own terms as
of August 31, 2005. Under this risk-sharing arrangement,
the parties performed annual reconciliations and settlements of
the risk pool for each contract year. The contract with CCHCN
prescribed reconciliation procedures all of which were completed
without agreement on amounts owed under the risk-sharing
arrangement. On August 27, 2008, AMERIGROUP Texas, Inc.
filed suit against CCHCN and CCPN in the District Court for the
153rd Judicial District in Tarrant County, Texas, Case
No. 153-232258-08.
The amended petition asserted a breach of contract claim and
sought compensatory damages in the amount of $11,300 plus pre-
and post-judgment interest, attorneys fees and costs.
CCHCN and CCPN filed an amended counterclaim against AMERIGROUP
Texas, Inc. seeking an amount to be determined at trial plus
pre- and post-judgment interest and attorneys fees and
costs. On December 22, 2009, AMERIGROUP Corporation,
AMERIGROUP Texas, Inc., CCHCN and CCPN entered into a
confidential Settlement Agreement
100
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and Release resolving all claims related to the amended petition
and counterclaim. The effect of this Settlement Agreement was
not material to the Companys results of operations.
Memorial
Hermann Litigation
On November 21, 2007, Memorial Hermann Hospital System
(Memorial Hermann) filed an Original Petition in the
District Court of Harris County, Texas against AMERIGROUP Texas,
Inc. alleging, inter alia, that AMERIGROUP Texas failed
to pay claims for healthcare services rendered to members in
accordance with the terms set forth in the contract between the
parties. The Original Petition asserted a breach of contract
claim and requested damages in the principal amount of $723,
plus interest, punitive damages, attorneys fees, costs,
and other relief. On December 3, 2009, Memorial Hermann
filed a Second Amended Petition asserting claims for breach of
contract and quantum meruit and requesting damages in the
principal amount of $38,400, plus pre-judgement and
post-judgment interest, statutory damages, attorneys fees,
and costs. AMERIGROUP Texas has denied that it is indebted to
Memorial Hermann as alleged in the petitions. The case is
currently scheduled for trial on August 23, 2010.
The Company believes that AMERIGROUP Texas has substantial
defenses to the claims asserted by Memorial Hermann and we
intend to vigorously contest their claims. Although it is
possible that the ultimate outcome of this litigation may not be
favorable to the Company, the amount of loss, if any, is
uncertain. Accordingly, the Company has not recorded any amounts
in the Consolidated Financial Statements for unfavorable
outcomes, if any, as a result of this litigation. There can be
no assurances that the ultimate outcome of this litigation will
not have a material adverse effect on the Companys
financial position, results of operations or liquidity.
Litigation
Settlement
On August 13, 2008, the Company settled a qui tam
litigation relating to certain marketing practices of its
former Illinois health plan for a cash payment of $225,000
without any admission of wrong-doing by the Company or its
subsidiaries or affiliates. The Company also paid approximately
$9,205 to the relator for legal fees. Both payments were made
during the three months ended September 30, 2008. As a
result, a one-time expense in the amount of $234,205, or
$199,638 net of the related tax effects, was recorded in
the year ended December 31, 2008 resulting in a net loss
for the year. In June 2009, the Company recorded a $22,449 tax
benefit regarding the tax treatment of the settlement under an
agreement in principle with the IRS which was formalized through
a pre-filing agreement with the IRS in September 2009. The
pre-filing agreement program permits taxpayers to resolve tax
issues in advance of filing their corporate income tax returns.
The Company does not anticipate that there will be any further
material changes to the tax benefit associated with this
settlement in future periods.
Other
Litigation
Additionally, the Company is involved in various other legal
proceedings in the normal course of business. Based upon its
evaluation of the information currently available, the Company
believes that the ultimate resolution of any such proceedings
will not have a material adverse effect, either individually or
in the aggregate, on its financial position, results of
operations or cash flows.
|
|
(15)
|
Parent
Financial Statements
|
The following parent only condensed financial information
reflects the financial condition, results of operations and cash
flows of AMERIGROUP Corporation.
