We
routinely are subjected to legal proceedings in the normal course of business.
While the ultimate resolution of such matters is uncertain, we do not expect
the
results of any of these matters individually, or in the aggregate, to have
a
material effect on our financial position or results of operations.
FACTORS
THAT MAY AFFECT FUTURE RESULTS AND THE
TRADING
PRICE OF OUR COMMON STOCK
You
should carefully consider the risks described below before making an investment
decision. The trading price of our common stock could decline due to any of
these risks, in which case you could lose all or part of your investment. You
should also refer to the other information in this filing, including our
consolidated financial statements and related notes. The risks and uncertainties
described below are those that we currently believe may materially affect our
Company. Additional risks and uncertainties that we are unaware of or that
we
currently deem immaterial also may become important factors that affect our
Company.
Risks
Related to Being a Regulated Entity
Reduction
in Medicaid, SCHIP and SSI funding could substantially reduce our
profitability.
Most
of
our revenues come from Medicaid, SCHIP and SSI premiums. The base premium rate
paid by each state differs, depending on a combination of factors such as
defined upper payment limits, a member’s health status, age, gender, county or
region, benefit mix and member eligibility categories. Future levels of
Medicaid, SCHIP and SSI funding and premium rates may be affected by continuing
government efforts to contain healthcare costs and may further be affected
by
state and federal budgetary constraints. Additionally, state and federal
entities may make changes to the design of their Medicaid programs resulting
in
the cancellation or modification of these programs.
For
example, in August 2007, the Centers for Medicare & Medicaid Services, or
CMS, published a final rule regarding the estimation and recovery of
improper payments made under Medicaid and SCHIP. This rule requires a CMS
contractor to sample selected states each year to estimate improper payments
in
Medicaid and SCHIP and create national and state specific error rates.
States must provide information to measure improper payments in Medicaid and
SCHIP for managed care and fee-for-service. Each state will be selected for
review once every three years for each program. States are required to repay
CMS
the federal share of any overpayments identified.
On
February 8, 2006, President Bush signed the Deficit Reduction Act of 2005 to
reduce the size of the federal deficit. The Act reduces federal spending by
nearly $40 billion over 5 years, including a $5 billion reduction in Medicaid.
The Act reduces spending by cutting Medicaid payments for prescription drugs
and
gives states new power to reduce or reconfigure benefits. This law may also
lead
to lower Medicaid reimbursements in some states. The Bush administration’s
budget proposal for fiscal year 2008 proposes cutting Medicaid funding by $25.7
billion in funding reductions over five years. Additionally, the Bush
administration’s 2008 budget for SCHIP provides for yearly allotments at the
fiscal year 2007 levels, plus an additional $5 billion over the five-year
period, which some believe will result in a funding shortfall. States also
periodically consider reducing or reallocating the amount of money they spend
for Medicaid, SCHIP and SSI. In recent years, the majority of states have
implemented measures to restrict Medicaid, SCHIP and SSI costs and
eligibility.
Changes
to Medicaid, SCHIP and SSI programs could reduce the number of persons enrolled
in or eligible for these programs, reduce the amount of reimbursement or payment
levels, or increase our administrative or healthcare costs under those programs,
all of which could have a negative impact on our business. We believe that
reductions in Medicaid, SCHIP and SSI payments could substantially reduce our
profitability. Further, our contracts with the states are subject to
cancellation by the state after a short notice period in the event of
unavailability of state funds.
If
SCHIP is not reauthorized, our business could suffer.
The
authorization for SCHIP expired at the end of federal fiscal year 2007
(September 30, 2007). Congress has passed a continuing resolution that approved
a six-week extension of SCHIP at 2007 funding levels. If SCHIP is not
reauthorized by mid-November when the continuing resolution expires, we cannot
predict whether another continuing resolution will be
passed. Further, we cannot guarantee that federal funding of SCHIP
will be reauthorized and if it is, what changes might be made to the program
following reauthorization. President Bush and Congress have expressed differing
views as to what should be contained in an SCHIP reauthorization
bill. It is unclear how and when these differences will be resolved
and therefore we cannot predict the impact that reauthorization will have on
our
business, assuming SCHIP is reauthorized.
