| MAGELLAN HEALTH SERVICES INC Item 1A Risk Factors Fresh Start Reporting—The Company’s application of fresh start reporting makes it more difficult to compare the Company’s post-emergence operations and results to those in pre-emergence periods |
| Due to the Company’s emergence from bankruptcy, the Company has implemented the fresh start reporting provisions of SOP 90-7 effective December 31, 2003 |
| Fresh start reporting requires the Company to restate all assets and liabilities to reflect their fair values |
| As a result, the consolidated balance sheet as of and subsequent to December 31, 2003 and the statements of operations for periods after the Company’s emergence from bankruptcy are not comparable to the consolidated financial statements for the periods prior to the Company’s emergence from bankruptcy, which were prepared on a historical basis |
| Reliance on Behavioral Healthcare Customer Contracts—The Company’s inability to renew, extend or replace expiring or terminated behavioral healthcare customer contracts could adversely affect the Company’s liquidity, profitability and financial condition |
| Substantially all of the Company’s net revenue is derived from contracts with payors of behavioral healthcare benefits |
| Substantially all of these contracts may be terminated immediately with cause and many, including some of the Company’s most significant contracts, are terminable without cause by the customer upon notice and the passage of a specified period of time (typically between 60 and 180 days), or upon the occurrence of certain other specified events |
| The Company’s ten largest customers accounted for 70dtta3 percent and 74dtta0 percent of the Company’s net revenue in the fiscal years ended December 31, 2004 and 2005, respectively |
| Loss of all of these contracts or customers would, and loss of any one of these contracts or customers could, materially reduce the Company’s net revenue and have a material adverse effect on the Company’s liquidity, profitability and financial condition |
| The Company’s contracts with Aetna and the State of Tennessee’s (the “State”) TennCare program each generated revenues that exceeded ten percent of consolidated net revenues for each of the years ended December 31, 2004 and 2005 |
| In addition, the Company’s contracts with subsidiaries of WellPoint, Inc, including WellChoice, Inc, which merged with WellPoint, Inc |
| effective December 29, 19 ______________________________________________________________________ 2005 (“WellPoint”), generated revenues that, in the aggregate, exceeded ten percent of consolidated net revenues for the year ended December 31, 2005 |
| The Company recorded net revenue from Aetna of dlra228dtta1 million and dlra245dtta0 million for the fiscal years ended December 31, 2004 and 2005, respectively |
| The Company’s contract with Aetna terminated on December 31, 2005 |
| Total revenue from the contracts with WellPoint approximated dlra202dtta2 million during the year ended December 31, 2005 |
| Substantially all of the remaining dlra177dtta1 million of revenue is from contracts which have terms that extend through December 31, 2007 |
| The TennCare program provides health and other related benefits to Medicaid recipients in the State of Tennessee as well as to certain other uninsured individuals |
| The State has divided the TennCare program into three regions, and the Company’s TennCare contracts, which extend through June 30, 2007, currently encompass all of the TennCare membership for all three regions |
| The Company recorded dlra431dtta5 million and dlra432dtta7 million from its TennCare contracts during the years ended December 31, 2004 and 2005, respectively |
| On November 6, 2005, TennCare announced that it had issued a Request for Information (“RFI”) with regard to a possible model for the management of the integrated delivery of behavioral and physical medical care to TennCare enrollees in the Middle region by managed care organizations |
| Subsequently, TennCare indicated that it will issue a Request for Proposals (“RFP”) in March 2006 for the management of healthcare, including behavioral care, for such enrollees of the Middle region |
| Because the Company’s contracts with TennCare can be terminated by TennCare prior to June 30, 2007, the contract for the Middle region would be terminated by TennCare should an implementation occur prior to June 30, 2007 of any contract awarded pursuant to the RFP The RFI contemplated that TennCare was targeting October 2006 as the start date of any such contract awarded pursuant to the RFP For the year ended December 31, 2005, revenue derived from TennCare enrollees residing in the Middle region amounted to dlra149dtta8 million |
| Integration of Companies Acquired by Magellan—The Company’s profitability could be adversely affected if the integration of companies acquired by Magellan, including NIA, is not completed in a timely and effective manner |
| As previously discussed, one of the Company’s growth strategies is to make strategic acquisitions which are complementary to its existing operations |
| NIA is the first such acquisition completed by the Company |
| After Magellan closes on an acquisition, it must integrate the acquired company into Magellan’s polices, procedures and systems |
| Failure to effectively integrate an acquisition could result in excessive costs being incurred (ie a delay in obtaining targeted synergies), decreased customer performance (which could result in contract penalties and/or terminations), increased employee turnover, and lost sales opportunities |