101
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
58,326
|
|
|
$
|
256,126
|
|
Short-term investments
|
|
|
52,765
|
|
|
|
|
|
Due from affiliates
|
|
|
26,076
|
|
|
|
|
|
Deferred income taxes
|
|
|
7,975
|
|
|
|
9,396
|
|
Prepaid expenses and other
|
|
|
12,928
|
|
|
|
10,531
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
158,070
|
|
|
|
276,053
|
|
Long-term investments
|
|
|
120,886
|
|
|
|
53,706
|
|
Investment in subsidiaries
|
|
|
934,838
|
|
|
|
844,031
|
|
Property, equipment and software, net
|
|
|
84,035
|
|
|
|
84,312
|
|
Deferred income taxes
|
|
|
11,278
|
|
|
|
|
|
Other long-term assets
|
|
|
12,525
|
|
|
|
14,673
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,321,632
|
|
|
$
|
1,272,775
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,144
|
|
|
$
|
6,810
|
|
Accrued payroll and related liabilities
|
|
|
37,311
|
|
|
|
62,469
|
|
Accrued expenses and other
|
|
|
38,891
|
|
|
|
41,690
|
|
Due to subsidiaries
|
|
|
|
|
|
|
3,064
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
83,346
|
|
|
|
114,539
|
|
Long-term convertible debt
|
|
|
235,104
|
|
|
|
225,130
|
|
Long-term debt less current portion
|
|
|
|
|
|
|
43,826
|
|
Deferred income taxes
|
|
|
6,379
|
|
|
|
2,782
|
|
Other long-term liabilities
|
|
|
12,359
|
|
|
|
13,839
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
337,188
|
|
|
|
400,116
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized
100,000,000 shares; issued and outstanding 50,638,474 and
52,673,363 at December 31, 2009 and 2008, respectively
|
|
|
546
|
|
|
|
539
|
|
Additional
paid-in-capital
|
|
|
494,735
|
|
|
|
466,926
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,354
|
|
|
|
(3,207
|
)
|
Retained earnings
|
|
|
590,632
|
|
|
|
440,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,087,267
|
|
|
|
904,796
|
|
Less treasury stock at cost (3,956,560 and
1,207,510 shares at December 31, 2009 and
December 31, 2008, respectively)
|
|
|
(102,823
|
)
|
|
|
(32,137
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
984,444
|
|
|
|
872,659
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,321,632
|
|
|
$
|
1,272,775
|
|
|
|
|
|
|
|
|
|
|
102
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees from subsidiaries
|
|
$
|
368,379
|
|
|
$
|
291,350
|
|
|
$
|
279,686
|
|
Investment income and other
|
|
|
2,476
|
|
|
|
15,309
|
|
|
|
27,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
370,855
|
|
|
|
306,659
|
|
|
|
307,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
262,684
|
|
|
|
228,155
|
|
|
|
218,785
|
|
Depreciation and amortization
|
|
|
27,256
|
|
|
|
27,626
|
|
|
|
24,292
|
|
Litigation settlement
|
|
|
|
|
|
|
234,205
|
|
|
|
|
|
Interest
|
|
|
16,225
|
|
|
|
19,382
|
|
|
|
18,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
306,165
|
|
|
|
509,368
|
|
|
|
262,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and equity earnings in
subsidiaries
|
|
|
64,690
|
|
|
|
(202,709
|
)
|
|
|
45,252
|
|
Income tax (expense) benefit
|
|
|
(465
|
)
|
|
|
20,855
|
|
|
|
(17,128
|
)
|
Equity earnings in subsidiaries
|
|
|
85,054
|
|
|
|
125,248
|
|
|
|
84,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
149,279
|
|
|
$
|
(56,606
|
)
|
|
$
|
112,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
2.89
|
|
|
$
|
(1.07
|
)
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
51,647,267
|
|
|
|
52,816,674
|
|
|
|
52,595,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
2.85
|
|
|
$
|
(1.07
|
)
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and dilutive potential
common shares outstanding
|
|
|
52,309,268
|
|
|
|
52,816,674
|
|
|
|
53,845,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
STATEMENTS OF CASHFLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
149,279
|
|
|
$
|
(56,606
|
)
|
|
$
|
112,227
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
27,256
|
|
|
|
27,626
|
|
|
|
24,292
|
|
Loss on disposal or abandonment of property, equipment and
software
|
|
|
121
|
|
|
|
402
|
|
|
|
84
|
|
Long-term convertible debt interest
|
|
|
9,974
|
|
|
|
9,344
|
|
|
|
6,671
|
|
Deferred tax (benefit) expense
|
|
|
(9,467
|
)
|
|
|
195
|
|
|
|
(3,076
|
)
|
Compensation expense related to share-based payments
|
|
|
15,936
|
|
|
|
10,381
|
|
|
|
11,879
|
|
Gain on sale of contract rights
|
|
|
(5,810
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(2,763
|
)
|
|
|
(384
|
)
|
|
|
|
|
Changes in assets and liabilities (decreasing) increasing cash
flows from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity earnings in subsidiaries
|
|
|
(85,054
|
)
|
|
|
(125,248
|
)
|
|
|
(84,103
|
)
|
Unearned revenue
|
|
|
|
|
|
|
|
|
|
|
(5,561
|
)
|
Prepaid expenses and other current assets
