HEALTHSPRING, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2005
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission
File Number 001-32739
HealthSpring, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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20-1821898 |
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(State or Other Jurisdiction of Incorporation or
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(I.R.S. Employer Identification No.) |
Organization) |
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44 Vantage Way, Suite 300 |
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Nashville, Tennessee
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37228 |
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(Address of Principal Executive Offices)
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(Zip Code) |
(615) 291-7000
Registrants telephone number, including area code
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Common Stock, par value $0.01 per share
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New York Stock Exchange |
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(Title of Class)
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(Name of Each Exchange on which |
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Registered) |
Securities registered pursuant to Section 12(g) of the Exchange Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 of Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. Large Accelerated Filer o Accelerated Filer
o Non-Accelerated Filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based
on the closing price of these shares on the New York Stock Exchange on March 28, 2006, was
approximately $576,800,000. For the purposes of this disclosure only, the registrant has assumed that its
directors, executive officers, and beneficial owners of 10% or more of the registrants common
stock are affiliates of the registrant, provided that such persons may disclaim such status.
As
of March 28, 2006 there were outstanding 57,269,540 shares of the registrants Common
Stock, par value $0.01 per share.
Documents Incorporated by Reference
Portions of the registrants definitive Proxy Statement for the 2006 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K that are not historical fact may be
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934
(the Exchange Act). In some cases, you can identify forward-looking statements by terms including
anticipates, believes, could, estimates, expects, intends, may, plans, potential,
predicts, projects, should, will, would, and similar expressions intended to identify
forward-looking statements. We intend such statements to be covered by the safe harbor provisions
for forward-looking statements contained in Section 21E of the Exchange Act. These statements
involve known and unknown risks, uncertainties and other factors, including those described in Item
1A. Risk Factors, that may cause our actual results, performance or achievements to be materially
different from any future results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements reflect our current views with respect to
future events and are based on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking statements. We
undertake no obligation beyond that required by law to update publicly any forward-looking
statements for any reason, even if new information becomes available or other events occur in the
future. You should read this report and the documents that we reference in this report and have
filed as exhibits to this report completely and with the understanding that our actual future
results may be materially different from what we expect.
i
PART I
Item 1. Business
Overview
HealthSpring, Inc. (sometimes referred to herein as HealthSpring, company, we, us, and
our) is a managed care organization with a primary focus on Medicare, the federal
government-sponsored health insurance program for retired U.S. citizens aged 65 and older,
qualifying disabled persons, and persons suffering from end-stage renal disease. Our concentration
on Medicare, and the Medicare Advantage program in particular, provides us with opportunities to
understand the complexities of the Medicare program, design competitive products, manage medical
costs, and offer high quality healthcare benefits to Medicare beneficiaries in our local service
areas. Our Medicare Advantage and physician management experience allows us to build collaborative
and mutually beneficial relationships with healthcare providers, including comprehensive networks
of hospitals and physicians that are experienced in managing Medicare populations. As of December
31, 2005, we were serving 101,281 Medicare members in 105 counties in the states of Tennessee,
Texas, Alabama, Illinois, and Mississippi. We also utilize our infrastructure and provider
networks in Alabama and Tennessee to offer commercial health plans to individuals and employer
groups.
Our management team has extensive experience managing providers and provider networks. Through
our relationships with providers, in which we create mutually beneficial incentives to efficiently
manage medical expenses, we have achieved medical loss ratios, or MLRs, that we believe are below
industry averages. We have also implemented comprehensive disease management and utilization
management programs, primarily designed to treat our members and promote the wellness of the
chronically ill, which generally are the least healthy of our membership and often account for a
significant portion of the costs of Medicare managed care populations.
We were incorporated in October 2004 in connection with the leveraged recapitalization of our
predecessor, NewQuest, LLC, by us and certain investment funds affiliated with GTCR Golder Rauner
II, L.L.C., which we collectively refer to herein as GTCR or the GTCR Funds, together with
management, our existing equityholders, lenders, and other investors. (See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations The Recapitalization)
We commenced operations in September 2000 when our predecessor purchased an interest in an
unprofitable health maintenance organization, or HMO, operating in the Nashville, Tennessee area.
On February 8, 2006, we completed our initial public offering, or IPO. We sold 10.6 million
shares and selling stockholders sold 11.02 million shares of common stock at a price of $19.50 per
share. The aggregate net proceeds from the shares of common stock sold by us were approximately
$193.3 million, which we used, together with cash on hand, to pay outstanding indebtedness and
offering expenses.
Our corporate headquarters are located at 44 Vantage Way, Suite 300, Nashville, Tennessee
37228, and our telephone number is (615) 291-7000. Our corporate website address is
www.myhealthspring.com. Information contained on our website is not incorporated by reference into
this report and we do not intend the information on or linked to our website to constitute part of
this report. We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports on our website, free of charge, to
individuals interested in acquiring such reports. The reports can be accessed at our website as
soon as reasonably practicable after they are electronically filed with, or furnished to, the
Securities and Exchange Commission, or SEC. The public may read and copy these materials
at the SECs public reference room located at 100 F. Street, N.E., Washington, D.C. 20549 or on
their website at http://www.sec.gov. Questions regarding the operation of the public reference
room may be directed to the SEC at 1-800-732-0330. References to HealthSpring, company, we,
our, and us refer to HealthSpring, Inc. together with our subsidiaries and our predecessor
entities, unless the context suggests otherwise.
1
The Medicare Program and Medicare Managed Care
Medicare is the health insurance program for retired United States citizens aged 65 and older,
qualifying disabled persons, and persons suffering from end-stage renal disease. Medicare is funded
by the federal government and administered by The Centers for Medicare & Medicaid Services, or CMS.
The Medicare program, created in 1965, offers both hospital insurance, known as Medicare Part A,
and medical insurance, known as Medicare Part B. In general, Medicare Part A covers hospital care
and some nursing home, hospice, and home care. Although there is no monthly premium for Medicare
Part A, beneficiaries are responsible for significant deductibles and co-payments. All United
States citizens eligible for Medicare are automatically enrolled in Medicare Part A when they turn
65. Enrollment in Medicare Part B is voluntary. In general, Medicare Part B covers outpatient
hospital care, physician services, laboratory services, durable medical equipment, and some other
preventive tests and services. Beneficiaries that enroll in Medicare Part B pay a monthly premium
that is usually withheld from their Social Security checks. Medicare Part B generally pays 80% of
the cost of services and beneficiaries pay the remaining 20% after the beneficiary has satisfied a
deductible. To fill the gaps in traditional fee-for-service Medicare coverage, individuals have the
option to purchase Medicare supplement products, commonly known as Medigap, to cover deductibles,
copayments, and coinsurance.
Initially, Medicare was offered only on a fee-for-service basis. Under the Medicare
fee-for-service payment system, an individual can choose any licensed physician and use the
services of any hospital, healthcare provider, or facility certified by Medicare. CMS reimburses
providers if Medicare covers the service and CMS considers it medically necessary. There is
currently no fee-for-service coverage for certain preventive services, including annual physicals
and wellness visits, eyeglasses, hearing aids, dentures, and most dental services.
As an alternative to the traditional fee-for-service Medicare program, in geographic areas
where a managed care plan has contracted with CMS pursuant to the Medicare Advantage program,
Medicare beneficiaries may choose to receive benefits from a managed care plan. The current
Medicare managed care program was established in 1997 when Congress created a Medicare Part C,
formerly known as Medicare+Choice and now known as Medicare Advantage. Pursuant to Medicare Part C,
Medicare Advantage plans contract with CMS to provide benefits at least comparable to those offered
under the traditional fee-for-service Medicare program in exchange for a fixed monthly premium
payment per member per month, or PMPM, from CMS. The monthly premium varies based on the county in
which the member resides, as adjusted to reflect the members demographics and the plans risk
scores as more fully described below. Individuals who elect to participate in the Medicare
Advantage program often receive greater benefits than traditional fee-for-service Medicare
beneficiaries such as additional preventive services and dental and vision benefits. Medicare
Advantage plans typically have lower deductibles and co-payments than traditional fee-for-service
Medicare, and plan members do not need to purchase supplemental Medigap policies. In exchange for
these enhanced benefits, members are generally required to use only the services and provider
network provided by the Medicare Advantage plan. Most Medicare Advantage plans have no additional
premiums. In some geographic areas, however, and for plans with open access to providers, members
may be required to pay a monthly premium.
Prior to 1997, CMS reimbursed health plans participating in the Medicare program primarily on
the basis of the demographic data of the plans members. One of CMSs primary directives in
establishing the Medicare Advantage program was to make it more attractive to managed care plans to
enroll members with higher intensity illnesses. To accomplish this, CMS implemented a risk
adjustment payment system for Medicare health plans in 1997 pursuant to the Balanced Budget Act of
1997. This payment system was further modified pursuant to the Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act of 2000. CMS is phasing-in this risk adjustment payment
methodology with a model that bases a portion of the total CMS reimbursement payments on various
clinical and demographic factors including hospital inpatient diagnoses, additional diagnosis data
from ambulatory treatment settings, hospital outpatient department and physician visits, gender,
age, and 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 CMSs
internal database. Under this system, the risk adjusted portion of the total CMS payment to the
Medicare Advantage plans will equal the local rate set forth in the traditional demographic rate
book, adjusted to reflect the plans average gender, age, and disability demographics. During 2003,
risk adjusted payments accounted for only 10% of Medicare health plan payments, with the remaining
90% being reimbursed in accordance with the traditional demographic rate book. The portion of risk
adjusted payments was increased to 30% in 2004, 50%, in 2005, and 75% in 2006, and will increase to
100% in 2007.
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The 2003 Medicare Modernization Act
Overview. In December 2003 Congress passed the Medicare Prescription Drug, Improvement and
Modernization Act, which is known as the Medicare Modernization Act, or MMA. The MMA increased the
amounts payable to Medicare Advantage plans such as ours and expanded Medicare beneficiary
healthcare options, including adding a Medicare Part D prescription drug benefit beginning in 2006,
as further described below.
One of the goals of the MMA was to reduce the costs of the Medicare program by increasing
participation in the Medicare Advantage program. Beginning in 2004, the MMA adjusted Medicare
Advantage statutory payment rates to 100% of Medicares expected cost per beneficiary under the
traditional fee-for-service program. Generally, this adjustment resulted in an increase in payments
per member to Medicare Advantage plans. Medicare Advantage plans are required to use these
increased payments to improve the healthcare benefits that are offered, to reduce premiums, or to
strengthen provider networks. We believe the reforms proposed by the MMA, including in particular
the increased reimbursement rates to Medicare Advantage plans, have allowed and will continue to
allow Medicare Advantage plans to offer more comprehensive and attractive benefits, including
better preventive care and dental and vision benefits, while also reducing out-of-pocket expenses
for beneficiaries. As a result of these reforms, we expect enrollment in Medicares managed care
programs to increase in the coming years.
Prescription Drug Benefit. As part of the MMA, effective January 1, 2006, every Medicare
recipient is able to select a prescription drug plan through Medicare Part D. Medicare Part D
replaced the transitional prescription drug discount program and replaced Medicaid prescription
drug coverage for beneficiaries eligible for participation under both the Medicare and Medicaid
programs, or dual-eligibles. The Medicare Part D prescription drug benefit is largely subsidized by
the federal government and is additionally supported by risk-sharing with the federal government
through risk corridors designed to limit the profits or losses of the drug plans and reinsurance
for catastrophic drug costs. The government subsidy is based on the national weighted average
monthly bid for this coverage, adjusted for member demographics and risk factor payments. The
beneficiary is responsible for the difference between the government subsidy and his or her plans
bid, together with the amount of his or her plans supplemental premium (before rebate
allocations), subject to the co-pays, deductibles, and late enrollment penalties, if applicable,
described below. Additional subsidies are provided for dual-eligible beneficiaries and specified
low-income beneficiaries.
The Medicare Part D benefits are available to Medicare Advantage plan enrollees as well as
Medicare fee-for-service enrollees. Medicare Advantage plan enrollees who elect to participate may
pay a monthly premium for this Medicare Part D prescription drug benefit, or MA-PD, while
fee-for-service beneficiaries will be able to purchase a stand-alone prescription drug plan, or
PDP, from a list of CMS-approved PDPs available in their area. Our Medicare Advantage members were
automatically enrolled in our MA-PD plans as of January 1, 2006 unless they chose another
providers prescription drug coverage or one of our other plan options without drug coverage. Any
Medicare Advantage member enrolling in a stand-alone PDP, however, is automatically disenrolled
from the Medicare Advantage plan altogether, thereby resuming traditional fee-for-service Medicare.
In addition, certain dual-eligible beneficiaries are automatically enrolled with approved PDPs in
their region. Under the standard Part D drug coverage for 2006, beneficiaries enrolled in a
stand-alone PDP pay a $250 deductible, co-insurance payments equal to 25% of the drug costs between
$250 and the initial annual coverage limit of $2,250, and all drug costs between $2,250 and $5,100,
which is commonly referred to as the Part D doughnut hole. After the beneficiary has incurred
$3,600 in out-of-pocket drug expenses, the MMA provides stop loss coverage that will cover
approximately 95% of the beneficiaries remaining out-of-pocket drug costs for that year. MA-PDs
are not required to mirror these limits, but are required to provide, at a minimum, coverage that
is actuarially equivalent to the standard drug coverage delineated in the MMA. The deductible,
co-pay, and coverage amounts will be adjusted by CMS on an annual basis. As additional incentive to
enroll in a Part D prescription drug plan, CMS will impose a cumulative penalty added to a
beneficiarys monthly Part D plan premium in an amount equal to 1% of the applicable premium for
each month between the date of a beneficiarys enrollment deadline and the beneficiarys actual
enrollment. This penalty amount will be passed through the plan to the government. Each Medicare
Advantage plan is required to offer a Part D drug prescription plan as part of its benefits. We
currently offer MA-PD benefits and stand-alone PDPs in each of our markets.
Dual-Eligible Beneficiaries. A dual-eligible beneficiary is a person who is eligible for
both Medicare, because of age or other qualifying status, and Medicaid, because of economic status.
Health plans that serve dual-
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eligible beneficiaries receive a higher premium from CMS for dual-eligible members. CMS pays
an additional premium for a dually-eligible beneficiary based upon the estimated incremental cost
CMS incurs, on average, to care for dual-eligible beneficiaries. By managing utilization and
implementing disease management programs, many Medicare Advantage plans can profitably care for
dually-eligible members. The MMA provides subsidies and reduced or eliminated deductibles for
certain low-income beneficiaries, including dual-eligible individuals. Pursuant to the MMA, as of
January 1, 2006 dual-eligible individuals receive their drug coverage from the Medicare program
rather than the Medicaid program. Companies offering stand-alone PDPs with bids at or below the
regional weighted average bid resulting from the annual bidding process received a pro-rata
allocation and auto-enrollment of the dual-eligible beneficiaries within their applicable region.
2006 Bidding Process. Although Medicare Advantage plans will continue to be paid on a
capitated, or PMPM basis, as of January 1, 2006 CMS implemented a new rate calculation system for
Medicare Advantage plans. The new system is based on a competitive bidding process that allows the
federal government to share in any cost savings achieved by Medicare Advantage plans. In general,
the statutory payment rate for each county, which is primarily based on CMSs estimated per
beneficiary fee-for-service expenses, was relabeled as the benchmark amount, and local Medicare
Advantage plans will annually submit bids that reflect the costs they expect to incur in providing
the base Medicare Part A and Part B benefits in their applicable service areas. If the bid is less
than the benchmark for that year, Medicare will pay the plan its bid amount, risk adjusted based on
its risk scores, plus a rebate equal to 75% of the amount by which the benchmark exceeds the bid,
resulting in an annual adjustment in reimbursement rates. Plans will be required to use the rebate
to provide beneficiaries with extra benefits, reduced cost sharing, or reduced premiums, including
premiums for MA-PD and other supplemental benefits. CMS will have the right to audit the use of
these proceeds. The remaining 25% of the excess amount will be retained in the statutory Medicare
trust fund. If a Medicare Advantage plans bid is greater than the benchmark, the plan will be
required to charge a premium to enrollees equal to the difference between the bid amount and the
benchmark, which is expected to make such plans less competitive. For 2006, the county benchmarks
equals the 2005 rates increased by 4.8%, which is the national growth rate in fee-for-service
expenditures.
Annual Enrollment and Lock-in. Prior to the MMA, Medicare beneficiaries were permitted to
enroll in a Medicare managed care plan or change plans at any point during the year. As of January
1, 2006, Medicare beneficiaries have defined enrollment periods, similar to commercial plans, in
which they can select a Medicare Advantage plan, stand-alone PDP, or traditional fee-for-service
Medicare. The initial enrollment period for 2006 began November 15, 2005 and continues through May
15, 2006 for a MA-PD or stand-alone PDP. In addition, beneficiaries will have an open election
period from January 1, 2006 through June 30, 2006 in which they can make or change an equivalent
election. Thereafter, the annual enrollment period for a PDP will be from November 15 through
December 31 of each year, and enrollment in Medicare Advantage plans will occur from November 15
through March 31 of the subsequent year. Enrollment on or prior to December 31 will be effective as
of January 1 of the following year and enrollment on or after January 1 and within the enrollment
period will be effective as of the first day of the month following the date on which the
enrollment occurred. After these defined enrollment periods end, generally only seniors turning 65
during the year, Medicare beneficiaries who permanently relocate to another service area,
dual-eligible beneficiaries and others who qualify for special needs plans, and employer group
retirees will be permitted to enroll in or change health plans during that plan year. Eligible
beneficiaries who fail to timely enroll in a Part D plan will be subject to the penalties described
above under Prescription Drug Benefit if they later decide to enroll in a Part D plan.
Products and Services
We offer Medicare Advantage health plans, including MA-PD plans and stand-alone PDPs, in each
of our markets. Our Medicare Advantage plans cover Medicare eligible members with benefits that are
at least comparable to those offered under traditional Medicare fee-for-service plans. Through our
plans, we have the flexibility to offer benefits not covered under traditional fee-for-service
Medicare. Our plans are designed to be attractive to seniors and offer a broad range of benefits
that vary across our markets and service areas but may include, for example, mental health
benefits, dental, vision and hearing benefits, transportation services, preventive health services
such as health and fitness programs, routine physicals, various health screenings, immunizations,
chiropractic services, and mammograms. Most of our MA-PD members pay no monthly premium in addition
to the premium we receive from Medicare but are subject in some cases to co-payments and
deductibles, depending upon the market and benefit. Our members are required to use a primary care
physician within our network of providers, except in limited cases,
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including emergencies, and generally must receive referrals from their primary care physician
in order to see a specialist or other ancillary provider. In addition to our typical Medicare
Advantage benefits, we offer a special needs zero premium, zero co-payment plan to dual-eligible
individuals in each of our markets.
The amount of premiums we receive for each Medicare member is established by contract,
although it varies according to various demographic factors, including the members geographic
location, age, and gender, and is further adjusted based on our plans average risk scores. During
the month of December 2005, our Medicare premiums across our service areas ranged from an average
of $650.13 to $781.31 PMPM. In addition to the premiums payable to us, our contracts with CMS
regulate, among other matters, benefits provided, quality assurance procedures, and marketing and
advertising for our Medicare products.
In addition to our Medicare products, we offer commercial managed care products and services
in certain of our markets. Our commercial plans cover individuals and employer groups with medical
coverage and benefits that differ from plan to plan for a set monthly premium. Our commercial
products include:
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commercial HMO plans in Alabama and Tennessee; |
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PPO network rental, which allows third party administrators to use our provider network
for an access fee, in Tennessee; |
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exclusive provider organization, or EPO, products for self-insured employers in
Tennessee that provide access to our provider networks at negotiated rates; and |
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administrative services only, or ASO, products for self-insured employers in Tennessee. |
We also offer management services to independent physician associations in our Alabama, Tennessee,
and Texas markets, including claims processing, provider relations, credentialing, reporting and
other general business office services.
Our Health Plans
We operate in each of our five markets through HMO subsidiaries. Each of the HMO subsidiaries
is regulated by the department of insurance, and in some cases the department of health, in its
respective state. In addition, we own and operate management company subsidiaries that provide
administrative and management services to the HMO subsidiaries in exchange for a percentage of the
HMO subsidiaries income pursuant to management agreements and administrative services agreements.
Those services include:
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negotiation, monitoring, and quality assurance of contracts with third party healthcare providers; |
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medical management, credentialing, marketing, and product promotion; |
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support services and administration; |
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personnel recruiting and retention; |
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financial services; and |
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claims processing and other general business office services. |
5
The following table summarizes our Medicare Advantage and commercial plan membership as of the
dates indicated:
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December 31, |
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2005 |
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2004 |
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2003 |
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Medicare Advantage Membership |
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Tennessee |
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42,509 |
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29,862 |
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25,772 |
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Texas |
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29,706 |
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21,221 |
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15,637 |
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Alabama |
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24,531 |
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12,709 |
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6,490 |
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Illinois(1) |
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4,166 |
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Mississippi(2) |
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369 |
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Total |
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101,281 |
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63,792 |
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47,899 |
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Commercial Membership(3) |
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Tennessee |
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29,859 |
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32,139 |
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32,668 |
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Alabama |
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11,910 |
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16,241 |
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21,612 |
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Total |
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41,769 |
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48,380 |
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54,280 |
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(1) |
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We commenced operations in Illinois in December 2004. |
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(2) |
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We commenced enrollment efforts in Mississippi in July 2005. |
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(3) |
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Does not include members of commercial PPOs owned and operated by unrelated third
parties that pay us a fee for access to our contracted provider network. |
Tennessee
We began operations in Tennessee in September 2000 when we purchased a 50% interest in an
unprofitable HMO in the Nashville, Tennessee area that offered commercial and Medicare products.
When we purchased the plan, it had approximately 8,000 Medicare Advantage members in five counties
and 22,000 commercial members in 27 counties. We purchased an additional 35% interest in the HMO in
2003 and purchased the remaining 15% in March 2005. As of December 31, 2005, our Tennessee HMO,
known as HealthSpring of Tennessee, had approximately 72,400 members in 27 counties, including
approximately 42,500 Medicare Advantage members, and 29,900 commercial members. In addition,
through Signature Health Alliance, our wholly-owned PPO network subsidiary, we provided repricing
and access to our provider networks for approximately 83,100 members as of December 31, 2005
throughout the 20-county area of Middle Tennessee.
As of December 31, 2005, there were approximately 944,300 Medicare beneficiaries in the State
of Tennessee, including approximately 437,300 Medicare beneficiaries in the counties in which we
currently operate. Our Tennessee market is primarily divided into three major service areas
including Middle Tennessee, the three-county greater Memphis area, and the four-county greater
Chattanooga area. As of December 31, 2005, approximately 10.9% of the Medicare beneficiaries in
these service areas participated in a Medicare Advantage plan, compared to 10.1% of Medicare
beneficiaries on a statewide basis.
We believe there are currently four competing Medicare Advantage plans in our service areas in
Tennessee and that we held the leading market position as of December 31, 2005, based on
membership, in these areas. Our principal competitors in these service areas are UnitedHealth
Group, Humana, Inc., Sterling Life Insurance Company, and Cariten Healthcare.
Texas
We began operations in Texas in November 2000 as an independent physician association
management company. We began operating an HMO in Texas in November 2002 when we acquired
approximately 7,800 Medicare lives from a managed care plan in state receivership. As of December
31, 2005, our Texas HMO, known as Texas HealthSpring, had approximately 29,700 Medicare Advantage
members in 20 counties in Southeast Texas, Northeast Texas, and the Rio Grande Valley.
As of December 31, 2005, there were approximately 2.6 million Medicare beneficiaries in the
State of Texas, including approximately 701,000 Medicare beneficiaries in the counties in which we
currently operate. Our Texas
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market is primarily divided into three major service areas including, the 14-county greater
Houston area, a four-county Northeast Texas area, and a two-county Rio Grande Valley area. As of
December 31, 2005, approximately 8.9% of the Medicare beneficiaries in these major service areas
participated in a Medicare Advantage plan, compared to 8.7% of the Medicare beneficiaries on a
statewide basis.
We believe there are currently four competing Medicare Advantage plans in our service areas in
Texas and that we held the leading market position as of December 31, 2005, based on membership.
Our principal competitors in these service areas are Humana, Inc., XLHealth, Universal American
Financial Corp., doing business as SelectCare of Texas, and UnitedHealth Group, doing business as
EverCare.
Alabama
We began operations in Alabama in November 2002 when we purchased an HMO with approximately
23,000 commercial members and approximately 2,800 Medicare members in two counties. As of December
31, 2005, HealthSpring of Alabama served over 36,400 members, including approximately 24,500
Medicare Advantage members and 11,900 commercial members, in 42 counties.
We recently decided to discontinue offering commercial benefits to individuals and small group
employers in Alabama effective June 1, 2006. Prior to June 1, 2006, small employer groups currently
enrolled in our commercial plans may elect to continue participating in our plans through June 30,
2007. As of December 31, 2005, there were 1,417 commercial members participating in our individual
and small employer group plans in Alabama. Pursuant to Alabama law, as a result of our decision to
exit the individual and small group commercial markets, we may not re-enter the individual and
small group employer commercial markets in Alabama until November 30, 2010.
As
of December 31, 2005, there were approximately 774,000 Medicare beneficiaries in the State of
Alabama, including approximately 551,000 Medicare beneficiaries in the 42 counties in which we
currently operate. As we generally operate statewide, we do not have distinct primary service areas
in Alabama. As of December 31, 2005, approximately 13.5% of the Medicare beneficiaries in the
counties in which we operate participated in a Medicare Advantage plan, compared to 9.7% of the
Medicare beneficiaries statewide. We believe there are currently two competing Medicare Advantage
plans in our service areas in the State of Alabama, and that our market position as of December 31,
2005, based on membership, was second. Our principal competitors in these service areas are
UnitedHealth Group and Viva Health, a member of the University of Alabama at Birmingham Health
System.
Illinois
We began operations in Illinois in December 2004 and, as of December 31, 2005, our Medicare
Advantage plan in Illinois, known as HealthSpring of Illinois, served approximately 4,100
beneficiaries in eight counties in the Chicago area. HealthSpring of Illinois is one of four
managed care companies currently offering competing Medicare Advantage plans that operate in the
greater Chicago metropolitan area, and we believe our primary competitor is Humana, Inc.