| Changes in the Medical Managed Care Industry—Certain changes in the business practices of this industry could negatively impact the Company’s resources, profitability and results of operations |
| Substantially all of the Company’s Health Plan Solutions segment net revenue is derived from customers in the medical managed care industry, including managed care companies, health insurers and other health plans |
| Some types of changes in this industry’s business practices could negatively impact the Company |
| For example, if the Company’s managed care customers seek to provide managed behavioral healthcare services directly to their subscribers, instead of contracting with the Company for such services, the Company could be adversely affected |
| In this regard, as noted above, the Company’s contract with Aetna terminated on December 31, 2005 and two contracts the Company had with subsidiaries of WellPoint were not renewed by the customer, and in each case the customer had decided to provide 20 ______________________________________________________________________ managed behavioral healthcare services directly to their subscribers |
| In addition to these customers, other managed care customers of the Company did not renew all or part of their contracts with the Company during 2005, and will instead provide managed behavioral healthcare services directly to their subscribers |
| The Company believes that the total impact of these non-renewals, including those relating to Aetna and the WellPoint affiliates, will be a reduction in 2006 revenues from that recorded in 2005 of approximately dlra326dtta2 million, dlra245dtta0 million of which relates to Aetna |
| Other of the Company’s customers that are managed care companies could also seek to provide managed behavioral healthcare services directly to their subscribers, rather than by contracting with the Company for such services |
| In addition, the Company has a significant number of contracts with Blue Cross Blue Shield plans and other regional health plans |
| Consolidation of the healthcare industry through acquisitions and mergers could potentially result in the loss of contracts for the Company |
| Any of these changes could reduce the Company’s net revenue, and adversely affect the Company’s profitability and financial condition |
| Changes in the Contracting Model for Medicaid Contracts—Certain changes in the contracting model used by states for managed healthcare services contracts relating to Medicaid lives could negatively impact the Company’s resources, profitability and results of operations |
| Substantially all of the Company’s Public Sector Solutions segment net revenue is derived from direct contracts that it has with state or county governments for the provision of services to Medicaid enrollees |
| As previously discussed, the State of Tennessee has issued an RFI with regard to a possible model for the management of the integrated delivery of behavioral and physical medical care to TennCare enrollees in the Middle region by managed care organizations |
| In addition, certain other states have recently contracted with managed care companies to manage both the behavioral and physical medical care of its Medicaid enrollees |
| If the State of Tennessee, or other governmental entities, changes the method for contracting for Medicaid business to a fully integrated model, the Company will attempt to subcontract with the managed care organizations to provide behavioral healthcare management for such Medicaid business; however, there is no assurance that the Company would be able to secure such arrangements |
| Accordingly, if such a change in the contracting model were to occur, it is possible that the Company could lose current contracted revenues, as well as be unable to bid on potential new business opportunities, thus negatively impacting the Company’s profitability and financial condition |
| Risk-Based Products—Because the Company provides services at a fixed fee, if the Company is unable to accurately predict and control healthcare costs, the Company’s profitability could decline |
| The Company derives its net revenue primarily from arrangements under which the Company assumes responsibility for costs of treatment services (excluding at present the cost of pharmaceuticals or other medication) in exchange for a fixed fee |
| The Company refers to such arrangements as ‘‘risk-based contracts’’ or ‘‘risk-based products |
| ’’ These arrangements provided 81dtta7 percent and 82dtta8 percent of the Company’s net revenue in the fiscal years ended December 31, 2004 and 2005, respectively |
| Profitability of these contracts could be reduced if the Company is unable to accurately estimate the rate of service utilization by members or the cost of such services when the Company prices its services |
| If the cost of services provided to members under a contract together with the administrative costs exceeds the aggregate fees received by the Company under such contract, the Company will incur a loss |
| The Company’s assumptions of these costs when the Company prices its services may not ultimately reflect actual utilization rates and costs, many aspects of which are beyond the Company’s control |
| The Company’s profitability could also be reduced if the Company is required to make adjustments to estimates made in reporting historical financial results, particularly those regarding cost of care, reflected in the Company’s financial statements as medical claims payable |
| Medical claims payable includes reserves for incurred but not reported (‘‘IBNR’’) claims, which are claims for covered services rendered by the Company’s providers which have not yet been submitted to the Company for payment |