|
|
|
(2,397
|
)
|
|
|
23,064
|
|
|
|
(3,095
|
)
|
Other assets
|
|
|
(1,146
|
)
|
|
|
795
|
|
|
|
(2,359
|
)
|
Accounts payable and other current liabilities
|
|
|
(28,215
|
)
|
|
|
17,498
|
|
|
|
13,450
|
|
Other long-term liabilities
|
|
|
(1,480
|
)
|
|
|
(409
|
)
|
|
|
8,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
66,234
|
|
|
|
(93,342
|
)
|
|
|
78,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Purchases of) proceeds from sale of securities, net
|
|
|
(115,115
|
)
|
|
|
71,980
|
|
|
|
147
|
|
Purchase of property and equipment and software
|
|
|
(24,656
|
)
|
|
|
(29,321
|
)
|
|
|
(27,918
|
)
|
Contributions made to subsidiaries
|
|
|
(70,104
|
)
|
|
|
(87,390
|
)
|
|
|
(102,847
|
)
|
Dividends received from subsidiaries
|
|
|
71,700
|
|
|
|
70,151
|
|
|
|
70,519
|
|
Proceeds from sale of contract rights
|
|
|
5,810
|
|
|
|
|
|
|
|
|
|
Release (purchase) of restricted investments held as collateral,
net
|
|
|
|
|
|
|
351,318
|
|
|
|
(351,318
|
)
|
Purchase of convertible note hedge instruments
|
|
|
|
|
|
|
|
|
|
|
(52,702
|
)
|
Proceeds from sale of warrant instruments
|
|
|
|
|
|
|
|
|
|
|
25,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(132,365
|
)
|
|
|
376,738
|
|
|
|
(438,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in due to and due from subsidiaries, net
|
|
|
(29,140
|
)
|
|
|
1,989
|
|
|
|
20,165
|
|
Proceeds from issuance of convertible notes
|
|
|
|
|
|
|
|
|
|
|
260,000
|
|
Borrowings under credit facility
|
|
|
|
|
|
|
|
|
|
|
351,318
|
|
Repayment of borrowings under credit facility
|
|
|
(44,318
|
)
|
|
|
(84,028
|
)
|
|
|
(222,293
|
)
|
Payment of debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(11,732
|
)
|
Payment of capital lease obligations
|
|
|
|
|
|
|
(368
|
)
|
|
|
(842
|
)
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
and employee stock purchases
|
|
|
10,698
|
|
|
|
10,248
|
|
|
|
11,662
|
|
Repurchase of common stock shares
|
|
|
(69,751
|
)
|
|
|
(30,647
|
)
|
|
|
|
|
Tax benefit related to exercise of stock options
|
|
|
842
|
|
|
|
2,034
|
|
|
|
4,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(131,669
|
)
|
|
|
(100,772
|
)
|
|
|
412,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(197,800
|
)
|
|
|
182,624
|
|
|
|
53,006
|
|
Cash and cash equivalents at beginning of year
|
|
|
256,126
|
|
|
|
73,502
|
|
|
|
20,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
58,326
|
|
|
$
|
256,126
|
|
|
$
|
73,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
AMERIGROUP
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(16)
|
Quarterly
Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
2009
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Premium revenues
|
|
$
|
1,217,447
|
|
|
$
|
1,284,890
|
|
|
$
|
1,298,969
|
|
|
$
|
1,357,683
|
|
Health benefits expense
|
|
|
1,019,303
|
|
|
|
1,103,213
|
|
|
|
1,136,391
|
|
|
|
1,148,366
|
|
Selling, general and administrative expenses
|
|
|
110,375
|
|
|
|
96,285
|
|
|
|
82,238
|
|
|
|
105,191
|
|
Income before income taxes
|
|
|
59,434
|
|
|
|
43,374
|
|
|
|
34,949
|
|
|
|
63,662
|
|
Net income
|
|
|
36,909
|
|
|
|
49,599
|
|
|
|
22,549
|
|
|
|
40,222
|
|
Diluted net income per share
|
|
|
0.69
|
|
|
|
0.94
|
|
|
|
0.43
|
|
|
|
0.79
|
|
Weighted-average number of common shares and dilutive potential
shares outstanding
|
|
|
53,424,802
|
|
|
|
53,029,943
|
|
|
|
51,920,745
|
|
|
|
51,069,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
2008
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Premium revenues
|
|
$
|
1,050,004
|
|
|
$
|
1,098,356
|
|
|
$
|
1,080,367
|
|
|
$
|
1,137,632
|
|
Health benefits expense
|
|
|
874,921
|
|
|
|
911,471
|
|
|
|
885,774
|
|
|
|
946,095
|
|
Selling, general and administrative expenses
|
|
|
106,742
|
|
|
|
113,140
|
|
|
|
112,222
|
|
|
|
103,772
|
|
Income (loss) before income taxes
|
|
|
54,357
|
|
|
|
(178,222
|
)
|
|
|
62,196
|
|
|
|
59,413
|
|
Net income (loss)
|
|
|
33,637
|
|
|
|
(164,032
|
)
|
|
|
37,926
|
|
|
|
35,863
|
|
Diluted net income (loss) per share
|
|
|
0.62
|
|
|
|
(3.10
|
)
|
|
|
0.71
|
|
|
|
0.67
|
|
Weighted-average number of common shares and dilutive potential
shares outstanding
|
|
|
54,403,315
|
|
|
|
52,953,851
|
|
|
|
53,494,690
|
|
|
|
53,345,226
|
|
|
|
(17)
|
Comprehensive
Earnings
|
Differences between net income (loss) and total comprehensive
income (loss) resulted from net unrealized gains (losses) on the
investment portfolio as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net income (loss)
|
|
$
|
149,279
|
|
|
$
|
(56,606
|
)
|
|
$
|
112,227
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on
held-to-maturity
investment portfolio at time of transfer to
available-for-sale,
