| AMERIGROUP CORP Item 1A Risk Factors RISK FACTORS Risks related to being a regulated entity Changes in government regulations designed to protect providers and members rather than our stockholders could force us to change how we operate and could harm our business |
| 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 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: • force us to change how we do business, • restrict revenue and enrollment growth, • increase our health benefits and administrative costs, • impose additional capital requirements, and • increase or change our claims liability |
| 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 |
| We principally operate through our health plan subsidiaries |
| These subsidiaries are subject to 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 |
| 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, 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 and make needed capital expenditures |
| Regulations could limit our profits as a percentage of revenues |
| Our New Jersey, Maryland and Illinois subsidiaries 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 |
| In Illinois, New Jersey, Maryland and Florida, contractual sanctions may be imposed if these levels are not met |
| In addition, our Ohio subsidiary is subject to certain administrative limits |
| 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 |
| Our Texas health plan is required to pay a rebate to the State of Texas in the event profits exceed established levels |
| The rebate calculation reports that we filed for the contract years ended August 31, 2000 through 2004 are currently being audited by a contracted auditing firm |
| In a preliminary report, the auditor has challenged inclusion in the rebate calculation certain expenses incurred by the Company in providing services to the health plan under the administrative services agreement |
| Although we believe that the rebate calculations were done appropriately, if the regulators were ultimately to disallow certain of these expenses in the rebate calculation, it could result in the requirement that we pay the State of Texas additional amounts for these prior periods and it could reduce our profitability in future periods |
| 23 _________________________________________________________________ Our failure to comply with government regulations could subject us to civil and criminal penalties and limitations on our profitability |
| 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 |
| For example, in four markets in which we operate we are required to spend a minimum percentage of our premium revenue on medical expenses |
| If we fail to comply with this requirement, we could be required to pay monetary damages |
| Additionally, we could be required to file a corrective plan of action with the state and we could be subject to further fines and additional corrective 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 regulations could limit the profits we can obtain |
| Additionally, 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 CMS regulations |
| While we have not been subject to any fines or violations that were material, we cannot assure you that we will not become 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 in Illinois, Florida and New York and for failure to meet timeliness of the payment requirements in New Jersey |
| In 2005, the Florida and New York plans were fined for marketing violations |
| We are aware that New York State authorities are reviewing compliance with marketing and enrollment rules by Medicaid managed care organizations |
| The Company’s New York managed care subsidiary is also reviewing its marketing and enrollment practices with respect to compliance with these regulations |
| Although we train our employees with respect to compliance with state and federal laws and the marketing rules of each of the states in which we do business, no assurance can be given that violations will not occur |
| On October 12, 2001, we responded to a Civil Investigative Demand (CID) of the HMO industry by the Office of the Attorney General of the State of Texas relating to processing of provider claims |
| We understand from the Office of the Attorney General that responses were required from the nine largest HMOs in Texas, of which, at the time, we were the ninth |
| The other eight are HMOs that primarily provide commercial products |
| The CID is being conducted in connection with allegations of unfair contracting, delegating and payment practices and violations of the Texas Deceptive Trade Practices — Consumer Protection Act and Article 21dtta21 of the Texas Insurance Code by HMOs |
| It is our understanding that we are not currently the target of any investigation by the Office of the Attorney General |
| The Office of the Attorney General could request additional information or clarification that could be costly and time consuming for us to produce |
| 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 whistle-blower program |
| Further, HIPAA imposes civil and criminal penalties for failure to comply with the privacy and security standards set forth in the regulation |
| Despite a press release issued by the Department of Health and Human Services, (HHS) recommending that Congress create a private right of action under HIPAA, no such private cause of action has yet been created, and we do not know when or if such changes may be enacted |
| The federal government has enacted, and state governments are enacting, 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 new federal and state rules and regulations may require us to make unanticipated expenditures |
| The federal government and the governments of the states in which we operate have in the past and may in the future pass laws on implementing regulations which have had or may have the effect of changing the way we do business or raising the cost of doing business |
| Regulations implementing HIPAA have had such an effect |
| In 24 _________________________________________________________________ 2003, regulations were promulgated under HIPAA requiring the use of electronic transactions and code sets for healthcare claims and payment transactions submitted or received electronically and to protect the security and privacy of health-related information |
| Regulations have now been promulgated requiring the implementation of the NPI by May of 2007 |