| The Company estimates and reserves for IBNR claims based on past claims payment experience, including the average 21 ______________________________________________________________________ interval between the date services are rendered and the date the claims are received and between the date services are rendered and the date claims are paid, enrollment data, utilization statistics, adjudication decisions, authorized healthcare services and other factors |
| This data is incorporated into contract-specific reserve models |
| The estimates for submitted claims and IBNR claims are made on an accrual basis and adjusted in future periods as required |
| Factors that affect the Company’s ability to price the Company’s services, control the Company’s costs or accurately make estimates of IBNR claims and other expenses for which the Company creates reserves may include changes in the Company’s assumptions for medical costs caused by changes in actual experience including: · changes in the delivery system; · changes in utilization patterns; · changes in the number of members seeking treatment; · unforeseen fluctuations in claims backlogs; · increases in the costs of the services; · the occurrence of catastrophes; · regulatory changes; · changes in benefit plan design; and · implementation of new products by the Company If the Company’s membership in risk-based business grows, the Company’s exposure to potential losses from risk-based products will also increase |
| Furthermore, with respect to radiology benefits management, the Company believes that it is positioned to accelerate the growth of NIA by expanding NIA’s current product offering into risk-based products |
| The Company believes that it can leverage its information systems, call center, claims and network infrastructure as well as its financial strength and underwriting expertise to facilitate the development of a risk-based RBM product offering |
| Neither the Company nor NIA currently possesses any experience related to underwriting risk-based RBM products |
| If such risk-based RBM products are not correctly underwritten, the Company’s profitability and financial condition could be adversely affected |
| Fluctuation in Operating Results—The Company experiences fluctuations in quarterly operating results and, as a consequence, the Company may fail to meet or exceed market expectations, which could cause the Company’s stock price to decline |
| The Company’s quarterly operating results have varied in the past and may fluctuate significantly in the future due to seasonal and other factors, including: · changes in utilization levels by enrolled members of the Company’s risk-based contracts, including seasonal utilization patterns (for example, members generally tend to seek services less during the third and fourth quarters of the year than in the first and second quarters of the year); · performance-based contractual adjustments to net revenue, reflecting utilization results or other performance measures; · changes in estimates for contractual adjustments under commercial contracts; · retrospective membership adjustments; · the timing of implementation of new contracts and enrollment changes; and 22 ______________________________________________________________________ · changes in estimates regarding medical costs and IBNR claims |
| These factors may affect the Company’s quarterly and annual net revenue, expenses and profitability in the future and, accordingly, the Company may fail to meet or exceed market expectations, which could cause the Company’s stock price to decline |
| Dependence on Government Spending for Managed Healthcare—The Company can be adversely affected by changes in federal, state and local healthcare policies |
| All of the Company’s Public Sector Solutions segment net revenue and a portion of the Company’s net revenue in the Company’s other two segments are derived, directly or indirectly, from governmental agencies, including state Medicaid programs |
| Contract rates vary from state to state, are subject to periodic negotiation and may limit the Company’s ability to maintain or increase rates |
| The Company is unable to predict the impact on the Company’s operations of future regulations or legislation affecting Medicaid programs, or the healthcare industry in general, and future regulations or legislation may have a material adverse effect on the Company |
| Moreover, any reduction in government spending for such programs could also have a material adverse effect on the Company (See “Reliance on Behavioral Healthcare Customer Contracts”) |
| In addition, the Company’s contracts with federal, state and local governmental agencies, under both direct contract and subcontract arrangements, generally are conditioned upon financial appropriations by one or more governmental agencies, especially in the case of state Medicaid programs |
| These contracts generally can be terminated or modified by the customer if such appropriations are not made |
| Finally, some of the Company’s contracts with federal, state and local governmental agencies, under both direct contract and subcontract arrangements, require the Company to perform additional services if federal, state or local laws or regulations imposed after the contract is signed so require, in exchange for additional compensation to be negotiated by the parties in good faith |
| Government and other third-party payors generally seek to impose lower contract rates and to renegotiate reduced contract rates with service providers in a trend toward cost control |