net of tax
|
|
|
3,030
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
available-for-sale
securities, net of tax
|
|
|
2,346
|
|
|
|
(4,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
5,376
|
|
|
|
(4,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
154,655
|
|
|
$
|
(60,628
|
)
|
|
$
|
112,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
(a) Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act), as of the end of the period covered
by this report. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of
the end of such period, our disclosure controls and procedures
are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be
disclosed by us in the reports that we file or submit under the
Exchange Act and are effective in ensuring that information
required to be disclosed by us in the reports that we file or
submit under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
(b) Internal Control over Financial Reporting.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of AMERIGROUP Corporation is responsible for
establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting
is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act as a process designed by, or under the
supervision of, the Companys principal executive and
principal financial officers and effected by the Companys
Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally
accepted accounting principles.
The management of AMERIGROUP Corporation assessed the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2009. In making this
assessment, we used the criteria established in Internal
Control Integrated Framework set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our assessment, we have concluded
that, as of December 31, 2009, the Companys internal
control over financial reporting was effective based on those
criteria.
AMERIGROUP Corporations independent registered public
accounting firm has issued an audit report on the effectiveness
of the Companys internal control over financial reporting
as of December 31, 2009. That report has been included
herein.
(c) Changes in Internal Controls
During the year ended December 31, 2009, in connection with
our evaluation of internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act of
2002, we concluded there were no changes in our internal control
procedures that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
(d) Other
Our internal control over financial reporting includes policies
and procedures that:
|
|
|
|
|
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
|
106
|
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of
the Companys assets that could have a material effect on
the consolidated financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
|
|
Item 9B.
|
Other
Information
|
None.
107
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
AMERIGROUP Corporation:
We have audited AMERIGROUP Corporation and subsidiaries
internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). AMERIGROUP Corporation and subsidiaries
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the AMERIGROUP Corporation and
subsidiaries internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, AMERIGROUP Corporation and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of AMERIGROUP Corporation and
subsidiaries as of December 31, 2009 and 2008, and
the related consolidated statements of operations and
consolidated statements of stockholders equity and cash
flows for each of the years in the three-year period ended
December 31, 2009, and our report dated February 22,
2010 expressed an unqualified opinion on those consolidated
financial statements.
Norfolk, VA
February 22, 2010
108
PART III.
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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The information regarding directors is incorporated herein by
reference from the section entitled PROPOSAL #1:
ELECTION OF DIRECTORS in the Proxy Statement.
The information regarding Executive Officers is contained in
Part I of this Report under the caption Executive
Officers of the Company.
There are no family relationships among any of our directors or
executive officers.
The information regarding compliance with Section 16(a) of
the Exchange Act is incorporated herein by reference from the
section entitled Section 16(a) Beneficial Ownership
Reporting Compliance of our definitive Proxy Statement
(the Proxy Statement) to be filed pursuant to
Regulation 14A of the Exchange Act, as amended, for our
Annual Meeting of Stockholders to be held on Thursday,
May 13, 2010. The Proxy Statement will be filed within
120 days after the end of our fiscal year ended
December 31, 2009.