Several
states have faced shortfalls in federal SCHIP funding, which could have an
impact on our business.
States
receive matching funds from the federal government to pay for their SCHIP
programs, which matching funds have a per state annual cap. It had been
predicted that two states in which we have SCHIP contracts, Georgia and New
Jersey, would spend all of their federal allocation for fiscal year 2007 prior
to the end of the year. In December 2006, Congress passed legislation that
redistributed funds that were not spent in prior years to the states that were
facing these shortfalls. The Congressional Research Service estimated that
this
legislation would delay the shortfall to the first part of May 2007. On May
25,
2007, President Bush signed a bill that allocates $650 million to cover the
SCHIP shortfalls. It therefore does not currently appear that any
states in which we have SCHIP contracts will suffer a shortfall in fiscal year
2007. However, because they have funding caps, there is a risk that
these states could experience shortfalls in future years, which could have
an
impact on our ability to receive amounts owed to us from these
states.
If
our Medicaid and SCHIP contracts are terminated or are not renewed, our business
will suffer.
We
provide managed care programs and selected services to individuals receiving
benefits under federal assistance programs, including Medicaid, SCHIP and SSI.
We provide those healthcare services under contracts with regulatory entities
in
the areas in which we operate. Our contracts with various states are generally
intended to run for one or two years and may be extended for one or two
additional years if the state or its agent elects to do so. Our current
contracts are set to expire between December 31, 2007 and December 31, 2010.
When our contracts expire, they may be opened for bidding by competing
healthcare providers. There is no guarantee that our contracts will be renewed
or extended. For example, on August 25, 2006, we received notification from
the
Kansas Health Policy Authority that FirstGuard Health Plan Kansas, Inc.’s
contract with the State would not be renewed or extended, and as a result,
our
contract ended on December 31, 2006. Further, our contracts with the states
are
subject to cancellation by the state after a short notice period in the event
of
unavailability of state funds. Our contracts could also be terminated if we
fail
to perform in accordance with the standards set by state regulatory agencies.
For example, the Indiana contract under which we operate can be terminated
by
the State without cause. If any of our contracts are terminated, not renewed,
or
renewed on less favorable terms, our business will suffer, and our operating
results may be materially affected.
Changes
in government regulations designed to protect the financial interests of
providers and members rather than our investors 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. The applicable laws and regulations are subject to frequent
change and generally are intended to benefit and protect the financial interests
of health plan providers and members rather than investors. The enactment of
new
laws and rules or changes to existing laws and rules or the interpretation
of
such laws and rules could, among other things:
• force
us to restructure our relationships with providers within our
network;
• require
us to implement additional or different programs and systems;
• mandate
minimum medical expense levels as a percentage of premium revenues;
• restrict
revenue and enrollment growth;
• require
us to develop plans to guard against the financial insolvency of our
providers;
• increase
our healthcare and administrative costs;
• impose
additional capital and reserve requirements; and
• increase
or change our liability to members in the event of malpractice by our
providers.
For
example, Congress has previously considered various forms of patient protection
legislation commonly known as the Patients’ Bill of Rights and such legislation
may be proposed again. We cannot predict the impact of any such legislation,
if
adopted, on our business.
Regulations
may decrease the profitability of our health plans.
Certain
states have enacted regulations which require us to maintain a minimum health
benefits ratio, or establish limits on our profitability. Other states require
us to meet certain performance and quality metrics in order to receive our
full
contractual revenue. In certain circumstances, our plans may be required to
pay
a rebate to the state in the event profits exceed established levels. These
regulatory requirements, changes in these requirements or the adoption of
similar requirements by our other regulators may limit our ability to increase
our overall profits as a percentage of revenues. Certain states, including
but
not limited to Georgia, Indiana, New Jersey and Texas have implemented
prompt-payment laws and are enforcing penalty provisions for failure to pay
claims in a timely manner. Failure to meet these requirements can result in
financial fines and penalties. In addition, states may attempt to reduce their
contract premium rates if regulators perceive our health benefits ratio as
too
low. Any of these regulatory actions could harm our operating results. Certain
states also impose marketing restrictions on us which may constrain our
membership growth and our ability to increase our revenues.