As of December 31, 2005, there were approximately 1.7 million Medicare beneficiaries in the
State of Illinois, including over one million Medicare beneficiaries in the eight counties in which
we currently operate. As of December 31, 2005, approximately 43,000, or 4.2%, of the Medicare
beneficiaries in the counties in which we operate participated in a Medicare Advantage plan,
compared to 5.0% of the Medicare beneficiaries statewide. Prior to the impact of the budget
restrictions and other changes to the Medicare program following the BBA, there were approximately
150,000 Medicare beneficiaries in the Chicago metropolitan area enrolled in Medicare managed care
plans.
Mississippi
We commenced our enrollment efforts in July 2005 for our Medicare Advantage plan, known as
HealthSpring of Mississippi, in two counties in northern Mississippi located near Memphis,
Tennessee. We entered these service areas consistent with our growth strategy to leverage existing
operations to expand to new service areas located near or contiguous to our existing service areas.
We are licensed and intend to expand our operations in our Mississippi
7
market to include six counties in southern Mississippi located near Mobile, Alabama. Those
expansion efforts were temporarily delayed as a result of Hurricane Katrina, and have recently been
resumed.
As of December 31, 2005, there were approximately 468,000 Medicare beneficiaries in the State
of Mississippi, including approximately 88,000 Medicare beneficiaries in our service areas in
Mississippi. Currently, we believe there are two other managed care companies offering competing
Medicare Advantage plans in the State of Mississippi: Tenet Healthcare Corporation and Humana, Inc.
Medical Health Services Management and Provider Networks
One of our primary goals is to arrange for high quality healthcare for our members. To achieve
our goal of ensuring high quality, cost-effective healthcare, we have established various quality
management programs, including disease management and utilization management programs.
Our disease management programs are focused on prevention and care and are designed to support
the coordination of healthcare intervention, physician/patient relationships and plans of care,
preventive care, and patient empowerment with the goal of improving the quality of patient care and
controlling related costs. Our disease management programs are focused primarily on high-risk care
management and the treatment of our chronically ill members. These programs are designed to
efficiently treat patients with specific high risk or chronic conditions such as coronary artery
disease, congestive heart failure, prenatal and premature infant care, end stage renal disease,
diabetes, asthma related conditions, and certain other conditions. In addition to internal disease
management efforts, we have partnered with outsourced disease management companies to educate
members on chronic medical conditions, help them comply with medication regimens, and counsel
members on healthy lifestyles.
We also have implemented utilization, or case, management programs to provide more efficient
and effective use of healthcare services by our members. Our case management programs are designed
to improve outcomes for members with chronic conditions through standardization, proactive
management, coordinating fragmented healthcare systems to reduce duplication, provide
gate-keeping services, and improve collaboration with physicians. We have partners that monitor
hospitalization, coordinate care, and ensure timely discharge from the hospital. In addition, we
use internal case management programs and contracts with other third parties to manage severely and
chronically ill patients. We utilize on-site critical care intensivists, hospitalists and
concurrent review nurses, who manage the appropriate times for outpatient care, hospitalization,
rehabilitation or home care. We also offer prenatal case management programs as part of our
commercial plans.
We have information technology systems that support our quality improvement and management
activities by allowing us to identify opportunities to improve care and track the outcomes of the
services provided to achieve those improvements. We utilize this information as part of our monthly
analytical reviews described above and to enhance our preventive care and disease and case
management programs where appropriate.
Additionally, we internally monitor and evaluate, and seek to enhance, the performance of our
providers. Our related programs include:
|
|
|
review of utilization of preventive measures and disease/case management resources and
related outcomes; |
|
|
|
|
member satisfaction surveys; |
|
|
|
|
review of grievances and appeals by members and providers; |
|
|
|
|
orientation visits to, and site audits of, select providers; |
|
|
|
|
ongoing provider and member education programs; and |
|
|
|
|
medical record audits. |
8
As more fully described below under Provider Arrangements and Payment Methods, our
reimbursement methods are also designed to encourage providers to utilize preventive care and our
other disease and case management services in an effort to improve clinical outcomes.
We believe strong provider relationships are essential to increasing our membership, improving
the quality of care to our members and making our health plans profitable. We have established
comprehensive networks of providers in each of the areas we serve. We seek providers who have
experience in managing the Medicare population, including through a risk-sharing or other
relationship with a Medicare Advantage plan. Our goal is to create mutually beneficial and
collaborative arrangements with our providers. We believe provider incentive arrangements should
not only help us attract providers, but also help align their interests with our objective of
providing high-quality, cost-effective healthcare and ultimately encourage providers to deliver a
level of care that promotes member wellness, reduces avoidable catastrophic outcomes, and improves
clinical results.
The following table shows the approximate number of physicians, specialists, and other
providers participating in our Medicare Advantage networks as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Care |
|
|
|
|
|
|
|
|
|
|
Ancillary |
|
Market |
|
Physicians |
|
|
Specialists |
|
|
Hospitals |
|
|
Providers |
|
Tennessee |
|
|
1,198 |
|
|
|
3,057 |
|
|
|
53 |
|
|
|
353 |
|
Texas |
|
|
607 |
|
|
|
942 |
|
|
|
44 |
|
|
|
277 |
|
Alabama |
|
|
726 |
|
|
|
2,168 |
|
|
|
44 |
|
|
|
315 |
|
Illinois |
|
|
458 |
|
|
|
1,441 |
|
|
|
24 |
|
|
|
306 |
|
Mississippi |
|
|
21 |
|
|
|
17 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,010 |
|
|
|
7,625 |
|
|
|
166 |
|
|
|
1,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In our efforts to improve the quality and cost-effectiveness of heathcare for our members, we
continue to refine and develop new methods of medical management and physician engagement. Two
such initiatives are currently underway. We have had encouraging preliminary results from the
initial pilot of our pay-for-performance initiative, which provides quality and outcomes-based
financial incentives to physicians, with a single medical group in Tennessee. The program, as
piloted, includes an in-office resource, usually a nurse, in the physician practice that is
dedicated to serving our members. We also provide a dedicated call center resource for disease
management support. We are currently in the process of expanding the program to physician offices
in Tennessee, Alabama, and Texas to determine whether the early results can be replicated across
markets.
We
are also planning to open later in 2006 our first clinic dedicated to our Medicare plan members,
partnering with the same medical group in Tennessee that experienced the encouraging
pay-for-performance results discussed above. The clinic will be designed with the Medicare member
in mind, with amenities designed to minimize any barrier to patient access such as single floors
(no elevators or stairs); adjacent parking or valet service and, in some cases pick-up and return
services; open reception areas; on-site nutritionists, dieticians, and nurse educators; wide
corridors and doors; handicapped-accessible facilities; and electronic medical records. We believe
clinics have the potential to improve member satisfaction, service levels, and clinical
outcomes and provide for a more satisfying and cost-efficient manner for the physician to deliver
care. We also believe clinics will give us an advantage over our competitors, creating a more
attractive network for our members.
Generally, we contract for pharmacy services through an unrelated pharmacy benefits manager,
or PBM, who is reimbursed at a discount to the average wholesale price for the provision of
covered outpatient drugs. In addition, our HMOs are entitled to share in the PBMs rebates based on
pharmacy utilization relating to certain qualifying medications. We also contract with a third
party behavioral health vendor who provides mental health and substance abuse services for our
members.
We strive to be the preferred Medicare Advantage partner for providers in each market we
serve. In addition to risk-sharing and other incentive-based financial arrangements, we seek to
promote a provider-friendly relationship by paying claims promptly, providing periodic performance
and efficiency evaluations, providing convenient, web-based access to eligibility data and other
information, and encouraging provider input on plan benefits. We also emphasize quality assurance
and compliance by periodically reviewing our networks and providers. By fostering a collaborative,
interactive relationship with our providers, we are better able to gather data relevant to
improving the
9
level of preventive healthcare available under our plans, monitor the utilization of medical
treatment and the accuracy of patient encounter data, risk coding and the risk scores of our plans,
and otherwise ensure our contracted providers are providing high-quality and timely medical care.
Provider Arrangements and Payment Methods
We attempt to structure our provider arrangements and payment methods in a manner that
encourages the medical provider to deliver high quality medical care to our members. We also
attempt to structure our provider contracts in a way that mitigates some or all of our medical risk
either through capitation or other risk-sharing arrangements. In general, there are two types of
medical risk professional and institutional. Professional risk primarily relates to physician and
other outpatient services. Institutional risk primarily relates to hospitalization and other
inpatient or institutionally-based services.
We generally pay our providers under one of three payment methods:
|
|
|
fee-for-service, based on a negotiated fixed-fee schedule where we are fully
responsible for managing institutional and professional risk; |
|
|
|
|
capitation, based on a PMPM payment, where physicians generally assume the professional
risk, or on a case-rate or per diem basis where a hospital or health system generally
assumes the institutional or professional risk, or both; and |
|
|
|
|
risk-sharing arrangements, typically with a physician group, where we advance, on a
PMPM basis, amounts designed to cover the anticipated professional risk and then adjust
payments, on a monthly basis, between us and the physician group based on actual experience
measured against pre-determined sharing ratios. |
Under any of these payment methods, we may also supplement provider payments with incentive
arrangements based, in general, on the quality of healthcare delivery. For example, as an incentive
to encourage our providers to deliver high quality care for their patients and assist us with our
quality assurance and medical management programs, we often seek to implement incentive
arrangements whereby we compensate our providers for quality performance, including increased
fee-for-service rates for specified preventive health services and additional payments for
providing specified encounter data on a timely basis. We also seek to implement financial
incentives relating to other operational matters where appropriate.
In some cases, particularly with respect to contracts between hospitals or health care systems
and our commercial health plans, we may be at risk for medical expenses above and beyond a
negotiated amount (a so-called stop loss provision),
which amount is typically calculated by reference to a percentage of
billed charges, in some cases back to the first dollar of medical
expense. When our members receive services for which
we are responsible from a provider with whom we have not contracted, such as in the case of
emergency room services from non-contracted hospitals, we generally attempt to negotiate a rate
with that provider. In some cases, we may
be obligated to pay the full rate billed by the provider. In the case of a Medicare patient who is
admitted to a non-contracting hospital, we are only obligated to pay the amount that the hospital
would have received from CMS under traditional fee-for-service Medicare.
We believe our incentive and risk-sharing arrangements with physicians help to align their
interests with us and our members and improve both clinical and financial outcomes. We will
continue to seek to implement these arrangements where possible in our existing and new service
areas.
Sales and Marketing Programs
As of December 31, 2005, our sales force consisted of approximately 700 independent agents and
80 internal licensed sales employees (including in-house telemarketing personnel). Our independent
agents are compensated on a commission basis. Medicare Advantage enrollment is generally a decision
made individually by the member. Accordingly, our sales agents and representatives focus their
efforts on in-person contacts with potential enrollees. In addition to traditional marketing
methods including direct mail, telemarketing, radio, internet and other mass media, and cooperative
advertising with participating hospitals and medical groups to generate leads, we also conduct
community outreach programs in churches and community centers and in coordination with government
10
agencies. We regularly participate in local community health fairs and events, and seek to
become involved with local senior citizen organizations to promote our products and the benefits of
preventive care. Our sales and marketing programs are tailored to each of our local service areas
and are designed with the goal of educating, attracting, and retaining members and providers. In
addition, we seek to create ethnically and culturally competent marketing programs where
appropriate that reflect the diversity of the areas that we serve.
Our marketing and sales activities are heavily regulated by CMS and other governmental
agencies. For example, CMS has oversight over all, and in some cases has imposed advance approval
requirements with respect to, marketing materials used by our Medicare Advantage plans, and our
sales activities are limited to activities such as conveying information regarding the benefits of
preventive care, describing the operations of managed care plans, and providing information about
eligibility requirements. The activities of our third-party brokers and agents are also heavily
regulated.
Prior to 2006, Medicare beneficiaries could enroll in or change health plans at any time
during the year. As of January 1, 2006, Medicare beneficiaries have a limited annual enrollment
period during which they can choose between a Medicare Advantage plan and traditional
fee-for-service Medicare. After this annual enrollment period ends, generally only seniors turning
65 during the year, dual-eligible beneficiaries and others who qualify for special needs plans,
Medicare beneficiaries permanently relocating to another service area, and employer group retirees
will be permitted to enroll in or change health plans. The annual enrollment period for 2006 is
November 15, 2005 through May 15, 2006 for stand-alone PDPs and through June 30, 2006 for Medicare
Advantage plans. Thereafter, the annual enrollment period will be from November 15 through December
31 each year for stand-alone PDPs and through March 31 of the following year for Medicare Advantage
plans. Although our experience to date with the prospect of limited enrollment has not resulted in
significant changes to our sales and marketing efforts, we have not fully determined whether the
impact of limited enrollment will adversely affect such efforts or our sales and marketing
personnel or our business as a whole.
Quality Assurance
As part of our quality assurance program, we have implemented processes designed to ensure
compliance with regulatory and accreditation standards. Our quality assurance program also consists
of internal programs that credential providers and programs designed to help ensure we meet the
audit standards of federal and state agencies, including CMS and the state departments of
insurance, as well as applicable external accreditation standards. For example, we monitor and
educate, in accordance with audit tools developed by CMS, our claims, credentialing, customer
service, enrollment, health services, providers relations, contracting, and marketing departments
with respect to compliance with applicable laws, regulations, and other requirements.
Our providers must satisfy specific criteria, such as licensing, credentialing, patient
access, office standards, after-hours coverage, and other factors. Our participating hospitals must
also meet specific criteria, including accreditation criteria established by CMS.
Competition
We operate in an increasingly competitive environment. Our principal competitors for
contracts, members, and providers vary by local service area and are principally national, regional
and local commercial managed care organizations that serve Medicare recipients, including, among
others, UnitedHealth Group, Humana, Inc., and Universal American Financial Corp. In addition, the
MMA (including Medicare Part D) may cause a number of commercial managed care organizations, some
of which are already in our service areas, to decide to enter the Medicare Advantage market.
Furthermore, the implementation of Medicare Part D prescription drug benefits in 2006 has attracted
national and regional pharmaceutical distributors and retailers, pharmacy benefit managers, and
managed care organizations to our markets and provide services and benefits to the Medicare
eligible population. Pursuant to the MMA, a regional Medicare PPO program was implemented as of
January 1, 2006. Medicare PPOs allow their members more flexibility to select physicians than HMO
Medicare Advantage plans. The new regional Medicare PPO plans will compete with local Medicare
Advantage HMO plans, including the plans we offer.
11
We believe the principal factors influencing a Medicare recipients choice among health plan
options are:
|
|
|
additional premiums, if any, payable by the beneficiary; |
|
|
|
|
benefits offered; |
|
|
|
|
location and choice of healthcare providers; |
|
|
|
|
quality of customer service and administrative efficiency; |
|
|
|
|
reputation for quality care; |
|
|
|
|
financial stability of the plan; and |
|
|
|
|
accreditation results. |
A number of these competitive elements are partially dependent upon and can be positively
affected by financial resources available to a health plan. We face competition from other managed
care companies that have greater financial and other resources, larger enrollments, broader ranges
of products and benefits, broader geographical coverage, more established reputations in the
national market and in our markets, greater market share, larger contracting scale, and lower
costs. Superior benefit design, provider network, and community perception may also provide a
distinct competitive advantage. If a competing plan is able to gain a competitive advantage over us
in our markets, it may negatively impact our enrollment and profitability.
Our Competitive Advantages
We believe the following are our key competitive advantages:
Focus on Medicare Advantage Market. We are focused primarily on Medicare. We believe our
focus on designing and operating Medicare health plans tailored to each of our local service areas
enables us to offer superior Medicare plans and to operate those plans with what we believe to be
lower MLRs. Our focus allows us to:
|
|
|
build relationships with provider networks that deliver the care desired by Medicare
beneficiaries in their local service areas at contractual rates that take into account
Medicare reimbursement schedules; |
|
|
|
|
direct our sales and marketing efforts primarily to Medicare beneficiaries and their
families, customized to the demographics of the communities in which we operate; and |
|
|
|
|
staff each of our service areas with locally-based senior managers who understand the
particular dynamics influencing behavior of local Medicare beneficiaries and providers as
well as political and legislative impacts on our programs. |
Leading Presence in Attractive, Underpenetrated Markets. We have a significant market
position in our established service areas and in many of our service areas we are the market leader
in terms of the number of members. Although Medicare Advantage penetration is highly variable
across the country as a result of numerous factors, including infrastructure and provider
accessibility, our service areas in particular are underpenetrated, providing opportunities for
increased membership. In our current service areas the percentage of Medicare eligible
beneficiaries that were enrolled in our or a competitors Medicare Advantage plan as of December
31, 2005 ranged from 0.4% to 13.5% (or 8.1% across all service areas). Medicare Advantage
penetration in service areas in other markets has surpassed 40%. In addition, as of December 31,
2005, our share of Medicare Advantage plan enrollees (expressed as a percentage of total Medicare
Advantage plan enrollees) in our service areas in our Tennessee, Texas, and Alabama markets was
approximately 88%, 47%, and 32%, respectively.
Effective Medical Management. Our medical management efforts are designed primarily for the
Medicare Advantage program. For the combined twelve month period ended December 31, 2005, our
Medicare MLR was 78.4%. We believe our ability to predict and manage our medical expenses is the
result of the following primary factors:
12
|
|
|
Analytical Focus We have institutionalized, throughout our management team, a
data-driven analytical focus on our operations. We intensively review, on a monthly basis,
actuarial analyses of claims data, IBNR claims, medical cost trends and loss ratios, and
other relevant data by service area and product. We also assess provider relations on a
monthly basis in reliance upon reports prepared by the senior management team for each of
our markets. The monthly reviews are attended by senior management of the company and our
local markets and allow us to identify and address favorable and adverse trends in a timely
manner. |
|
|
|
|
Provider Partnerships Our management team has extensive experience managing providers
and provider networks, including independent physician associations such as Renaissance
Physician Organization, or RPO. We believe this experience provides us a competitive
advantage in structuring our provider contracts and provider relations generally. Our
provider networks at December 31, 2005 included over 10,600 physicians and 165 hospitals.
We seek providers who have experience in managing the Medicare population. We attempt to
partner with our providers by, among other things, aligning physician interests with our
interests and the interests of our members by way of incentive compensation and
risk-sharing arrangements. These incentive arrangements are designed to encourage our
providers to deliver a level of care that promotes member wellness, reduces avoidable
catastrophic outcomes, and improves clinical and financial results. Additionally, we
internally monitor and evaluate the performance of our providers on a periodic basis to
ensure these relationships are successful in meeting their goals and engage our providers
directly when appropriate to address performance deficiencies individually or within their
networks. |
|
|
|
|
Focus on Promoting Member Wellness and Managing Medical Care Utilization We practice
a gatekeeper approach to managing care. Each member selects a primary care physician who
coordinates care for that member and, in conjunction with the company, monitors and
controls the members utilization of the network. Although the primary care physician is
primarily responsible for managing member utilization and promoting member wellness, we
have also implemented comprehensive health services quality management programs to help
ensure high quality, cost-effective healthcare for our members, and in particular the
chronically ill. We actively manage improvements in beneficiary care through internal and
outsourced disease management programs for members with chronic medical conditions. We have
also designed case management programs to provide more effective utilization of healthcare
services by our members, including through the employment of on-site critical care
intensivists, hospitalists, and concurrent review nurses who are trained to know the
appropriate times for outpatient care, hospitalization, rehabilitation, or home care, and
through partnerships with third party case management specialists. We work closely with our
disease and case management partners in a hands-on approach to help ensure the desired
outcomes. Our providers are trained and encouraged to utilize our disease and case
management programs in an effort to improve clinical and financial outcomes. |
Scalable Operating Structure. We have centralized certain functions of our health plans,
including claims payment, actuarial review, health risk assessment, and benefit design for
operational efficiencies and to facilitate our analytical, data-driven approach to operations.
Other functions, including member services, sales and marketing, provider relations, medical
management, and financial reporting and analysis, are customized for each of our local service
areas. We believe this combination of centralized administrative functions and local service area
focus, including localized medical management programs and on-site personnel at facility locations,
gives us an advantage over competitors who have standardized and centralized many or all of these
operating and member services functions. Additionally, we have designed our centralized and local
administrative and information services functions to be scalable to accommodate our growth in
existing or new service areas.
Experienced Management Team. Our management team has expertise in the Medicare Advantage
segment of the managed care industry. Our present operations team has focused primarily on the
operation of Medicare managed care plans since 2000. Prior to joining the company, our operations
team managed physician networks and structured risk-sharing relationships among healthcare
providers. We believe this experience, including operating and growing Medicare Advantage plans
through acquisitions and internal growth, gives us an advantage over our competitors. We also
intend to use our independent physician association management experience to further develop our
provider relationships, and independent physician association relationships in particular, through
the replication of existing arrangements we have created with independent physician associations in
certain of our markets.
13
Regulation
Overview
As a managed healthcare company, our operations are and will continue to be subject to
substantial federal, state, and local government regulation which will have a broad effect on the
operation of our health plans. The laws and regulations affecting our industry generally give state
and federal regulatory authorities broad discretion in their exercise of supervisory, regulatory
and administrative powers. These laws and regulations are intended primarily for the benefit of the
members and providers of the health plans.
Our right to obtain payment from Medicare is subject to compliance with numerous regulations
and requirements, many of which are complex, evolving as a result of the MMA and subject to
administrative discretion. Moreover, since we are contracting only with the Medicare program to
provide coverage for beneficiaries of our Medicare Advantage plans, our Medicare revenues are
completely dependent upon the reimbursement levels and coverage determinations in effect from time
to time in the Medicare Advantage program.
In addition, in order to operate our Medicare Advantage plans, we must obtain and maintain
certificates of authority or license from each state in which we operate. In order to remain
certified we generally must demonstrate, among other things, that we have the financial resources
necessary to pay our anticipated medical care expenses and the infrastructure needed to account for
our costs and otherwise meet applicable licensing requirements. Accordingly, in order to remain
qualified for the Medicare Advantage program, it may be necessary for our Medicare Advantage plans
to make changes from time to time in their operations, personnel, and services. Although we intend
for our Medicare Advantage plans to maintain certification and to continue to participate in those
reimbursement programs, there can be no assurance that our Medicare Advantage plans will continue
to qualify for participation.
Each of our health plans is also required to report quarterly on its financial performance to
the appropriate regulatory agency in the state in which the health plan is licensed. Each plan also
undergoes periodic reviews of our quality of care and financial status by the applicable state
agencies.
Federal Regulation
Medicare. Medicare is a federally sponsored healthcare plan for persons aged 65 and over,
qualifying disabled persons and persons suffering from end-stage renal disease which provides a
variety of hospital and medical insurance benefits. We contract with CMS to provide services to
Medicare beneficiaries pursuant to the Medicare Advantage program. As a result, we are subject to
extensive federal regulations, some of which are described in more detail below. CMS may audit any
health plan operating under a Medicare contract to determine the plans compliance with federal
regulations and contractual obligations.
A more complete description of Medicare and the MMA is set forth above under The 2003
Medicare Modernization Act. We are currently monitoring the implementation of the MMA to
determine how it will impact our operations throughout 2006 and we will continue to monitor this
issue as new regulations are released.
Additionally, the marketing activities of Medicare Advantage plans are strictly regulated by
CMS. For example, CMS has oversight over all, and in some cases has imposed advance approval
requirements with respect to, marketing materials used by our Medicare Advantage plans, and our
sales activities are limited to activities such as conveying information regarding the benefits of
preventive care, describing the operations of managed care plans, and providing information about
eligibility requirements. Federal law precludes states from imposing additional marketing
restrictions on Medicare Advantage plans. States, however, remain free to regulate, and typically
do regulate, the marketing activities of plans that enroll commercial beneficiaries.
Fraud and Abuse Laws. The federal anti-kickback statute imposes criminal and civil penalties
for paying or receiving remuneration (which includes kickbacks, bribes, and rebates) in connection
with any federal healthcare program, including the Medicare program. The law and related
regulations have been interpreted to prohibit the payment, solicitation, offering or receipt of any
form of remuneration in return for the referral of federal healthcare program patients or any item
or service that is reimbursed, in whole or in part, by any federal healthcare program.
14
In some of our markets, states have adopted similar anti-kickback provisions, which apply
regardless of the source of reimbursement.
With respect to the federal anti-kickback statute, there are two safe harbors addressing
certain risk-sharing arrangements. In addition, the Office of the Inspector General has adopted
other safe harbors related to managed care arrangements. These safe harbors describe relationships
and activities that are deemed not to violate the federal anti-kickback statute. However, failure
to satisfy each criterion of an applicable safe harbor does not mean that an arrangement
constitutes a violation of the law; rather the arrangement must be analyzed on the basis of its
specific facts and circumstances. Business arrangements that do not fall within a safe harbor do
create a risk of increased scrutiny by government enforcement authorities. We have attempted to
structure our risk-sharing arrangements with providers, the incentives offered by our health plans
to Medicare beneficiaries, and the discounts our plans receive from contracting healthcare
providers to satisfy the requirements of these safe harbors. There can be no assurance, however,
that upon review regulatory authorities will determine that our arrangements do not violate the
federal anti-kickback statute.
CMS has promulgated regulations that prohibit health plans with Medicare contracts from
including any direct or indirect payment to physicians or other providers as an inducement to
reduce or limit medically necessary services to a Medicare beneficiary. These regulations impose
disclosure and other requirements relating to physician incentive plans including bonuses or
withholdings that could result in a physician being at substantial financial risk as defined in
Medicare regulations. Our ability to maintain compliance with these regulations depends, in part,
on our receipt of timely and accurate information from our providers. We conduct our operations in
an attempt to comply with these regulations; however, we are subject to future audit and review. It
is possible that regulatory authorities may challenge our provider arrangements and operations and
there can be no assurance that we would prevail if challenged.