| Restrictive Covenants in the Company’s Debt Instruments—Restrictions imposed by the Company’s debt agreements limit the Company’s operating and financial flexibility |
| These restrictions may adversely affect the Company’s ability to finance the Company’s future operations or capital needs or engage in other business activities that may be in the Company’s interest |
| The Company’s credit agreement with Deutsche Bank dated January 5, 2004, as amended (the ‘‘Credit Agreement’’), contains a number of covenants |
| These covenants limit Company management’s discretion in operating the Company’s business by restricting or limiting the Company’s ability, among other things, to: · incur or guarantee additional indebtedness or issue preferred or redeemable stock; · pay dividends and make other distributions; · repurchase equity interests; · make certain other payments called ‘‘restricted payments’’; · enter into sale and leaseback transactions; · create liens; · sell and otherwise dispose of assets; · acquire or merge or consolidate with another company; and · enter into some types of transactions with affiliates |
| 23 ______________________________________________________________________ These restrictions could adversely affect the Company’s ability to finance future operations or capital needs or engage in other business activities that may be in the Company’s interest |
| The Credit Agreement also requires the Company to comply with specified financial ratios and tests |
| Failure to do so, unless waived by the lenders under the Credit Agreement, pursuant to its terms, would result in an event of default under the Credit Agreement |
| The Credit Agreement is guaranteed by most of the Company’s subsidiaries and is secured by most of the Company’s assets and the Company’s subsidiaries’ assets |
| Required Assurances of Financial Resources—The Company’s liquidity, financial condition, prospects and profitability can be adversely affected by present or future state regulations and contractual requirements that the Company provide financial assurance of the Company’s ability to meet the Company’s obligations |
| Some of the Company’s contracts and certain state regulations require the Company or certain of the Company’s subsidiaries to maintain specified cash reserves or letters of credit and/or to maintain certain minimum tangible net equity in certain of the Company’s subsidiaries as assurance that the Company has financial resources to meet the Company’s contractual obligations |
| Many of these state regulations also restrict the investment activity of certain of the Company’s subsidiaries |
| Some state regulations also restrict the ability of certain of the Company’s subsidiaries to pay dividends to Magellan |
| Additional state regulations could be promulgated that would increase the cash or other security the Company would be required to maintain |
| In addition, the Company’s customers may require additional restricted cash or other security with respect to the Company’s obligations under the Company’s contracts, including the Company’s obligation to pay IBNR claims and other medical claims not yet processed and paid |
| In addition, certain of the Company’s contracts and state regulations limit the profits that the Company may earn on risk-based business |
| The Company’s liquidity, financial condition, prospects and profitability could be adversely affected by the effects of such regulations and contractual provisions |
| See Note 3—“Summary of Significant Accounting Policies—Restricted Assets” to the consolidated financial statements set forth elsewhere herein for a discussion of the Company’s restricted assets |
| Competition—The competitive environment in the managed healthcare services industry may limit the Company’s ability to maintain or increase the Company’s rates, which would limit or adversely affect the Company’s profitability, and any failure in the Company’s ability to respond adequately may adversely affect the Company’s ability to maintain contracts or obtain new contracts |
| The Company’s managed healthcare services business is highly competitive |
| The Company competes with other healthcare organizations as well as with insurance companies, HMOs, PPOs, TPAs, IPAs, multi-disciplinary medical groups and other managed care companies, including managed healthcare services companies |
| Many of the Company’s competitors, particularly certain insurance companies and HMOs, are significantly larger and have greater financial, marketing and other resources than the Company, which can create downward pressure on prices through economies of scale |
| The entrance or expansion of these larger companies in the managed healthcare services industry (including the Company’s customers who have insourced or who may choose to insource healthcare services) could increase the competitive pressures the Company faces and could limit the Company’s ability to maintain or increase the Company’s rates |
| If this happens, the Company’s profitability could be adversely affected |
| In addition, if the Company does not adequately respond to these competitive pressures, it could cause the Company to not be able to maintain its current contracts or to not be able to obtain new contracts |
| Possible Impact of Healthcare Reform—Healthcare reform can significantly reduce the Company’s revenues or profitability |
| The US Congress is considering legislation that, among other things, would limit healthcare plans and methods of operations, limit employers’ and healthcare plans’ ability to define medical necessity and permit employers and healthcare plans to be sued in state courts for coverage determinations |