We
face periodic reviews, audits and investigations under our contracts with state
government agencies, and these audits could have adverse findings, which may
negatively impact our business.
We
contract with various state governmental agencies to provide managed healthcare
services. Pursuant to these contracts, we are subject to various reviews, audits
and investigations to verify our compliance with the contracts and applicable
laws and regulations. Any adverse review, audit or investigation could result
in:
• refunding
of amounts we have been paid pursuant to our contracts;
• imposition
of fines, penalties and other sanctions on us;
• loss
of our right to participate in various markets;
• increased
difficulty in selling our products and services; and
• loss
of one or more of our licenses.
Failure
to comply with government regulations could subject us to civil and criminal
penalties.
Federal
and state governments have enacted fraud and abuse laws and other laws to
protect patients’ privacy and access to healthcare. In some states, we may be
subject to regulation by more than one governmental authority, which may impose
overlapping or inconsistent regulations. Violation of these and other laws
or
regulations governing our operations or the operations of our providers could
result in the imposition of civil or criminal penalties, the cancellation of
our
contracts to provide services, the suspension or revocation of our licenses
or
our exclusion from participating in the Medicaid, SCHIP and SSI programs. If
we
were to become subject to these penalties or exclusions as the result of our
actions or omissions or our inability to monitor the compliance of our
providers, it would negatively affect our ability to operate our
business.
The
Health Insurance Portability and Accountability Act of 1996, or 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 established new enforcement mechanisms
to
combat fraud and abuse, including civil and, in some instances, criminal
penalties for failure to comply with specific standards relating to the privacy,
security and electronic transmission of most individually identifiable health
information. It is possible that Congress may enact additional legislation
in
the future to increase penalties and to create a private right of action under
HIPAA, which could entitle patients to seek monetary damages for violations
of
the privacy rules.
We
may incur significant costs as a result of compliance with government
regulations, and our management will be required to devote time to
compliance.
Many
aspects of our business are affected by government laws and regulations. The
issuance of new regulations, or judicial or regulatory guidance regarding
existing regulations, could require changes to many of the procedures we
currently use to conduct our business, which may lead to additional costs that
we have not yet identified. We do not know whether, or the extent to which,
we
will be able to recover from the states our costs of complying with these new
regulations. The costs of any such future compliance efforts could have a
material adverse effect on our business. We have already expended significant
time, effort and financial resources to comply with the privacy and security
requirements of HIPAA. We cannot predict whether states will enact stricter
laws
governing the privacy and security of electronic health information. If any
new
requirements are enacted at the state or federal level, compliance would likely
require additional expenditures and management time.
In
addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented
by
the SEC and the New York Stock Exchange, or the NYSE, have imposed various
requirements on public companies, including requiring changes in corporate
governance practices. Our management and other personnel will continue to devote
time to these compliance initiatives.
The
Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal control over financial reporting. In particular, we must perform system
and process evaluation and testing of our internal controls over financial
reporting to allow management to report on the effectiveness of our internal
controls over our financial reporting as required by Section 404 of the
Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent
registered public accounting firm, may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses.
Our
compliance with Section 404 requires that we incur substantial accounting
expense and expend significant management efforts. Moreover, if we are not
able
to comply with the requirements of Section 404, 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.
Changes
in healthcare law and benefits may 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. 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. For
example, these changes could reduce the number of persons enrolled or eligible
to enroll in Medicaid, reduce the reimbursement or payment levels for medical
services or reduce benefits included in Medicaid coverage. We are also unable
to
predict whether new laws or proposals will favor or hinder the growth of managed
healthcare in general. Legislation or regulations that require us to change
our
current manner of operation, benefits provided or our contract arrangements
may
seriously harm our operations and financial results.