| Costs will be incurred in the future to implement NPI, although no estimate can be made at this time as to the cost of compliance and implementation |
| In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the NYSE, have imposed various requirements on public companies, including requiring changes in corporate governance practices |
| Our management and other personnel will need to continue to devote a substantial amount of time to these new compliance initiatives |
| Moreover, these rules and regulations have and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly |
| The Sarbanes-Oxley Act of 2002 also requires that we maintain effective internal control over financial reporting |
| In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal control over our financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002 |
| Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses |
| Our compliance with Section 404 will continue to require that we incur substantial accounting expense and expend significant management time and effort |
| Moreover, if we are not able to continue to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NYSE, SEC or other regulatory authorities, which would require additional financial and management resources |
| In certain of the markets in which we do business, state laws or insurance regulations require that our HMO, MCO, and PHSP subsidiaries participate in guarantee funds to protect consumers and providers in the event of the insolvency of an HMO or other insurer |
| Our HMO, MCO, and PHSP subsidiaries have in the past, and may in the future, be subject to unanticipated assessments from such funds which may be material in amount |
| 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 Medicaid reform initiatives in Florida and Illinois’ Primary Care Case Management program, 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 |
| Although some of the recent 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 |
| Changes in federal funding mechanisms could reduce our profitability |
| On February 8, 2006, President Bush signed the Budget Reconciliation Bill (the Bill) passed by Congress to reduce the size of the federal deficit |
| Net savings for Medicaid totals dlra4dtta75 billion over five years, and the legislation includes a number of reforms to the Medicaid program |
| These reform measures include providing states with greater flexibility in establishing cost-sharing and premium payments for Medicaid beneficiaries, and provide states with increased flexibility in establishing benchmark benefit packages for Medicaid beneficiaries |
| In addition, the Bill tightens rules on how assets are treated for purposes of qualifying for Medicaid coverage |
| The Bill also makes changes to how prescription drugs are priced within the Medicaid program |
| 25 _________________________________________________________________ The Bill includes some provisions that directly affect Medicaid managed care companies |
| It prohibits the further use of Medicaid MCO provider taxes for purposes of receiving federal financial participation |
| In order for a provider tax to be eligible for a federal match, it must be broad based and not limited to Medicaid MCO plans only |
| The legislation, however, provides an exemption for states that currently have MCO provider taxes in effect and allows these programs to remain in existence through September of 2009 |
| The Bill also establishes a payment ceiling for emergency room services provided by a hospital provider not under contract with a Medicaid MCO It limits payments to no more than Medicaid Fee-For-Service amounts for out-of-network emergency services |
| States are just beginning to examine the many changes that this legislation will bring to the Medicaid program |
| It is uncertain if states will make significant changes to their Medicaid programs in the near future, but such changes, depending on their scope, could impact our revenue or membership |
| In addition, Congress and the federal government may adopt changes in Medicare reimbursement levels that might negatively affect our SNP business |
| Reductions in Medicaid funding by the states 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 member’s 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 by the state in the event of unavailability of 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 |
| Budget problems in the states in which we operate could result in limited increases or even decreases in the premiums paid to us by the states |
| 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 profitability |
| If state governments do not renew our contracts with them on favorable terms, our business will suffer |
| As of December 31, 2005, we served members who received healthcare benefits through 20 contracts with the regulatory entities in the jurisdictions in which we operate |
| Five of these contracts, which are with the States of Florida, Maryland, New Jersey and Texas, individually accounted for 10prca or more of our revenues for the year ended December 31, 2005, with the largest of these contracts representing approximately 18prca of our revenues |
| If any of our contracts were not renewed on favorable terms or were terminated for cause or if we were to lose a contract in a re-bidding process, our business would suffer |
| All our contracts have been extended until at least mid-2006 |
| Termination or non-renewal of any single contract could materially impact our revenues and operating results |
| Some of our contracts are subject to a re-bidding or re-application process |
| For example, our Texas markets are re-bid every six years and the re-bidding process occurred in 2005 |
| We currently are in the process of implementing the changes resulting from this re-bid |
| 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 |
| Though the State could re-bid the program in 2006, our SCHIP contract covering our Florida markets will likely re-bid in 2007 |
| We can give no assurance that the contract will extended and not be re-bid |
| If we lost the 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 |
| 26 _________________________________________________________________ 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 state’s application for renewal, our business would suffer as a result of a likely decrease in membership |
