| METROPOLITAN HEALTH NETWORKS INC ITEM 1A RISK FACTORS The PSNapstas Operations are Dependent on Humana, Inc |
| The PSN currently derives, and expect to continue to derive, the vast majority of its revenues from its Humana Agreements which provide for the receipt of capitated fees |
| For the twelve months ended December 31, 2005, approximately 98prca of its revenue was obtained from these Humana Agreements |
| Humana may immediately terminate either of the Humana Agreements and/or any individual physician credentialed under the Humana Agreements upon the occurrence of certain events |
| Humana may also amend the material terms of the Humana Agreements under certain circumstances |
| BUSINESS - Humana Agreements "e for a detailed discussion of the Humana Agreements |
| Failure to maintain the Humana Agreements on favorable terms, for any reason, would adversely affect the Companyapstas results of operations and financial condition |
| A material decline in enrollees in Humanaapstas Medicare Advantage program could also have a material adverse effect on the Companyapstas results of operation |
| Because Most of the Companyapstas Revenue Is Established by Contract and Cannot Be Modified During the Contract Terms, the Companyapstas Operating Margins Could be Negatively Impacted if It is Unable to Manage Its Medical Expenses Effectively |
| The Humana Agreements and the CMS Agreement are risk agreements under which it receives monthly payments per participating member ( "e Participating Member "e ) at a rate established by the agreements, also called a capitated fee |
| In accordance with the agreements, the total monthly payment is a function of the number of Participating Members, regardless of the actual utilization rate of covered services |
| In return, the PSN or MHP, as applicable, through its affiliated providers, assumes full financial responsibility for the provision of all necessary medical care to the Participating Members, regardless of whether or not its affiliated providers directly provide the covered medical services |
| - 19 - To the extent that the Participating Members require more care than is anticipated, aggregate capitation rates may be insufficient to cover the costs associated with the treatment of such Participating Members |
| If medical expenses exceed the Companyapstas estimates, except in very limited circumstances, it will be unable to increase the premiums it receives under these contracts during the then-current terms |
| Relatively small changes in the Companyapstas ratio of medical expense to revenue can create significant changes in its financial results |
| Accordingly, the failure to adequately predict and control medical expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported, or IBNR, claims, may have a material adverse effect on the Companyapstas financial condition, results of operations, or cash flows |
| Historically, the Companyapstas medical expenses as a percentage of revenue have fluctuated |
| Factors that may cause medical expenses to exceed estimates include: o higher than expected utilization of new or existing healthcare services or technologies; o an increase in the cost of healthcare services and supplies, including pharmaceuticals, whether as a result of inflation or otherwise; o changes to mandated benefits or other changes in healthcare laws, regulations, and practices; o Humanaapstas periodic renegotiation of provider contracts with specialist physicians, hospitals and ancillary providers; o periodic renegotiation of IP contracts; o changes in the demographics of our members and medical trends affecting them; o contractual or claims disputes with providers, hospitals, or other service providers within the Humana network; and o the occurrence of catastrophes, major epidemics, or acts of terrorism |
| Metropolitan attempts to control these costs through a variety of techniques, including capitation and other risk-sharing payment methods, collaborative relationships with primary care physicians and other providers, advance approval for hospital services and referral requirements, case and disease management and quality assurance programs, information systems, and reinsurance |
| Despite its efforts and programs to manage its medical expenses, Metropolitan may not be able to continue to manage these expenses effectively in the future |
| Effective July 1, 2005, MHP entered into the CMS Agreement to begin offering Medicare Advantage plans to Medicare beneficiaries in six Florida counties which include the cities of Fort Pierce, Port St |
| The initial term of the CMS Agreement expired on December 31, 2005 and was subject to annual renewal at the election of CMS A new CMS Agreement was entered into effective January 1, 2006 and expires on December 31, 2006 |
| Pursuant to the CMS Agreements, MHP is required to comply with federal Medicare laws and regulations and the CMS Agreement is subject to termination by CMS in the event of MHPapstas noncompliance |
| If MHP is unable to renew or to successfully rebid for the CMS Agreement, or if the CMS Agreement is terminated, its business would be negatively impacted |
| As of December 31, 2005, substantially all of the Companyapstas revenues were indirectly or directly derived from reimbursements generated by Medicare Advantage health plans |
| As a result, its revenue and profitability are dependent on government funding levels for Medicare Advantage programs |
| The Medicare programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings and funding restrictions, any of which could have the effect of limiting or reducing reimbursement levels |
| These government programs, as well as private insurers such as Humana, have taken and may continue to take steps to control the cost, use and delivery of health care services |