For
example, in August 2007 CMS issued guidance that imposes new requirements on
states that cover children in families with incomes above 250% of the federal
poverty level. Under these new requirements, applicable states must
provide assurances to CMS that the state has enrolled at least 95% of the
Medicaid and SCHIP eligible children in the state who are in families with
incomes below 200% of the federal poverty level in Medicaid or SCHIP and that
the number of children insured through private employers has not decreased
by
more than two percentage points over the prior five year
period. Three states in which we have SCHIP contracts, Georgia, New
Jersey and Wisconsin, are subject to these new regulations. If they
are unable to meet these new requirements, they will be unable to continue
to
cover children in families with incomes above 250% of the federal poverty level,
which would likely decrease our membership in such states. Many
states object to these new requirements as unduly burdensome and likely to
result in a decrease in the number of children covered by SCHIP, and some
states, including New Jersey, are pursuing legal challenges against CMS in
relation to these new requirements. CMS expects states to comply with
the new requirements within 12 months of the issuance of the
guidance. We cannot predict whether legal challenges to the new
policy will be successful or whether the reauthorized version of SCHIP will
expressly address these new requirements. We cannot predict the
impact these requirements will have on our revenue if changes are implemented
in
states in which we serve SCHIP beneficiaries.
If
a state fails to renew a required federal waiver for mandated Medicaid
enrollment into managed care or such application is denied, our membership
in
that state will likely decrease.
States
may administer Medicaid managed care programs pursuant to demonstration programs
or required waivers of federal Medicaid standards. Waivers and demonstration
programs are generally 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 such a waiver or demonstration program or
the
Federal government denies a state’s application for renewal, membership in our
health plan in the state could decrease and our business could
suffer.
Changes
in federal
funding mechanisms may reduce our profitability.
The
Bush
administration previously proposed a major long-term change in the way Medicaid
and SCHIP are funded. The proposal, if adopted, would allow states to elect
to
receive, instead of federal matching funds, combined Medicaid-SCHIP “allotments”
for acute and long-term healthcare for low-income, uninsured persons.
Participating states would be given flexibility in designing their own health
insurance programs, subject to federally-mandated minimum coverage requirements.
It is uncertain whether this proposal will be enacted. Accordingly, it is
unknown whether or how many states might elect to participate or how their
participation may affect the net amount of funding available for Medicaid and
SCHIP programs. If such a proposal is adopted and decreases the number of
persons enrolled in Medicaid or SCHIP in the states in which we operate or
reduces the volume of healthcare services provided, our growth, operations
and
financial performance could be adversely affected.
On
May
29, 2007, CMS issued a final rule that would reduce states’ use of
intergovernmental transfers for the states’ share of Medicaid program funding.
By restricting the use of intergovernmental transfers, this rule may restrict
some states’ funding for Medicaid, which could adversely affect our growth,
operations and financial performance. On May 25, 2007, President Bush
signed an Iraq war supplemental spending bill that includes a one-year
moratorium on the effectiveness of the final rule. We cannot predict
whether the rule will ever be implemented and if it is, what impact it will
have
on our business.
Recent
legislative changes in the Medicare program may also affect our business. For
example, the Medicare Prescription Drug, Improvement and Modernization Act
of
2003 revised cost-sharing requirements for some beneficiaries and requires
states to reimburse the federal Medicare program for costs of prescription
drug
coverage provided to beneficiaries who are enrolled simultaneously in both
the
Medicaid and Medicare programs. The Bush administration has also proposed to
further reduce total federal funding for the Medicaid program by $25.7 billion
over the next five years. These changes may reduce the availability of funding
for some states’ Medicaid programs, which could adversely affect our growth,
operations and financial performance. In addition, the new Medicare prescription
drug benefit is interrupting the distribution of prescription drugs to many
beneficiaries simultaneously enrolled in both Medicaid and Medicare, prompting
several states to pay for prescription drugs on an unbudgeted, emergency basis
without any assurance of receiving reimbursement from the federal Medicaid
program. These expenses may cause some states to divert funds originally
intended for other Medicaid services which could adversely affect our growth,
operations and financial performance.
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
health maintenance organizations, or HMOs, and managed care organizations,
or
MCOs. HMOs and MCOs 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 HMOs 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.
If
we are unable to participate in SCHIP programs, our growth rate may be
limited.
SCHIP
is
a federal initiative designed to provide coverage for low-income children not
otherwise covered by Medicaid or other insurance programs. The programs vary
significantly from state to state. Participation in SCHIP programs is an
important part of our growth strategy. If states do not allow us to participate
or if we fail to win bids to participate, our growth strategy may be materially
and adversely affected.