| Delays in program expansions, renewals or contract changes could negatively impact our business |
| In any program start-up, expansion, or re-bid, the state’s 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 |
| For example, in 2006, we anticipate a significant increase in our business related to entering the State of Georgia |
| If the State delays or changes the contract terms, including the enrollment process, marketing rules, or reimbursement rules, our business could be negatively impacted |
| We rely on the accuracy of eligibility lists provided by the state government, and in the case of our Special Needs Plan members in Houston, by the federal government |
| Inaccuracies in those lists would 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 discovers contains individuals who are not in fact eligible for a government sponsored program or are 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 would be adversely affected as a result of such reimbursement to the government if we had made related payments to providers and were unable to recoup such payments from the providers |
| 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 MCO and one PHSP HMOs |
| MCOs, 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 |
| 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 to 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 |
| Risks related to our business Receipt of inadequate or significantly delayed premiums would negatively impact our revenues, profitability and cash flow |
| 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 than we do over our selling, general and administrative expenses |
| Historically, our expenses related to health benefits as a percentage of premium revenue have fluctuated |
| For example, our expenses related to health benefits were 84dtta7prca of our premium revenue in 2005, and 81dtta0prca of our premium revenue in 2004 |
| If health benefits costs increase at a higher rate than premium increases, our earnings would be impacted negatively |
| In addition, if there is a significant delay in our receipt of premiums to offset previously incurred health benefits costs increases, our earnings could be negatively impacted |
| 27 _________________________________________________________________ Maryland sets the rates that must be paid to hospitals by all payors |
| In 2005, the State increased rates payable to the hospitals without granting a corresponding increase in premiums to us |
| This discrepancy, which is contrary to State rules, is still in the process of being resolved |
| If this remains unresolved or were to occur again, or if other states were to take similar actions, our profitability would be harmed |
| Premiums are contractually payable to us before or during the month for services that we are obligated to provide to our members |
| Our cash flow would be negatively impacted if premium payments are not made according to contract terms |
| This situation is likely to occur in the initial months of the conversion to the Special Needs Plan under the Medicare Modernization Act |
| Our inability to manage medical costs effectively would 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, 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 primary care physicians 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, such as SNP, or new markets, such as Georgia, 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 non-network providers will be appealed and subsequently reprocessed at higher amounts |
| This would result in an adjustment to claims 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 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 it |
| We have a significant relationship with Cook Children’s Physician Network in Fort Worth, Texas |
| Termination of this relationship could negatively affect our results of operations |
| We had an exclusive risk-sharing arrangement with Cook Children’s Health Care Network (CCHCN) and Cook Children’s Physician Network (CCPN), which includes Cook Children’s Medical Center (CCMC), that was terminated as of August 31, 2005 |
| In its place, we entered into separate non-exclusive fee-for-service provider agreements with CCPN and CCMC On December 27, 2005, CCPN and CCMC each sent notices indicating their intent to terminate these agreements as of March 31, 2006 |
| We do not believe that such terminations are warranted under these agreements |
| It is our intent to take appropriate actions to persuade CCPN and CCMC to rescind their notices of termination |
| However, there is no assurance that our efforts will be successful |
| CCPN and CCMC control most of the inpatient and specialty pediatric services available in Fort Worth, Texas |
| If these agreements terminate, it would force us to make alternate arrangements for many services to our pediatric membership, which may adversely impact our costs and our membership |
| Therefore, our results from operations could be harmed as a result of the termination of these arrangements, and the impact could be material |
| As part of the State of Texas re-bidding process, CCHCN obtained its own contract with the State of Texas to provide healthcare services to Medicaid recipients starting September 1, 2006 |
| As a result, we may lose members based upon CCHCN’s contract with the State of Texas, and the impact could be material |
| In addition, under the risk-sharing arrangement with CCHCN that terminated as of August 31, 2005, the parties have an obligation to perform annual reconciliations and settlements of the risk pool for each contract year |
| We believe that CCHCN may owe us substantial payments for the 2004 and 2005 contract years which we estimate to be approximately dlra12dtta5 million as December 31, 2005 |
| As of this date, we have not reached an agreement with CCHCN as to the settlement amounts for the 2004 and 2005 contract years |
| If we are unable to agree on a settlement, our health benefits expenses attributable to these periods may be adversely affected, and we may incur significant costs in our efforts to reach a final resolution of this matter |
| 28 _________________________________________________________________ Our limited ability to predict our incurred medical expenses accurately has in the past and could in the future materially impact our reported results |
| Our medical expenses include estimates of claims that are yet to be received, or incurred but not reported (IBNR) |