| It is 24 ______________________________________________________________________ uncertain whether the Company could recoup, through higher revenues or other measures, the increased costs of federally mandated benefits or other increased costs caused by such legislation or similar legislation |
| In addition, if any federal parity legislation is adopted and the difference in coverage limits for mental health coverage and medical health coverage is reduced or eliminated, any increase in net revenue the Company derives following such legislation may not be sufficient to cover the increase in costs that would result from a greater utilization of mental healthcare services |
| The Company cannot predict the effect of this legislation or other legislation that may be adopted by Congress, and such legislation, if implemented, could have an adverse effect on the Company |
| Government Regulation—The Company is subject to substantial government regulation and scrutiny, which increase the Company’s costs of doing business and could adversely affect the Company’s profitability |
| The managed healthcare services industry and the provision of managed healthcare services are subject to extensive and evolving federal and state regulation |
| Such laws and regulations cover, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirements, information privacy and security, reimbursement for patient services, and Medicare and Medicaid fraud and abuse |
| Government investigations and allegations have become more frequent concerning possible violations of fraud and abuse and false claims statutes and regulations by healthcare organizations |
| Violators may be excluded from participating in government healthcare programs, subject to fines or penalties or required to repay amounts received from the government for previously billed services |
| A violation of such laws and regulations may have a material adverse effect on the Company |
| The Company is subject to certain state laws and regulations and federal laws as a result of the Company’s role in management of customers’ employee benefit plans |
| Regulatory issues may also affect the Company’s operations including, but not limited to: · additional state licenses that may be required to conduct the Company’s businesses, including utilization review and TPA activities; · limits imposed by state authorities upon corporations’ control or excessive influence over managed healthcare services through the direct employment of physicians, psychiatrists, psychologists or other professionals, and prohibiting fee splitting; · laws that impose financial terms and requirements on the Company due to the Company’s assumption of risk under contracts with licensed insurance companies or HMOs; · laws in certain states that impose an obligation to contract with any healthcare provider willing to meet the terms of the Company’s contracts with similar providers; · maintaining confidentiality of patient information; and · complying with HIPAA within the imposed deadlines |
| The imposition of additional licensing and other regulatory requirements may, among other things, increase the Company’s equity requirements, increase the cost of doing business or force significant changes in the Company’s operations to comply with these requirements |
| 25 ______________________________________________________________________ The costs associated with compliance with government regulation as discussed above may adversely affect the Company’s financial condition and results of operations |
| Risks Related To Realization of Goodwill and Intangible Assets—The Company’s profitability could be adversely affected if the value of intangible assets is not fully realized |
| The Company’s total assets at December 31, 2005 reflect goodwill of approximately dlra290dtta2 million, representing approximately 27dtta1 percent of total assets |
| Furthermore, the Company anticipates that the January 31, 2006 acquisition of NIA will result in the establishment of additional goodwill and intangible assets during fiscal 2006 |
| There can be no assurance that such goodwill or intangible assets will be realizable |
| The application of the fresh start reporting provisions of SOP 90-7 upon consummation of the Plan as of December 31, 2003 required the Company to value the Company’s assets and liabilities at fair market value |
| In accordance with these fresh start reporting provisions implemented as of December 31, 2003, the Company’s reorganization value was allocated to the Company’s tangible and identified intangible assets |
| Under SOP 90-7, if any portion of the Company’s reorganization value could not be allocated to specific assets, it was reported as goodwill |
| The Company completed the Company’s annual impairment analysis of goodwill as of October 1 noting that the fair value exceeded the associated carrying value; therefore, no impairment was recorded |
| Intangible assets are amortized over their estimated useful lives, which range from approximately four to eighteen years |
| The amortization periods used may differ from those used by other entities |
| In addition, the Company may be required to shorten the amortization period for intangible assets in future periods based on changes in the Company’s business |
| The Company may not ever realize the value of such assets |
| The Company evaluates, on a regular basis, whether for any reason the carrying value of the Company’s intangible assets and other long-lived assets may no longer be completely recoverable, in which case a charge to earnings for impairment losses could become necessary |