If
state regulators do not approve payments of dividends and distributions by
our
subsidiaries to us, we may not have sufficient funds to implement our business
strategy.
We
principally operate through our health plan subsidiaries. If funds normally
available to us become limited in the future, we may need to rely on dividends
and distributions from our subsidiaries to fund our operations. 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. If these regulators were to deny our subsidiaries’ request
to pay dividends to us, the funds available to us would be limited, which could
harm our ability to implement our business strategy.
Risks
Related to Our Business
Ineffectiveness
of state-operated systems and subcontractors could adversely affect our
business.
Our
health plans rely on other state-operated systems or sub-contractors to qualify,
solicit, educate and assign eligible clients into the health plans. The
effectiveness of these state operations and sub-contractors can have a material
effect on a health plan’s enrollment in a particular month or over an extended
period. When a state implements new programs to determine eligibility, new
processes to assign or enroll eligible clients into health plans, or chooses
new
contractors, there is an increased potential for an unanticipated impact on
the
overall number of members assigned into the health plans.
Failure
to accurately predict our medical expenses could negatively affect our reported
results.
Our
medical expenses include estimates of medical expenses incurred but not yet
reported, or IBNR. We estimate our IBNR medical expenses monthly based on a
number of factors. Adjustments, if necessary, are made to medical expenses
in
the period during which the actual claim costs are ultimately determined or
when
criteria used to estimate IBNR change. We cannot be sure that our IBNR estimates
are adequate or that adjustments to those estimates will not harm our results
of
operations. For example, in the three months ended June 30, 2006 we adjusted
our
IBNR by $9.7 million for adverse medical cost development from the first quarter
of 2006. In addition, when we commence operations in a new state or region,
we
have limited information with which to estimate our medical claims liabilities.
For example, we commenced operations in the Atlanta and Central regions of
Georgia on June 1, 2006 and the Southwest region of Georgia on September 1,
2006
and have based our estimates on state provided historical actuarial data and
limited actual incurred and received data. From time to time in the past, our
actual results have varied from our estimates, particularly in times of
significant changes in the number of our members. Our failure to estimate IBNR
accurately may also affect our ability to take timely corrective actions,
further harming our results.
Receipt
of inadequate or significantly delayed premiums would negatively affect our
revenues and profitability.
Our
premium revenues consist of fixed monthly payments per member and supplemental
payments for other services such as maternity deliveries. These premiums are
fixed by contract, and we are obligated during the contract periods to provide
healthcare services as established by the state governments. We use a large
portion of our revenues to pay the costs of healthcare services delivered to
our
members. If premiums do not increase when expenses related to medical services
rise, our earnings will be affected negatively. In addition, our actual medical
services costs may exceed our estimates, which would cause our health benefits
ratio, or our expenses related to medical services as a percentage of premium
revenue, to increase and our profits to decline. In addition, it is possible
for
a state to increase the rates payable to the hospitals without granting a
corresponding increase in premiums to us. If this were to occur in one or more
of the states in which we operate, our profitability would be harmed. In
addition, if there is a significant delay in our receipt of premiums to offset
previously incurred health benefits costs, our earnings could be negatively
impacted.
Failure
to effectively manage our medical costs or related administrative costs would
reduce our profitability.
Our
profitability depends, to a significant degree, on our ability to predict and
effectively manage expenses related to health benefits. We have less control
over the costs related to medical services than we do over our general and
administrative expenses. Because of the narrow margins of our health plan
business, relatively small changes in our health benefits ratio can create
significant changes in our financial results. Changes in healthcare regulations
and practices, the 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, are beyond our control and could reduce our ability to predict and
effectively control the costs of providing health benefits. We may not be able
to manage costs effectively in the future. If our costs related to health
benefits increase, our profits could be reduced or we may not remain
profitable.
Difficulties
in executing our acquisition strategy could adversely affect our
business.
Historically,
the acquisition of
Medicaid and specialty services businesses, contract rights and related assets
of other health plans both in our existing service areas and in new markets
has
accounted for a significant amount of our growth. Many of the other potential
purchasers have greater financial resources than we have. In addition, many
of
the sellers are interested either in (a) selling, along with their Medicaid
assets, other assets in which we do not have an interest or (b) selling their
companies, including their liabilities, as opposed to the assets of their
ongoing businesses.