| Any changes that limit or reduce Medicare reimbursement levels could have a material adverse effect on the Companyapstas business |
| For example, the following events could result in an adverse effect on its results of operations: o reductions in or limitations of reimbursement amounts or rates under programs; o reductions in funding of programs; o elimination of coverage for certain benefits; or o elimination of coverage for certain individuals or treatments under programs |
| For instance, the President recently signed the Deficit Reduction Act of 2005 |
| According to the Congressional Budget Office, the provisions of this Act are expected to reduce federal Medicare spending by dlra6dtta4 billion over the next five years |
| In addition, in his 2007 budget proposal, President Bush has requested that Congress implement legislative changes to produce approximately dlra35dtta9 billion in Medicare savings over five years |
| The Company cannot predict whether Congress will implement the changes requested by the President and, if implemented, the sources of such savings |
| The MMA substantially changed the Medicare program and is complex and wide-ranging |
| The Company has not yet been able to fully assess the impact of all of the changes |
| While it anticipates that many of these changes will generally benefit the Medicare Advantage sector, certain provisions of the MMA may increase competition, create challenges with respect to educating the PSNapstas and MHPapstas existing and potential Participating Members about the changes, and create other risks and substantial and potentially adverse uncertainties, including the following: o Increased reimbursement rates for Medicare Advantage plans could result in an increase in the number of plans that participate in the Medicare program |
| This could create new competition that could adversely affect the number of Participating Members the PSN or MHP serve and their respective results of operations |
| - 21 - o Managed care companies began offering various new products beginning in 2006 pursuant to the MMA, including regional preferred provider organizations, or PPOs, and private fee-for-service plans |
| Medicare PPOs and private fee-for-service plans allow their members more flexibility in selecting physicians than Medicare Advantage HMOs, which typically require members to coordinate with a primary care physician |
| The MMA has encouraged the creation of regional PPOs through various incentives, including certain risk corridors, or cost-reimbursement provisions, a stabilization fund for incentive payments, and special payments to hospitals not otherwise contracted with a Medicare Advantage plan who treat regional plan enrollees |
| The Company currently is unable to determine whether the formation of regional Medicare PPOs and private fee-for-service plans will affect its PSNapstas or HMOapstas relative attractiveness to existing and potential Medicare members in its service areas |
| o Beginning in 2006, the payments for the local and regional Medicare Advantage plans will be based on a competitive bidding process that may directly or indirectly cause the PSN and/or MHP to decrease the amount of premiums paid to it or cause it to increase the benefits it offers |
| o Beginning in 2006, Medicare beneficiaries generally have a more limited annual enrollment period during which they can choose to participate in a Medicare Advantage plan or receive benefits under the traditional fee-for-service Medicare program |
| After the annual enrollment period, most Medicare beneficiaries will not be permitted to change their Medicare benefits |
| This "e lock-in "e may make it difficult for MHP to retain an adequate sales force |
| The new annual enrollment process and subsequent "e lock-in "e provisions of the MMA may adversely affect the Companyapstas level of revenue growth as it will limit its ability to market to and enroll new Participating Members in its established service areas outside of the annual enrollment period |
| Such limitations could adversely and materially affect its profitability and results of operations |
| o Beginning in 2006, managed care companies that offer Medicare Advantage plans are required to offer prescription drug benefits as part of their Medicare Advantage plans |
| Managed care plans offering drug benefits are, under the new law, called MA-PDs |
| It is not known at this time whether the governmental payments will be adequate to cover the actual costs for these new MA-PD benefits or whether it will be able to profitably or competitively manage its MA-PD Individuals who are enrolled in a Medicare Advantage plan must receive their drug coverage through their Medicare Advantage prescription drug plan |
| Enrollees may prefer a stand-alone drug plan and may cease to be a Participating Member in order to participate in a stand-alone drug plan |
| Accordingly, the new Medicare Part D prescription drug benefit could reduce the PSNapstas and/or MHPapstas Participating Member enrollment and revenues |
| CMS has implemented a risk adjustment payment system for Medicare health plans to improve the accuracy of payments and establish incentives for Medicare plans to enroll and treat less healthy Medicare beneficiaries |
| CMS is phasing-in this payment methodology with a risk adjustment model that bases a portion of the total CMS reimbursement payments on various clinical and demographic factors including hospital inpatient diagnoses, diagnostic data from ambulatory treatment settings, including hospital outpatient facilities and physician visits, gender, age, and Medicaid eligibility |
| CMS requires that all managed care companies capture, collect, and submit the necessary diagnosis code information to CMS twice a year for reconciliation with CMSapstas internal database |