The information regarding the Companys Code of Business
Conduct and Ethics is incorporated herein by reference from the
sections entitled Corporate Governance in the Proxy
Statement.
The information regarding the Companys procedures by which
security holders may recommend nominees to the Companys
Board of Directors is incorporated herein by reference from the
sections entitled Questions and Answers About the Proxy
Materials and our 2010 Annual Meeting of Stockholders in
the Proxy Statement.
The information regarding the members of the Audit Committee and
the determination of an audit committee financial expert is
incorporated herein by reference from the sections entitled
Information About our Board of Directors and
Committees in the Proxy Statement.
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Item 11.
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Executive
Compensation
|
Information regarding executive compensation is incorporated
herein by reference from the sections entitled
Compensation Discussion and Analysis,
Compensation Committee Report and Compensation
of Directors in the Proxy Statement. The Compensation
Committee Report shall be deemed furnished with this
Form 10-K,
and shall not be filed for purposes of
Section 18 of the Exchange Act, nor shall it be deemed
incorporated by reference in any filing under the Securities Act
of 1933, as amended, or the Exchange Act.
|
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information regarding security ownership of certain beneficial
owners and management and securities authorized for issuance
under equity compensation plans is incorporated herein by
reference from the sections entitled Security Ownership of
Certain Beneficial Owners and Management in the Proxy
Statement.
|
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence
|
Information regarding certain relationships and related
transactions is incorporated herein by reference from the
section entitled Certain Relationships and Related
Transactions in the Proxy Statement.
|
|
Item 14.
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Principal
Accountant Fees and Services
|
Information regarding principal accountant fees and services is
incorporated herein by reference from the section entitled
Proposal #2: RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM in the Proxy
Statement.
109
PART IV.
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|
Item 15.
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Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements.
The following financial statements appear on the pages listed,
herein:
(a)(2) Financial Statement Schedules.
None.
(b) Exhibits.
The exhibits listed on the accompanying Exhibit Index
immediately following the Signatures page are incorporated by
reference into this report.
110
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, in the City of Virginia Beach,
Commonwealth of Virginia, on February 22, 2010.
AMERIGROUP Corporation
Name: James W. Truess
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|
|
Title:
|
Chief Financial Officer and
Executive Vice President
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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|
|
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|
Signatures
|
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Title
|
|
Date
|
|
|
|
|
|
|
/s/ James
G. Carlson
James
G. Carlson
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|
Chairman, Chief Executive Officer and President
|
|
February 22, 2010
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|
|
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|
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/s/ James
W. Truess
James
W. Truess
|
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Chief Financial Officer and Executive Vice President
|
|
February 22, 2010
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/s/ Margaret
M. Roomsburg
Margaret
M. Roomsburg
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Chief Accounting Officer and Senior Vice President
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|
February 22, 2010
|
|
|
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|
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/s/ Thomas
E. Capps
Thomas
E. Capps
|
|
Director
|
|
February 22, 2010
|
|
|
|
|
|
/s/ Jeffrey
B. Child
Jeffrey
B. Child
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|
Director
|
|
February 22, 2010
|
|
|
|
|
|
/s/ Emerson
U. Fullwood
Emerson
U. Fullwood
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Director
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|
February 22, 2010
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|
|
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/s/ Kay
Coles James
Kay
Coles James
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Director
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|
February 22, 2010
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|
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/s/ William
J. McBride
William
J. McBride
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Director
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|
February 22, 2010
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|
|
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/s/ Hala
Moddelmog
Hala
Moddelmog
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Director
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February 22, 2010
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|
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/s/ Richard
D. Shirk
Richard
D. Shirk
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Director
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February 22, 2010
|
111
EXHIBIT INDEX
The following exhibits, which are furnished with this annual
report or incorporated herein by reference, are filed as part of
this annual report.
The agreements included or incorporated by reference as exhibits
to this Annual Report on
Form 10-K
contain representations and warranties by each of the parties to
the applicable agreement. These representations and warranties
were made solely for the benefit of the other parties to the
applicable agreement and (i) were not intended to be
treated as categorical statements of fact, but rather as a way
of allocating the risk to one of the parties if those statements
prove to be inaccurate; (ii) may have been qualified in
such agreement by disclosures that were made to the other party
in connection with the negotiation of the applicable agreement;
(iii) may apply contract standards of
materiality that are different from
materiality under the applicable securities laws;
and (iv) were made only as of the date of the applicable
agreement or such other date or dates as may be specified in the
agreement.
The Company acknowledges that, notwithstanding the inclusion of
the foregoing cautionary statements, it is responsible for
considering whether additional specific disclosures of material
information regarding material contractual provisions are
required to make the statements in this Annual Report on
Form 10-K
not misleading.