We
generally are 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, even if
we
already operate in a state in which we acquire a new business, we would be
required to obtain additional regulatory approval if the acquisition would
result in our operating in an area of the state in which we did not operate
previously, and we could be required to renegotiate provider contracts of the
acquired business. We cannot assure you that we would be able to comply with
these regulatory requirements for an acquisition in a timely manner, or at
all.
In deciding whether to approve a proposed acquisition, state regulators may
consider a number of factors outside our control, including giving preference
to
competing offers made by locally owned entities or by not-for-profit
entities.
We
also
may be unable to obtain sufficient additional capital resources for future
acquisitions. If we are unable to effectively execute our acquisition strategy,
our future growth will suffer and our results of operations could be
harmed.
Execution
of our growth strategy may increase costs or liabilities, or create disruptions
in our business.
We
pursue
acquisitions of other companies or businesses from time to time. Although we
review the records of companies or businesses we plan to acquire, even an
in-depth review of records may not reveal existing or potential problems or
permit us to become familiar enough with a business to assess fully its
capabilities and deficiencies. As a result, we may assume unanticipated
liabilities or adverse operating conditions, or an acquisition may not perform
as well as expected. We face the risk that the returns on acquisitions will
not
support the expenditures or indebtedness incurred to acquire such businesses,
or
the capital expenditures needed to develop such businesses. We also face the
risk that we will not be able to integrate acquisitions into our existing
operations effectively without substantial expense, delay or other operational
or financial problems. Integration may be hindered by, among other things,
differing procedures, including internal controls, business practices and
technology systems. We may need to divert more management resources to
integration than we planned, which may adversely affect our ability to pursue
other profitable activities.
In
addition to the difficulties we may face in identifying and consummating
acquisitions, we will also be required to integrate and consolidate any acquired
business or assets with our existing operations. This may include the
integration of:
• additional
personnel who are not familiar with our operations and corporate
culture;
• provider
networks that may operate on different terms than our existing
networks;
• existing
members, who may decide to switch to another healthcare plan; and
• disparate
administrative, accounting and finance, and information systems.
Additionally,
our growth strategy includes start-up operations in new markets or new products
in existing markets. We may incur significant expenses prior to commencement
of
operations and the receipt of revenue. As a result, these start-up operations
may decrease our profitability. In the event we pursue any opportunity to
diversify our business internationally, we would become subject to additional
risks, including, but not limited to, political risk, an unfamiliar regulatory
regime, currency exchange risk and exchange controls, cultural and language
differences, foreign tax issues, and different labor laws and
practices.
Accordingly,
we may be unable to identify, consummate and integrate future acquisitions
or
start-up operations successfully or operate acquired or new businesses
profitably.
If
competing managed care programs are unwilling to purchase specialty services
from us, we may not be able to successfully implement our strategy of
diversifying our business lines.
We
are
seeking to diversify our business lines into areas that complement our Medicaid
business in order to grow our revenue stream and balance our dependence on
Medicaid risk reimbursement. In order to diversify our business, we must succeed
in selling the services of our specialty subsidiaries not only to our managed
care plans, but to programs operated by third-parties. Some of these third-party
programs may compete with us in some markets, and they therefore may be
unwilling to purchase specialty services from us. In any event, the offering
of
these services will require marketing activities that differ significantly
from
the manner in which we seek to increase revenues from our Medicaid programs.
Our
inability to market specialty services to other programs may impair our ability
to execute our business strategy.
Failure
to achieve timely profitability in any business would negatively affect 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 in most jurisdictions, we must first
establish a provider network, have systems in place and demonstrate our ability
to obtain a state contract and 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, any new business
of
ours 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 expenses associated with starting up a
new
business could have a significant impact on our results of operations if we
are
unable to achieve profitable operations in a timely fashion.
We
derive a majority of our premium revenues from operations in a small number
of
states, and our operating results would be materially affected by a decrease
in
premium revenues or profitability in any one of those
states.