| When events or changes in circumstances occur that indicate the carrying amount of long-lived assets may not be recoverable, the Company assesses the recoverability of long-lived assets other than goodwill by determining whether the carrying value of such intangible assets will be recovered through the future cash flows expected from the use of the asset and its eventual disposition |
| Any event or change in circumstances leading to a future determination requiring additional write-offs of a significant portion of unamortized intangible assets or goodwill would adversely affect the Company’s profitability |
| Risk of Potential Limitation of the Company’s Net Operating Loss Carryforwards (“NOLs”)—Certain future changes in the composition of the Company’s stockholder population could, in certain circumstances, limit the Company’s ability to use the Company’s NOLs |
| The Company estimates that, as of December 31, 2005, the Company had NOLs of approximately dlra481 million |
| These NOLs expire in 2010 through 2020 and are subject to examination and adjustment by the IRS In addition, the Company’s utilization of these NOLs became subject to limitation under Internal Revenue Code section 382 (“Section 382”) upon emergence from bankruptcy, which affects the timing of the use of NOLs |
| At this time, the Company does not believe these limitations will materially limit the Company’s ability to use any NOLs before they expire |
| The limitations imposed by Section 382 provide that a corporation that undergoes an “ownership change” may generally thereafter only utilize its pre-change losses (including, in some cases, certain so-called “built-in” losses that have not yet been recognized for federal income tax purposes) to offset a fixed amount of taxable income per year |
| A corporation generally undergoes an ownership change if the 26 ______________________________________________________________________ percentage of stock of the corporation owned by one or more 5prca shareholders has increased by more than 50 percentage points over, at most, a three-year period (with certain groups of less-than-5prca shareholders treated as a single shareholder for this purpose) |
| The Company underwent such an ownership change upon consummation of its reorganization in January 2004 |
| Subsequent changes in the Company’s stock ownership, including other sales of the Company’s common stock by 5prca shareholders, certain purchases that result in 5prca or greater ownership of the Company’s common stock, certain changes in the indirect beneficial ownership of the Company’s common stock, and issuances or redemptions of common stock by the Company, could result in another ownership change that would trigger an additional Section 382 limitation |
| The application of another Section 382 limitation on the Company’s NOLs as a result of future ownership changes could reduce the amount of NOLs the Company could utilize in a year, and thereby have an adverse effect on the Company’s anticipated future cash flow, were, for example, the fair market value of the Company’s stock to decline significantly prior to such ownership change |
| In general, the amount of the annual limitation to which a corporation’s pre-change losses are subject following an ownership change is equal to the product of (1) the fair market value of the corporation’s stock immediately before the ownership change (subject to certain reductions) multiplied by (2) the “long-term tax-exempt rate” in effect for the month in which the ownership change occurs |
| In certain circumstances, the annual limitation for a particular year may be increased due to the subsequent recognition of so-called “built-in” gains that existed at the time of the ownership change |
| Any unused limitation may be carried forward, thereby increasing the annual limitation in the subsequent taxable year |
| However, if the Company did not continue the Company’s historic business or use a significant portion of the Company’s assets in a new business for two years after the ownership change, the resulting annual limitation would be reduced, possibly to zero |
| Claims for Professional Liability—Pending or future actions or claims for professional liability (including any associated judgments, settlements, legal fees and other costs) could require the Company to make significant cash expenditures and consume significant management time and resources, which could have a material adverse effect on the Company’s profitability and financial condition |
| Management and administration of the delivery of managed healthcare services, and the direct provision of healthcare treatment services, entail significant risks of liability |
| In recent years, participants in the managed healthcare industry have become subject to an increasing number of lawsuits |
| From time to time, the Company is subject to various actions and claims of professional liability alleging negligence in performing utilization review activities, as well as for the acts or omissions of the Company’s employees, network providers or others |
| In the normal course of business, the Company receives reports relating to suicides and other serious incidents involving patients enrolled in the Company’s programs |
| Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company or the Company’s network providers |
| The Company is also subject to actions and claims for the costs of services for which payment was denied |