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|
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Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to exhibit 3.1 to our
Registration Statement on
Form S-3
(No. 333-108831)).
|
|
3
|
.2
|
|
Amended and Restated By-Laws of the Company (incorporated by
reference to exhibit 3.1 to our Current Report on
Form 8-K
filed on February 14, 2008).
|
|
4
|
.1
|
|
Form of share certificate for common stock (incorporated by
reference to exhibit 4.1 to our Registration Statement on
Form S-1
(No. 333-347410)).
|
|
4
|
.2
|
|
Indenture related to the 2.0% Convertible Senior Notes due
2012 dated March 28, 2007, between AMERIGROUP Corporation
and The Bank of New York, as trustee (including the form of
2.0% Convertible Senior Note due 2012) (incorporated by
reference to exhibit 4.1 to our Current Report on
Form 8-K
filed on April 2, 2007).
|
|
4
|
.3
|
|
Registration Rights Agreement dated March 28, 2007, between
AMERIGROUP Corporation, Goldman Sachs, & Co., as
representative of the initial purchasers (incorporated by
reference to exhibit 4.2 to our Current Report on
Form 8-K
filed on April 2, 2007).
|
|
10
|
.1
|
|
Retirement and Employment Agreement by and between AMERIGROUP
Corporation and Stanley F. Baldwin, dated August 4, 2009
(incorporated by reference to exhibit 10.3 to our Current
Report on
Form 8-K
filed on August 10, 2009).
|
|
10
|
.2
|
|
Confirmation, Re Convertible Note Hedge Transaction, dated
March 22, 2007 between AMERIGROUP Corporation and Wells
Fargo Bank, National Association (incorporated by reference to
exhibit 10.1 to our Current Report on
Form 8-K
filed April 3, 2007).
|
|
10
|
.3
|
|
Confirmation, Re Issuer Warrant Transaction, dated
March 22, 2007 between AMERIGROUP Corporation and Wells
Fargo Bank, National Association (incorporated by reference to
exhibit 10.2 to our Current Report on
Form 8-K
filed April 3, 2007).
|
|
10
|
.4
|
|
Amendment to Confirmation, Re Issuer Warrant Transaction, dated
April 3, 2007 between AMERIGROUP Corporation and Wells
Fargo Bank, National Association (incorporated by reference to
exhibit 10.1 to our Current Report on
Form 8-K
filed April 9, 2007).
|
|
10
|
.5
|
|
AMERIGROUP Corporation Amended and Restated Form 2007 Cash
Incentive Plan dated November 6, 2008, (incorporated by
reference to exhibit 10.2 to our Current Report on
Form 8-K
filed on November 12, 2008).
|
|
10
|
.6
|
|
Amendment to AMERIGROUP Corporation 2009 Equity Incentive Plan
dated August 5, 2009, (incorporated by reference to
exhibit 10.5 to our Current Report on
Form 8-K
filed on August 10, 2009).
|
|
10
|
.7
|
|
Form 2008 AMERIGROUP Corporation Severance Plan
(incorporated by reference to exhibit 10.6 to our Current
Report on
Form 8-K
filed on November 12, 2008).
|
|
10
|
.7.1
|
|
Amendment to the AMERIGROUP Corporation Severance Plan
(incorporated by reference to exhibit 10.1 to our Current
Report on
Form 8-K
filed on May 4, 2009).
|
112
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.8
|
|
Form the Officer and Director Indemnification Agreement
(incorporated by reference to exhibit 10.16 to our
Registration Statement on
Form S-1
(No. 333-37410)).
|
|
10
|
.9
|
|
Form of Employee Non-compete, Nondisclosure and Developments
Agreement (incorporated by reference to exhibit 10.1 to our
Current Report on
Form 8-K
filed on February 23, 2005).
|
|
10
|
.10
|
|
Form of Incentive Stock Option Agreement (2009 Equity Incentive
Plan); (incorporated by reference to exhibit 10.2 to our
Current Report on
Form 8-K,
filed on May 4, 2009).
|
|
10
|
.11
|
|
Form of Nonqualified Stock Option Agreement (2009 Equity
Incentive Plan); (incorporated by reference to exhibit 10.3
to our Current Report on
Form 8-K
filed on May 4, 2009).
|
|
10
|
.12
|
|
Form of Restricted Stock Agreement (2009 Equity Incentive Plan);
(incorporated by reference to exhibit 10.4 to our Current
Report on
Form 8-K
filed on May 4, 2009).