Federal False Claims Act. We are subject to a number of laws that regulate the presentation
of false claims or the submission of false information to the federal government. For example, the
federal False Claims Act provides, in part, that the federal government may bring a lawsuit against
any person or entity whom it believes has knowingly presented, or caused to be presented, a false
or fraudulent request for payment from the federal government, or who has made a false statement or
used a false record to get a claim approved. The federal government has taken the position that
claims presented in violation of the federal Anti-Kickback Statute may be considered a violation of
the federal False Claims Act. Violations of the False Claims Act are punishable by treble damages
and penalties of up to $11,000 per false claim. In addition to suits filed by the government, a
special provision under the False Claims Act allows a private individual (e.g., a whistleblower
such as a disgruntled former employee, competitor or patient) to bring an action under the False
Claims Act on behalf of the government alleging that an entity has defrauded the federal government
and permits the whistleblower to share in any settlement or judgment that may result from that
lawsuit. Although we strive to operate our business in compliance with all applicable rules and
regulations, we may be subject to investigations and lawsuits under the False Claims Act that may
be initiated either by the government or a whistleblower. It is not possible to predict the impact
such actions may have on our business.
Health Insurance Portability and Accountability Act of 1996. The Health Insurance Portability
and Accountability Act of 1996, or HIPAA, imposes requirements relating to a variety of issues that
affect our business, including the privacy and security of medical information, limits on
exclusions based on preexisting conditions for our plans, guaranteed renewability of healthcare
coverage for most employers and individuals and administrative simplification procedures involving
the standardization of transactions and the establishment of uniform healthcare provider, payor and
employer identifiers. Various federal agencies have issued regulations to implement certain
sections of HIPAA.
For example, the Department of Health and Human Services, or DHHS, issued a final rule that
establishes the standard data content and format for the electronic submission of claims and other
administrative health transactions. Although we believe our operations are compliant with the
electronic data standards established by the final rule, to the extent that we submit to Medicare
electronic healthcare claims and payment transactions that are deemed not to be in compliance with
these standards, payments to us may be delayed or denied. Additionally, DHHS has issued a final
privacy rule and final security standards that apply to individually identifiable health
information. The primary purposes of the privacy rule are to protect and enhance the rights of
consumers by providing them access to their health information and controlling the inappropriate
use of that information, and to
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improve the efficiency and effectiveness of healthcare delivery by creating a national
framework for health privacy protection that builds on efforts by states, health systems,
individual organizations, and individuals. The final rule for security standards establishes
minimum standards for the security of individually identifiable health information that is
transmitted or maintained electronically. We will conduct our operations in an attempt to comply
with the requirements of the privacy rule and the security standards. There can be no assurance,
however, that upon review regulatory authorities will find that we are in compliance with these
requirements.
On January 8, 2001, the U.S. Department of Labors Pension and Welfare Benefits
Administration, the IRS and DHHS issued two regulations that provide guidance on the
nondiscrimination provisions under HIPAA as they relate to health factors and wellness programs.
These provisions prohibit a group health plan or group health insurance issuer from denying an
individual eligibility for benefits or charging an individual a higher premium based on a health
factor. We do not believe that these regulations will have a material adverse effect on our
business.
Employee Retirement Income Security Act of 1974. The provision of services to certain
employee health benefit plans is subject to the Employee Retirement Income Security Act of 1974, or
ERISA. ERISA regulates certain aspects of the relationships between plans and employers who
maintain employee benefit plans subject to ERISA. Some of our administrative services and other
activities may also be subject to regulation under ERISA.
The U.S. Department of Labor adopted federal regulations that establish claims procedures for
employee benefit plans under ERISA. The regulations shorten the time allowed for health and
disability plans to respond to claims and appeals, establish requirements for plan responses to
appeals and expand required disclosures to participants and beneficiaries. These regulations have
not had a material adverse effect on our business.
State Regulation
Though generally governed by federal law, each of our HMO subsidiaries is licensed in the
market in which it operates and is subject to the rules, regulations, and oversight by the
applicable state department of insurance in the areas of licensing and solvency. Our HMO
subsidiaries file reports with these state agencies describing their capital structure, ownership,
financial condition, certain inter-company transactions and business operations. Our HMO
subsidiaries are also generally required to demonstrate among other things, that we have an
adequate provider network, that our systems are capable of processing providers claims in a timely
fashion and of collecting and analyzing the information needed to manage their business. State
regulations also require the prior approval or notice of acquisitions or similar transactions
involving an HMO, and of certain transactions between an HMO and its parent or affiliated entities
or persons. Generally, our HMOs are limited in their ability to pay dividends to their
stockholders.
Our HMO subsidiaries are required to maintain minimum levels of statutory capital. The minimum
statutory capital requirements differ by state and are generally based on a percentage of
annualized premium revenue, a percentage of annualized healthcare costs or risk-based capital, or
RBC, requirements. The RBC requirements are based on guidelines established by the National
Association of Insurance Commissioners, or NAIC and are administered by the states. If adopted, the
RBC requirements may be modified as each state legislature deems appropriate for that state.
Currently, only our Texas HMO subsidiary is subject to RBC requirements and our other HMO
subsidiaries are subject to other minimum statutory capital requirements mandated by the states in
which they are licensed. These requirements assess the capital adequacy of an HMO subsidiary based
upon investment asset risks, insurance risks, interest rate risks and other risks associated with
its business to determine the amount of statutory capital believed to be required to support the
HMOs business. If the HMOs statutory capital level falls below certain required capital levels,
the HMO may be required to submit a capital corrective plan to the state department of insurance,
and at certain levels may be subjected to regulatory orders, including regulatory control through
rehabilitation or liquidation proceedings.
Managed Care Legislative Proposals
Proposals are regularly introduced in the U.S. Congress and various state legislatures
relating to managed healthcare reform. On the federal level, while the MMA recently overhauled the
Medicare program, it is possible that significant managed healthcare reform may be enacted in the
future. At this time, it is unclear as to when any federal legislation might be enacted or the
timing or content of any new federal legislation, and we cannot predict
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the effect on our operations of any pending or other legislation that may be adopted in
the future. The provisions of legislation that may be introduced or adopted at the state level
cannot be accurately and completely predicted at this time either, and we therefore cannot predict
the effect of proposed or future legislation on our operations.
Technology
We have developed and implemented integrated and reliable information technology systems that
we believe have been critical to our success. Our systems collect and process information centrally
and support our core administrative functions, including premium billing, claims processing,
utilization management, reporting, medical cost trending, planning and analysis, as well as certain
member and provider service functions, including enrollment, member eligibility verification,
claims status inquiries, and referrals and authorizations.
Additionally, we recently enhanced our disease and case management
software functionality. We believe our information systems:
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improve the operating efficiency of our health plans through cost containment, claims
auditing, benefits administration and claims adjudication; |
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collect key data for our actuarial analysis, enabling well informed medical management
and quality assurance decisions; and |
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improve communications among us and our members and providers. |
Our systems are scalable to accommodate our desired organic growth and growth related to
acquisitions. We are in the process of implementing a comprehensive disaster recovery and business
continuity plan. We expect that our business continuity plan will be completed in 2006.
We use or employ independent third parties, such as DST Health Solutions, Inc. and OAO Health
Solutions, Inc., with whom we have entered into what we believe are customary agreements for the
provision of software and related consulting services with respect to our information technology
systems. We are in the process of developing increased internal software development capability to
support and enhance our core processing systems and in order to respond to rapidly changing market,
regulatory, and operational requirements.
Employees
At December 31, 2005, we had approximately 900 employees, substantially all of whom were
full-time. None of our employees are presently covered by a collective bargaining agreement. We
consider relations with our employees to be good and have never experienced any work stoppage.
Service Marks
The name HealthSpring is a registered service mark with the United States Patent and
Trademark Office. We also have other registered service marks. Prior use of our service marks by
third parties may prevent us from using our service marks in certain geographic areas. We intend to
protect our service marks by appropriate legal action whenever necessary.
EXECUTIVE OFFICERS OF THE COMPANY
The following are our executive officers and their biographies and ages as of February 28,
2006:
Herbert A. Fritch, age 55, has served as the Chairman of the Board of Directors, President,
and Chief Executive Officer of the company and its predecessor, New Quest, LLC, since the
commencement of operations in September 2000. Mr. Fritch is also the president of RPO. Beginning
his career in 1973 as an actuary, Mr. Fritch has over 30 years of experience in the managed
healthcare business. Prior to founding NewQuest, LLC, Mr. Fritch founded and served as president of
North American Medical Management, Inc., or NAMM, an independent physician association management
company, from 1991 to 1999. NAMM was acquired by PhyCor, Inc., a physician practice management
company, in 1995. Mr. Fritch served as vice president of managed care for PhyCor following PhyCors
acquisition of NAMM. Prior to NAMM, Mr. Fritch served as a regional vice president for Partners
National
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Healthplans from 1988 to 1991, where he was responsible for the oversight of seven HMOs in the
southern region. Mr. Fritch holds a B.A. in Mathematics from Carleton College. Mr. Fritch is a
fellow of the Society of Actuaries and a member of the Academy of Actuaries.
Jeffrey L. Rothenberger, age 46, has served as Executive Vice President and Chief Operating
Officer of the company since March 2005, and served in various capacities, including chief
operating officer, for the companys predecessor since September 2000. Prior to joining NewQuest,
LLC, Mr. Rothenberger served as vice president for NAMM from 1996 to August 2000, with operating
responsibility for several markets. Mr. Rothenberger also served as chief financial officer for the
Houston independent physician associations affiliated with NAMM in 1995. Mr. Rothenberger holds a
B.B.A. in Accounting from the University of Georgia and an M.B.A. from the University of Houston.
In addition, Mr. Rothenberger is a certified public accountant.
J. Murray Blackshear, age 47, has served as Executive Vice President of the company since
March 2005, and as President Tennessee Division since January 2006. Mr. Blackshear has served in
various capacities, including President Texas Division, for the company and its predecessor since
September 2000. Prior to joining NewQuest, LLC, Mr. Blackshear served as vice president for NAMM
from 1996 to June 2000, where he had operating responsibility for 21 markets in twelve states. Mr.
Blackshear holds a B.B.A. in Management from Texas A&M University.
Kevin M. McNamara, age 49, has served as Executive Vice President and Chief Financial Officer
and Treasurer of the company since April 2005. Mr. McNamara served as non-executive chairman from
April 2005 to January 2006 of ProxyMed, Inc., a provider of automated healthcare business and cost
containment solutions for financial, administrative and clinical transactions in the healthcare
payments marketplace, and served as interim chief executive officer of ProxyMed, Inc. from December
2004 through June 2005. Mr. McNamara served as chief financial officer of HCCA International, Inc.,
a healthcare management and recruitment company, from October 2002 to April 2005. From November
1999 until February 2001, Mr. McNamara served as chief executive officer and a director of Private
Business, Inc., a provider of electronic commerce solutions that help community banks provide
accounts receivable financing to their small business customers. From 1996 to 1999, Mr. McNamara
served as senior vice president and chief financial officer of Envoy Corporation, a provider of
electronic transactions processing services to participants in the healthcare industry, which was
acquired by Quintiles Transnational Corp. in 1999. Mr. McNamara also serves on the board of
directors of Luminex Corporation, a diagnostic and life sciences tool and consumables manufacturer,
Comsys IT Partners, Inc., an information technology staffing services company, and several private
companies. Mr. McNamara is a certified public accountant (inactive) and holds a B.S. in Accounting
from Virginia Commonwealth University and an M.B.A. from the University of Richmond.
J. Gentry Barden, age 44, has served as Senior Vice President, Corporate General Counsel, and
Secretary of the company since July 2005. From September 2003 to July 2005, Mr. Barden was a member
of Brentwood Capital Advisors LLC, an investment banking firm based in Nashville, Tennessee that
advised the company in the recapitalization. From September 2000 to February 2003, Mr. Barden was a
managing director of McDonald Investments Inc., an investment banking subsidiary of Cleveland,
Ohio-based KeyCorp, in its Nashville office. From December 1998 to June 2000, Mr. Barden was a
managing director and member of J.C. Bradford & Co., LLC, a Nashville-based investment banking
firm, and co-directed its mergers and acquisitions operations. Mr. Barden has approximately 12
years experience as a corporate and securities lawyer from 1986 through 1998, including
approximately seven years with Bass, Berry & Sims PLC in Nashville, Tennessee. Mr. Barden graduated
with a B.A. from The University of the South (Sewanee) and with a J.D. from the University of
Texas.
Pasquale R. Pingitore, M.D., age 56, has served as Senior Vice President and Chief Medical
Officer of the company since March 2005, and served in various capacities, including Chief Medical
Officer, for the companys predecessor since the commencement of operations in September 2000. Dr.
Pingitore served as the chief medical officer of RPO from 2001
to December 2005. Dr. Pingitore served as Medical Director
for NAMM from January 1998 to July 2000. Dr. Pingitore holds a B.A. from Loyola College (Montreal)
and an M.D. from McGill University. Dr. Pingitore also serves as a director of Christus Dubuis
Hospital.
David L. Terry, Jr, age 54, has served as Senior Vice President and Chief Actuary of the
company since March 2005, and served in various capacities, including Chief Actuary, for the
companys predecessor since July 2003. Prior to joining NewQuest, LLC, Mr. Terry served as senior
consultant for Reden & Anders, Ltd., a healthcare consulting firm, from July 2000 to July 2003. Mr.
Terry holds a B.S. in Statistics from Colorado State University and an M.S. in actuarial science
from the University of Nebraska.
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Item 1A. Risk Factors
You should consider carefully the risks and uncertainties described below, and all information
contained in this report, in evaluating our company and our business. The occurrence of any of the
following risks or uncertainties described below could significantly and adversely affect our
business, prospects, financial condition, and operating results. In any such event, the trading
price of our common stock could decline.
Risks Related to Our Industry
Reductions in Funding for Medicare Programs Could Significantly Reduce Our Profitability.
Approximately 82.4% and 72.4% of our total revenue for the combined twelve months ended
December 31, 2005 and the year ended December 31, 2004, respectively, are premiums generated by the
operation of our Medicare Advantage health plans. As a result, our revenue and profitability are
dependent on government funding levels for Medicare Advantage programs. The premium rates paid to
Medicare Advantage health plans like ours are established by contract, although the rates differ
depending on a combination of factors, including upper payment limits established by CMS, a
members health profile and status, age, gender, county or region, benefit mix, member eligibility
categories, and the plans risk scores. Future Medicare premium rate levels may be affected by
continuing government efforts to contain medical expense or other federal budgetary constraints.
Changes in the Medicare program, including with respect to funding, may lead to reductions in the
amount of reimbursement, elimination of coverage for certain benefits, or reductions in the number
of persons enrolled in or eligible for Medicare.
CMSs Risk Adjustment Payment System and Budget Neutrality Factors Make Our Revenue and
Profitability Difficult to Predict and Could Result In Material Retroactive Adjustments to Our
Results of Operations.
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, diagnosis 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 CMSs internal
database. As part of the phase-in, during 2003, risk adjusted payments accounted for 10% of
Medicare health plan payments, with the remaining 90% being reimbursed in accordance with the
traditional CMS demographic rate books. The portion of risk-adjusted payments was increased to 30%
in 2004, 50% in 2005, and 75% in 2006, and will increase to 100% in 2007. As a result of this
process, it is difficult to predict with certainty our future revenue or profitability. In
addition, our own risk scores for any period may result in favorable or unfavorable adjustments to
the payments we receive from CMS and our Medicare premium revenue. There can be no assurance that
our contracting physicians and hospitals will be successful in improving the accuracy of recording
diagnosis code information and thereby enhancing our risk scores.
Payments to Medicare Advantage plans are also adjusted by a budget neutrality factor that
was implemented in 2003 by Congress and CMS to prevent health plan payments from being reduced
overall while, at the same time, directing risk adjusted payments to plans with more chronically
ill enrollees. In general, this adjustment has favorably impacted payments to all Medicare
Advantage plans. The Presidents budget for 2005 assumed the phasing out of the budget neutrality
adjustments over a five year period from 2007 through 2011. In February 2006, the President signed
legislation that reduces federal funding for Medicare Advantage plans by approximately $6.5 billion
over five years. Among other changes, the legislation provides for an accelerated phase-out of
budget neutrality for risk adjustment of payments made to Medicare Advantage plans. These
legislative changes will have the effect of reducing payments to Medicare Advantage plans in
general. Consequently, our plans premiums could be reduced unless our risk scores increase.
Although our risk scores have increased historically, there is no assurance that the increases
could continue or, if they do, that they will be large enough to offset the elimination of this
adjustment.
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The Medicare Prescription Drug, Improvement and Modernization Act of 2003 Made Changes to the
Medicare Program That Will Materially Impact Our Operations and Could Reduce Our Profitability and
Increase Competition for Members.
MMA substantially changed the Medicare program and will continue to modify how we operate our
Medicare Advantage business. Many of these changes are effective for 2006 and, as we have not been
able to fully assess the impact of these changes, we do not know whether we will be able to operate
our Medicare Advantage plans at current levels of profitability or competitively with other managed
care companies. Although many of these changes are designed to benefit Medicare Advantage plans
generally, certain provisions of the MMA may increase competition, create challenges for us with
respect to educating our existing and potential members about the changes, and create other risks
and substantial and potentially adverse uncertainties, including the following:
Increased competition could adversely affect our enrollment and results of operations:
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The MMA increased reimbursement rates for Medicare Advantage plans. We believe higher
reimbursement rates may increase the number of plans that participate in the Medicare
program, creating additional competition that could adversely affect our enrollment and
results of operations. For example, prior to the MMA, there were three Medicare Advantage
plans in our Houston, Texas service area. Currently, there are five plans with Medicare
Advantage members in that service area. In addition, as a result of Medicare Part D, a
number of potential new competitors, such as pharmacy benefits managers and prescription
drug retailers and wholesalers, have established stand-alone prescription drug plans, or
PDPs, which are competitive with some of our Medicare programs. |
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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 such as ours, 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. Although we have not experienced any meaningful
competition from regional Medicare PPOs and private fee-for-service plans in our service
areas, there can be no assurance that such plans will not in the future adversely affect
our Medicare Advantage plans relative attractiveness to existing and potential Medicare
members. |
The new limited annual enrollment process may adversely affect our growth and ability to market our
products:
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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. See Item 1.
Business The 2003 Medicare Modernization Act Annual Enrollment and Lock-in for a
description of the annual enrollment process. After the annual enrollment period, most
Medicare beneficiaries will not be permitted to change their Medicare benefits. The new
annual enrollment process and subsequent lock-in provisions of the MMA may adversely
affect our growth as it will limit our ability to enter new service areas and market to or
enroll new members in our established service areas outside of the annual enrollment
period. |
The limited annual enrollment period may make it difficult to retain an adequate sales force:
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As a result of the limited annual enrollment period and the subsequent lock-in
provisions of the MMA, our sales force, including our independent sales brokers and agents,
may be limited in their ability to market our products year-round. Our agents rely on sales
commissions for their income. Given the limited annual sales window, it may become more
difficult to find agents to market and promote our products. The annual enrollment window
may also make hiring full-time sales employees impracticable, which could increase our
already substantial reliance on outside agents. Accordingly, we may not be able to retain
an adequate sales force to support our growth strategy. As our members are primarily
enrolled through in-person sales calls, a |
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reduction in our sales force may adversely affect our future enrollment, including our
expansion efforts, and, accordingly, adversely and materially affect our profitability and
results of operations. |
The new competitive bidding process may adversely affect our profitability:
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As of January 1, 2006, the payments for local and regional Medicare Advantage plans are
based on a competitive bidding process that may decrease the amount of premiums paid to us
or cause us to increase the benefits we offer without a corresponding increase in premiums.
As a result of the competitive bidding process, in order to maintain our current level of
profitability we may in the future be required to reduce benefits or charge our members an
additional premium, either of which could make our health plans less attractive to members
and adversely affect our membership. |
We may be unable to provide the new Medicare Part D benefit profitably:
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Managed care companies that offer Medicare Advantage plans were required to offer
prescription drug benefits beginning January 1, 2006 as part of their Medicare Advantage
plans. Such combined 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 our actual costs for these new MA-PD benefits or, in light of our
inexperience with this program, whether we will be able to profitably or competitively
manage our MA-PDs. |
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Managed care companies began offering PDPs as of January 1, 2006. These PDPs provide
Medicare eligible beneficiaries with an opportunity to obtain a stand-alone drug benefit
without joining a Medicare Advantage plan. Some enrollees may have chosen our Medicare
Advantage plan in the past rather than those of our competitors or traditional Medicare
fee-for-service because of the drug benefit that we offered with our Medicare Advantage
plans. We do not know at this time whether our PDP or MA-PD benefits will be as or more
attractive than those of our competitors. Additionally, Medicare beneficiaries that
participate in a Medicare Advantage plan that enroll in a PDP are automatically disenrolled
from their Medicare Advantage plan. Moreover, in early 2006, there has been substantial
confusion among Medicare members regarding their opportunity to select Part D prescription
drug benefits under the new legislation, which confusion has been exacerbated by the
proliferation and complexity of drug benefits offered by various
Part D vendors and CMS enrollment reconciliation and systems
issues.
Accordingly, the implementation of Part D has resulted in our members intentionally or
inadvertently disenrolling from our MA-PD and PDP plans. |
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We began marketing our MA-PDs and PDPs in October 2005 and began enrolling members,
effective as of January 1, 2006, on November 15, 2005. Our ability to profitably operate
our MA-PDs and PDPs will depend on a number of factors, including our ability to attract
members, to develop the necessary core systems and processes and to manage our medical
expense related to these plans. Because required prescription drug benefits are new to
Medicare and to the health insurance market generally, there is significant uncertainty of
the potential market size, consumer demand, and related MLR. Accordingly, we do not know
whether we will be able to operate our MA-PDs or PDPs profitably or competitively, and our
failure to do so could have an adverse effect on our results of operations. |
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The MMA provides for risk corridors that are expected to limit to some extent the
losses MA-PDs or PDPs would incur if their costs turned out to be higher than those in the
PMPM bids submitted to CMS in excess of certain specified ranges. For example, for 2006 and
2007 drug plans will bear all gains and losses up to 2.5% of their expected costs, but will
be reimbursed for 75% of the losses between 2.5% and 5%, and 80% of losses in excess of 5%.
It is anticipated that the initial risk corridors in 2006 and 2007 will provide more
protection against excess losses than will be available beginning in 2008 and future years
as the thresholds increase and the reimbursement percentages decrease. In addition, we
expect there will be a delay in obtaining reimbursement from CMS for reimbursable losses
pursuant to the risk corridors. For example, if we incur reimbursable losses in 2006, we
would not be reimbursed by CMS until 2007. In that event, we expect there would be a
negative impact on our cash flows and financial condition as a result of being required to
finance excess losses until we are reimbursed. In addition, as the risk corridors are
designed to be symmetrical, a plan whose actual costs fall below their expected costs would
be required to reimburse CMS based on a similar methodology as set forth above.
Furthermore, reconciliation payments for estimated |
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upfront federal reinsurance payments, or, in some cases, the entire amount of the reinsurance
payments, for Medicare beneficiaries who reach the drug benefits catastrophic threshold are
made retroactively on an annual basis, which could expose plans to upfront costs in providing
the benefit. Accordingly, it may be difficult to accurately predict or report the operating
results associated with our drug benefits. |
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The current issues regarding the proper accounting for Medicare Part D,
particularly as it relates to the timing of revenue and expense recognition, taken together
with the complexity of the Part D product and the current
challenges in reconciling CMS Part
D membership data, will lead to differences in our reporting of quarter-to-quarter earnings
and may lead to uncertainty among investors and research analysts following the company as to
the impacts on full year results. |
Our Business Activities Are Highly Regulated and New and Proposed Government Regulation or
Legislative Reforms Could Increase Our Cost of Doing Business, and Reduce Our Membership,
Profitability, and Liquidity.
Our health plans are subject to substantial federal and state regulation. These laws and
regulations, along with the terms of our contracts and licenses, regulate how we do business, what
services we offer, and how we interact with our 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 our business by, among other things:
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imposing additional license, registration, or statutory capital requirements; |
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increasing our administrative and other costs; |
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forcing us to undergo a corporate restructuring; |
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increasing mandated benefits without corresponding premium increases; |
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limiting our ability to engage in inter-company transactions with our affiliates and subsidiaries; |
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forcing us to restructure our relationships with providers; or |
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requiring us to implement additional or different programs and systems. |
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 our ability to operate under
the Medicare program and to continue to serve our members and attract new members.
If We Are Required to Maintain Higher Statutory Capital Levels for Our Existing Operations or if We
Are Subject to Additional Capital Reserve Requirements as We Pursue New Business Opportunities, Our
Cash Flows and Liquidity May Be Adversely Affected.
Our health plans are operated through subsidiaries in various states. These subsidiaries are
subject to state regulations that, among other things, require the maintenance of minimum levels of
statutory capital, or net worth, as defined by each state. One or more of these states 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. Currently, Texas is the only jurisdiction in which we operate that has adopted
risk-based capital requirements. Regardless of whether the other states in which we operate adopt
risk-based capital requirements, the state departments of insurance can require our HMO
subsidiaries to maintain minimum levels of statutory capital in excess of amounts required under
the applicable state laws if they determine that maintaining additional statutory capital is in the
best interests of our members. Any increases in these requirements could materially increase our
statutory capital requirements. In addition, as we continue to expand our plan offerings in new
states or pursue new business opportunities, including our strategy to offer PDPs, we may be
required to maintain additional statutory capital. In either case, our available funds could be
materially reduced, which could harm our ability to implement our business strategy.
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If State Regulators Do Not Approve Payments, Including Dividends and Other Distributions, by Our
Health Plans to Us, Our Business and Growth Strategy Could Be Materially Impaired or We Could Be
Required to Incur Indebtedness to Fund These Strategies.
Our health plan subsidiaries are subject to laws and regulations that limit the amount of
dividends and distributions they can pay to us for purposes other than to pay income taxes related
to the earnings of the health plans. These laws and regulations also limit the amount of management
fees our health plan subsidiaries may pay to affiliates of our health plans, including our
management subsidiaries, without prior approval of, or notification to, state regulators. The
pre-approval and notice requirements vary from state to state with some states, such as Texas,
generally allowing, subject to advance notice requirements, dividends to be declared, provided the
HMO meets or exceeds the applicable deposit, net worth, and risk-based capital requirements. The
discretion of the state regulators, if any, in approving or disapproving a dividend is not always
clearly defined. Health plans that declare non-extraordinary dividends must usually provide notice
to the regulators in advance of the intended distribution date. Historically, we have not relied on
dividends or other distributions from our health plans to fund a material amount of our operating
cash requirements. If the regulators were to deny or significantly restrict our subsidiaries
requests to pay dividends to us or to pay management and other fees to the affiliates of our health
plan subsidiaries, however, the funds available to us would be limited, which could impair our
ability to implement our business and growth strategy or we could be required to incur additional
indebtedness to fund these strategies.