| As part of the phase-in, during 2003, risk adjusted payments accounted for 10prca of Medicare health plan payments, with the remaining 90prca being reimbursed in accordance with the traditional CMS demographic rate books |
| The portion of risk adjusted payments was increased to 30prca in 2004, 50prca in 2005, and 75prca in 2006, and will increase to 100prca in 2007 |
| As a result of this process, it is difficult to predict with certainty the Companyapstas future revenue or profitability |
| In addition, MHPapstas and/or Humanaapstas risk scores for any period may result in favorable or unfavorable adjustments to the payments directly or indirectly received from CMS and the Companyapstas Medicare premium revenue |
| There can be no assurance that the Companyapstas contracting physicians and hospitals will be successful in improving the accuracy of related recording diagnostic code information and thereby enhancing its risk scores |
| - 22 - Since 2003, payments to Medicare Advantage plans have also been adjusted by a "e budget neutrality "e factor that was implemented by Congress and CMS to prevent health plan payments from being reduced overall while, at the same time, directing higher, risk adjusted payments to plans with more chronically ill enrollees |
| In general, this adjustment has favorably impacted payments to all Medicare Advantage plans |
| The Presidentapstas budget for 2005 assumed the phasing out of the budget neutrality adjustments over a five year period from 2007 through 2011 |
| The President recently signed the Deficit Reduction Act of 2005 which, among other changes, provides for an accelerated phase-out of budget neutrality for risk adjustment of payments made to Medicare Advantage plans |
| This legislation will have the effect of reducing payments to Medicare Advantage plans in general |
| Consequently, the Company expects the premiums it receives could be reduced, dependent upon MHPapstas and Humanaapstas risk scores |
| A Disruption in Its or Humanaapstas Healthcare Provider Networks Could Have an Adverse Effect on The Companyapstas Operations and Profitability |
| The PSNapstas operations are dependent on the management information systems of Humana |
| Humana provides the PSN with claims processing, billing services, data collection and other information, including reports and calculations of costs of services provided and payments to be received by the PSN While the PSN relies on Humanaapstas information systems, it does not own or control such systems and, accordingly, has limited ability to ensure that these systems are properly maintained, serviced and updated |
| In addition, information systems such as these may be vulnerable to failure, acts of sabotage and obsolescence |
| Although the PSN has the contractual right to receive various information and data from Humana, and it receives monthly downloads of claims data from Humana, the PSNapstas business and results of operations could be materially and adversely affected by its inability, for any reason, to timely receive information from Humana |
| A significant portion of the PSNapstas Total Medical Expenses are payable to entities that are not members and/or directly contracted with the PSN Although virtually all of such entities are Humana approved service providers, and although the PSN can provide Humana input with respect to Humanaapstas service providers, the PSN does not control the process by which Humana negotiates and/or contracts with service providers in the Humana Medicare Advantage network |
| - 23 - The Company Depends on Third Parties to Provide It with Crucial Information and Data |
| The Companyapstas PSN operations are dependent on the management information systems of Humana |
| Humana provides it with claims processing, billing services, data collection and other information, including reports and calculations of costs of services provided and payments to be received by us |
| While it relies on Humanaapstas information systems, it does not own or control such systems and, accordingly, has limited ability to ensure that it is properly maintained, serviced and updated |
| In addition, information systems such as these may be vulnerable to failure, acts of sabotage and obsolescence |
| Although it has the contractual right to receive various information and data from Humana, and it receives monthly downloads of claims data from Humana, its business and results of operations could be materially and adversely affected by its inability, for any reason, to timely receive information from Humana |
| MHP relies on HFAS, a third party service provider, to provide various administrative and management services, including, but not limited to, claims processing and adjudication, certain management information services, regulatory reporting and customer services pursuant to the terms of the Services Agreement |
| The initial term of the Services Agreement expires on June 30, 2010 and thereafter is automatically renewable for additional one-year terms |
| After the initial term, either party may terminate the Services Agreement for any reason upon 180 days written notice |
| Either party may also terminate the Services Agreement upon prior written notice (with a 30 day opportunity to cure) in the event of the otherapstas material breach of the Services Agreement in any manner, including but not limited to, MHPapstas failure to maintain sufficient funds for HFAS to pay claims, or in the event MHP engages in or acquiesce to any act of bankruptcy, receivership or reorganization or in the event either party fails to secure any license, government approval or exemption required by law |