|
|
10
|
.13
|
|
Form of Stock Appreciation Rights Agreement (2009 Equity
Incentive Plan); (incorporated by reference to exhibit 10.5
to our Current Report
Form 8-K
filed on May 4, 2009).
|
|
10
|
.14
|
|
AMERIGROUP Corporation Amended and Restated Form 2005
Executive Deferred Compensation Plan between AMERIGROUP
Corporation and Executive Associates dated November 6,
2008, (incorporated by reference to exhibit 10.4 to our
Current Report on
Form 8-K
filed on November 12, 2008).
|
|
10
|
.15
|
|
Form of 2005 Non-Employee Director Deferred Compensation Plan
between AMERIGROUP Corporation and Non-Executive Associates
(incorporated by reference to exhibit 10.3 to our Current
Report on
Form 8-K
filed on March 4, 2005).
|
|
10
|
.16
|
|
Employment Agreement of James G. Carlson dated January 16,
2008 (incorporated by reference to exhibit 10.1 to our
Current Report on
Form 8-K
filed on January 18, 2008).
|
|
10
|
.16.1
|
|
Amendment No. 1 to Executive Employment Agreement dated
November 6, 2008 between AMERIGROUP Corporation and James
G. Carlson (incorporated by reference to exhibit 10.5 to
our Current Report on
Form 8-K
filed on November 12, 2008).
|
|
10
|
.16.2
|
|
Amendment No. 2 to Executive Employment Agreement dated
August 4, 2009 between AMERIGROUP Corporation and James G.
Carlson (incorporated by reference to exhibit 10.1 to our
Current Report on
Form 8-K
filed on August 10, 2009).
|
|
10
|
.17
|
|
Noncompetition Agreement for James G. Carlson dated
January 16, 2008 (incorporated by reference to
exhibit 10.2 to our Current Report on
Form 8-K
filed on January 18, 2008).
|
|
*10
|
.18
|
|
Medical Contract between the State of Florida, Agency for
HealthCare Administration and AMERIGROUP Florida Inc. (AHCA
Contract No. FA913) (incorporated by reference to
Exhibit 10.1 to our Quarterly Report on
Form 10-Q
filed on November 4, 2009).
|
|
10
|
.19
|
|
Amendment No. 3 dated October 23, 2008, Amended and
Restated Contract between Georgia Department of Community Health
and AMERIGROUP Georgia Managed Care Company, Inc. for the period
from July 1, 2008 through June 30, 2009, (incorporated
by reference to Exhibit 10.4 to our Quarterly Report on
Form 10-Q
filed on October 28, 2008).
|
|
10
|
.19.1
|
|
Amendment No. 4 dated October 23, 2008 between Georgia
Department of Community Health and AMGP Georgia Managed Care
Company, Inc. for the period from July 1, 2008 through
June 30, 2009, (incorporated by reference to
Exhibit 10.5 to our Quarterly Report on
Form 10-Q
filed on October 28, 2008).
|
|
*10
|
.19.2
|
|
Amendment No. 5 dated October 23, 2008 between Georgia
Department of Community Health and AMGP Georgia Managed Care
Company, Inc. for the period from July 1, 2008 through
June 30, 2009, (incorporated by reference to
Exhibit 10.6 to our Quarterly Report on
Form 10-Q
filed on October 28, 2008).
|
|
*10
|
.19.3
|
|
Amendment No. 7 dated September 23, 2009 between
Georgia Department of Community Health and AMGP Georgia Managed
Care Company, Inc. for the period from July 1, 2009 through
June 30, 2010, (incorporated by reference to
Exhibit 10.3 to our Quarterly Report on
Form 10-Q
filed on November 4, 2009).
|
|
*10
|
.20
|
|
Health & Human Services Commission Uniform Managed
Care Contract covering all service areas and products in which
the subsidiary has agreed to participate, effective
September 1, 2006 (incorporated by reference to
exhibit 10.32.9 to our Quarterly Report on
Form 10-Q
filed on November 14, 2006).
|
113
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
*10
|
.20.1
|
|
Amendment, effective September 1, 2007, to the
Health & Human Services Commission Agreement for
Health Services to the STAR, STAR+PLUS, CHIP, CHIP Perinatal,
programs in the Bexar, Dallas, Harris, Nueces, Tarrant and
Travis Service Delivery Areas effectively extending the contract
through August 31, 2008 (incorporated by reference to
Exhibit 10.35.10 to our Quarterly Report on
Form 10-Q
filed on November 2, 2007).