We Are 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 us to comply with standards regarding the exchange of health information within our company
and with third parties, including healthcare providers, business associates and our 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.
We will conduct our 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,
our ongoing ability to comply with the HIPAA requirements is uncertain. Furthermore, a states
ability to promulgate stricter laws, and uncertainty regarding many aspects of such state
requirements, make compliance more difficult. To the extent that we submit electronic healthcare
claims and payment transactions that do not comply with the electronic data transmission standards
established under HIPAA, payments to us may be delayed or denied. Additionally, the costs of
complying with any changes to the HIPAA regulations may have a negative impact on our operations.
Sanctions for failing to comply with the HIPAA health information provisions include criminal
penalties and civil sanctions, including significant monetary penalties. In addition, our failure
to comply with state health information laws that may be more restrictive than the regulations
issued under HIPAA could result in additional penalties.
Risks Related to Our Business
If Our Medicare Contracts Are Not Renewed or Are Terminated, Our Business Would Be Substantially
Impaired.
We provide services to our Medicare eligible members through our Medicare Advantage health
plans pursuant to a limited number of contracts with CMS. These contracts generally have terms of
one year and must be renewed each year. Each of our contracts with CMS is terminable for cause if
we breach a material provision of the contract or violate relevant laws or regulations. If we are
unable to renew, or to successfully rebid or compete for any of these contracts, or if any of these
contracts are terminated, our business would be materially impaired.
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Because Our Premiums, Which Generate Most of Our Revenue, Are Established by Contract and Cannot Be
Modified During the Contract Terms, Our Profitability Will Likely Be Reduced or We Could Cease to
Be Profitable if We Are Unable to Manage Our Medical Expenses Effectively.
Substantially all of our revenue is generated by premiums consisting of monthly payments per
member that are established by contracts with CMS for our Medicare Advantage plans or by contracts
with our commercial customers, all of which are typically renewable on an annual basis. If our
medical expenses exceed our estimates, except in very limited circumstances or as a result of risk
score adjustments for member acuity, we will be unable to increase the premiums we receive under
these contracts during the then-current terms. As a result, our profitability depends, to a
significant degree, on our ability to adequately predict and effectively manage our medical
expenses related to the provision of healthcare services. Relatively small changes in our MLR can
create significant changes in our 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 our financial
condition, results of operations, or cash flows.
Historically, our medical expenses as a percentage of premium revenue have fluctuated. Factors
that may cause medical expenses to exceed our estimates include:
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an increase in the cost of healthcare services and supplies, including pharmaceuticals,
whether as a result of inflation or otherwise; |
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higher than expected utilization of healthcare services; |
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periodic renegotiation of hospital, physician, and other provider contracts; |
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changes in the demographics of our members and medical trends affecting them; |
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new mandated benefits or other changes in healthcare laws, regulations, and practices; |
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new treatments and technologies; |
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consolidation of physician, hospital, and other provider groups; |
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contractual disputes with providers, hospitals, or other service providers; and |
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the occurrence of catastrophes, major epidemics, or acts of terrorism. |
Because of the relatively high average age of the Medicare population, medical expenses for
our Medicare Advantage plans may be particularly difficult to control. We attempt 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, with respect to our commercial products, reinsurance. Despite
our efforts and programs to manage our medical expenses, we may not be able to continue to manage
these expenses effectively in the future. If our medical expenses increase, our profits could be
reduced or we may not remain profitable.
Our Failure to Estimate Incurred But Not Reported (IBNR) Claims Accurately Will Affect Our Reported
Financial Results.
Our medical care costs include estimates of our IBNR claims. We estimate our medical expense
liabilities using actuarial methods based on historical data adjusted for payment patterns, cost
trends, product mix, seasonality, utilization of healthcare services, and other relevant factors.
Actual conditions, however, could differ from those we assume in our estimation process. We
continually review and update our estimation methods and the resulting accruals and make
adjustments, if necessary, to medical expense when the criteria used to determine IBNR change and
when actual claim costs are ultimately determined. As a result of the uncertainties associated with
the factors used in these assumptions, the actual amount of medical expense that we incur may be
materially more or less than
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the amount of IBNR originally estimated. If our estimates of IBNR are inadequate in the
future, our reported results of operations will be negatively impacted. Further, our inability to
estimate IBNR accurately may also affect our ability to take timely corrective actions or otherwise
establish appropriate premium pricing, further exacerbating the extent of any adverse effect on our
results.
Competition in Our Industry May Limit Our Ability to Maintain or Attract Members, Which Could
Adversely Affect Our Results of Operations.
We operate in a highly competitive environment subject to significant changes as a result of
business consolidations, new strategic alliances, and aggressive marketing practices by other
managed care organizations that compete with us for members. Our principal competitors for
contracts, members, and providers vary by local service area and are comprised of national,
regional, and local managed care organizations that serve Medicare recipients. Our failure to
maintain or attract members to our health plans could adversely affect our results of operations.
We believe changes resulting from the MMA may bring additional competitors into our Medical
Advantage service areas. In addition, we face competition from other managed care companies that
often have greater financial and other resources, larger enrollments, broader ranges of products
and benefits, broader geographical coverage, more established reputations in the national market
and our markets, greater market share, larger contracting scale, and lower costs. Such competition
may negatively impact our enrollment, financial forecasts, and profitability.
Our Inability to Maintain Our Medicare Advantage Members or Increase Our Membership Could Adversely
Affect Our Results of Operations.
A reduction in the number of members in our Medicare Advantage plans, or the failure to
increase our membership, could adversely affect our results of operations. In addition to
competition, factors that could contribute to the loss of, or failure to attract and retain,
members include:
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negative accreditation results or loss of licenses or contracts to offer Medicare Advantage plans; |
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negative publicity and news coverage relating to us or the managed healthcare industry generally; |
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litigation or threats of litigation against us; |
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automatic disenrollment, whether intentional or inadvertent, as a result of members
choosing a stand-alone PDP; and |
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our inability to market to and re-enroll members who enlist with our competitors
because of the new annual enrollment and lock-in provisions under the MMA. |
A Disruption in Our Healthcare Provider Networks Could Have an Adverse Effect on Our Operations and
Profitability.
Our operations and profitability are dependent, in part, upon our ability to contract with
healthcare providers and provider networks on favorable terms. In any particular service area,
healthcare providers or provider networks could refuse to contract with us, demand higher payments,
or take other actions that could result in higher healthcare costs, disruption of benefits to our
members, or difficulty in meeting our regulatory or accreditation requirements. In some service
areas, healthcare providers may have significant market positions. If healthcare providers refuse
to contract with us, use their market position to negotiate favorable contracts, or place us at a
competitive disadvantage, then our ability to market products or to be profitable in those service
areas could be adversely affected. Our provider networks could also be disrupted by the financial
insolvency of a large provider group. Any disruption in our provider network could result in a loss
of membership or higher healthcare costs.
Approximately 29% and 33% of our Medicare Advantage members and 29% and 29% of our total
revenue as of and for the combined twelve months ended December 31, 2005 and the year ended
December 31, 2004, respectively, were related to our Texas operations. A significant proportion of
our providers in our Texas market are affiliated with Renaissance Physician Organization, or RPO, a
large group of independent physician associations. As of December 31, 2005, physicians associated
with RPO served as the primary care physicians for approximately
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87% of our members in our Texas market. Our agreements with RPO generally have a term expiring
December 31, 2014, but may be terminated sooner by RPO for cause or in connection with a change in
control of the company that results in the termination of senior management and otherwise raises a
reasonable doubt as to our successors ability to perform the agreements. If our Texas HMO
subsidiarys agreement with RPO were terminated, we would be required to sign direct contracts with
the RPO physicians or additional physicians in order to avoid any disruption in care of our
Houston-area members. It could take significant time to negotiate and execute direct contracts, and
we would be forced to reassign members to new primary care physicians if all of the current primary
care physicians did not sign direct contracts. This would result in loss of membership assuming
that not all members would accept the reassignment to a new primary care physician. Accordingly,
any significant disruption in, or termination of, our relationship with RPO could materially and
adversely impact our results of operations. Moreover, RPOs ability to terminate its agreements
with us in connection with certain changes in control of the company could have the effect of
delaying or frustrating a potential acquisition or other change in control of the company.
Recent Challenges Faced by CMS and Our Plans Information and Reporting Systems Related to
Implementation of Part D May Temporarily Disrupt or Adversely Affect Our Plans Relationships with
Our Members.
Partially in relation to the implementation of Part D, CMS transitioned to new information and
reporting systems, which have recently generated confusing and, we believe in some cases, erroneous
membership and payment reports concerning our and others Medicare eligibility and enrollment. 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 our plans to experience short-term disruptions in their operations and challenged our
information and communications systems. The enrollment errors have also caused significant
confusion among Medicare beneficiaries as to their participation in our or others Medicare
Advantage plans. Moreover, we have experienced a reallocation of
administrative resources and incurred
unanticipated administrative expenses dealing with this confusion. Although we believe the current
conditions are temporary, there can be no assurance that the current confusion, systems failures,
and mistaken payment reports will not disrupt or adversely affect our plans relationships with our
members, which could result in a reduction of our membership and adversely affect our results of
operations.
We May Be Unsuccessful in Implementing Our Growth Strategy If We Are Unable to Complete
Acquisitions on Favorable Terms or Integrate the Businesses We Acquire into Our Existing
Operations, or If We Are Unable to Otherwise Expand into New Service Areas in a Timely Manner in
Accordance with Our Strategic Plans.
Depending on acquisition, expansion, and other opportunities, we expect to continue to
increase our membership and to expand to new service areas within our existing markets and in other
markets. Opportunistic acquisitions of contract rights and other health plans are an important
element of our growth strategy. We may be unable to identify and complete appropriate acquisitions
in a timely manner and in accordance with our or our investors expectations for future growth. The
market price of businesses that operate Medicare Advantage plans has generally increased recently,
which may increase the amount we are required to pay to complete future acquisitions. Some of our
competitors have greater financial resources than we have and may be willing to pay more for these
businesses. In addition, we are generally required to obtain regulatory approval from one or more
state agencies when making acquisitions, which may require a public hearing, regardless of whether
we already operate a plan in the state in which the business to be acquired is located. We may be
unable to comply with these regulatory requirements for an acquisition in a timely manner, or at
all. Moreover, some sellers may insist on selling assets that we may not want, including commercial
lines of business, or transferring their liabilities to us as part of the sale of their companies
or assets. Even if we identify suitable acquisition targets, we may be unable to complete
acquisitions or obtain the necessary financing for these acquisitions on terms favorable to us, or
at all.
To the extent we complete acquisitions, we may be unable to realize the anticipated benefits
from acquisitions because of operational factors or difficulties in integrating the acquisitions
with our existing businesses. This may include the integration of:
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additional employees who are not familiar with our operations; |
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new provider networks, which may operate on terms different from our existing networks; |
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additional members, who may decide to transfer to other healthcare providers or health plans; |
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disparate information technology, claims processing, and record-keeping systems; and |
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accounting policies, including those that require a high degree of judgment or complex
estimation processes, including estimates of IBNR claims, accounting for goodwill,
intangible assets, stock-based compensation, and income tax matters. |
For all of the above reasons, we may not be able to successfully implement our acquisition
strategy. Furthermore, in the event of an acquisition or investment, we may issue stock that would
dilute existing stock ownership, incur debt that would restrict our cash flow, assume liabilities,
incur large and immediate write-offs, incur unanticipated costs, divert managements attention from
our existing business, experience risks associated with entering markets in which we have no or
limited prior experience, or lose key employees from the acquired entities.
Additionally, we are likely to incur additional costs if we enter new service areas or states
where we do not currently operate, which may limit our ability to expand to, or further expand in,
those areas. Our rate of expansion into new geographic areas may also be limited by:
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the time and costs associated with obtaining an HMO license to operate in the new area
or expanding our licensed service area, as the case may be; |
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our inability to develop a network of physicians, hospitals, and other healthcare
providers that meets our requirements and those of the applicable regulators; |
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competition, which could increase the costs of recruiting members, reduce the pool of
available members, or increase the cost of attracting and maintaining our providers; |
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the cost of providing healthcare services in those areas; |
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demographics and population density; and |
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the new annual enrollment period and lock-in provisions of the MMA. |
Negative Publicity Regarding the Managed Healthcare Industry Generally or Us in Particular Could
Adversely Affect Our Results of Operations or Business.
Negative publicity regarding the managed healthcare industry generally or us in particular may
result in increased regulation and legislative review of industry practices that further increase
our costs of doing business and adversely affect our results of operations by:
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requiring us to change our products and services; |
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increasing the regulatory burdens under which we operate; |
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adversely affecting our ability to market our products or services; or |
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adversely affecting our ability to attract and retain members. |
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We Are Dependent Upon Our Executive Officers, and the Loss of Any One or More of These Officers and
Their Managed Care Expertise Could Adversely Affect Our Business.
Our operations are highly dependent on the efforts of Herbert A. Fritch, our President and
Chief Executive Officer, and certain other senior executives, including Jeffrey L. Rothenberger,
our Chief Operating Officer, and J. Murray Blackshear, our Executive Vice President, each of whom
has been instrumental in developing our business strategy and forging our business relationships.
Although certain of our executives, including Messrs. Fritch, Rothenberger, and Blackshear, have
entered into employment agreements with us, these agreements may not provide sufficient incentives
for those executives to continue their employment with us. The loss of the leadership, knowledge,
and experience of Messrs. Fritch, Rothenberger, and Blackshear and our other executive officers
could adversely affect our business. Replacing any of our executive officers might be difficult or
take an extended period of time because a limited number of individuals in the managed care
industry have the breadth and depth of skills and experience of our executive officers. We do not
currently maintain key-man life insurance on any of our executive officers.
Violation of the Laws and Regulations Applicable to Us Could Expose Us to Liability, Reduce Our
Revenue and Profitability, or Otherwise Adversely Affect Our Operations and Operating Results.
The federal and state agencies administering the laws and regulations applicable to us have
broad discretion to enforce them. We are subject, on an ongoing basis, to various governmental
reviews, audits, and investigations to verify our compliance with our contracts, licenses, and
applicable laws and regulations. An adverse review, audit, or investigation could result in any of
the following:
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loss of our right to participate in the Medicare program; |
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loss of one or more of our licenses to act as an HMO or third party administrator or to
otherwise provide a service; |
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forfeiture or recoupment of amounts we have been paid pursuant to our contracts; |
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imposition of significant civil or criminal penalties, fines, or other sanctions on us and our key employees; |
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damage to our reputation in existing and potential markets; |
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increased restrictions on marketing our products and services; and |
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inability to obtain approval for future products and services, geographic expansions, or acquisitions. |
The U.S. 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. We cannot assure you that the
findings of an audit or investigation of our business would not have an adverse effect on us or
require substantial modifications to our operations. In addition, private citizens, acting as
whistleblowers, are entitled to bring enforcement actions under a special provision of the federal
False Claims Act.
Claims Relating to Medical Malpractice and Other Litigation Could Cause Us to Incur Significant
Expenses.
From time to time, we are 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, Congress and several states have considered or are considering legislation that
would expressly permit managed care organizations to be held liable for negligent treatment
decisions or benefits coverage determinations. Of the states in which we currently operate, only
Texas has enacted legislation relating to health plan liability for negligent treatment decisions
and benefits coverage determinations. In addition, our providers involved in medical care decisions
may be exposed to the risk of
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medical malpractice claims. Some of these providers do not have malpractice insurance.
Although our network providers are independent contractors, claimants sometimes allege that a
managed care organization 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, we may also be subject to other claims of our members
in the ordinary course of business, including claims of improper marketing practices by our
independent and employee sales agents and claims arising out of decisions to deny or restrict
reimbursement for services.
We cannot predict with certainty the eventual outcome of any pending litigation or potential
future litigation, and we cannot assure you that we will not incur substantial expense in defending
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 our business. In addition, our exposure to potential liability under
punitive damage or other theories may significantly decrease our ability to settle these claims on
reasonable terms.
We maintain errors and omissions insurance and other insurance coverage that we believe are
adequate based on industry standards. Potential liabilities may not be covered by insurance, our
insurers may dispute coverage or may be unable to meet their obligations, or the amount of our
insurance coverage and/or related reserves may be inadequate. We cannot assure you that we 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 us are unsuccessful or
without merit, we would have to defend ourselves against such claims. The defense of any such
actions may be time-consuming and costly and may distract our managements attention. As a result,
we may incur significant expenses and may be unable to effectively operate our business.
The Inability or Failure to Properly Maintain Effective and Secure Management Information Systems,
Successfully Update or Expand Processing Capability, or Develop New Capabilities to Meet Our
Business Needs Could Result in Operational Disruptions and Other Adverse Consequences.
Our business depends significantly on effective and secure information systems. The
information gathered and processed by our management information systems assists us in, among other
things, marketing and sales tracking, underwriting, billing, claims processing, medical management,
medical care cost and utilization trending, financial and management accounting, reporting,
planning and analysis and e-commerce. These systems also support on-line customer service
functions, provider and member administrative functions and support tracking and extensive analyses
of medical expenses and outcome data. These information systems and applications require continual
maintenance, upgrading and enhancement to meet our operational needs and handle our expansion and
growth. Any inability or failure to properly maintain management information systems, successfully
update or expand processing capability or develop new capabilities to meet our business needs in a
timely manner, could result in operational disruptions, loss of existing customers, difficulty in
attracting new customers or in implementing our growth strategies, disputes with customers and
providers, regulatory problems, increases in administrative expenses, loss of our ability to
produce timely and accurate reports and other adverse consequences. To the extent a failure in
maintaining effective information systems occurs, we may need to contract for these services with
third-party management companies, which may be on less favorable terms to us and significantly
disrupt our operations and information flow.
Furthermore, our business requires the secure transmission of confidential information over
public networks. Because of the confidential health information we store and transmit, security
breaches could expose us to a risk of regulatory action, litigation, possible liability and loss.
Our security measures may be inadequate to prevent security breaches, and our business operations
and profitability would be adversely affected by cancellation of contracts, loss of members and
potential criminal and civil sanctions if they are not prevented.
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Risks Related to Our Common Stock
There Has Been a Public Market for our Common Stock for a Limited Time and Market Volatility May
Affect Our Stock Price.
Prior to our recently completed initial public offering there was not a public market for our
common stock. We cannot predict the extent to which a trading market will develop, how liquid that
market might become, or whether it will be maintained. The market prices for securities of managed
care companies in general have been volatile and may continue to be volatile in the future. The
following factors, in addition to other risk factors described herein, may have a significant
impact on the market price of our common stock:
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Medicare budget decreases or changes in Medicare premium levels or reimbursement methodologies; |
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regulatory or legislative changes; |
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changes in expectations of our future membership growth or future financial performance
or changes in financial estimates, if any, of public market analysts; |
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expectations regarding increases or decreases in medical claims and medical care costs; |
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adverse publicity regarding HMOs, other managed care organizations and health insurers in general; |
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government action regarding Medicare eligibility; |
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the termination of any of our material contracts; |
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announcements relating to our business or the business of our competitors; |
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conditions generally affecting the managed care industry or our provider networks; |
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the success of our operating or growth strategies; |
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the operating and stock price performance of other comparable companies; |
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sales of large blocks of our common stock; |
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sales of our common stock by our executive officers, directors and significant stockholders; |
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changes in accounting principles; and |
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the loss of any of our key management personnel. |
The stock markets in general, and the markets for healthcare stocks in particular, have
experienced substantial volatility that has often been unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the trading price of our
common stock. In the past, class action litigation has often been instituted against companies
whose securities have experienced periods of volatility in market price. Any such litigation
brought against us could result in substantial costs and divert managements attention and
resources, which could hurt our business, operating results, and financial condition.
If We Are Unable to Implement Effective Internal Controls Over Financial Reporting, Investors Could
Lose Confidence in the Reliability of Our Financial Statements, Which Could Result in a Decrease in
the Price of Our Common Stock.
As a result of our recently completed initial public offering, we are required to enhance and
test our financial, internal, and management control systems to meet obligations imposed by the
Sarbanes-Oxley Act of 2002. We are working with our independent legal, accounting, and financial
advisors to identify those areas in which changes
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should be made to our financial and management control systems. These areas include corporate
governance, corporate control, internal audit, disclosure controls and procedures and financial
reporting and accounting systems. Consistent with the Sarbanes-Oxley Act and the rules and
regulations of the SEC, managements assessment of our internal controls over financial reporting
and the audit opinion of the Companys independent registered accounting firm as to the
effectiveness of our controls will be first required in connection with the Companys filing of its
Annual Report on Form 10-K for the fiscal year ending December 31, 2007. If we are unable to timely
identify, implement, and conclude that we have effective internal controls over financial reporting
or if our independent auditors are unable to conclude that our internal controls over financial
reporting are effective, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the value of our common stock. Our assessment of
our internal controls over financial reporting may also uncover weaknesses or other issues with
these controls that could also result in adverse investor reaction. These results may also subject
us to adverse regulatory consequences.
The Significant Concentration of Ownership of Our Common Stock Will Limit Your Ability to Influence
Corporate Activities and Could Adversely Affect the Trading Price of Our Common Stock.
GTCR and its affiliates own approximately 23.9% of our outstanding common stock. As a result,
GTCR has substantial influence over the outcome of matters requiring stockholder approval,
including the election of directors, amendments to our amended and restated certificate of
incorporation, and significant corporate transactions. The interests of GTCR may not always
coincide with our interests or the interests of other stockholders. This concentration of ownership
may also have the effect of delaying, preventing or deterring a change in control of our company,
which could deprive our stockholders of an opportunity to receive a premium for their common stock
as part of a sale of our company and might adversely affect the market price of our common stock.
In addition, this concentration of stock ownership may adversely affect the trading price of our
common stock because investors may perceive disadvantages in owning stock in a company with a
significant stockholder. Additionally, pursuant to our amended and restated stockholders agreement,
we have agreed to nominate, and the stockholders party thereto have agreed to vote in favor of, two
representatives designated by GTCR to serve as directors, which increases the influence GTCR will
have with respect to significant corporate transactions.
Under Our Amended and Restated Certificate Of Incorporation, the GTCR and Other Non-Employee
Directors Will Not Have Any Duty to Refrain From Engaging Directly or Indirectly in the Same or
Similar Business Activities or Lines of Business That We Do, Which May Result in the Company Not
Having the Opportunity to Pursue a Corporate Opportunity That May Have Been Appropriate or
Beneficial for the Company to Undertake.
Under our amended and restated certificate of incorporation, the directors, officers,
stockholders, members, managers, employees, and affiliates of GTCR and the GTCR and our other
non-employee directors will not have any duty to refrain from engaging directly or indirectly in
the same or similar business activities or lines of business that we do. In the event that any GTCR
affiliate or entity or non-employee director, as the case may be, acquires knowledge of a potential
transaction or matter which may be a corporate opportunity for itself and us, the GTCR fund or
non-employee director, as the case may be, will not, unless such opportunity has been expressly
offered to such person solely in his capacity as a director of the company, have any duty to
communicate or offer such corporate opportunity to us and may pursue such corporate opportunity for
itself or direct such corporate opportunity to another person, which may result in the company not
having the opportunity to pursue a corporate opportunity that may have been appropriate or
beneficial for us to undertake.
Anti-takeover Provisions in Our Organizational Documents Could Make an Acquisition of Us More
Difficult and May Prevent Attempts by Our Stockholders to Replace or Remove Our Current Management.
Provisions in our amended and restated certificate of incorporation and our second amended and
restated bylaws may delay or prevent an acquisition of us or a change in our management or similar
change in control transaction, including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices or that stockholders may deem to be in their
best interests. In addition, these provisions may frustrate or prevent any attempts by our
stockholders to replace or remove our current management by making it more difficult for
stockholders to replace members of our board of directors. Because our board of directors is
responsible for appointing the members of our management team, these provisions could in turn
affect any attempt by our stockholders to replace current members of our management team. These
provisions provide, among other things, that:
31
|
|
|
special meetings of our stockholders may be called only by the chairman of the board of
directors, our chief executive officer or by the board of directors pursuant to a
resolution adopted by a majority of the directors; |
|
|
|
|
any stockholder wishing to properly bring a matter before a meeting of stockholders
must comply with specified procedural and advance notice requirements; |
|
|
|
|
actions taken by the written consent of our stockholders require the consent of the
holders of at least 662/3% of our outstanding shares; |
|
|
|
|
our board of directors is classified into three classes, with each class serving a staggered three-year term; |
|
|
|
|
the authorized number of directors may be changed only by resolution of the board of directors; |
|
|
|
|
our second amended and restated bylaws and certain sections of our amended and restated
certificate of incorporation relating to anti-takeover provisions may generally only be
amended with the consent of the holders of at least 662/3% of our
outstanding shares; |
|
|
|
|
directors may be removed other than at an annual meeting only for cause; |
|
|
|
|
any vacancy on the board of directors, however the vacancy occurs, may only be filled
by the directors; and |
|
|
|
|
our board of directors has the ability to issue preferred stock without stockholder
approval. |
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in approximately 85,000 square feet of leased office
space in Nashville, Tennessee. The lease for our corporate headquarters expires on December 31,
2010. We also lease office space for our health plans in several locations in Alabama, Illinois,
Mississippi, Tennessee and Texas. We believe our facilities are adequate for our present and
currently anticipated needs.
Item 3. Legal Proceedings
We are not currently involved in any pending legal proceedings that we believe are material.
We are, however, involved from time to time in routine legal matters and other claims incidental to
our business, including employment-related claims, claims relating to our relationships
with providers and members, and claims relating to marketing practices of sales agents that are
employed by, or independent contractors to, us. Recently, our Alabama HMO and certain independent
sales agents have been sued in state courts in southern Alabama by several former HealthSpring
plan members alleging, among other things, fraudulent and otherwise inappropriate sales and enrollment
practices. Although these lawsuits are brought on behalf of different plaintiffs, the nature of the
complaints and the facts alleged are substantially similar. We are in the preliminary stages
of these lawsuits and our investigations are ongoing. We intend to defend vigorously against these
actions.