| Because these matters are outsourced as opposed to handled internally, MHP has less control over the manner in which these matters are handled and the data that is ultimately provided to it than it would have if it handled these matters internally |
| Additionally, any loss of information by HFAS could have a material adverse effect on the Companyapstas business and the results of its operations |
| Claims Relating to Medical Malpractice and Other Litigation Could Cause the Company to Incur Significant Expenses |
| From time to time, the Company is party to various litigation matters, some of which seek monetary damages |
| Managed care organizations may be sued directly for alleged negligence, including in connection with the credentialing of network providers or for alleged improper denials or delay of care |
| In addition, providers affiliated with the PSN or MHP involved in medical care decisions may be exposed to the risk of medical malpractice claims |
| A small percentage of these providers do not have malpractice insurance |
| As a result of increased costs or inability to secure malpractice insurance, the percentage of physicians who do not have malpractice insurance may increase |
| Although most of its network providers are independent contractors, claimants sometimes allege that a PSN and/or HMO should be held responsible for alleged provider malpractice, particularly where the provider does not have malpractice insurance, and some courts have permitted that theory of liability |
| Similar to other managed care companies, MHP may also be subject to other claims of Participating Members in the ordinary course of business, including claims arising out of decisions to deny or restrict reimbursement for services |
| - 24 - The Company cannot predict with certainty the eventual outcome of any pending litigation or potential future litigation, and there can be no assurances that it will not incur substantial expense in defending these or future lawsuits or indemnifying third parties with respect to the results of such litigation |
| The loss of even one of these claims, if it results in a significant damage award, could have a material adverse effect on its business |
| In addition, exposure to potential liability under punitive damage or other theories may significantly decrease the Companyapstas ability to settle these claims on reasonable terms |
| The Company maintains errors and omissions insurance and other insurance coverage that it believes are adequate based on industry standards |
| Nonetheless, potential liabilities may not be covered by insurance, insurers may dispute coverage or may be unable to meet their obligations, or the amount of insurance coverage and/or related reserves may be inadequate |
| There can be no assurances that it will be able to obtain insurance coverage in the future, or that insurance will continue to be available on a cost-effective basis, if at all |
| Moreover, even if claims brought against it are unsuccessful or without merit, it would have to defend itself against such claims |
| The defense of any such actions may be time-consuming and costly and may distract managementapstas attention |
| As a result, it may incur significant expenses and may be unable to effectively operate its business |
| Metropolitan competes in the highly competitive and regulated health care industry, which is subject to continuing changes with respect to the provisioning of services and the selection and compensation of providers |
| Substantially all of its revenues come from the Humana Agreements |
| Humana competes with other HMOs and PPOs in securing and serving patients in the Medicare Advantage Program |
| Companies in other health care industry segments, some of which have financial and other resources comparable to Humana, may become competitors to Humana |
| The market in Florida may become increasingly attractive to HMOs and PPOs that may compete with Humana or MHP Humana and MHP may not be able to continue to compete effectively in the health care industry if additional competitors enter the same market |
| The Humana Agreements are structured as one-year automatically renewable agreements |
| In addition to terminations for cause, Humana may terminate such agreements upon 180 days &apos notice to the PSN of non-renewal |
| The PSN competes with other service providers for Humanaapstas business and Humana competes with other HMOs and PPOs in securing and serving patients in the Medicare Advantage Program |
| Failure to maintain favorable terms in its agreements with Humana would adversely affect the Companyapstas results of operations and financial condition |
| The Companyapstas competitors vary in size and scope, in terms of products and services offered |
| It believes that it competes directly with various national, regional and local companies in providing its services |
| Some of the PSNapstas direct competitors are Continucare Corporation, Primary Care Associates, Inc, MCCI and Island Doctors, all based and operating in Florida |
| Metropolitan believes that Continucare Corporation, Primary Care Associates, Inc |
| and MCCI provide PSN services to Humana in South Florida and Island Doctors provides PSN services to Humana in Central Florida |
| Additionally, companies in other health care industry segments, some of which have financial and other resources greater than us, may become competitors in providing similar services at any given time |
| The market in Florida may become increasingly attractive to competitor PSNs due to the large population of Medicare participants |
| Humana and the Company may not be able to continue to compete effectively in the health care industry if additional competitors enter the same markets |