Operations
in a few states have accounted for most of our premium revenues to date. For
example, our Medicaid contract with Kansas, which terminated December 31, 2006,
together with our Medicaid contract with Missouri accounted for $317.0 million
in revenue for the year ended December 31, 2006. If we were unable to continue
to operate in any of our current states or if our current operations in any
portion of one of those states were significantly curtailed, our revenues could
decrease materially. Our reliance on operations in a limited number of states
could cause our revenue and profitability to change suddenly and unexpectedly
depending on legislative or other governmental or regulatory actions and
decisions, economic conditions and similar factors in those states. Our
inability to continue to operate in any of the states in which we operate would
harm our business.
Competition may limit our ability to increase 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. Subject to
limited exceptions by federally approved state applications, the federal
government requires that there be choices for Medicaid recipients among managed
care programs. Voluntary programs and mandated competition may limit our ability
to increase our market share.
Some
of
the health plans with which we compete have greater financial and other
resources and offer a broader scope of products than we do. In addition,
significant merger and acquisition activity has occurred in the managed care
industry, as well as in industries that act as suppliers to us, such as the
hospital, physician, pharmaceutical, medical device and health information
systems businesses. To the extent that competition intensifies in any market
that we serve, our ability to retain or increase members and providers, or
maintain or increase our revenue growth, pricing flexibility and control over
medical cost trends may be adversely affected.
In
addition, in order to increase our membership in the markets we currently serve,
we believe that we must continue to develop and implement community-specific
products, alliances with key providers and localized outreach and educational
programs. If we are unable to develop and implement these initiatives, or if
our
competitors are more successful than we are in doing so, we may not be able
to
further penetrate our existing markets.
If
we are unable to maintain relationships with our provider networks, our
profitability may be harmed.
Our
profitability depends, in large part, upon our ability to contract favorably
with hospitals, physicians and other healthcare providers. Our provider
arrangements with our primary care physicians, specialists and hospitals
generally may be cancelled by either party without cause upon 90 to 120 days
prior written notice. We cannot assure you that we will be able to continue
to
renew our existing contracts or enter into new contracts enabling us to service
our members profitably.
From
time
to time providers assert or threaten to assert claims seeking to terminate
noncancelable agreements due to alleged actions or inactions by us. Even if
these allegations represent attempts to avoid or renegotiate contractual terms
that have become economically disadvantageous to the providers, it is possible
that in the future a provider may pursue such a claim successfully. In addition,
we are aware that other managed care organizations have been subject to class
action suits by physicians with respect to claim payment procedures, and we
may
be subject to similar claims. Regardless of whether any claims brought against
us are successful or have merit, they will still be time-consuming and costly
and could distract our management’s attention. As a result, we may incur
significant expenses and may be unable to operate our business
effectively.
We
will
be required to establish acceptable provider networks prior to entering new
markets. 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.
We
may be unable to attract and retain
key personnel.
We
are
highly dependent on our ability to attract and retain qualified personnel to
operate and expand our business. If we lose one or more members of our senior
management team, including our chief executive officer, Michael Neidorff, who
has been instrumental in developing our business strategy and forging our
business relationships, our business and operating results could be harmed.
Our
ability to replace any departed members of our senior management or other key
employees may be difficult and may take an extended period of time because
of
the limited number of individuals in the Medicaid managed care and specialty
services industry with the breadth of skills and experience required to operate
and successfully expand a business such as ours. Competition to hire from this
limited pool is intense, and we may be unable to hire, train, retain or motivate
these personnel.
Negative
publicity regarding the managed care industry may harm our business and
operating results.
The
managed care industry has received negative publicity. This publicity has led
to
increased legislation, regulation, review of industry practices and private
litigation in the commercial sector. These factors may adversely affect our
ability to market our services, require us to change our services, and increase
the regulatory burdens under which we operate. Any of these factors may increase
the costs of doing business and adversely affect our operating
results.
Claims
relating to medical malpractice could cause us to incur significant
expenses.
Our
providers and employees involved in medical care decisions may be subject to
medical malpractice claims. In addition, some states, including Texas, have
adopted legislation that permits managed care organizations to be held liable
for negligent treatment decisions or benefits coverage determinations. Claims
of
this nature, if successful, 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. Even if any claims brought against us are unsuccessful or
without merit, they would still be time consuming and costly and could distract
our management’s attention. As a result, we may incur significant expenses and
may be unable to operate our business effectively.