|
|
*10
|
.20.2
|
|
Amendment effective September 1, 2008, to the
Health & Human Services Commission Agreement for
Health Services to the STAR, STAR+PLUS, CHIP, CHIP Perinatal
programs effectively extending the contract through
August 31, 2009, (incorporated by reference to
Exhibit 10.1 to our Quarterly Report on
Form 10-Q
filed on October 28, 2008).
|
|
*10
|
.20.3
|
|
Amendment effective March 1, 2009, to the
Health & Human Services Commission Agreement for
Health Services to the STAR, STAR+PLUS, CHIP, CHIP Perinatal
programs effectively extending the contract through
August 31, 2010, (incorporated by reference to
Exhibit 10.1 to our Quarterly Report on
Form 10-Q
filed on May 5, 2009).
|
|
*10
|
.20.4
|
|
Amendment effective September 1, 2009, to the
Health & Human Services Commission Agreement for
Health Services to the STAR, STAR+PLUS, CHIP, CHIP Perinatal
programs in the Bexar, Dallas, Harris, Nueces, Tarrant, and
Travis Service Delivery Areas effectively extending the contract
through August 31, 2010, (incorporated by reference to
Exhibit 10.2 to our Quarterly Report on
Form 10-Q
filed on November 4, 2009).
|
|
10
|
.35
|
|
Contractor Risk Agreement between the State of Tennessee and
AMERIGROUP Tennessee, Inc. effective August 15, 2006,
(incorporated by reference to exhibit 10.1 to our Current
Report on
Form 8-K
filed on August 21, 2006).
|
|
10
|
.35.1
|
|
Amendment No. 3 to Contract Risk Agreement between the
State of Tennessee and AMERIGROUP Tennessee, Inc. effective
July 1, 2008, (incorporated by reference to
exhibit 10.8 to our Quarterly Report on
Form 10-Q
filed on July 29, 2008).
|
|
10
|
.35.2
|
|
Amendment No. 4 to Contract Risk Agreement between the
State of Tennessee and AMERIGROUP Tennessee, Inc. effective
September 1, 2009, (incorporated by reference to
exhibit 10.4 to our Quarterly Report on
Form 10-Q
filed on November 4, 2009).
|
|
10
|
.35.3
|
|
Amendment to Amendment No. 4, to Contract Risk Agreement
between the State of Tennessee and AMERIGROUP Tennessee, Inc.
effective July 1, 2009, (incorporated by reference to
exhibit 10.1 to our Current Report on
Form 8-K
filed on December 30, 2009).
|
|
*10
|
.36
|
|
Contract dated August 26, 2008 between the State of New
Mexico and AMERIGROUP New Mexico, Inc. for the period from
August 1, 2008 through June 30, 2012, (incorporated by
reference to Exhibit 10.2 to our Quarterly Report on
Form 10-Q
filed on October 28, 2008).
|
|
10
|
.37
|
|
Settlement Agreement dated as of August 13, 2008, by and
among the United States of America, acting through the United
States Department of Justice and on behalf of the Office of
Inspector General of the Department of Health and Human
Services; the State of Illinois acting through the Office of the
Illinois Attorney General; Cleveland A. Tyson; AMERIGROUP
Corporation; and AMERIGROUP Illinois, Inc. (incorporated by
reference to Exhibit 10.1 to our Current Report on
Form 8-K
filed on August 14, 2008).
|
|
10
|
.38.2
|
|
AMERIGROUP Corporation Amended and Restated Change in Control
Benefit Policy dated November 6, 2008 (incorporated by
reference to Exhibit 10.3 to our Current Report on
Form 8-K
filed on November 12, 2008).
|
|
10
|
.39
|
|
AMERIGROUP Corporation Corporate Integrity Agreement
(incorporated by reference to Exhibit 10.2 to our Current
Report on
Form 8-K
filed on August 14, 2008).
|
|
12
|
.1
|
|
Computation of Ratio of Earnings to Fixed Charges
|
|
14
|
.1
|
|
AMERIGROUP Corporation Amended and Restated Code of Business
Conduct and Ethics (incorporated by reference to
Exhibit 14.1 to our Current Report on
Form 8-K
filed on August 10, 2009).
|
|
21
|
.1
|
|
List of Subsidiaries
|
|
23
|
.1
|
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm, with respect to financial statements of the registrant.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002, dated
February 22, 2010.
|
114
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002, dated
February 22, 2010.
|
|
32
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of Sarbanes-Oxley Act of
2002, dated February 22, 2010.
|
|
|
|
* |
|
The Company has requested confidential treatment of the redacted
portions of this exhibit pursuant to
Rule 24b-2,
under the Securities Exchange Act of 1934, as amended, and has
separately filed a complete copy of this exhibit with the
Securities and Exchange Commission. |
115