| - 25 - Metropolitan believes that many of its competitors and potential competitors are substantially larger than its PSN and/or MHP and have significantly greater financial, sales and marketing, and other resources |
| The Company believes that most of its competitors also have more experience operating as an HMO and that these competitors may be able to respond more rapidly to changes in the regulatory environment in which it operates and changes in managed care organization business or to devote greater resources to the development and promotion of their services than it can |
| Furthermore, it is the Companyapstas belief that some of its competitors may make strategic acquisitions or establish cooperative relationships among themselves |
| The Company is Dependent upon Certain Executive Officers and Key Management Personnel for Its Future Success |
| The Companyapstas success depends to a significant extent on the continued contributions of certain of its executive officers and key management personnel |
| The loss of these persons could have a material adverse effect on the Companyapstas business, results of operations, financial condition and plans for future development |
| While it has employment contracts with certain executive officers and key members of management, these agreements may not provide sufficient incentive for these persons to continue their employment with the Company |
| It competes with other companies in the industry for executive talent and there can be no assurance that highly qualified executives would be readily and easily available without delay, given the limited number of individuals in the industry with expertise particular to its business operations |
| These laws and regulations, along with the terms of its contracts and licenses, directly or indirectly regulate how it does business, what services it offers, and how it interacts with its members, providers, and the public |
| Healthcare laws and regulations are subject to frequent change and varying interpretations |
| Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or the issuance of new regulations could adversely affect the Companyapstas business by, among other things: o imposing additional license, registration, or capital reserve requirements; o increasing its administrative and other costs; o forcing it to undergo a corporate restructuring; o increasing mandated benefits without corresponding premium increases; o limiting its ability to engage in inter-company transactions with our affiliates and subsidiaries; o forcing it to restructure our relationships with providers; or o requiring it to implement additional or different programs and systems |
| - 26 - It is possible that future legislation and regulation and the interpretation of existing and future laws and regulations could have a material adverse effect on the Companyapstas ability to operate under the Medicare program and to continue to serve Participating Members and attract new Participating Members |
| The Health Care Industry is Highly Regulated the Companyapstas Failure to Comply with Laws or Regulations, or a Determination that in the Past It Had Failed to Comply with Laws or Regulations, Could Have an Adverse Effect on the Companyapstas Business, Financial Condition and Results of Operations |
| The health care services that the Company and its affiliated professionals provide are subject to extensive federal, state and local laws and regulations governing various matters such as the licensing and certification of its facilities and personnel, the conduct of its operations, billing and coding policies and practices, policies and practices with regard to patient privacy and confidentiality, and prohibitions on payments for the referral of business and self-referrals |
| These laws are generally aimed at protecting patients and not shareholders of Metropolitan and the agencies charged with the administration of these laws have broad authority to enforce them |
| BUSINESS - Government Regulation "e for a discussion of the various federal government and the State laws and regulations to which we are subject |
| The federal and state agencies administering the laws and regulations applicable to Metropolitan have broad discretion to enforce them |
| The Company is subject, on an ongoing basis, to various governmental reviews, audits, and investigations to verify its compliance with its contracts, licenses, and applicable laws and regulations |
| These reviews, audits and investigations can be time consuming and costly |
| An adverse review, audit, or investigation could result in any of the following: o loss of the PSNapstas or MHPapstas right to directly or indirectly participate in the Medicare program; o loss of one or more of the PSNapstas and/or MHPapstas licenses to act as a service provider, HMO or third party administrator or to otherwise provide a service; o forfeiture or recoupment of amounts the PSN and/or MHP has been paid pursuant to its contracts; o imposition of significant civil or criminal penalties, fines, or other sanctions on the Company and its key employees; o damage to the Companyapstas reputation in existing and potential markets; o increased restrictions on marketing of the PSNapstas or MHPapstas products and services; and o inability to obtain approval for future products and services, geographic expansions, or acquisitions |
| The US Department of Health and Human Services Office of the Inspector General, Office of Audit Services, or OIG, is conducting a national review of Medicare Advantage plans to determine whether they used payment increases consistent with the requirements of the MMA Under the MMA, when a Medicare Advantage plan receives a payment increase, it must reduce beneficiary premiums or cost sharing, enhance benefits, put additional payment amounts in a benefit stabilization fund, or use the additional payment amounts to stabilize or enhance access |