Loss
of providers due to increased insurance costs could adversely affect our
business.
Our
providers routinely purchase insurance to help protect themselves against
medical malpractice claims. In recent years, the costs of maintaining
commercially reasonable levels of such insurance have increased dramatically,
and these costs are expected to increase to even greater levels in the future.
As a result of the level of these costs, providers may decide to leave the
practice of medicine or to limit their practice to certain areas, which may
not
address the needs of Medicaid participants. We rely on retaining a sufficient
number of providers in order to maintain a certain level of service. If a
significant number of our providers exit our provider networks or the practice
of medicine generally, we may be unable to replace them in a timely manner,
if
at all, and our business could be adversely affected.
Growth
in the number of Medicaid-eligible persons during economic downturns could
cause
our operating results to suffer if state and federal budgets decrease or do
not
increase.
Less
favorable economic conditions may cause our membership to increase as more
people become eligible to receive Medicaid benefits. During such economic
downturns, however, state and federal budgets could decrease, causing states
to
attempt to cut healthcare programs, benefits and rates. We cannot predict the
impact of changes in the United States economic environment or other economic
or
political events, including acts of terrorism or related military action, on
federal or state funding of healthcare programs or on the size of the population
eligible for the programs we operate. If federal funding decreases or remains
unchanged while our membership increases, our results of operations will
suffer.
Growth
in the number of Medicaid-eligible persons may be countercyclical, which could
cause our operating results to suffer when general economic conditions are
improving.
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. Conversely, this number may grow more slowly or
even decline if economic conditions improve. Therefore, improvements in general
economic conditions may cause our membership levels to decrease, thereby causing
our operating results to suffer, which could lead to decreases in our stock
price during periods in which stock prices in general are
increasing.
If
we are unable to integrate and manage our information systems effectively,
our
operations could be disrupted.
Our
operations depend significantly 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.
Our
information systems and applications require continual maintenance, upgrading
and enhancement to meet our operational needs and regulatory requirements.
Moreover, our acquisition activity requires frequent transitions to or from,
and
the integration of, various information systems. We regularly upgrade and expand
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.
In
addition, our ability to integrate and manage our information systems may be
impaired as the result of events outside our control, including acts of nature,
such as earthquakes or fires, or acts of terrorists.
We
rely on the accuracy of eligibility lists provided by state governments.
Inaccuracies in those lists would negatively affect our results of
operations.
Premium
payments to us are based upon eligibility lists produced by state governments.
From time to time, states require us to reimburse them for premiums paid to
us
based on an eligibility list that a state 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 state
could fail to pay us for members for whom we are entitled to payment. Our
results of operations would be adversely affected as a result of such
reimbursement to the state if we had made related payments to providers and
were
unable to recoup such payments from the providers.
We
may not be able to obtain or maintain adequate
insurance.
We
maintain liability insurance, subject to limits and deductibles, for claims
that
could result from providing or failing to provide managed care and related
services. These claims could be substantial. We believe that our present
insurance coverage and reserves are adequate to cover currently estimated
exposures. We cannot assure you that we will be able to obtain adequate
insurance coverage in the future at acceptable costs or that we will not incur
significant liabilities in excess of policy limits.
From
time to time, we may become involved in costly and time-consuming litigation
and
other regulatory proceedings, which require significant attention from our
management.
We
are a
defendant from time to time in lawsuits and regulatory actions relating to
our
business. Due to the inherent uncertainties of litigation and regulatory
proceedings, we cannot accurately predict the ultimate outcome of any such
proceedings. An unfavorable outcome could have a material adverse impact on
our
business and operating results. In addition, regardless of the outcome of any
litigation or regulatory proceedings, such proceedings are costly and require
significant attention from our management. For example, in 2006, we were named
in two securities class action lawsuits that have now been dismissed. In
addition, we may in the future be the target of similar litigation. As with
other litigation, securities litigation could be costly and time consuming,
require significant attention from our management and could harm our business
and operating results.