| We estimate our IBNR medical expenses 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 medical expenses in the period during which the actual claim costs are ultimately determined or when underlying assumptions or factors used to estimate IBNR change |
| In addition to using our internal resources, we utilize the services of independent actuaries who are contracted on a routine basis to calculate and review the adequacy of our medical liabilities |
| We cannot be sure that our current or future IBNR estimates are adequate or that any further adjustments to such IBNR estimates will not 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 harm on our results |
| Though we employ our best 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 expenses in the period such difference is determined |
| New products, such as SNP, or new markets, such as Georgia, could pose new and unexpected challenges to effectively predict medical costs |
| Difficulties in executing our acquisition strategy or integrating acquired business could adversely affect our business |
| Historically, acquisitions including the acquisition of Medicaid 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 will be important to our growth strategy |
| Many of the other potential purchasers of these assets have greater financial resources than we have |
| In addition, many of the sellers are interested in either (1) selling, along with their Medicaid assets, other assets in which we do not have an interest; or (2) 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 |
| We are currently evaluating potential acquisitions that would increase our membership, as well as acquisitions of complementary healthcare service businesses |
| These potential acquisitions are at various stages of consideration and discussion and we may enter into letters of intent or other agreements relating to these proposals at any time |
| However, we cannot predict when or whether we will actually acquire these businesses |
| We are generally required to obtain regulatory approval from one or more state agencies when making 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 a new business, 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 |
| Our existing credit facility imposes certain restrictions on acquisitions |
| We may not be able to meet these restrictions |
| 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: • additional employees who are not familiar with our operations, • existing provider networks, which may operate on different terms than our existing networks, • existing members, who may decide to switch to another healthcare provider, and • disparate information and record keeping systems |
| 29 _________________________________________________________________ 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 |
| We also may be unable to obtain sufficient additional capital resources for future acquisitions |
| 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 |
| Failure of a new business would 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 be able to process claims |
| If we were 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 harmed |
| 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 1996, we had dlra22dtta9 million of premium revenue |
| In 2005, we had dlra2cmam311dtta6 million in premium revenue |
| This increase represents a compounded annual growth rate of 67dtta0prca |
| Depending on acquisition and other opportunities, 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 |
| 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 state Medicaid programs that reimburse providers as care is provided |
| 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, the programs are voluntary in other states, such as Illinois |
| Subject to limited exceptions by federally approved state applications, the federal government requires that there be 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 |
| 30 _________________________________________________________________ Restrictions and covenants in our credit facility could limit our ability to take actions |
| On May 10, 2005, we entered into an amendment (Amendment) to our Amended and Restated Credit Agreement (as amended, the Credit Agreement), which, among other things, provides for an increase in the commitments under our Credit Agreement then in existence to dlra150dtta0 million and a five-year extension of the term from the date of the Amendment |
| The Credit Agreement contains a provision which allows us to obtain, subject to certain conditions, an increase in revolving commitments of up to an additional dlra50dtta0 million |
| The proceeds of the Credit Agreement are available for general corporate purposes, including, without limitation, permitted acquisitions of businesses, assets and technologies |
| The borrowings under the Credit Agreement will accrue interest at one of the following rates, at our option: Eurodollar plus the applicable margin or an alternate base rate plus the applicable margin |
| The applicable margin for Eurodollar borrowings is between 0dtta875prca and 1dtta625prca and the applicable margin for alternate base rate borrowings is between 0dtta00prca and 0dtta75prca |
| The applicable margin will vary depending on our leverage ratio |
| The Credit Agreement is secured by substantially all of the assets of the Company and its wholly-owned subsidiary, PHP Holdings, Inc, including the stock of their respective wholly-owned managed care subsidiaries |
| There is a commitment fee on the unused portion of the Credit Agreement that ranges from 0dtta20prca to 0dtta325prca, depending on the leverage ratio |
| The Credit Agreement terminates on May 10, 2010 |
| As of December 31, 2005, there were no borrowings outstanding under our Credit Agreement |
| Events beyond our control, such as prevailing economic conditions and changes in the competitive environment, could impair our operating performance, which could affect our ability to comply with the terms of the Credit Agreement |
| Breaching any of the covenants or restrictions could result in the unavailability of the Credit Agreement or a default under the Credit Agreement |
| We can provide no assurance that our assets or cash flows will be sufficient to fully repay outstanding borrowings under the Credit Agreement or that we would be able to restructure such indebtedness on terms favorable to us |