When it appears probable in managements judgment that we will incur monetary damages or other
costs in connection with any claims or proceedings, and such costs can be reasonably estimated,
liabilities are recorded in the financial statements and charges are recorded against earnings.
Though there can be no assurances, our management believes that the resolution of routine matters
and other incidental claims, taking into account accruals and insurance, will not have a material
adverse effect on our financial condition or results of operation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
32
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities |
Market for Common Stock
Our common stock was listed and began trading on the New York Stock Exchange on February 3,
2006 under the trading symbol HS. Prior to that date, there was no established public trading
market for our common stock. The last reported sale price of our common stock on the New York Stock
Exchange on March 28, 2006 was $18.58, and we had approximately
260 holders of record of our
common stock on such date.
Dividends
We have not declared or paid any cash dividends on our common stock since our formation. Our
predecessor, which was a pass-through limited liability company for tax purposes, made no
distributions to its members in 2005 prior to the recapitalization and made distributions to its
members in the aggregate amount of $19.5 million in 2004. We currently intend to retain any future
earnings to fund the operation, development, and expansion of our business, and therefore we do not
anticipate paying cash dividends in the foreseeable future. Furthermore, our revolving credit
facility will, in the event any amounts are then outstanding thereunder, restrict our ability to
declare cash dividends on our common stock. Our ability to pay dividends is also dependent on the
availability of cash dividends from our regulated HMO subsidiaries, which are restricted by the
laws of the states in which we operate, as well as the requirements of CMS relating to the
operations of our Medicare health plans. Any future determination to declare and pay dividends
will be at the discretion of our board of directors, subject to compliance with applicable law and
the other limitations described above.
Recent Sales of Unregistered Securities
Since the initial organization of HealthSpring, Inc., we have issued securities in the
following transactions, each of which was exempt from the registration requirements of the
Securities Act of 1933, as amended (the Securities Act), under Section 4(2) of the Securities Act
as transactions by an issuer not involving any public offering, or under Rule 701 under the
Securities Act. All of the below-referenced securities are deemed restricted securities for the
purposes of the Securities Act. No underwriters were involved in any of the below-referenced sales
of securities.
(1) |
|
On March 1, 2005, in connection with the
recapitalization, we sold and issued an aggregate of
(a) 30,445,218 shares of our common stock, par value
$.01 per share, to the GTCR Funds, members of our
predecessor, and certain other investors at a
purchase price of $0.20 per share, or for an
aggregate purchase price of $6,089,043; and (b)
227,154 shares of our preferred stock, par value $.01
per share, to the GTCR Funds, members of our
predecessor, and certain other investors at a
purchase price of $1,000 per share, or for an
aggregate purchase price of $227,154,000. We also
issued 1,286,250 shares of restricted common stock on
March 1, 2005 to certain of our employees pursuant to
restricted stock purchase agreements at a purchase
price of $0.20 per share, or an aggregate purchase
price of $257,250. |
|
(2) |
|
On April 18, 2005, we issued an aggregate of 520,000
shares of our common stock to two employees pursuant
to restricted stock purchase agreements at a purchase
price of $0.20 per share, or an aggregate purchase
price of $104,000. |
|
(3) |
|
On April 30, 2005, we issued an aggregate of 32,500
shares of our common stock to two employees pursuant
to restricted stock purchase agreements at a purchase
price of $0.20 per share, or an aggregate purchase
price of $6,500. |
On February 8, 2006, as a result of our IPO, all of our issued and
outstanding shares of preferred stock, including accrued and unpaid dividends thereon, were
converted into 12,552,905 shares of common stock based on the IPO price in accordance with the
terms of such preferred stock. Additionally, all membership
33
units of one of our HMO subsidiaries, Texas HealthSpring, LLC, that were not owned by us were
exchanged by us for 2,040,194 shares of our common stock in accordance with the terms of such
securities.
Initial Public Offering
In
connection with the IPO, the SEC declared our
Registration Statement on Form S-1 (No. 333-128939), filed under the Securities Act of 1933, as
amended, effective on February 2, 2006. Goldman, Sachs & Co., Citigroup Corporate and Investment
Banking, UBS Investment Bank, Lehman Brothers, CIBC World Markets, Raymond James, and Avondale
Partners were co-managers for the firm-commitment underwritten offering. We sold 10.6 million
shares of common stock and the GTCR Funds sold 11.02 million shares of common stock at a price to
the public of $19.50 per share, resulting in an aggregate offering price of approximately $421.6
million. The offering closed and was terminated on February 8, 2006 after the sale of all of the
securities registered on the registration statement. The aggregate gross proceeds from the shares
of common stock sold by the company, after the underwriting discount, were approximately $193.3
million (or $18.2325 per share). Our share of the underwriters commission was $13.4 million (or
$1.2675 per share) and we incurred offering expenses of approximately $4.5 million. We used the net
proceeds from the IPO, together with approximately $1.1 million in available cash, to repay
all of our outstanding debt and accrued and unpaid interest and a related prepayment premium. None
of the expenses, or application of the net proceeds to the company, were paid, directly or
indirectly, to directors, officers or persons owning 10% or more of our common stock or to their
associates, or to our affiliates. The company did not receive any of the proceeds from the sale of
shares sold by the selling stockholders.
Issuer Purchases of Equity Securities
During the fourth quarter of 2005, the company repurchased shares of its common stock as
follows:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Dollar Value |
|
|
Total |
|
|
|
|
|
Shares Purchased as |
|
of Shares that May Yet Be |
|
|
Number of |
|
|
|
|
|
Part of Publicly |
|
Purchased Under the |
|
|
Shares |
|
Price Paid |
|
Announced Plans |
|
Plans or Programs |
Period |
|
Purchased |
|
per Share (1) |
|
or Programs |
|
($000) |
|
10/1/05 10/31/05 |
|
|
67,500 |
|
|
$ |
.20 |
|
|
|
|
|
|
$ |
|
|
11/1/05 11/30/05 |
|
|
25,000 |
|
|
|
.20 |
|
|
|
|
|
|
|
|
|
12/1/05 12/31/05 |
|
|
107,500 |
|
|
|
.20 |
|
|
|
|
|
|
|
|
|
|
Total fourth quarter |
|
|
200,000 |
|
|
$ |
.20 |
|
|
|
|
|
|
$ |
|
|
|
(1) |
|
Shares were repurchased pursuant to the terms of restricted stock purchase agreements between
terminated employees and the company. The shares were voluntarily repurchased by the company
at $.20 per share, an amount equal to the employees cost per share. |
34
Item 6. Selected Financial Data
The following tables present selected historical financial data and other information for the
company and its predecessor, NewQuest, LLC. We derived the selected historical statement of income,
cash flows, and balance sheet data as of and for the years ended December 31, 2001, 2002, 2003,
2004, and 2005 from the audited consolidated financial statements of NewQuest, LLC and the company.
The audited consolidated financial statements and the related notes to the audited consolidated
financial statements of the company as of and for the years ended December 31, 2003, 2004 and 2005,
as applicable, together with the related report of our independent registered public accounting
firm are included elsewhere in this report.
The selected consolidated financial data and other information set forth below should be read
in conjunction with the consolidated financial statements included in this report and the related
notes and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthSpring, Inc. |
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
Period from March |
|
|
January 1, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months |
|
|
|
1, 2005 to |
|
|
2005 to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended December |
|
|
|
December 31, |
|
|
February 28, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31, 2005(1) |
|
|
|
2005(2) |
|
|
2005(2) |
|
|
2004(3) |
|
|
2003(4) |
|
|
2002(5) |
|
|
2001(6) |
|
|
|
(Dollars in thousands, except share and unit data) |
|
Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare premiums |
|
$ |
705,677 |
|
|
|
$ |
610,913 |
|
|
$ |
94,764 |
|
|
$ |
433,729 |
|
|
$ |
240,037 |
|
|
$ |
(7 |
) |
|
$ |
(7 |
) |
Commercial premiums |
|
|
126,872 |
|
|
|
|
106,168 |
|
|
|
20,704 |
|
|
|
146,318 |
|
|
|
120,877 |
|
|
|
(7 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums |
|
|
832,549 |
|
|
|
|
717,081 |
|
|
|
115,468 |
|
|
|
580,047 |
|
|
|
360,914 |
|
|
|
24,939 |
|
|
|
|
|
Fee revenue |
|
|
20,416 |
|
|
|
|
16,955 |
|
|
|
3,461 |
|
|
|
17,919 |
|
|
|
11,054 |
|
|
|
1,099 |
|
|
|
3,976 |
|
Investment income |
|
|
3,798 |
|
|
|
|
3,337 |
|
|
|
461 |
|
|
|
1,449 |
|
|
|
695 |
|
|
|
78 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
856,763 |
|
|
|
|
737,373 |
|
|
|
119,390 |
|
|
|
599,415 |
|
|
|
372,663 |
|
|
|
26,116 |
|
|
|
4,019 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare expense |
|
|
553,084 |
|
|
|
|
478,553 |
|
|
|
74,531 |
|
|
|
338,632 |
|
|
|
187,368 |
|
|
|
(7 |
) |
|
|
(7 |
) |
Commercial expense |
|
|
107,095 |
|
|
|
|
90,783 |
|
|
|
16,312 |
|
|
|
124,743 |
|
|
|
104,164 |
|
|
|
(7 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical expense |
|
|
660,179 |
|
|
|
|
569,336 |
|
|
|
90,843 |
|
|
|
463,375 |
|
|
|
291,532 |
|
|
|
12,631 |
|
|
|
|
|
Selling, general and administrative |
|
|
111,854 |
|
|
|
|
97,187 |
|
|
|
14,667 |
|
|
|
68,868 |
|
|
|
50,576 |
|
|
|
11,133 |
|
|
|
4,921 |
|
Transaction expense |
|
|
10,941 |
|
|
|
|
4,000 |
|
|
|
6,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phantom stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
7,305 |
|
|
|
|
6,990 |
|
|
|
315 |
|
|
|
3,210 |
|
|
|
2,361 |
|
|
|
275 |
|
|
|
347 |
|
Interest |
|
|
14,511 |
|
|
|
|
14,469 |
|
|
|
42 |
|
|
|
214 |
|
|
|
256 |
|
|
|
25 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
804,790 |
|
|
|
|
691,982 |
|
|
|
112,808 |
|
|
|
559,867 |
|
|
|
344,725 |
|
|
|
24,064 |
|
|
|
5,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of
unconsolidated affiliates |
|
|
282 |
|
|
|
|
282 |
|
|
|
|
|
|
|
234 |
|
|
|
2,058 |
|
|
|
4,148 |
|
|
|
7,855 |
|
Option amendment gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
and income taxes |
|
|
52,255 |
|
|
|
|
45,673 |
|
|
|
6,582 |
|
|
|
39,782 |
|
|
|
29,996 |
|
|
|
10,370 |
|
|
|
6,596 |
|
Minority interest |
|
|
(3,227 |
) |
|
|
|
(1,979 |
) |
|
|
(1,248 |
) |
|
|
(6,272 |
) |
|
|
(5,519 |
) |
|
|
(1,315 |
) |
|
|
(1,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
49,028 |
|
|
|
|
43,694 |
|
|
|
5,334 |
|
|
|
33,510 |
|
|
|
24,477 |
|
|
|
9,055 |
|
|
|
5,546 |
|
Income tax expense |
|
|
19,772 |
|
|
|
|
17,144 |
|
|
|
2,628 |
|
|
|
9,193 |
|
|
|
5,417 |
|
|
|
363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before preferred
dividends |
|
|
29,256 |
|
|
|
|
26,550 |
|
|
|
2,706 |
|
|
|
24,317 |
|
|
|
19,060 |
|
|
|
8,692 |
|
|
|
5,546 |
|
Preferred dividends |
|
|
15,607 |
|
|
|
|
15,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to members or
common stockholders |
|
$ |
13,649 |
|
|
|
$ |
10,943 |
|
|
$ |
2,706 |
|
|
$ |
24,317 |
|
|
$ |
19,060 |
|
|
$ |
8,692 |
|
|
$ |
5,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
$ |
0.55 |
|
|
$ |
5.31 |
|
|
$ |
4.67 |
|
|
$ |
2.13 |
|
|
$ |
1.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
$ |
0.55 |
|
|
$ |
5.31 |
|
|
$ |
4.67 |
|
|
$ |
2.13 |
|
|
$ |
1.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
4,884,176 |
|
|
|
4,578,176 |
|
|
|
4,078,176 |
|
|
|
4,078,176 |
|
|
|
4,078,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
4,884,176 |
|
|
|
4,578,176 |
|
|
|
4,078,176 |
|
|
|
4,078,176 |
|
|
|
4,078,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
available to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
|
$ |
0.34 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
$ |
32,173,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
$ |
32,215,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
2,745 |
|
|
|
|
2,596 |
|
|
|
149 |
|
|
|
2,512 |
|
|
|
3,198 |
|
|
|
190 |
|
|
|
46 |
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
72,103 |
|
|
|
|
57,139 |
|
|
|
14,964 |
|
|
|
24,665 |
|
|
|
63,392 |
|
|
|
6,569 |
|
|
|
(488 |
) |
Investing activities |
|
|
(276,346 |
) |
|
|
|
(270,877 |
)(8) |
|
|
(5,469 |
) |
|
|
(34,615 |
) |
|
|
42,647 |
|
|
|
(6,123 |
) |
|
|
(46 |
) |
Financing activities |
|
|
322,935 |
|
|
|
|
323,823 |
(8) |
|
|
(888 |
) |
|
|
(23,311 |
) |
|
|
(11,750 |
) |
|
|
5,748 |
|
|
|
250 |
|
Balance Sheet Data (at period end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
110,085 |
|
|
|
|
110,085 |
|
|
|
76,441 |
|
|
|
67,834 |
|
|
|
101,095 |
|
|
|
6,806 |
|
|
|
612 |
|
Total assets |
|
|
591,838 |
|
|
|
|
591,838 |
|
|
|
157,350 |
|
|
|
142,674 |
|
|
|
132,420 |
|
|
|
37,559 |
|
|
|
9,941 |
|
Total long-term debt, including
current
maturities |
|
|
188,526 |
|
|
|
|
188,526 |
|
|
|
5,358 |
|
|
|
5,475 |
|
|
|
6,175 |
|
|
|
4,958 |
|
|
|
|
|
Members/stockholders equity |
|
|
260,544 |
|
|
|
|
260,544 |
|
|
|
58,131 |
|
|
|
55,435 |
|
|
|
22,969 |
|
|
|
14,504 |
|
|
|
8,515 |
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthSpring, Inc. |
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
Period from March |
|
|
January 1, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months |
|
|
|
1, 2005 to |
|
|
2005 to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended December |
|
|
|
December 31, |
|
|
February 28, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31, 2005(1) |
|
|
|
2005(2) |
|
|
2005(2) |
|
|
2004(3) |
|
|
2003(4) |
|
|
2002(5) |
|
|
2001(6) |
|
Operating Statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical loss ratio Medicare(9) |
|
|
78.38 |
% |
|
|
|
78.33 |
% |
|
|
78.65 |
% |
|
|
78.07 |
% |
|
|
78.06 |
% |
|
|
(7 |
) |
|
|
(7 |
) |
Medical loss ratio Commercial(9) |
|
|
84.41 |
% |
|
|
|
85.51 |
% |
|
|
78.79 |
% |
|
|
85.25 |
% |
|
|
86.17 |
% |
|
|
(7 |
) |
|
|
(7 |
) |
Selling, general and
administrative expense ratio(10) |
|
|
13.06 |
% |
|
|
|
13.18 |
% |
|
|
12.28 |
% |
|
|
11.49 |
% |
|
|
13.57 |
% |
|
|
42.63 |
% |
|
|
122.44 |
% |
Members Medicare(11) |
|
|
101,281 |
|
|
|
|
101,281 |
|
|
|
69,236 |
|
|
|
63,792 |
|
|
|
47,899 |
|
|
|
33,579 |
|
|
|
|
|
Members Commercial(11) |
|
|
41,769 |
|
|
|
|
41,769 |
|
|
|
40,523 |
|
|
|
48,380 |
|
|
|
54,280 |
|
|
|
53,605 |
|
|
|
|
|
|
|
|
(1) |
|
The combined financial information for the twelve months ended December 31, 2005 includes
the results of operations of NewQuest, LLC, for the period from January 1, 2005 through
February 28, 2005 and the results of operations of the company for the period from March 1,
2005 through December 31, 2005. The combined financial information is for illustrative
purposes only, reflects the combination of the two-month period and the ten month period to
provide a comparison with the comparable twelve month period in 2004, and is not presented in
accordance with Generally Accepted Accounting Principles (GAAP). |
|
(2) |
|
On November 10, 2004, NewQuest, LLC and its members entered into a purchase and exchange
agreement with the company as part of the recapitalization. Pursuant to this agreement and a
related stock purchase agreement, on March 1, 2005, the GTCR Funds and certain other persons
contributed $139.7 million of cash to the company and the members of NewQuest, LLC contributed
a portion of their membership units in exchange for preferred and common stock of the company.
Additionally, we entered into a $165.0 million term loan, with an additional $15.0 million
available pursuant to a revolving loan facility, and issued $35.0 million of subordinated
notes. We used the cash contribution and borrowings to acquire the members remaining
membership units in NewQuest, LLC for approximately $295.4 million in cash. The aggregate
transaction value for the recapitalization was $438.6 million, which included $5.3 million of
capitalized acquisition related costs. Additionally, the Company incurred $6.3 million of
deferred financing costs. In addition, NewQuest, LLC incurred $6.9 million of transaction
costs which were expensed during the two-month period ended February 28, 2005 and the company
incurred $4.0 million of transaction costs that were expensed during the ten-month period
ended December 31, 2005. The transactions resulted in the Company recording $315.0 million in
goodwill and $91.2 million in identifiable intangible assets. |
|
(3) |
|
On January 1, 2004, the minority members of TennQuest Health Solutions, LLC, or TennQuest, an
84.375% owned subsidiary of NewQuest, LLC, converted their ownership of TennQuest into 500,000
membership units in NewQuest, LLC, and on February 2, 2004 TennQuest was merged into NewQuest,
LLC. Effective December 31, 2004, holders of phantom membership units in NewQuest, LLC
converted their phantom units into 306,000 membership units of NewQuest, LLC. In connection
with the conversion, the company recognized phantom stock compensation expense of $24.2
million. |
|
(4) |
|
On April 1, 2003, TennQuest exercised an option to acquire an additional 33% interest in
HealthSpring Management, Inc., or HSMI, from another shareholder of HSMI. As a result of the
acquisition of these shares, the company held 83% of the ownership interests in HSMI and
consolidated the results of operations of HealthSpring of Tennessee with the companys
operations for the period from April 1, 2003. Prior to April 1, 2003, the company accounted
for its ownership interest in HSMI under the equity method. On December 19, 2003, HSMI and
HealthSpring USA, LLC each redeemed certain of their outstanding ownership interests, which
resulted in the company owning 84.8% of the outstanding ownership interests of HSMI and
HealthSpring USA, LLC at December 31, 2003. |
|
(5) |
|
In November, 2002, NewQuest, LLC acquired The Oath A Health Plan for Alabama, Inc.,
subsequently renamed HealthSpring of Alabama, Inc., an Alabama for-profit HMO. |
|
(6) |
|
On December 21, 2001, the minority shareholders of GulfQuest, L.P., an 85% owned subsidiary
of NewQuest, LLC, converted their 15% interest in GulfQuest into NewQuest, LLC membership
units. |
|
(7) |
|
Premium revenues and medical expense are reported in total only and are not separated into
Medicare and commercial for 2001 and 2002 as the company did not report information in this
format. As a result, the company is not able to determine the Medicare and commercial medical
loss ratios for 2001 and 2002. |
|
(8) |
|
A substantial portion of the cash flows for investing and financing activities for the
ten-month period ended December 31, 2005 relate to the
recapitalization. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations The
Recapitalization. |
|
(9) |
|
The medical loss ratio represents medical expense incurred for plan participants as a
percentage of premium revenue for plan participants. |
|
(10) |
|
The selling, general and administrative expense ratio represents selling, general and
administrative expenses as a percentage of total revenue. |
|
(11) |
|
At end of each period presented. Data not available for 2001. |
36
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our financial
statements and related notes included elsewhere in this report. This discussion contains
forward-looking statements based on our current expectations that by their nature involve risks and
uncertainties. Our actual results and the timing of selected events could differ materially from
those anticipated in these forward-looking statements. Moreover, past financial and operating
performance are not necessarily reliable indicators of future performance and you are cautioned in
using our historical results to anticipate future results or to predict future trends. In
evaluating any forward-looking statement, you should specifically consider the information set
forth under the caption Special Note Regarding Forward-Looking Statements and in Item 1A. Risk
Factors, as well as other cautionary statements contained elsewhere in this report, including the
matters discussed in Critical Accounting Policies and Estimates below.
Overview
We are a managed care organization that focuses primarily on Medicare, the health insurance
program for retired United States citizens aged 65 and older, qualifying disabled persons, and
persons suffering from end-stage renal disease. Medicare is funded by the federal government and
administered by CMS. As of December 31, 2005, we owned and operated Medicare health plans,
including stand-alone prescription drug plans, in Tennessee, Texas, Alabama, Illinois, and
Mississippi. For the combined twelve months ended December 31, 2005, approximately 82.4% of our
total revenue consisted of premiums we received from CMS pursuant to our Medicare contracts.
Although we concentrate on Medicare plans, we also utilize our infrastructure and provider networks
in Tennessee and Alabama to offer commercial health plans to individuals and employer groups.
We operate our business through our subsidiaries. In general, we have a licensed HMO
subsidiary in each state in which we do business that is regulated by the relevant state department
of insurance. We also typically have nonregulated management subsidiaries in each of our geographic
markets that contract with our HMO subsidiaries for management and other administrative services,
including financial administration and analysis, credentialing, personnel, claims processing,
utilization management, risk management, quality management, customer service, insurance
processing, contract negotiation, provider relations, and reporting and analysis.
In Tennessee, from the commencement of our operations in September 2000 until March 31, 2003,
we indirectly owned a 50% interest in our Tennessee HMO and management subsidiaries and accounted
for these subsidiaries using the equity method. On April 1, 2003, we acquired an additional 33%
interest in those subsidiaries and from the acquisition date consolidated the operations of these
subsidiaries for accounting purposes. On December 19, 2003, we increased our ownership interest in
the Tennessee subsidiaries to approximately 85%, which was our level of ownership immediately
preceding the recapitalization on March 1, 2005 (discussed in more detail below). Concurrently with
the recapitalization, we acquired the remaining minority interest in the Tennessee HMO and
management subsidiaries. We acquired our Alabama HMO subsidiary in November 2002. In Texas,
although we have had minority ownership interests in our Texas HMO subsidiary, we have accounted
for our Texas operations on a consolidated basis for all periods presented herein.
On February 8, 2006, we completed our initial public offering, or IPO, of common stock. In the
IPO, we issued 10.6 million shares of common stock at a price of $19.50 per share. We used the net
proceeds of the IPO of approximately $193.3 million to repay all of our outstanding indebtedness,
including accrued and unpaid interest and other expenses related to the IPO. In connection with the
IPO, the minority interests in our Texas HMO subsidiary were exchanged for 2,040,194 shares of our
common stock. In addition, as a result of the IPO, all of our outstanding shares of preferred stock
and accrued but unpaid dividends automatically converted into shares of Common Stock at the IPO
price. Upon completion of the IPO, we had 57,289,549 shares of common stock outstanding.
37
Our primary source of revenue is monthly premium payments we receive based on membership
enrolled in our managed care plans. The following table summarizes our Medicare Advantage and
commercial plan membership, by state, as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Medicare Advantage Membership |
|
|
|
|
|
|
|
|
|
|
|
|
Tennessee |
|
|
42,509 |
|
|
|
29,862 |
|
|
|
25,772 |
|
Texas |
|
|
29,706 |
|
|
|
21,221 |
|
|
|
15,637 |
|
Alabama |
|
|
24,531 |
|
|
|
12,709 |
|
|
|
6,490 |
|
Illinois (1) |
|
|
4,166 |
|
|
|
|
|
|
|
|
|
Mississippi(2) |
|
|
369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
101,281 |
|
|
|
63,792 |
|
|
|
47,899 |
|
|
|
|
|
|
|
|
|
|
|
Commercial Membership(3) |
|
|
|
|
|
|
|
|
|
|
|
|
Tennessee |
|
|
29,859 |
|
|
|
32,139 |
|
|
|
32,668 |
|
Alabama |
|
|
11,910 |
|
|
|
16,241 |
|
|
|
21,612 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
41,769 |
|
|
|
48,380 |
|
|
|
54,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We commenced operations in Illinois in December 2004 |
|
(2) |
|
We commenced enrollment efforts in Mississippi in July, 2005. |
|
(3) |
|
Does not include members of commercial PPOs owned and operated by unrelated third
parties that pay us a fee for access to our contracted provider network. |
As a result of the MMA reforms, and particularly as a result of the prescription drug coverage
requirements under Medicare Part D that became effective January 1, 2006, we expect Medicare
Advantage plan membership penetration in our markets generally and enrollment in our Medicare plans
specifically to increase. For example, as of January 1, 2006, initial CMS enrollment reports indicated we
had approximately 90,000 beneficiaries enrolled in our PDPs, substantially all of whom were
auto-enrolled dual-eligible beneficiaries. Subsequent enrollment reports indicated stand-alone PDP membership of
approximately 75,000,
although the exact number of our current PDP members is not determinable because of challenges
experienced by CMS in generating accurate enrollment and payment reports. Moreover, as a result of
various factors, including primarily, we believe, confusion of Medicare beneficiaries over the new
Part D prescription drug benefits, our net new enrollment in our MA-PD plans in early 2006 has been
lower than anticipated. Although we believe the CMS systems challenges, Medicare beneficiary confusion, and our
current enrollment trends are temporary, there can be no assurances that these factors will not
continue to adversely affect our membership growth.