| Many of these actions and claims seek substantial damages and require the Company to incur significant fees and costs related to the Company’s defense and consume significant management time and resources, which could have a material adverse effect on the Company’s profitability and financial condition |
| Professional Liability and Other Insurance—Claims brought against the Company that exceed the scope of the Company’s liability coverage or denial of coverage could materially and adversely affect the Company’s profitability and financial condition |
| The Company maintains a program of insurance coverage against a broad range of risks in the Company’s business |
| As part of this program of insurance, the Company carries professional liability insurance, subject to certain deductibles and self-insured retentions |
| The Company also is sometimes 27 ______________________________________________________________________ required by customer contracts to post surety bonds with respect to the Company’s potential liability on professional responsibility claims that may be asserted in connection with services the Company provides |
| As of December 31, 2005, the Company had approximately dlra4 million of such bonds outstanding |
| The Company’s insurance may not be sufficient to cover any judgments, settlements or costs relating to present or future claims, suits or complaints |
| Upon expiration of the Company’s insurance policies, sufficient insurance may not be available on favorable terms, if at all |
| To the extent the Company’s customers are entitled to indemnification under their contracts with the Company relating to liabilities they incur arising from the operation of the Company’s programs, such indemnification may not be covered under the Company’s insurance policies |
| To the extent that certain actions and claims seek punitive and compensatory damages arising from the Company’s alleged intentional misconduct, such damages, if awarded, may not be covered, in whole or in part, by the Company’s insurance policies |
| The Company also has potential liability relating to the self-insurance program the Company maintained previously with respect to the Company’s provider business |
| If the Company is unable to secure adequate insurance in the future, or if the insurance the Company carries is not sufficient to cover any judgments, settlements or costs relating to any present or future actions or claims, such judgments, settlements or costs may have a material adverse effect on the Company’s profitability and financial condition |
| If the Company is unable to obtain needed surety bonds in adequate amounts or make alternative arrangements to satisfy the requirements for such bonds, the Company may no longer be able to operate in those states, which would have a material adverse effect on the Company |
| Class Action Suits and Other Legal Proceedings—The Company could be targeted by class action and other lawsuits that could result in material liabilities to the Company or cause the Company to incur material costs, to change the Company’s operating procedures in ways that increase costs or to comply with additional regulatory requirements |
| Managed healthcare companies have been targeted as defendants in national class action lawsuits regarding their business practices |
| The Company has been subject to such class actions as defendants and is also subject to other lawsuits and legal proceedings in conducting the Company’s business |
| These lawsuits may take years to resolve and cause the Company to incur substantial litigation expenses and the outcomes could have a material adverse effect on the Company’s profitability and financial condition |
| In addition to potential damage awards, depending upon the outcomes of such cases, these lawsuits may cause or force changes in practices of the Company’s industry and may also cause additional regulation of the industry through new federal or state laws or new applications of existing laws or regulations |
| Such changes could increase the Company’s operating costs |
| Government Investigations—The Company may be subjected to additional regulatory requirements and to investigations or regulatory action by governmental agencies, each of which may have a material adverse effect on the Company’s business, financial condition and results of operations |
| From time to time, the Company receives notifications from and engages in discussions with various government agencies concerning the Company’s managed care businesses and operations |
| As a result of these contacts with regulators, the Company may, as appropriate, be required to implement changes to the Company’s operations, revise the Company’s filings with such agencies and/or seek additional licenses to conduct the Company’s business |
| The Company’s inability to comply with the various regulatory requirements may have a material adverse effect on the Company’s business |
| In addition, the Company may become subject to regulatory investigations relating to the Company’s business, which may result in litigation or regulatory action |
| A subsequent legal liability or a significant regulatory action against the Company could have a material adverse effect on the Company’s business, financial condition and results of operations |
| Moreover, even if the Company ultimately prevails in the 28 ______________________________________________________________________ litigation, regulatory action or investigation, such litigation, regulatory action or investigation could have a material adverse effect on the Company’s business, financial condition and results of operations |