| There can be no assurances that the findings of an audit or investigation of the Companyapstas business would not have an adverse effect on it or require substantial modifications to its operations |
| In addition, private citizens, acting as whistleblowers, are entitled to bring enforcement actions under a special provision of the federal False Claims Act |
| Direct medical expenses incurred by the Company include costs paid by Humana on its behalf |
| These costs also include estimates of claims incurred but not reported ( "e IBNR "e ) |
| The IBNR estimates are made by Humana utilizing actuarial methods and are continually evaluated and adjusted by the Companyapstas management, based upon its specific claims experience |
| Adjustments, if necessary, are made to direct medical expenses when the criteria used to determine IBNR change and when actual claim costs are ultimately determined |
| With regards to MHP, the cost of medical benefits includes an IBNR estimate based on managementapstas best estimate of medical benefits payable, in conjunction with an independent actuarial firm |
| Due to the inherent uncertainties associated with the factors used in these estimations, materially different amounts could be reported in the Companyapstas financial statements for a particular period under different possible conditions or using different, but still reasonable, assumptions |
| Although its past estimates of IBNR have typically been adequate, they may be inadequate in the future, which would adversely affect the Companyapstas results of operations |
| Further, the inability to estimate IBNR accurately may also affect its ability to take timely corrective actions, further exacerbating the extent of any adverse effect on its results |
| MHP is subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital, or net worth |
| The State of Florida may raise the statutory capital level from time to time |
| Other states have adopted risk-based capital requirements based on guidelines adopted by the National Association of Insurance Commissioners, which tend to be, although are not necessarily, higher than existing statutory capital requirements |
| Regardless of whether Florida adopts risk-based capital requirements, the Florida state department of insurance can require MHP to maintain minimum levels of statutory capital in excess of amounts required under the applicable state laws if it determines that maintaining additional statutory capital is in the best interests of MHPapstas Participating Members |
| Any increases in these requirements could materially increase our reserve requirements |
| In addition, as it continues to expand plan offerings in Florida or pursue new business opportunities, MHP may be required to maintain additional statutory capital reserves |
| In either case, available funds could be materially reduced, which could harm the Companyapstas ability to implement its business strategy |
| The Company Is Required to Comply With Laws Governing the Transmission, Security and Privacy of Health Information That Require Significant Compliance Costs, and Any Failure to Comply With These Laws Could Result in Material Criminal and Civil Penalties |
| Regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, require the Company to comply with standards regarding the exchange of health information within its company and with third parties, including healthcare providers, business associates and members |
| These regulations include standards for common healthcare transactions, including claims information, plan eligibility, and payment information; unique identifiers for providers and employers; security; privacy; and enforcement |
| HIPAA also provides that to the extent that state laws impose stricter privacy standards than HIPAA privacy regulations, a state seeks and receives an exception from the Department of Health and Human Services regarding certain state laws, or state laws concern certain specified areas, such state standards and laws are not preempted |
| - 28 - The Company will conduct its operations in an attempt to comply with all applicable HIPAA requirements |
| Given the complexity of the HIPAA regulations, the possibility that the regulations may change, and the fact that the regulations are subject to changing and, at times, conflicting interpretation, its ongoing ability to comply with the HIPAA requirements is uncertain |
| Furthermore, a stateapstas ability to promulgate stricter laws, and uncertainty regarding many aspects of such state requirements, make compliance more difficult |
| To the extent that the Company submits electronic healthcare claims and payment transactions that do not comply with the electronic data transmission standards established under HIPAA, payments may be delayed or denied |
| Additionally, the costs of complying with any changes to the HIPAA regulations may have a negative impact on operations |
| Sanctions for failing to comply with the HIPAA health information provisions include criminal penalties and civil sanctions, including significant monetary penalties |
| In addition, failure to comply with state health information laws that may be more restrictive than the regulations issued under HIPAA could result in additional penalties |
| Recent Challenges Faced by CMS Related to Implementation of Part D May Temporarily Disrupt or Adversely the PSNapstas and MHPapstas Relationships with their Respective Members |