The Recapitalization
HealthSpring, Inc. was formed in October 2004 in connection with a recapitalization
transaction, which was accounted for using the purchase method, involving our predecessor,
NewQuest, LLC, its members, the GTCR Funds, and certain other investors and lenders. The
recapitalization was completed on March 1, 2005. Prior to the recapitalization, NewQuest, LLC was
owned 43.9% by our officers and employees, 38.2% by non-management directors of NewQuest, LLC, and
17.9% by outside investors.
In connection with the recapitalization, the company, NewQuest, LLC, its members, the GTCR
Funds, and certain other investors entered into a purchase and exchange agreement and other related
agreements pursuant to which the GTCR Funds and certain other investors purchased an aggregate of
136,072 shares of our preferred stock and 18,237,587 shares of our common stock for an aggregate
purchase price of $139.7 million. The members of NewQuest, LLC exchanged or sold their ownership
interests in NewQuest, LLC for an aggregate of $295.4 million in cash (including $17.2 million
placed in escrow to secure contingent post-closing indemnification liabilities), 91,082 shares of
our preferred stock, and 12,207,631 shares of our common stock. In addition, upon the closing of
the recapitalization, the company issued an aggregate of 1,286,250 shares of restricted common
stock to employees
38
of the company for an aggregate purchase price of $257,250. The company used the proceeds from
the sale of preferred and common stock and $200 million of borrowings under our senior credit
facility and senior subordinated notes to fund the cash payments to the members of NewQuest, LLC
and to pay expenses and other payments relating to the transaction. Immediately following the
recapitalization, the company was owned 55.1% by the GTCR Funds, 28.7% by our executive officers
and employees, and 16.2% by outside investors, including one of our non-employee directors. In
connection with the IPO, the GTCR Funds sold 11.02 million shares of common stock, thereby reducing
their ownership to 23.9% of our outstanding common stock.
Prior to the recapitalization, approximately 15% of the ownership interests in two of our
Tennessee management subsidiaries and approximately 27% of the membership interests of our Texas
HMO subsidiary, Texas HealthSpring, LLC, were owned by outside investors. Contemporaneously with
the recapitalization, we purchased all of the minority interests in our Tennessee subsidiaries for
an aggregate consideration of approximately $27.5 million and a portion of the membership interests
held by the minority investors in Texas HealthSpring, LLC for aggregate consideration of
approximately $16.8 million. Following the purchase, the outside investors in Texas HealthSpring,
LLC owned an approximately 9% ownership interest. In June 2005, Texas HealthSpring completed a
private placement pursuant to which it issued new membership interests to existing and new
investors, primarily physicians affiliated with RPO, for net proceeds of $7.7 million. Following
this private placement, and as of December 31, 2005, the outside investors owned an approximately
15.9% interest in Texas HealthSpring, LLC, which interest was automatically exchanged, without
additional consideration, for 2,040,194 shares of our common stock immediately prior to the IPO.
The recapitalization was accounted for using the purchase method of accounting in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations. The
aggregate transaction value for the recapitalization was $438.6 million, which included $5.3
million of capitalized acquisition related costs and $6.3 million of deferred financing costs. In
addition, the company incurred $6.9 million of transaction costs that were expensed during the
two-month period ended February 28, 2005 and $4.0 million of costs that were expensed during the
ten-month period ended December 31, 2005. As a result of the recapitalization, the company acquired
$438.6 million of net assets, including $91.2 million of identifiable intangible assets and
goodwill of approximately $315.0 million. Of the $91.2 million of identifiable intangible assets we
recorded, $24.5 million has an indefinite life, and the remaining $66.7 million is being amortized
over periods ranging from 2 to 15 years.
Basis of Presentation
HealthSpring as it existed prior to the March 1, 2005 recapitalization is sometimes referred
to as predecessor. For purposes of comparing our 2005 twelve-month results with the comparable
2004 period, we have combined the results of operations of the predecessor from January 1, 2005
through February 28, 2005 and of the company for the period from March 1, 2005 through December 31,
2005. This combined presentation is not in accordance with GAAP; however, we believe it is useful
in analyzing and comparing certain of our operating trends for the last two fiscal years. The
combined and consolidated results of operations include the accounts of HealthSpring, Inc. and all
of its subsidiaries. Significant intercompany accounts and transactions have been eliminated.
Results of Operations
Revenue
General. Our revenue consists primarily of (i) premium revenue we generate from our Medicare
and commercial lines of business; (ii) fee revenue we receive for management and administrative
services provided to independent physician associations, health plans, and self-insured employers,
and for access to our provider networks; and (iii) investment income.
Premium Revenue. Our Medicare and commercial lines of business include all premium revenue we
receive in our health plans. Our Medicare contracts entitle us to premium payments from CMS, on
behalf of each Medicare beneficiary enrolled in our plans, generally on a per member per month, or
PMPM, basis. In our commercial HMOs, we receive a monthly payment from or on behalf of each
enrolled member. In both our commercial and Medicare plans we recognize premium revenue during the
month in which the company is obligated to provide services to an enrolled member. Premiums we
receive in advance of that date are recorded as deferred revenue.
39
Premiums for our Medicare and commercial products are generally fixed by contract in advance
of the period during which health care is covered. Each of our Medicare plans submits rate
proposals to CMS, generally by county or service area, in June for each Medicare product that will
be offered beginning January 1 of the subsequent year. Retroactive rate adjustments are made
periodically with respect to each of our Medicare Advantage plans based on the aggregate health
status and risk scores of our plan populations. These rate adjustments are recorded as received.
Our commercial premiums are generally fixed for the plan year, in most cases beginning January 1.
Fee Revenue. Fee revenue includes amounts paid to us for management services provided to
independent physician associations and health plans. Our management subsidiaries typically generate
fee revenue on one of three principal bases: (1) as a percentage of revenue collected by the
relevant health plan; (2) as a fixed PMPM payment or percentage of revenue for members serviced by
the relevant independent physician association; or (3) as fees we receive for offering access to
our provider networks and for administrative services we offer to self-insured employers. Fee
revenue is recognized in the month in which services are provided. In addition, pursuant to certain
of our management agreements with independent physician associations, we receive fees based on a
share of the profits of the independent physician associations. To the extent these fees relate to
members of our HMO subsidiaries, the fees are recognized as a credit to medical expense. Management
fees calculated based on profits are recognized, as fee revenue or as a credit to medical expenses,
if applicable, when we can readily determine that such fees have been earned, which determination
is typically made on a monthly basis.
Investment Income. Investment income consists of interest income and gross realized gains and
losses incurred on short term available for sale and long term held to maturity investments.
Medical Expense
Our largest expense is the cost of medical services we arrange for our members, or medical
expense. Medical expense for our Medicare and commercial plans primarily consist of payments to
physicians, hospitals, and other health care providers for services provided to our Medicare
Advantage and commercial members. We generally pay our providers on one of three bases: (1)
fee-for-service contracts based on negotiated fee schedules; (2) capitated arrangements, generally
on a fixed PMPM payment basis, whereby the provider generally assumes some or all of the medical
expense risk; and (3) risk-sharing arrangements, whereby we advance a capitated PMPM amount and
share the risk of the medical costs of our members with the provider based on actual experience as
measured against pre-determined sharing ratios.
One of our primary tools for managing our business and measuring our profitability is our
medical loss ratio, or MLR, the ratio of our medical expenses to the premiums we receive. Changes
in the MLR from period to period result from, among other things, changes in Medicare funding or
commercial premiums, changes in benefits offered by our plans, our ability to manage medical
expense, and changes in accounting estimates related to incurred but not reported, or IBNR, claims.
We use MLRs both to monitor our management of medical expenses and to make various business
decisions, including what plans or benefits to offer, what geographic areas to enter or exit, and
our selection of healthcare providers. We analyze and evaluate our Medicare and commercial MLRs
separately.
40
Percentage Comparisons
The following table sets forth the consolidated and combined statements of income data
expressed as a percentage of revenues for each period indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(combined) |
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Medicare premiums |
|
|
82.4 |
% |
|
|
72.4 |
% |
|
|
64.4 |
% |
Commercial premiums |
|
|
14.8 |
|
|
|
24.4 |
|
|
|
32.4 |
|
|
|
|
|
|
|
|
|
|
|
Total premiums |
|
|
97.2 |
|
|
|
96.8 |
|
|
|
96.8 |
|
Fee revenue |
|
|
2.4 |
|
|
|
3.0 |
|
|
|
3.0 |
|
Investment income |
|
|
0.4 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Medical expense |
|
|
77.0 |
|
|
|
77.3 |
|
|
|
78.2 |
|
Selling, general and administrative expense |
|
|
13.1 |
|
|
|
11.5 |
|
|
|
13.6 |
|
Transaction expense |
|
|
1.3 |
|
|
|
|
|
|
|
|
|
Phantom stock compensation |
|
|
|
|
|
|
4.0 |
|
|
|
|
|
Depreciation and amortization expense |
|
|
0.8 |
|
|
|
0.6 |
|
|
|
0.6 |
|
Interest expense |
|
|
1.7 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
93.9 |
|
|
|
93.4 |
|
|
|
92.5 |
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates |
|
|
|
|
|
|
|
|
|
|
0.6 |
|
Income before minority interest and income taxes |
|
|
6.1 |
|
|
|
6.6 |
|
|
|
8.1 |
|
Minority interest |
|
|
(0.4 |
) |
|
|
(1.0 |
) |
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
5.7 |
|
|
|
5.6 |
|
|
|
6.6 |
|
Income tax expense |
|
|
2.3 |
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
Net income before preferred dividends |
|
|
3.4 |
|
|
|
4.1 |
|
|
|
5.1 |
|
Preferred dividends |
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to members or common
stockholders |
|
|
1.6 |
% |
|
|
4.1 |
% |
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
Comparison of the Combined Twelve Month Period Ended December 31, 2005 to the Year Ended December
31, 2004
Membership
Our Medicare Advantage membership increased by 58.8% to 101,281 members at December 31, 2005
as compared to 63,792 members at December 31, 2004. The substantial majority of this increase was
attributable to growth in membership in our existing core markets in Tennessee, Texas and Alabama
through increased penetration in existing service areas and geographic expansion into new counties
contiguous to existing service areas. Enrollment efforts in our new markets, Illinois and
Mississippi, which commenced in December 2004 and July 2005, respectively, also contributed to the
increase. Our commercial HMO membership declined by 13.7% over the same period, from 48,380 to
41,769, primarily as a result of our decision to increase premiums to maintain our commercial
margins and the discontinuance of certain unprofitable customer and provider relationships in
Alabama and Tennessee.
Revenue
Total revenue was $856.8 million in the combined twelve months of 2005 as compared with $599.4
million for 2004, representing an increase of $257.4 million, or 42.9%. The components of revenue
were as follows:
Premium Revenue. Total premium revenue for the combined twelve months of 2005 was $832.5
million as compared with $580.0 million in 2004, representing an increase of $252.5 million, or
43.5%. The components of premium revenue and the primary reasons for changes were as follows:
41
Medicare: Medicare premiums were $705.7 million in the combined twelve months of 2005
versus $433.7 million in the prior year, representing an increase of $272.0 million, or 62.7%.
The primary factors affecting changes in Medicare premium revenue include membership (which we
measure in member months), premium rates and risk scores, the geographic mix of our Medicare
members, and the mix of our members qualifying as dual-eligibles. The increase in Medicare
premiums in 2005 is primarily attributable to the 46.1% increase in membership months to 996,929
for the combined twelve months of 2005 from 682,331 for the comparable period of 2004. An
increase in our average PMPM premium to $707.85 for the combined twelve months of 2005 from
$635.66 for 2004, or by 11.4%, also contributed to the increase in premium revenue.
Approximately $9.8 million, or $9.82 PMPM, of the rate increase was attributable to retroactive
risk payments received from CMS during the combined twelve months ended December 31, 2005. For
the combined twelve months of 2005, Medicare premiums represented 84.8% of total premium revenue
and 82.4% of total revenue as compared with 74.8% and 72.4%, respectively, for the comparable
period of the prior year.
Commercial: Commercial premiums were $126.9 million in the combined twelve months of 2005
as compared with $146.3 million in 2004, reflecting a decrease of $19.4 million, or 13.3%. The
decline in commercial premiums is attributable to the decline in commercial membership months to
497,973 for the combined twelve month period ended December 31, 2005 from 614,295 for 2004, or
by 18.9%, which was partially offset by average commercial premium increases of approximately
7.0% over the same period. For the combined twelve months of 2005, commercial premiums
represented 15.2% of total premium revenue and 14.8% of total revenue versus 25.2% and 24.4%,
respectively, for the prior year. Because of our expansion of our Medicare program into
Mississippi and new areas in Tennessee, Texas, and Illinois, continuing Medicare member growth
in existing service areas, our recent decision to exit the individual and small employer group
commercial markets in Alabama, and the implementation of Medicare Part D as of January 1, 2006,
we expect commercial premium revenue as a percentage of total premium revenue and total revenue
to continue to decline in the future.
Fee Revenue. Fee revenue was $20.4 million in the combined twelve months of 2005 as compared
with $17.9 million in 2004, representing an increase of $2.5 million, or 13.9%. The increase was
primarily attributable to the addition of a new independent physician association in Tennessee in
January 2005, increases in independent physician association management fees, which are calculated
by reference to increased PMPM premiums, and the increase in Medicare Advantage membership.
Investment Income. Investment income was $3.8 million for the combined twelve months of 2005
versus $1.4 million for 2004, reflecting an increase of $2.4 million, or 171.4%. The increase is
attributable primarily to an increase in average invested and cash balances, coupled with a higher
average yield on these balances.
Medical Expense
Medicare medical expense for the combined twelve months ended December 31, 2005 increased
$214.5 million, or 63.3%, to $553.1 million from $338.6 million for 2004, primarily as a result of
increased membership. Commercial medical expense decreased by $17.6 million, or 14.2%, to $107.1
million for the combined twelve months of 2005 as compared to $124.7 million for 2004, primarily as
a result of the decrease in commercial membership over the same period.
For the combined twelve months ended December 31, 2005, the Medicare MLR was 78.38% versus
78.07% for 2004, reflecting an increase of 31 basis points, which was primarily attributable to
general medical cost inflation, higher Medicare inpatient admissions per thousand, an increase in
the average cost per admission, and an increase in benefits, including implementation of a fitness
program in all markets and increased drug benefits in selected markets, offset in part by favorable
Medicare premium rates. Our Medicare medical expense calculated on a PMPM basis was $554.79 for the
combined twelve months ended December 31, 2005, compared with $496.29 for 2004, reflecting an
increase of 11.8%, which was primarily attributable to a higher mix of dual-eligible beneficiaries
in 2005. The commercial MLR was 84.41% for the combined twelve months of 2005 as compared with
85.25% in 2004, a decrease of 84 basis points, which was primarily attributable to improvement in
commercial premiums and relatively flat cost trends.
42
Selling, General, and Administrative Expense
Selling, general, and administrative, or SG&A, expense for the combined twelve months ended
December 31, 2005 was $111.9 million (not including the $10.9 million of transaction expense
described below) as compared with $68.9 million for the prior year, an increase of $43.0 million,
or 62.4%. As a percentage of revenue, SG&A expense was 13.06% for the combined twelve months of
2005 versus 11.49% for the prior year, an increase of 157 basis points. The increase in SG&A
expense was attributable, in part, to an increase in personnel, including increases in corporate
personnel in anticipation of the IPO, increased sales commissions resulting from the increased
membership, and other spending associated with supporting and sustaining our membership growth,
including expansion into new geographic areas. During late 2004 and early 2005, we commenced
expansion into selected counties surrounding Chattanooga and Memphis, Tennessee as well as into the
Chicago, Illinois metropolitan area. As we expand into new service areas, we incur a significant
amount of expense in advance of the effective member enrollment dates, when we begin to collect
revenue for new members. During 2005, the company incurred approximately $6.8 million of expense
associated with this expansion activity. In addition, in 2005 we incurred approximately $4.0
million of incremental expense relating primarily to sales and marketing activities associated with
the implementation of our Medicare Part D programs and new membership recruitment and enrollment
and $1.7 million of stock compensation expense.
Transaction Expense
Transaction expense of $10.9 million was incurred in the combined twelve months of 2005 in
conjunction with the recapitalization. This expense includes fees paid to financial and legal
advisors and other expenses, including $4.0 million related to a settlement with RPO. See Notes 7
and 23 to the Consolidated Financial Statements.
Depreciation and Amortization Expense
Depreciation and amortization expense was $7.3 million in the combined twelve months of 2005
as compared with $3.2 million in 2004, representing an increase of $4.1 million, or 128.1%. The
increase is primarily attributable to the amortization of identifiable intangible assets recorded
in conjunction with the recapitalization. Amortization related to the recapitalization in the
amount of $5.0 million was recorded during the combined twelve months of 2005. Management currently
expects that amortization relating to the identifiable intangible assets recorded in the
recapitalization for 2006 will be approximately $7.3 million, which includes the acceleration of
amortization of certain identifiable intangible assets as a result of
our Alabama HMOs decision following the recapitalization to exit the individual and small employer commercial business.
Interest Expense
Interest expense was $14.5 million in the combined twelve months of 2005. Almost all of the
companys interest expense related to the senior credit facility and senior subordinated notes put
in place in conjunction with the recapitalization. For the combined twelve months ended December
31, 2005, we recorded interest expense of $9.0 million related to our senior credit facility and
$4.5 million related to our senior subordinated notes. Additionally, interest expense in the
combined twelve months of 2005 includes $0.9 million for amortization of deferred finance costs.
The effective annual interest rate during the combined twelve months of 2005 on the senior credit
facility was 6.6% and on the senior subordinated notes was 15%, 12% of which was payable in cash
and 3% of which accrued quarterly and was added to the outstanding principal amount. In February
2006, in connection with the IPO, the company repaid all of its outstanding indebtedness and
related accrued interest, and wrote off related deferred financing costs of $5.5 million.
Minority Interest
Minority
interest was $3.2 million in the combined twelve months of 2005 as compared with $6.3
million in 2004. The change is attributable to the elimination of minority interest ownership in
our Tennessee HMO and management subsidiaries and the reduction of minority interest ownership
interest in our Texas HMO subsidiary in connection with the recapitalization. The earnings of these
subsidiaries increased in 2005 as compared with 2004, which would have resulted in an increase in
minority interest if it had not been offset by the Companys increases in ownership. In conjunction with the IPO, all minority interest ownership in the Texas HMO
subsidiary was exchanged for Company common stock.
43
Income Tax Expense
For the combined twelve months ended December 31, 2005, income tax expense was $19.8 million,
reflecting an effective tax rate of 40.3%, versus $9.2 million, reflecting an effective tax rate of
27.4%, for 2004. The increase in the effective tax rate is a result of the fact that our
predecessor and several of its subsidiaries were pass-through tax entities that were taxed at the
member level and the successor is taxed on a consolidated basis at the corporate level.
Preferred Dividend
In the combined twelve months ended December 31, 2005, we accrued $15.6 million of dividends
payable on the preferred stock issued in connection with the recapitalization. The $227.2 million
liquidation value of preferred stock had an accumulating dividend of 8%, whether declared or paid.
In February 2006, in connection with the IPO, the preferred stock and all accrued and unpaid
dividends were automatically converted into common stock.
Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003
As previously noted, prior to April 1, 2003, the predecessor accounted for its Tennessee
management subsidiary, HealthSpring Management, Inc., or HSMI, including HSMIs wholly owned
subsidiary, HealthSpring of Tennessee, Inc., or HTI, our Tennessee HMO, using the equity method. On
April 1, 2003, the predecessor increased its ownership of HSMI to 83% and consolidated the results
of HSMI and HTI for the balance of 2003 and all of 2004. Although not in accordance with GAAP,
management believes the changes from 2003 to 2004 in results of operations and the reasons
therefore are best understood by comparing 2004 as reported to 2003 as adjusted to reflect HSMI on
an as if consolidated basis for the first quarter of 2003. The adjustments to statement of income
data for 2003 to reflect HSMI on an as if consolidated basis are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSMI for the Period |
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
from January 1, 2003 |
|
|
|
|
|
|
Year Ended |
|
|
December 31, 2003 |
|
|
through March 31, |
|
|
Year Ended |
|
|
|
December 31, 2004 |
|
|
As Adjusted |
|
|
2003 |
|
|
December 31, 2003 |
|
|
|
(in thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare premiums |
|
$ |
433,729 |
|
|
$ |
298,831 |
|
|
$ |
58,794 |
|
|
$ |
240,037 |
|
Commercial premiums |
|
|
146,318 |
|
|
|
141,064 |
|
|
|
20,187 |
|
|
|
120,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums |
|
|
580,047 |
|
|
|
439,895 |
|
|
|
78,981 |
|
|
|
360,914 |
|
Fee revenue |
|
|
17,919 |
|
|
|
11,002 |
|
|
|
(52 |
) |
|
|
11,054 |
|
Investment income |
|
|
1,449 |
|
|
|
831 |
|
|
|
136 |
|
|
|
695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
599,415 |
|
|
|
451,728 |
|
|
|
79,065 |
|
|
|
372,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare expense |
|
|
338,632 |
|
|
|
238,753 |
|
|
|
51,385 |
|
|
|
187,368 |
|
Commercial expense |
|
|
124,743 |
|
|
|
119,936 |
|
|
|
15,772 |
|
|
|
104,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical expense |
|
|
463,375 |
|
|
|
358,689 |
|
|
|
67,157 |
|
|
|
291,532 |
|
Selling, general and administrative |
|
|
68,868 |
|
|
|
58,083 |
|
|
|
7,507 |
|
|
|
50,576 |
|
Phantom stock compensation |
|
|
24,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,210 |
|
|
|
2,773 |
|
|
|
412 |
|
|
|
2,361 |
|
Interest |
|
|
214 |
|
|
|
256 |
|
|
|
|
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
559,867 |
|
|
|
419,801 |
|
|
|
75,076 |
|
|
|
344,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in earnings
of unconsolidated affiliates,
minority interest, and income
taxes |
|
|
39,548 |
|
|
|
31,927 |
|
|
|
3,989 |
|
|
|
27,938 |
|
Equity in earnings of
unconsolidated affiliates |
|
|
234 |
|
|
|
64 |
|
|
|
(1,994 |
) |
|
|
2,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
and income taxes |
|
|
39,782 |
|
|
|
31,991 |
|
|
|
1,995 |
|
|
|
29,996 |
|
Minority interest |
|
|
(6,272 |
) |
|
|
(7,514 |
) |
|
|
(1,995 |
) |
|
|
(5,519 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
33,510 |
|
|
|
24,477 |
|
|
|
|
|
|
|
24,477 |
|
Income tax expense |
|
|
9,193 |
|
|
|
5,417 |
|
|
|
|
|
|
|
5,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,317 |
|
|
$ |
19,060 |
|
|
$ |
|
|
|
$ |
19,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Membership
Our Medicare Advantage membership increased by 33.2%, to 63,792 members at December 31, 2004,
as compared to 47,899 members at December 31, 2003. This increase was attributable to growth in
membership in all of our existing markets Tennessee (4,090, or 15.9%, increase in members), Texas
(5,584, or 35.7%, increase), and Alabama (6,219, or 95.8%, increase) through increased
penetration in existing service areas and geographic expansion into new counties contiguous to
existing service areas. Our commercial membership declined by 10.9% over the same period, from
54,280 to 48,380, primarily as a result of the decision to discontinue certain unprofitable
customer and provider relationships and markets in Alabama and Tennessee.
Revenue
Total revenue was $599.4 million for 2004 as compared with $451.7 million for 2003, as
adjusted, an increase of $147.7 million, or 32.7%. The components of revenue were as follows:
Premium Revenue. Total premium revenue for 2004 was $580.0 million as compared with $439.9
million in 2003, as adjusted, representing an increase of $140.1 million, or 31.8%. Total premium
revenue accounted for 96.8% and 97.4%, as adjusted, of our total revenue in 2004 and 2003,
respectively. The components of premium revenue were as follows:
Medicare: Medicare premium revenue for 2004 was $433.7 million versus $298.8 million in
2003, as adjusted. The increase in Medicare premium revenue in 2004 by $134.9 million, or 45.1%,
over 2003 is primarily attributable to a 13.0% increase in our average PMPM premiums, to $635.66
in 2004 from $562.53 in 2003, and a 28.4% increase in Medicare member months, to 682,331 in 2004
from 531,266 in 2003. Medicare premium revenues also increased because of the accelerating
growth of Medicare members, particularly dual-eligible members, in Texas and Alabama, where our
PMPM reimbursement rates were higher than in Tennessee. Medicare premium revenue accounted for
74.8% of total premium revenue in 2004 as compared to 67.9% of total premium revenue in 2003, as
adjusted.
Commercial. Commercial premiums were $146.3 million in 2004 as compared with $141.1
million in 2003, as adjusted, reflecting an increase of $5.2 million, or 3.7%. The increase in
commercial premiums is attributable to an average premium increase of $19.37, or 8.7%, which was
partially offset by a 4.7% decline in commercial member months.
Fee Revenue. Fee revenue was $17.9 million for 2004 as compared with $11.0 million, as
adjusted, in the prior year, an increase of $6.9 million, or 62.9%. The increase was primarily
attributable to increased Medicare membership and Medicare premiums in our managed independent
physician associations.
Investment Income. Investment income was $1.4 million for 2004 as compared with $0.8 million
for the prior year, as adjusted, reflecting an increase of $0.6 million, or 74.4%. The increase is
attributable primarily to an increase in average invested balances.
Medical Expense
Total medical expense for 2004 was $463.4 million as compared with $358.7 million for 2003, as
adjusted, reflecting an increase of $104.7 million, or 29.2%. Medicare medical expense for 2004 was
$338.6 million as compared $238.8 million for 2003, as adjusted. Commercial medical expense for
2004 was $124.7 million as compared to $119.9 million for 2003, as adjusted.