| If we were unable to repay, refinance or restructure our indebtedness under the Credit Agreement, the lenders could proceed against the collateral securing the indebtedness |
| Our inability to maintain satisfactory relationships with providers would harm our profitability |
| 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 one- to 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 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 150 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 will be harmed |
| On occasion, our members obtain care from providers that are not in our network and with which we do not have contracts |
| We have generally reimbursed non-network providers at the rates paid to comparable network providers or at the applicable rate that the provider could have received under the traditional fee-for-service Medicaid program or at a discount therefrom |
| In some instances, we pay non-network providers pursuant to the terms of our contracts with the state |
| However, some non-network providers have requested that we pay them at their highest billing rate, or “full-billed charges |
| ” Full-billed charges are significantly more than the amount the non-network providers could otherwise receive under the traditional fee-for-service Medicaid program |
| 31 _________________________________________________________________ To the extent that non-network providers are successful in obtaining payment at rates in excess of the rates that we have historically paid to non-network providers, our profitability could be materially adversely affected |
| Negative publicity regarding the managed care industry may harm our business and operating results |
| 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 medical malpractice, which could cause us to incur significant expenses |
| Our providers and employees involved in medical care decisions may be exposed to the risk of medical malpractice claims |
| Some states have passed or are considering legislation that permits managed care organizations to be held liable for negligent treatment decisions or benefits coverage determinations and or eliminate 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 malpractice or tort claims asserted against us, our providers or our employees could adversely affect our financial condition and profitability |
| 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 management’s attention |
| As a result, we may incur significant expenses and may be unable to effectively operate our business |
| Changes in the number of Medicaid eligibles, or benefits provided to Medicaid eligibles or a change in mix of Medicaid eligibles 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 |
| However, during such economic downturns, state budgets could decrease, 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 |
| Conversely, the number of persons eligible to receive Medicaid benefits may grow more slowly or even decline if 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 |
| Changes in SCHIP rules restricting eligibility could cause our operating results to suffer |
| The states in which we operate have experienced budget deficits in the past |
| In Florida and Texas, the rules governing SCHIP have either recently changed, or may change in the near future, to restrict or limit eligibility for benefits through the imposition of waiting periods, enrollment caps and/or new or increased co-payments |
| These changes in SCHIP eligibility could cause us to experience a net loss in SCHIP membership |
| If the states in which we operate continue to restrict or limit SCHIP eligibility, our operating results could suffer |
| 32 _________________________________________________________________ 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 |
| In November 2003, we signed a software licensing agreement for FACETS During 2005, we continued to invest in the implementation and testing of FACETS with a staggered conversion to FACETS by health plan beginning in 2005 and continuing through 2007 |
| As of October 1, 2005, claims payments for our Texas health plan are processed using FACETS We estimate that our current claims payment systems, without FACETS, could be at full capacity within the next 16 months |
| We currently expect that FACETS will meet our software needs and will support our long-term growth strategies |
| However, if we cannot execute a successful system conversion, our operations could be disrupted, which would have a negative impact on our profitability and our ability to grow could be harmed |
| Our information systems and applications require continual maintenance, upgrading and enhancement to meet our operational needs |
| Moreover, our acquisition activity requires frequent 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 |
| For example, we acquired our New York health plan as of January 1, 2005, that uses TXEN, an information system that is different from those used by the rest of our business |
| We expect to continue using this system exclusively for our New York plan until such time as the New York subsidiary can be successfully integrated onto FACETS Operating that system as a separate information system can be expected to increase our costs in the short-term, and there is no assurance that we can effect a seamless transition of the New York plan to our new system |
| Both the increased operational costs of this system and any difficulties in conversion to a new system could have a negative impact on our profitability |
| 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 medical costs |
| If an act or acts of terrorism or a natural disaster (such as a major hurricane) or a medical epidemic 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 in a market could cause a breakdown in the medical care delivery system which could cause our business to suffer |
| 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 |
| We are currently involved in certain legal proceedings and, from time to time, we may be subject to additional legal claims |
| We may suffer an unfavorable outcome as a result of one or more claims, resulting in the depletion of valuable 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 future results of operations or cash flows could be materially adversely affected |
| In addition, we may be subject to securities class action litigation |
| 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 |