| Partially in anticipation of the implementation of Part D, CMS transitioned to new information and reporting systems, which have recently generated confusing and, the Company believes in some cases, erroneous membership and payment reports concerning Medicare eligibility and enrollment, most of which it believes reflects inadvertently disenrolled dual-eligible and other beneficiaries who were already members of the Companyapstas PSN or HMO In addition, recent media reports are prevalent concerning the confusion caused by failures in systems and reporting for Part D, particularly as these failures adversely affect the access of dual-eligibles and low-income beneficiaries to their prescription drugs |
| These developments have caused the Companyapstas business to experience short-term disruptions in its operations and challenged its information and communications systems |
| Although the Company believes the current conditions are temporary, there can be no assurance that the current confusion, systems failures, and mistaken payment reports will not temporarily disrupt or adversely affect the PSNapstas or MHPapstas relationships with their respective members, which could result in a reduction of membership and adversely affect its results of operations |
| There Can be No Assurance that The Company Will be Successful in Its Operation of MHP Although the Company has operated as a risk provider since 1997, it has only operated MHP since July 1, 2005 |
| To successfully operate MHP, the Company believes it will have to continue its development of the following capabilities, among others: sales and marketing, customer service and regulatory compliance |
| The Company anticipates that the continued development efforts and reserve requirements for MHP can be funded by the Companyapstas current resources and projected cash flows from operations |
| The Company expects to spend approximately dlra3dtta0 million to dlra5dtta0 million of its existing or future cash resources in 2006 to continue development and expansion of MHP No assurances can be given that the Company will be successful in operating this segment of its business despite its allocation of a substantial amount of resources for this purpose |
| If MHP does not develop as anticipated or planned, the Company may have to devote additional managerial and/or capital resources to MHP, which could limit the Companyapstas ability to manage and/or grow its PSN - 29 - The Company May Be Unsuccessful in Implementing Its Growth Strategy If It Is Unable to Expand into New Service Areas in a Timely Manner in Accordance with Its Strategic Plans |
| The Companyapstas strategy is to continue to focus on growth within certain geographic regions of Florida |
| Continued growth may impair its ability to manage its existing operations and provide its services efficiently and to manage its employees adequately |
| Future results of operations could be materially adversely affected if it is unable to manage its growth efforts effectively |
| The Company is seeking to continue to increase PSN and MHP membership and to expand to new service areas within its existing markets and in other markets |
| The Company is likely to incur additional costs if the PSN or MHP enters new service areas in Florida where they do not respectively currently operate |
| The Companyapstas rate of expansion into new geographic areas may also be limited by: o the time and costs associated with obtaining an HMO license to operate in the new area or expanding MHPapstas licensed service area, as the case may be; o the PSN and/or MHPapstas inability to develop a network of physicians, hospitals, and other healthcare providers that meets their respecitve requirements and those of the applicable regulators; o competition, which could increase the costs of recruiting members, reduce the pool of available members, or increase the cost of attracting and maintaining providers; o the cost of providing healthcare services in those areas; o demographics and population density; and o the new annual enrollment period and lock-in provisions of the MMA The Company has Anti-Takeover Provisions Which May Make it Difficult to Acquire It or Replace or Remove Current Management |
| Provisions in the Companyapstas Articles of Incorporation and Bylaws may delay or prevent an acquisition of it or a change in its management or similar change in control transaction, including transactions in which its shareholders might otherwise receive a premium for their shares over then current prices or that shareholders may deem to be in their best interests |
| In addition, these provisions may frustrate or prevent any attempts by the Companyapstas shareholders to replace or remove its current management by making it more difficult for shareholders to replace members of its Board of Directors |
| Because its Board of Directors is responsible for appointing the members of its management team, these provisions could in turn affect any attempt by its shareholders to replace current members of its management team |
| These provisions provide, among other things, that: o any shareholder wishing to properly bring a matter before a meeting of shareholders must comply with specified procedural and advance notice requirements; - 30 - o special meetings of the Companyapstas shareholders may be called only by the Chairman of the Board of Directors, its President or by the Board of Directors pursuant to a resolution adopted by a majority of the directors; o the authorized number of directors may be changed only by resolution of the Board of Directors; and o the Board of Directors has the ability to issue up to 10cmam000cmam000 shares of preferred stock, with such rights and preferences as may be determined from time to time by the Board of Directors, without shareholder approval |
| The Companyapstas Quarterly Results Will Likely Fluctuate, Which Could Cause the Value of Its Common Stock to Decline |
| The Company is subject to quarterly variations in its Total Medical Expenses due to sometimes pronounced fluctuations in patient utilization |