45
The components of medical expense and the corresponding MLR, by line of business were, for the
periods indicated, as follows:
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
As Adjusted |
|
|
|
(in thousands) |
|
Premium Revenue: |
|
|
|
|
|
|
|
|
Medicare |
|
$ |
433,729 |
|
|
$ |
298,831 |
|
Commercial |
|
|
146,318 |
|
|
|
141,064 |
|
|
|
|
|
|
|
|
|
|
$ |
580,047 |
|
|
$ |
439,895 |
|
Medical Expense: |
|
|
|
|
|
|
|
|
Medicare |
|
$ |
338,632 |
|
|
$ |
238,753 |
|
Commercial |
|
|
124,743 |
|
|
|
119,936 |
|
|
|
|
|
|
|
|
|
|
$ |
463,375 |
|
|
$ |
358,689 |
|
Medical Loss Ratio (MLR): |
|
|
|
|
|
|
|
|
Medicare |
|
|
78.07 |
% |
|
|
79.90 |
% |
Commercial |
|
|
85.25 |
% |
|
|
85.02 |
% |
For 2004, the Medicare MLR was 78.07% compared with 79.90% for 2003, as adjusted, a decrease
of 183 basis points. The decline in Medicare MLR in 2004 was primarily the result of the favorable
impact of risk-adjusted revenue received from CMS during the third quarter of 2004, which included
positive retrospective adjustments back to January 2004. Our Medicare medical expense calculated on
a PMPM basis was $496.29 for 2004 compared with $449.40 for 2003, as adjusted, reflecting an
increase of 10.4%. Commercial MLR of 85.25% in 2004 was relatively flat as compared to 85.02% in
2003, as adjusted.
Selling, General, and Administrative Expense
SG&A expense for 2004 was $68.9 million versus $58.1 million in 2003, as adjusted, reflecting
an increase of $10.8 million, or 18.6%. This increase over 2003 was primarily attributable to an
increase in headcount, an increase in general advertising and marketing expense, and approximately
$1.3 million of incremental administrative expense associated with the new market expansion into
Illinois. As a percentage of total revenue, SG&A expense was 11.49% for 2004 versus 12.86% for
2003, as adjusted, a decrease of 137 basis points.
Phantom Stock Compensation
An expense of $24.2 million was incurred in 2004 in conjunction with the recapitalization.
This amount reflects the compensation expense associated with the conversion, as of December 31,
2004, by our employees of phantom membership units in the predecessor into 306,025 membership units
of the predecessor in anticipation of the recapitalization.
Depreciation and Amortization Expense
Depreciation and amortization expense for 2004 was $3.2 million as compared with $2.8 million
in 2003, as adjusted, reflecting an increase of $0.4 million, or 15.76%. This increase was
primarily attributable to additional depreciation on new assets purchased and increased
amortization resulting from a full year of ownership of two preferred provider organization
networks purchased in September 2003.
Minority Interest
Minority interest for 2004 was $6.3 million as compared with $7.5 million in 2003, as
adjusted. This change was primarily attributable to the acquisition of an additional 35% interest
in the Tennessee management subsidiaries during 2003.
46
Income Tax Expense
Income tax expense for 2004 was $9.2 million versus $5.4 million in 2003, reflecting an
increase of $3.8 million, or 70.4%. This increase over 2003 was primarily attributable to an
increase in 2004 in taxable income of $9.1 million.
Liquidity and Capital Resources
We have historically financed our operations primarily through internally generated funds.
Substantially all of the cash proceeds from the $200.0 million in debt we incurred in connection
with the recapitalization were paid to members of our predecessor in exchange for their membership
units or to others, primarily for expenses related to the recapitalization. All of our outstanding
funded indebtedness was repaid in February 2006 with proceeds from the IPO. Although we eliminated
our funded debt, we may borrow up to $15.0 million pursuant to our existing senior secured
revolving credit facility, which amount may be increased by up to $25.0 million subject to certain
conditions. See Indebtedness below.
We generate cash primarily from premium revenue and our primary use of cash is the payment of
medical and SG&A expenses. We anticipate that our current level of cash on hand, internally
generated cash flows, and borrowings available under our senior secured revolving credit facility
will be sufficient to fund our working capital needs and anticipated capital expenditures over the
next twelve months. We currently intend to enter into a new revolving credit facility in the second
quarter of 2006.
The reported changes in cash and cash equivalents for the combined twelve month period ended
December 31, 2005, which includes our predecessor for the period from January 1, 2005 through
February 28, 2005 and the company for the period from March 1, 2005 through December 31, 2005, and
the years ended December 31, 2004 and 2003, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Twelve |
|
|
|
|
|
|
Months Ended |
|
|
Year Ended December 31, |
|
|
|
December 31, 2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in thousands) |
|
Net cash provided by operating activities |
|
$ |
72,103 |
|
|
$ |
24,665 |
|
|
$ |
63,392 |
|
Net cash (used in) provided by investing activities |
|
|
(276,346 |
) |
|
|
(34,615 |
) |
|
|
42,647 |
|
Net cash provided by (used in) financing activities |
|
|
322,935 |
|
|
|
(23,311 |
) |
|
|
(11,750 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
118,692 |
|
|
$ |
(33,261 |
) |
|
$ |
94,289 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
Our cash flows are heavily influenced by the timing of the Medicare premium remittance from
CMS, which is payable to us on the first day of each month. This payment is sometimes received in
the last couple of days of the month prior to the month of medical coverage. When this happens, we
record the receipt in deferred revenue and recognize it as premium revenue in the month of medical
coverage. The January 2004 payment in the amount of $28.6 million was received in December of 2003,
which had the effect of increasing operating cash flows in that year with a corresponding decrease
in the following year. Adjusting our operating cash flows in 2003 and 2004 for the effect of the
timing of this payment, our operating cash flows would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Twelve |
|
|
|
|
|
|
Months Ended |
|
|
Year Ended December 31, |
|
|
|
December 31, 2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in thousands) |
|
Net cash provided by operating activities, as reported |
|
$ |
72,103 |
|
|
$ |
24,665 |
|
|
$ |
63,392 |
|
Timing effect of CMS payment |
|
|
|
|
|
|
28,597 |
|
|
|
(28,597 |
) |
|
|
|
|
|
|
|
|
|
|
Adjusted cash flow |
|
$ |
72,103 |
|
|
$ |
53,262 |
|
|
$ |
34,795 |
|
|
|
|
|
|
|
|
|
|
|
47
2005 Compared With 2004
The
increase in adjusted cash flow provided by operating activities to
$72.1 million for the combined twelve months ended December 31, 2005 as
compared with $53.3 million for 2004 is primarily attributable to
increases in membership and premiums. We preliminarily
reported cash flow provided by operating activities of $76.3 million for the combined 2005 twelve
months. The decrease was a result of additional
purchase accounting adjustments related to deferred tax assets and liabilities in connection with the recapitalization. For the
combined twelve months of 2005, we generated $29.3 million of
net income and increased working capital by $33.1 million. Net income had been reduced as a result of depreciation and amortization in the amount of
$7.3 million and minority interest of
$3.2 million, all of which represented non-cash items.
2004 Compared With 2003
The increase in adjusted cash flow for 2004 as compared with 2003 is primarily attributable to
increases in membership and premiums. For the period ended December 31, 2004, the major components
of adjusted operating cash flow were net income of $24.3 million, offset by an investment in net
working capital of approximately $6.1 million. Net income for the period ended December 31, 2004
had been reduced for depreciation and amortization in the amount of $3.2 million, expense related
to phantom stock compensation in the amount of $24.2 million, and minority interest of $6.3
million, all of which represented non-cash items.
Cash Flows from Investing and Financing Activities
For the combined twelve months ended December 31, 2005, the primary investing and financing
activities related to the recapitalization. The company also had $2.8 million of capital
expenditures. During 2004, the company made distributions to its members and minority interest
holders of its subsidiary companies in the amount of $22.6 million and purchased $32.2 million of
investments. Additionally, the company had capital expenditures in the amount of $2.5 million in
2004.
For the year ended December 31, 2003, the companys primary investing activity was the
purchase of an additional 33% interest in HSMI for $620,000. As a result of this purchase, the
company commenced consolidating this entity as a subsidiary and thus for accounting purposes was
deemed to have acquired approximately $37.5 million of cash on HSMIs balance sheet. Additionally,
the company had $3.2 million of capital expenditures in 2003 and made distributions to members of
$10.9 million. These payments were partially financed through proceeds from the maturity of
investments in the amount of $10.1 million.
Statutory Capital Requirements
Our HMO subsidiaries are required to maintain satisfactory minimum net worth requirements
established by the relevant state departments of insurance. At December 31, 2005, the statutory
minimum net worth requirements were $14.1 million in the aggregate, which was comprised of $8.1
million for HealthSpring of Tennessee, Inc.; $1.1 million for HealthSpring of Alabama, Inc.; and
$4.9 million for Texas HealthSpring, LLC. Each of these subsidiaries was in compliance with
applicable statutory capital requirements as of December 31, 2005. The HMOs are restricted from
making certain distributions to the company without appropriate regulatory notifications and
approvals or to the extent such distributions would put them out of compliance with statutory
capital requirements. At December 31, 2005, $148.2 million out of a total of $161.7 million of the
companys cash, cash equivalents, investment securities, and restricted investments were held by
the companys HMO subsidiaries and subject to these distribution restrictions.
Indebtedness
In connection with the recapitalization, our subsidiary, NewQuest, Inc., entered into a senior
credit facility and issued senior subordinated notes. We used borrowings under the senior credit
facility and proceeds from the issuance of the senior subordinated notes, net of $6.4 million of
fees recorded as deferred financing costs, as well as proceeds from the issuance of the preferred
and common stock, to fund the cash payments to the members of NewQuest, LLC in the recapitalization
and for other related expenses and payments.
48
The senior credit facility provided for borrowings in an aggregate principal amount of up to
$180.0 million, which included:
|
|
|
A senior secured term loan facility in an aggregate principal amount of up to $165.0
million (the term loan facility), which had $152.6 million principal amount outstanding as
of December 31, 2005, and which was repaid with proceeds from the IPO in February 2006 and
terminated; and |
|
|
|
|
A senior secured revolving credit facility in an aggregate principal amount of up to
$15.0 million, none of which had been drawn as of December 31, 2005. |
Following the IPO, the senior secured revolving credit facility remains in effect, under which we
may borrow up to $15.0 million aggregate principal amount, which amount may be increased by up to
$25.0 million, subject to certain conditions, through March 1, 2010. The obligations from time to
time under the senior credit facility are guaranteed by the Company and all of its non-HMO
subsidiaries and is secured by substantially all of our assets.
Amounts borrowed by the Company under the term loan facility bore interest at floating rates,
which could be either a base rate or, at our option, a LIBOR rate plus, in each case, an applicable
margin. On July 1, 2005, the Company elected the base rate option and amounts borrowed under the
term loan facility bore interest at an annual rate of 6.66% for the period through December 31,
2005 and 7.53% from January 1, 2006 until it was repaid in February 2006. As required by our term
loan facility, we entered into an interest rate swap agreement in July 2005, pursuant to which
$25.0 million of the principal amount outstanding under the term loan facility would bear interest
at a fixed annual rate of 4.25% plus the applicable margin (3.00%) for the period from January 1,
2006 to June 30, 2006. The swap did not qualify for hedge accounting and, accordingly, we recorded
the change in its fair market value as a component of earnings. At December 31, 2005 the swap had a
fair market value of $51,000. This swap was settled in connection with the IPO and the Company
received a breakage payment of $54,000 in February 2006.
The senior credit facility contains various financial covenants, including covenants with
respect to leverage ratio, interest and fixed charge coverage ratio, and capital expenditures, as
well as restrictions on undertaking specified corporate actions including, among others, asset
dispositions, acquisitions, payment of dividends, changes in control, incurrence of additional
indebtedness, creation of liens, and transactions with affiliates. We were in compliance with these
financial and restrictive covenants as of December 31, 2005. As stated above, we intend to enter
into a new revolving credit facility during the second quarter of 2006.
The senior subordinated notes, issued by our subsidiary NewQuest, Inc., bore interest at an
annual rate of 15%, 12% of which was payable quarterly in cash and 3% of which accrued quarterly
and was added to the outstanding principal amount. Approximately $35.9 million aggregate principal
amount and $70,018 of accrued and unpaid interest was outstanding at December 31, 2005. All amounts
outstanding under the senior subordinated notes, together with a prepayment premium of
approximately $1.1 million, were repaid with proceeds from the IPO.
Preferred Stock
We sold shares of preferred stock to the GTCR Funds, members of our predecessor, and certain
other new investors in connection with the recapitalization. The holders of the preferred stock
were entitled to an 8% cumulative dividend per year, which accrued on a daily basis and accumulated
quarterly commencing on March 31, 2005, on the sum of the liquidation value of $1,000 per share
plus all accumulated and unpaid dividends. The dividends accrued whether or not they have been
declared. As of December 31, 2005, accrued but unpaid dividends totaled $15.6 million. The
preferred stock had no voting rights. The preferred stock automatically converted into 12,552,905
shares of common stock based on the aggregate liquidation value of the preferred stock at the time
of the IPO of approximately $244.8 million, which included all accrued but unpaid dividends.
Off-Balance Sheet Arrangements
At December 31, 2005, we did not have any off-balance sheet arrangement requiring disclosure.
49
Commitments and Contingencies
Substantially all of our contractual commitments and contingencies requiring disclosure are
related to the recapitalization and arose after December 31, 2004. The following table sets forth
information regarding our contractual obligations as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period: |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Less than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
Long term debt(1)(2) |
|
$ |
199,009 |
|
|
$ |
26,107 |
|
|
$ |
48,893 |
|
|
$ |
44,415 |
|
|
$ |
79,594 |
|
Line of credit(1) |
|
|
316 |
|
|
|
76 |
|
|
|
152 |
|
|
|
88 |
|
|
|
|
|
Subordinated debt(1)(2) |
|
|
73,324 |
|
|
|
4,407 |
|
|
|
9,240 |
|
|
|
9,817 |
|
|
|
49,860 |
|
Medical claims |
|
|
82,645 |
|
|
|
82,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations(3) |
|
|
15,298 |
|
|
|
4,576 |
|
|
|
6,367 |
|
|
|
4,355 |
|
|
|
|
|
Other contractual obligations |
|
|
330 |
|
|
|
72 |
|
|
|
144 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
370,922 |
|
|
$ |
117,883 |
|
|
$ |
64,796 |
|
|
$ |
58,789 |
|
|
$ |
129,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Payments on long-term debt include principal and interest. At December 31, 2005, there was
$152.6 million of principal on long-term debt outstanding. Principal was payable quarterly in
the amount of $4.1 million through 2008, and at increased amounts thereafter. The long-term
credit facility bore interest at a floating rate, which was 6.66% for the period through
December 31, 2005. For purposes of this table, the company assumed that the interest rate on
the long-term credit facility remained at 6.66% for the term of the debt. The subordinated
debt is non-amortizing debt that bore interest at 15%, 12% of which was payable quarterly in
cash and 3% of which accrued quarterly and was added to the outstanding principal amount.
There is no amount outstanding under the line of credit. The amount shown for the line of
credit in the table is for an availability fee of 0.5% on the limit of $15.0 million. |
|
(2) |
|
In February 2006, in connection with the IPO, the Company paid off all outstanding long-term
debt, subordinated debt, and accrued interest. |
|
(3) |
|
Includes leases for office space and equipment. |
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires our management to make a
number of estimates and assumptions relating to the reported amount of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the period. We base our
estimates on historical experience and on various other assumptions that we believe are reasonable
under the circumstances. Changes in estimates are recorded if and when better information becomes
available. Actual results could significantly differ from those estimates under different
assumptions and conditions. We believe that the accounting policies discussed below are those that
are most important to the presentation of our financial condition and results of operations and
that require our managements most difficult, subjective, and complex judgments.
Medical Expense and Medical Claims Liability
Medical expense is recognized in the period in which services are provided and includes an
estimate of the cost of medical expense that has been incurred but not yet reported, or IBNR.
Medical expense includes claim payments, capitation payments, and pharmacy costs, net of rebates,
as well as estimates of future payments of claims incurred. Capitation payments represent monthly
contractual fees disbursed to physicians and other providers who are responsible for providing
medical care to members. Pharmacy costs represent payments for members prescription drug benefits,
net of rebates from drug manufacturers. Rebates are recognized when earned, according to the
contractual arrangements with the respective vendors. Premiums we pay to reinsurers are reported as
medical expenses and related reinsurance recoveries are reported as deductions from medical
expenses.
50
Medical claims liability includes medical claims reported to the plans but not yet paid as
well as an actuarially determined estimate of claims that have been incurred but not yet reported
to the plans.
The following table presents the components of our medical claims liability as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Incurred but not reported (IBNR) |
|
$ |
74,393 |
|
|
$ |
50,432 |
|
Reported claims |
|
|
8,252 |
|
|
|
2,755 |
|
|
|
|
|
|
|
|
Total medical claims liability |
|
$ |
82,645 |
|
|
$ |
53,187 |
|
|
|
|
|
|
|
|
The IBNR component of total medical claims liability is based on our historical claims data,
current enrollment, health service utilization statistics, and other related information.
Estimating IBNR is complex and involves a significant amount of judgment. Accordingly, it
represents our most critical accounting estimate. Changes in this estimate can materially affect,
either favorably or unfavorably, our consolidated operating results and overall financial position.
Our policy is to record managements best estimate of medical expense IBNR. Using actuarial
models, we calculate a minimum amount and maximum amount of the IBNR component. To most accurately
determine the best estimate, our actuaries determine the point estimate within their minimum and
maximum range by similar medical expense categories within lines of business. The medical expense
categories we use are: in-patient facility, outpatient facility, all professional expense, and
pharmacy. The lines of business are Medicare and commercial. At each of December 31, 2004 and 2005,
our point estimate was at or near the maximum amount of our IBNR range. The development of the IBNR
estimate generally considers favorable and unfavorable prior period developments and uses standard
actuarial developmental methodologies, including completion factors, claims trends, and provisions
for adverse claims developments.
The completion factor method estimates liabilities for claims based upon the historical lag
between the month when services are rendered and the month claims are paid and takes into
consideration factors such as expected medical cost inflation, seasonality patterns, product mix,
and membership changes. The completion factor is a measure of how complete the claims paid to date
are relative to the estimate of the total claims for services rendered for a given reporting
period. Although the completion factor is generally reliable for older service periods, it is more
volatile, and hence less reliable, for more recent periods given that the typical billing lag for
services can range from a week to as much as 90 days from the date of service. As a result, for the
most recent two to four months, the estimate for incurred claims is developed from a trend factor
analysis based on per member per month claims trends experienced in the preceding months.
Our use of the claims trend factor method considers many aspects of the managed care business.
These considerations are aggregated in the medical expense trend and include the incidences of
illness or disease state (such as cardiac heart failure cases, cases of upper respiratory illness,
the length and severity of the flu season, diabetes, and the number of neonatal intensive care
babies). Accordingly, we rely upon our historical experience, as continually monitored, to reflect
the ever-changing mix, needs and growth of our members in our trend assumptions. Among the factors
considered by management are changes in the level of benefits provided to members, seasonal
variations in utilization, identified industry trends, and changes in provider reimbursement
arrangements, including changes in the percentage of reimbursements made on a capitated as opposed
to a fee-for-service basis. Other external factors such as government-mandated benefits or other
regulatory changes, catastrophes, and epidemics may impact medical expense trends. Other internal
factors, such as system conversions and claims processing interruptions may impact our ability to
accurately predict estimates of historical completion factors or medical expense trends. Medical
expense trends potentially are more volatile than other segments of the economy.
We apply different estimation methods depending on the month of service for which incurred
claims are being estimated. For the more recent months, which constitute the majority of the amount
of IBNR, we estimate our claims incurred by applying the observed trend factors to the PMPM. For
prior months, costs have been estimated using completion factors. In order to estimate the PMPMs
for the most recent months, we validate our estimates of the most recent months utilization levels
to the utilization levels in older months using actuarial techniques that
51
incorporate a historical analysis of claim payments, including trends in cost of care
provided, and timeliness of submission and processing of claims.
Our provision for adverse claims development is intended to account for variability in the
following types of factors:
|
|
|
changes in claims payment patterns to the extent to which emerging claims payment
patterns differ from the historical payment patterns selected to calculate the IBNR reserve
estimate; |
|
|
|
|
differences between the estimated PMPM incurred expense for the most recent months and
the expected PMPM based on historical PMPM incurred estimates and the estimated trend from
the historical period to the most recent months; |
|
|
|
|
differences between the estimated impact of known differences in environmental factors
and the actual impact of known environmental factors; and |
|
|
|
|
the healthcare expense impact of present but unknown environmental factors that differ
from historical norms. |
We believe that our provision for adverse claims development is appropriate because our
hindsight analysis indicates this additional provision is needed to
cover additional unknown adverse claims not
anticipated by the standard assumptions used to produce the IBNR estimates that were incurred prior to but paid after a period
end. For the years ended December 31, 2005 and 2004, our provision for adverse claims development
has been relatively consistent, varying as of the end of each annual period ended December 31 by
less than 1.0% of the medical claims liability. Fluctuations within those periods and as of the period ends are primarily attributable to
differences in membership mix between Medicare and commercial plans and differences in services
(such as in-patient or outpatient services) provided by our plans. Based on these fluctuations, we
expect that our experience on a going-forward basis would result in our provision for adverse
claims, as a percentage of medical claims liability, not varying by more than 1.0% from one
quarterly period to the next.
The completion and claims trend factors are the most significant factors impacting the IBNR
estimate. The following table illustrates the sensitivity of these factors and the impact on our
operating results caused by changes in these factors that management believes are reasonably likely
based on our historical experience and December 31, 2005 data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion Factor(a) |
|
|
Claims Trend Factor(b) |
|
|
|
Increase |
|
|
|
|
|
|
Increase |
|
Increase |
|
(Decrease) |
|
|
Increase |
|
|
(Decrease) |
|
(Decrease) |
|
in Medical |
|
|
(Decrease) |
|
|
in Medical |
|
in Factor |
|
Claims
Liability |
|
|
in Factor |
|
|
Claims Liability |
|
|
|
(Dollars in thousands) |
|
3% |
|
$ |
(2,349 |
) |
|
|
(3 |
)% |
|
$ |
(1,472 |
) |
2 |
|
|
(1,585 |
) |
|
|
(2 |
) |
|
|
(980 |
) |
1 |
|
|
(802 |
) |
|
|
(1 |
) |
|
|
(489 |
) |
(1) |
|
|
822 |
|
|
|
1 |
|
|
|
488 |
|
|
|
|
(a) |
|
Impact due to change in completion factor for the most recent three months. Completion
factors indicate how complete claims paid to date are in relation to estimates for a given
reporting period. Accordingly, an increase in completion factor results in a decrease in the
remaining estimated liability for medical claims. |
|
(b) |
|
Impact due to change in annualized medical cost trends used to estimate PMPM costs for the
most recent three months. |
Each month, we re-examine the previously established medical claims liability estimates based
on actual claim submissions and other relevant changes in facts and circumstances. As the liability
estimates recorded in prior
52
periods become more exact, we increase or decrease the amount of the estimates, and include
the changes in medical expenses in the period in which the change is identified. In every annual
reporting period, our operating results include the effects of more completely developed medical
claims liability estimates associated with prior years.
The following table provides a reconciliation of changes in medical claims liability for the
years ended December 31, 2005 and 2004. The 2005 presentation represents a cumulative summary for
the twelve months ended December 31, 2005. See Note 12 to the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
HealthSpring, Inc. and |
|
|
|
|
|
|
Predecessor Combined |
|
|
Predecessor |
|
|
|
Year ended |
|
|
Year ended |
|
|
|
December 31, 2005 |
|
|
December 31, 2004 |
|
|
|
(in thousands) |
|
Balance at beginning of period |
|
$ |
53,187 |
|
|
$ |
47,729 |
|
Incurred related to: |
|
|
|
|
|
|
|
|
Current period |
|
|
665,407 |
|
|
|
467,289 |
|
Prior period |
|
|
(5,228 |
) |
|
|
(3,914 |
) |
|
|
|
|
|
|
|
Total incurred |
|
|
660,179 |
|
|
|
463,375 |
|
|
|
|
|
|
|
|
Paid related to: |
|
|
|
|
|
|
|
|
Current period |
|
|
582,944 |
|
|
|
415,136 |
|
Prior period |
|
|
47,777 |
|
|
|
42,781 |
|
|
|
|
|
|
|
|
Total paid |
|
|
630,721 |
|
|
|
457,917 |
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
82,645 |
|
|
$ |
53,187 |
|
|
|
|
|
|
|
|
Negative amounts reported for incurred related to prior years result from claims being
ultimately settled for amounts less than originally estimated (a favorable development). Positive
amounts reported for incurred related to prior years result from claims ultimately being settled
for amounts greater than originally estimated (an unfavorable development).
As summarized in the above table, our prior period liability development has been favorable
for each of the two years ended December 31, 2005 and 2004. During 2005, claim liability balances
at December 31, 2004 ultimately settled for $5.2 million less than the amount originally estimated.
The favorable development in 2005 and 2004 was primarily attributable to differences between
assumed and actual utilization and severity of claims, which are components of our claims trend
factor and completion factor. For the two-year period ended December 31, 2005, actual claims
expense has developed favorably by 1.1% to 1.3% as compared to estimated claims expense. The
favorable development in estimated prior period claims is primarily attributable to recontracting
with providers and better case management and disease management programs.
Our medical claims liability also considers premium deficiency situations and evaluates the
necessity for additional related liabilities. Premium deficiency
accruals were approximately $1.5 million and $1.1 million as of
December 31, 2005 and 2004, respectively.
Premium Revenue Recognition
We generate revenues primarily from premiums we receive from CMS and, to a lesser extent our
commercial customers, to provide healthcare benefits to our members. We receive premium payments on
a PMPM basis from CMS to provide healthcare benefits to our Medicare members, which premium is
fixed on an annual basis by contract with CMS. Although the amounts we receive from CMS for each
member is fixed, the amount varies among Medicare plans according to, among other things,
demographics, geographic location, age, and gender. We generally receive premiums on a monthly
basis in advance of providing services. Premiums collected in advance are deferred and reported as
deferred revenue. We recognize premium revenue during the period in which we are obligated to
provide services to our members. Any amounts that have not been received are recorded on the
balance sheet as accounts receivable.
We experience adjustments to our revenue based on member retroactivity, which reflect changes
in the number and eligibility status of enrollees subsequent to when revenue is received. We
estimate the amount of outstanding retroactivity each period and adjust premium revenue
accordingly. The estimates of retroactivity adjustments are
53
based on historical trends, premiums billed, the volume of member and contract renewal
activity, and other information. We refine our estimates and methodologies based upon actual
retroactivity experienced. To date, member-based retroactivity adjustments have not been
significant.