| It has significant fixed operating costs and, as a result, is highly dependent on patient utilization to sustain profitability |
| Its results of operations for any quarter are not necessarily indicative of results of operations for any future period or full year |
| Metropolitan experiences a greater use of medical services in the winter months |
| As a result, its results of operations may fluctuate significantly from period to period, which could cause the value of its Common Stock to decline |
| The Market Price of the Companyapstas Common Stock Could Fall as a Result of Sales of Shares of Common Stock in the Market or the Price Could Remain Lower because of the Perception that Such Sales May Occur |
| Metropolitan cannot predict the effect, if any, that future sales or the possibility of future sales may have on the market price of its Common Stock |
| As of December 31, 2005, there were 49cmam851cmam526 shares of its Common Stock outstanding, all of which are freely tradable without restriction with the exception of approximately 12cmam100cmam000 shares, owned by certain of its officers, directors and affiliates which may be sold publicly at any time subject to the volume and other restrictions promulgated pursuant to Rule 144 of the Securities Act |
| In addition, as of December 31, 2005, approximately 6cmam400cmam000 shares of the Companyapstas Common Stock were reserved for issuance upon the exercise of options which were previously granted |
| Sales of substantial amounts of Metropolitanapstas Common Stock or the perception that such sales could occur could adversely affect prevailing market prices which could impair its ability to raise funds through future sales of its Common Stock |
| The market price and trading volume of Metropolitanapstas Common Stock could fluctuate significantly and unexpectedly as a result of a number of factors, including factors beyond the Companyapstas control and unrelated to its business |
| Some of the factors related to Metropolitanapstas business include: termination of the Humana Agreements, announcements relating to the Companyapstas business or that of its competitors, adverse publicity concerning organizations such as Metropolitan, changes in state or federal legislation and programs, general conditions affecting the industry, performance of companies comparable to the Company, and changes in the expectations of analysts with the respect to the Companyapstas future financial performance |
| Additionally, Metropolitanapstas Common Stock may be affected by general economic conditions or specific occurrences such as epidemics (such as influenza), natural disasters (including hurricanes), acts of war or terrorism |
| Because of the limited trading market for the Companyapstas Common Stock, and because of the possible price volatility, the Companyapstas shareholders may not be able to sell their shares of Common Stock when they desire to do so |
| The inability to sell shares in a rapidly declining market may substantially increase the Companyapstas shareholders &apos risk of loss because of such illiquidity and because the price for the Companyapstas Common Stock may suffer greater declines because of its price volatility |
| - 31 - Delisting of Its Common Stock from AMEX Would Adversely Affect the Company and Its Shareholders |
| Metropolitanapstas Common Stock is listed on the AMEX To maintain listing of securities, the AMEX requires satisfaction of certain maintenance criteria that the Company is not sure that it will continue to be able to satisfy |
| If it is unable to satisfy such maintenance criteria in the future and it fails to comply, its Common Stock may be delisted from trading on AMEX If its Common Stock is delisted from trading on AMEX, then trading, if any, might thereafter be conducted in the over-the-counter market in the so-called "e pink sheets "e or on the "e Electronic Bulletin Board "e of the National Association of Securities Dealers, Inc |
| and consequently an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Companyapstas Common Stock |
| The Companyapstas Common Stock May Not be Excepted from "e Penny Stock "e Rules, Which May Adversely Affect the Market Liquidity of Our Common Stock |
| The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a "e penny stock "e |
| The Securities Exchange Commissionapstas (the "e Commission "e or the "e SEC "e ) regulations generally define a penny stock to be an equity security that has a market price of less than dlra5dtta00 per share, subject to certain exceptions |
| For example, such exceptions include any equity security listed on a national securities exchange such as the AMEX Currently, Metropolitanapstas Common Stock meets this exception |
| Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith |
| In addition, if our Common Stock becomes delisted from the AMEX and we do not meet another exception to the penny stock regulations, trading in its Common Stock would be covered by the Commissionapstas Rule 15g-9 under the Exchange Act for non-national securities exchange listed securities |
| Under this rule, broker/dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaserapstas written agreement to a transaction prior to sale |
| Securities also are exempt from this rule if the market price is at least dlra5dtta00 per share |
| If the Companyapstas Common Stock becomes subject to the regulations applicable to penny stocks, the market liquidity for its Common Stock could be adversely affected |
| In such event, the regulations on penny stocks could limit the ability of broker/dealers to sell Metropolitanapstas Common Stock and thus the ability of purchasers of its Common Stock to sell their shares in the secondary market |