Additionally, our Medicare premium revenue is adjusted periodically to give effect to a risk
component. In the Balanced Budget Act of 1997, Congress created a rate-setting methodology that
included a provision requiring CMS to implement a risk adjustment payment system for Medicare
health plans. Risk adjustment uses health status indicators to improve the accuracy of payments and
establish incentives for plans to enroll and treat less healthy Medicare beneficiaries. CMS
initially phased in this payment methodology in 2003 whereby the risk adjusted payment represented
10% of the payment to Medicare health plans, with the remaining 90% being based on demographic
factors. In 2004 and 2005, the portion of risk adjusted payments was increased to 30% and 50%,
respectively, and will increase to 75% in 2006 and 100% in 2007. Under risk adjustment methodology,
managed care plans must capture, collect, and submit diagnosis code information to CMS twice a
year. After reviewing the respective submissions, CMS adjusts the payments to Medicare plans
generally at the beginning of the calendar year and during the third quarter and then issues a
final payment in a subsequent year. The third quarter payment includes a retroactivity component
for the first two quarters of the year. We do not attempt to estimate the impact of these risk
adjustments and as such record them on an as-received basis. As a result, our CMS PMPM premiums may
change materially, either favorably or unfavorably. Our retroactivity adjustments in 2004 and 2005
were positive. Although we have placed a great deal of emphasis on managing and controlling the
elements that impact the risk payments, there can be no assurance that these positive trends will
continue in the future.
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over fair value of assets of businesses acquired.
Substantially all of our goodwill and other intangible assets was recorded in connection with the
recapitalization. Our primary identifiable intangible assets include our Medicare member network,
our HealthSpring trade name, our provider networks, customer relationships and non-compete
agreements. Goodwill is determined to have an indefinite useful life and is not amortized, but
instead is tested for impairment at least annually. The Company has determined that December 31
will be its annual testing date. Poor operating results or changes in market conditions could
result in an impairment of goodwill. Other intangible assets are amortized over their respective
estimated useful lives to their estimated residual values and reviewed for impairment at least
annually. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds its estimated future
cash flows.
Recent Accounting Pronouncements
In December 2004, the FASB revised SFAS No. 123, Accounting for Stock-Based Compensation,
which established the fair-value-based method of accounting as preferable for share-based
compensation awarded to employees and encouraged, but did not require, entities to adopt it until
July 1, 2005. On April 14, 2005, the Securities and Exchange Commission announced that it would
provide for a phased-in implementation process that allowed non-small business registrants with a
fiscal year ending December 31, 2005 an extension until January 1, 2006 to adopt SFAS No. 123(R),
Share-Based Payment. SFAS No. 123(R) eliminates the alternative to use APB Opinion No. 25,
Accounting for Stock Issued to Employees, which allowed entities to account for share-based
compensation arrangements with employees according to the intrinsic value method. SFAS No. 123(R)
requires the measurement of the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. The cost will be recognized
over the period during which an employee is required to provide service in exchange for the award.
No compensation cost is recognized for equity instruments for which employees do not render
service. The Company will adopt SFAS No. 123(R) effective January 1, 2006 using the modified
prospective method, which will require compensation cost to be recorded as expense over the
remaining vesting period, for the portion of outstanding unvested awards at January 1, 2006, based
on the grant-date fair value of those awards. The effect of adoption of SFAS No. 123(R) is
estimated to be approximately $2.7 million after tax in 2006, which includes
approximately $28,000 for unvested options outstanding at December 31, 2005. The substantial
majority of the expense estimated for 2006 relates to unvested options to purchase 2,065,500 shares
of common stock awarded in connection with the IPO. See Note 23 to the Consolidated Financial
54
Statements. Our actual equity-based compensation expense in 2006 will depend on a number of
factors, including the amount of awards granted and the fair value of those awards at the time of
the grant.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections A
Replacement of APB Opinion No. 20, Accounting Changes (APB 20), and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements (SFAS No. 154). APB 20 previously
required that most voluntary changes in accounting principles be recognized by including in net
income of the period of the change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 requires retrospective application to prior periods financial statements
of changes in accounting principles, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that
retrospective application of a change in accounting principle be limited to the direct effects of
the change. Indirect effects of a change in an accounting principle, such as a change in
nondiscretionary profit-sharing payments resulting from an accounting change, should be recognized
in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change
in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005. We will adopt the provisions of SFAS No. 154 effective January 1, 2006. The impact of SFAS
No. 154 will depend on the accounting change, if any, in a future period.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2005 and 2004, we had the following assets that may be sensitive to changes
in interest rates:
|
|
|
|
|
|
|
|
|
|
|
HealthSpring, Inc. |
|
|
Predecessor |
|
|
|
December 31, |
|
Asset Class |
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Investment securities, available for sale |
|
$ |
8,646 |
|
|
$ |
8,460 |
|
Investment securities, held to maturity: |
|
|
|
|
|
|
|
|
Current portion |
|
|
14,314 |
|
|
|
9,413 |
|
Long-term portion |
|
|
22,993 |
|
|
|
20,248 |
|
Restricted investments |
|
|
5,652 |
|
|
|
5,319 |
|
We have not purchased any of our investments for trading purposes. Our investment securities
classified as available for sale are repurchase agreements. For all other investment securities, we
intend to hold them to their maturity and classify them as current on our balance sheet if they
mature between three and 12 months from the balance sheet date and as long-term if their maturity
is more than one year from the balance sheet date. These investment securities, both current and
long-term, consist of highly liquid government and corporate debt obligations, a substantial
majority of which mature in five years or less. The investments classified as long-term are subject
to interest rate risk and will decrease in value if market rates increase. Because of their
relatively short-term nature, however, we would not expect the value of these investments to
decline significantly as a result of a sudden change in market interest rates. Moreover, because of
our ability and intent to hold these investments until maturity (or at least until a market price
recovery), we would not expect foreseeable changes in interest rates to materially impair their
carrying value. Restricted investments consist of certificates of deposit and government securities
deposited or pledged to state departments of insurance in accordance with state rules and
regulations. At December 31, 2004 and December 31, 2005, these restricted assets are recorded at
amortized cost and classified as long-term regardless of the contractual maturity date because of
the restrictive nature of the states requirements.
Assuming a hypothetical and immediate 1% increase in market interest rates at December 31,
2005, the fair value of our fixed income investments would decrease by approximately $420,000.
Similarly, a 1% decrease in market interest rates at December 31, 2005 would result in an increase
of the fair value of our investments of approximately $420,000. Unless we determined, however, that
the increase in interest rates caused more than a temporary impairment in our investments, or
unless we were compelled by a currently unforeseen reason to sell securities, such a change should
not affect our future earnings or cash flows.
As required by our term loan facility, we entered into an interest rate swap agreement in July
2005, pursuant to which $25.0 million of the principal amount outstanding under the term loan
facility will bear interest at a fixed annual rate of 4.25% plus the applicable margin (currently
3.00%) for the period from January 1, 2006 to June 30, 2006. The swap does not qualify for hedge
accounting. Accordingly, the company will record the change in the swaps fair market value as a
component of earnings. At December 31, 2005, the fair market value of the swap was approximately
$51,000. This loan facility was paid off and the swap was settled in connection with the IPO.
Accordingly, the company is not currently exposed to market interest rate fluctuations on
borrowings.
55
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
86 |
|
56
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
HealthSpring, Inc.:
We have audited the accompanying consolidated balance sheet of HealthSpring, Inc. and subsidiaries
(Company) as of December 31, 2005, and the related consolidated
statements of income, changes in stockholders
equity and comprehensive income, and cash flows for the ten-month period from March 1, 2005
(inception) to December 31, 2005; and the consolidated balance sheet of NewQuest, LLC and
subsidiaries (Predecessor) as of December 31, 2004, and the related consolidated statements of
income, changes in members equity and comprehensive income, and cash flows for the two months ended February
28, 2005 and for the years ended December 31, 2004 and 2003. In connection with our audits of the
consolidated financial statements, we also have audited financial statement Schedule I Condensed
Financial Information of Registrant. These consolidated financial statements and financial
statement schedule are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of HealthSpring, Inc. and subsidiaries as of December 31,
2005 and the results of their operations and their cash flows for the ten-month period from March
1, 2005 through December 31, 2005; and the financial position of NewQuest, LLC and subsidiaries as
of December 31, 2004 and the results of their operations and their cash flows for the two months
ended February 28, 2005 and for the years ended December 31, 2004 and 2003, in conformity with U.S.
generally accepted accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Nashville, Tennessee
March 30, 2006
57
HEALTHSPRING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit and share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
December 31, |
|
|
|
December 31, |
|
|
|
2005 |
|
|
|
2004 |
|
Assets |
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
110,085 |
|
|
|
|
67,834 |
|
Accounts receivable, net of allowance for doubtful accounts
of $1,165 and $578 at December 31, 2005 and 2004,
respectively |
|
|
7,248 |
|
|
|
|
14,605 |
|
Investment securities available for sale |
|
|
8,646 |
|
|
|
|
8,460 |
|
Current portion of investment securities held to maturity |
|
|
14,313 |
|
|
|
|
9,413 |
|
Deferred income tax asset |
|
|
5,778 |
|
|
|
|
868 |
|
Prepaid expenses and other assets |
|
|
3,148 |
|
|
|
|
4,732 |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
149,218 |
|
|
|
|
105,912 |
|
Investment securities held to maturity, less current portion |
|
|
22,993 |
|
|
|
|
20,248 |
|
Property and equipment, net |
|
|
4,287 |
|
|
|
|
1,876 |
|
Goodwill |
|
|
315,057 |
|
|
|
|
6,478 |
|
Intangible assets, net |
|
|
87,675 |
|
|
|
|
350 |
|
Investment in and receivable from unconsolidated affiliate |
|
|
1,469 |
|
|
|
|
172 |
|
Deferred income tax asset |
|
|
|
|
|
|
|
2,319 |
|
Deferred financing fee |
|
|
5,487 |
|
|
|
|
|
|
Restricted investments |
|
|
5,652 |
|
|
|
|
5,319 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
591,838 |
|
|
|
|
142,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders and Members Equity |
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
Medical claims liability |
|
$ |
82,645 |
|
|
|
|
53,187 |
|
Current portion of long-term debt |
|
|
16,500 |
|
|
|
|
700 |
|
Accounts payable and accrued expenses |
|
|
17,408 |
|
|
|
|
11,801 |
|
Deferred revenue |
|
|
365 |
|
|
|
|
608 |
|
Other current liabilities |
|
|
362 |
|
|
|
|
4,600 |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
117,280 |
|
|
|
|
70,896 |
|
Long-term debt, less current portion |
|
|
172,026 |
|
|
|
|
4,775 |
|
Deferred income tax liability |
|
|
29,782 |
|
|
|
|
|
|
Deferred rent |
|
|
205 |
|
|
|
|
1,365 |
|
Other long-term liabilities |
|
|
111 |
|
|
|
|
1,592 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
319,404 |
|
|
|
|
78,628 |
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
11,890 |
|
|
|
|
8,611 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see notes) |
|
|
|
|
|
|
|
|
|
Stockholders and members equity: |
|
|
|
|
|
|
|
|
|
Founders and membership units. Authorized 22,000,000 units;
issued and outstanding 4,884,176 units at December 31, 2004 |
|
|
|
|
|
|
|
31,787 |
|
Redeemable convertible preferred stock, $.01 par value,
authorized 1,000,000 shares, 227,154 shares issued and
outstanding at December 31, 2005 |
|
|
2 |
|
|
|
|
|
|
Common stock, $.01 par value, authorized 37,000,000 shares,
32,283,950 shares issued and 32,083,950 shares outstanding
at December 31, 2005 |
|
|
322 |
|
|
|
|
|
|
Additional paid in capital |
|
|
251,202 |
|
|
|
|
|
|
Unearned compensation |
|
|
(1,885 |
) |
|
|
|
|
|
Retained earnings |
|
|
10,943 |
|
|
|
|
23,648 |
|
Treasury stock, at cost, 200,000 shares at December 31, 2005 |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders and members equity |
|
|
260,544 |
|
|
|
|
55,435 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders and members equity |
|
$ |
591,838 |
|
|
|
|
142,674 |
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
58
HEALTHSPRING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except unit and share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Ten-Month |
|
|
|
Two-Month |
|
|
|
|
|
|
|
|
|
Period Ended |
|
|
|
Period Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, 2005 |
|
|
|
February 28, 2005 |
|
|
December 31, 2004 |
|
|
December 31, 2003 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium revenue |
|
$ |
717,081 |
|
|
|
|
115,468 |
|
|
|
580,047 |
|
|
|
360,914 |
|
Management and other fees |
|
|
16,955 |
|
|
|
|
3,461 |
|
|
|
17,919 |
|
|
|
11,054 |
|
Investment income |
|
|
3,337 |
|
|
|
|
461 |
|
|
|
1,449 |
|
|
|
695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
737,373 |
|
|
|
|
119,390 |
|
|
|
599,415 |
|
|
|
372,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical expenses |
|
|
569,336 |
|
|
|
|
90,843 |
|
|
|
463,375 |
|
|
|
291,532 |
|
Selling, general and administrative |
|
|
101,187 |
|
|
|
|
21,608 |
|
|
|
93,068 |
|
|
|
50,576 |
|
Depreciation and amortization |
|
|
6,990 |
|
|
|
|
315 |
|
|
|
3,210 |
|
|
|
2,361 |
|
Interest expense |
|
|
14,469 |
|
|
|
|
42 |
|
|
|
214 |
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
691,982 |
|
|
|
|
112,808 |
|
|
|
559,867 |
|
|
|
344,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in earnings of
unconsolidated affiliate, minority interest and
income taxes |
|
|
45,391 |
|
|
|
|
6,582 |
|
|
|
39,548 |
|
|
|
27,938 |
|
Equity in earnings of unconsolidated affiliate |
|
|
282 |
|
|
|
|
|
|
|
|
234 |
|
|
|
2,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and income taxes |
|
|
45,673 |
|
|
|
|
6,582 |
|
|
|
39,782 |
|
|
|
29,996 |
|
Minority interest |
|
|
(1,979 |
) |
|
|
|
(1,248 |
) |
|
|
(6,272 |
) |
|
|
(5,519 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
43,694 |
|
|
|
|
5,334 |
|
|
|
33,510 |
|
|
|
24,477 |
|
Income tax expense |
|
|
17,144 |
|
|
|
|
2,628 |
|
|
|
9,193 |
|
|
|
5,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
26,550 |
|
|
|
|
2,706 |
|
|
|
24,317 |
|
|
|
19,060 |
|
Preferred dividends |
|
|
15,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders and
members |
|
$ |
10,943 |
|
|
|
|
2,706 |
|
|
|
24,317 |
|
|
|
19,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per member unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
$ |
.55 |
|
|
|
5.31 |
|
|
|
4.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
$ |
.55 |
|
|
|
5.31 |
|
|
|
4.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average member units outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
4,884,196 |
|
|
|
4,578,176 |
|
|
|
4,078,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
4,884,196 |
|
|
|
4,578,176 |
|
|
|
4,078,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share available to
common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
32,173,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
32,215,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
59
HEALTHSPRING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS AND MEMBERS EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Founders and |
|
|
Founders and |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Membership |
|
|
Members |
|
|
Unearned |
|
|
Comprehensive |
|
|
Retained |
|
|
Members |
|
|
|
Units |
|
|
Units |
|
|
Compensation |
|
|
Income, Net |
|
|
Earnings |
|
|
Equity |
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2002 |
|
|
4,078 |
|
|
$ |
4,007 |
|
|
$ |
(197 |
) |
|
$ |
|
|
|
$ |
10,694 |
|
|
$ |
14,504 |
|
Amortization of deferred
compensation |
|
|
|
|
|
|
|
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
197 |
|
Distributions to members |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,877 |
) |
|
|
(10,877 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,060 |
|
|
|
19,060 |
|
Unrealized holding gains on
securities available for
sale, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003 |
|
|
4,078 |
|
|
|
4,007 |
|
|
|
|
|
|
|
85 |
|
|
|
18,877 |
|
|
|
22,969 |
|
Conversion of minority
interest in consolidated
subsidiary |
|
|
500 |
|
|
|
3,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,572 |
|
Conversion of phantom
membership plan to member
units |
|
|
306 |
|
|
|
24,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,208 |
|
Distributions to members |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,546 |
) |
|
|
(19,546 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,317 |
|
|
|
24,317 |
|
Unrealized holding losses
on securities available for
sale, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85 |
) |
|
|
|
|
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004 |
|
|
4,884 |
|
|
|
31,787 |
|
|
|
|
|
|
|
|
|
|
|
23,648 |
|
|
|
55,435 |
|
Distributions to members |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,706 |
|
|
|
2,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 28, 2005 |
|
|
4,884 |
|
|
$ |
31,787 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
26,354 |
|
|
$ |
58,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
60
HEALTHSPRING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS AND MEMBERS EQUITY
AND COMPREHENSIVE INCOME (cont.)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Additional Paid in |
|
|
Unearned |
|
|
Retained |
|
|
|
|
|
|
Stockholders |
|
|
|
Preferred Shares |
|
|
Preferred Stock |
|
|
Common Shares |
|
|
Common Stock |
|
|
Capital |
|
|
Compensation |
|
|
Earnings |
|
|
Treasury Stock |
|
|
Equity |
|
Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 1, 2005
(inception) |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Preferred shares issued |
|
|
227 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
227,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227,200 |
|
Preferred dividends accrued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,607 |
|
|
|
|
|
|
|
(15,607 |
) |
|
|
|
|
|
|
|
|
Common shares issued |
|
|
|
|
|
|
|
|
|
|
30,445 |
|
|
|
304 |
|
|
|
5,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,089 |
|
Unearned compensation on
issuance of restricted
shares |
|
|
|
|
|
|
|
|
|
|
1,839 |
|
|
|
18 |
|
|
|
2,888 |
|
|
|
(2,538 |
) |
|
|
|
|
|
|
|
|
|
|
368 |
|
Purchase of 200 shares of
restricted common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(276 |
) |
|
|
276 |
|
|
|
|
|
|
|
(40 |
) |
|
|
(40 |
) |
Amortization of unearned
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
377 |
|
Comprehensive income net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,550 |
|
|
|
|
|
|
|
26,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2005 |
|
|
227 |
|
|
$ |
2 |
|
|
|
32,284 |
|
|
$ |
322 |
|
|
$ |
251,202 |
|
|
$ |
(1,885 |
) |
|
$ |
10,943 |
|
|
$ |
(40 |
) |
|
$ |
260,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
61
HEALTHSPRING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Ten-Month |
|
|
|
Two-Month |
|
|
|
|
|
|
|
|
|
Period Ended |
|
|
|
Period Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, 2005 |
|
|
|
February 28, 2005 |
|
|
December 31, 2004 |
|
|
December 31, 2003 |
|
Cash from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,550 |
|
|
|
|
2,706 |
|
|
|
24,317 |
|
|
|
19,060 |
|
Adjustments to reconcile net income available to common
stockholders and members to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
6,990 |
|
|
|
|
315 |
|
|
|
3,210 |
|
|
|
2,361 |
|
Amortization of accrued loss on assumed lease |
|
|
|
|
|
|
|
(97 |
) |
|
|
(580 |
) |
|
|
(886 |
) |
Amortization of deferred compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197 |
|
Amortization of deferred financing cost |
|
|
879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-kind (PIK) interest on subordinated notes |
|
|
901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation |
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliate |
|
|
(282 |
) |
|
|
|
|
|
|
|
(234 |
) |
|
|
(2,058 |
) |
Minority interest |
|
|
1,979 |
|
|
|
|
1,248 |
|
|
|
6,272 |
|
|
|
5,519 |
|
Deferred taxes (benefit) expense |
|
|
(1,060 |
) |
|
|
|
93 |
|
|
|
2,163 |
|
|
|
(779 |
) |
Compensation expense related to phantom stock plan
cancellation |
|
|
|
|
|
|
|
|
|
|
|
24,200 |
|
|
|
|
|
Increase (decrease) in cash equivalents due to change in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
9,827 |
|
|
|
|
(2,470 |
) |
|
|
(9,977 |
) |
|
|
308 |
|
Interest receivable |
|
|
(439 |
) |
|
|
|
38 |
|
|
|
(299 |
) |
|
|
54 |
|
Investments in and receivable from unconsolidated affiliate |
|
|
(1,020 |
) |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
(3,266 |
) |
|
|
|
1,197 |
|
|
|
(3,849 |
) |
|
|
(2,754 |
) |
Medical claims liability |
|
|
23,629 |
|
|
|
|
5,829 |
|
|
|
5,458 |
|
|
|
7,701 |
|
Accounts payable, accrued expenses, and other current
liabilities |
|
|
(7,460 |
) |
|
|
|
6,202 |
|
|
|
2,562 |
|
|
|
6,593 |
|
Deferred rent |
|
|
205 |
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
(131 |
) |
|
|
|
(113 |
) |
|
|
(28,578 |
) |
|
|
28,076 |
|
Other long-term liabilities |
|
|
(540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
57,139 |
|
|
|
|
14,964 |
|
|
|
24,665 |
|
|
|
63,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(2,653 |
) |
|
|
|
(149 |
) |
|
|
(2,512 |
) |
|
|
(3,198 |
) |
Purchase of investment securities, held-to-maturity |
|
|
(16,313 |
) |
|
|
|
(5,942 |
) |
|
|
(23,777 |
) |
|
|
|
|
Purchase of investments, available for sale |
|
|
|
|
|
|
|
|
|
|
|
(8,460 |
) |
|
|
|
|
Sale/maturity of investment securities |
|
|
12,524 |
|
|
|
|
836 |
|
|
|
|
|
|
|
10,107 |
|
Purchase of restricted investments |
|
|
(119 |
) |
|
|
|
(214 |
) |
|
|
|
|
|
|
|
|
Distributions received from unconsolidated affiliate |
|
|
|
|
|
|
|
|
|
|
|
134 |
|
|
|
|
|
Purchase of shares in subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,133 |
) |
Purchase of minority interest |
|
|
(44,358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired |
|
|
(219,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
36,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(270,877 |
) |
|
|
|
(5,469 |
) |
|
|
(34,615 |
) |
|
|
42,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on notes payable |
|
|
(17,733 |
) |
|
|
|
(117 |
) |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
(6,366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on notes payable to members |
|
|
|
|
|
|
|
|
|
|
|
(700 |
) |
|
|
(873 |
) |
Proceeds from issuance of common and preferred stock |
|
|
140,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of units in consolidated subsidiary |
|
|
7,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to members |
|
|
|
|
|
|
|
|
|
|
|
(19,546 |
) |
|
|
(10,877 |
) |
Distributions to minority stockholders |
|
|
|
|
|
|
|
(1,771 |
) |
|
|
(3,065 |
) |
|
|
|
|
Cash advanced in recapitalization |
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used in) by financing activities |
|
|
323,823 |
|
|
|
|
(888 |
) |
|
|
(23,311 |
) |
|
|
(11,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
110,085 |
|
|
|
|
8,607 |
|
|
|
(33,261 |
) |
|
|
94,289 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
67,834 |
|
|
|
101,095 |
|
|
|
6,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
110,085 |
|
|
|
|
76,441 |
|
|
|
67,834 |
|
|
|
101,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
62
HEALTHSPRING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Ten-Month |
|
|
|
Two-Month |
|
|
|
|
|
|
|
|
|
Period Ended |
|
|
|
Period Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, 2005 |
|
|
|
February 28, 2005 |
|
|
December 31, 2004 |
|
|
December 31, 2003 |
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
11,229 |
|
|
|
|
42 |
|
|
|
274 |
|
|
|
333 |
|
Cash paid for taxes |
|
|
19,477 |
|
|
|
|
279 |
|
|
|
7,704 |
|
|
|
1,385 |
|
Conversion of minority interest in consolidated subsidiary |
|
|
|
|
|
|
|
|
|
|
|
3,572 |
|
|
|
|
|
Capitalized tenant improvement allowances |
|
|
|
|
|
|
|
|
|
|
|
715 |
|
|
|
|
|
Non-cash transaction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares in conjunction with recapitalization |
|
|
93,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned compensation related to issuance of restricted
common stock |
|
|
2,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
(438,576 |
) |
|
|
|
|
|
|
|
|
|
|
|
(17,254 |
) |
Equity investment in unconsolidated affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,189 |
|
Preferred stock issued |
|
|
91,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued |
|
|
2,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of minority interest |
|
|
44,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized transaction costs |
|
|
5,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired |
|
|
75,441 |
|
|
|
|
|
|
|
|
|
|
|
|
39,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition, net of cash acquired |
|
$ |
(219,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
36,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
63
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business and Basis of Presentation
HealthSpring, Inc., a Delaware corporation, is a managed care organization that focuses
primarily on Medicare, the federal government sponsored health insurance program for retired U.S.
citizens aged 65 and older, qualifying disabled persons, and persons suffering from end stage renal
disease. Through its health maintenance organization (HMO) subsidiaries, the Company operates
Medicare health plans in the states of Tennessee, Texas, Alabama, Illinois and Mississippi. In
addition, the Company also utilizes its infrastructure and provides networks in Tennessee and
Alabama to offer commercial health plans to individuals and employer groups. The Company also
manages healthcare plans and physician partnerships.
HealthSpring, Inc. was formed in October 2004 in connection with a recapitalization
transaction including NewQuest, LLC and its members, certain investment funds affiliated with GTCR
Golder Rauner II, LLC (GTCR) and certain other investors. The recapitalization was completed on
March 1, 2005; which was the inception of HealthSpring, Inc. See Note 2.
The consolidated financial statements include the accounts of HealthSpring, Inc. and its
wholly and majority owned subsidiaries as of and for the ten-month period from March 1, 2005
(inception) to December 31, 2005, and NewQuest, LLC and subsidiaries (collectively, the
Predecessor) as of December 31, 2004 and for the two-month period ended February 28, 2005 and for
the years ended December 31, 2004 and 2003. The financial statements of HealthSpring, Inc. and the
Predecessor are presented in comparative format. Although their accounting policies are consistent,
their financial statements are not directly comparable primarily because of the purchase accounting
adjustments resulting from the recapitalization, which was accounted for as a purchase. All
significant inter-company accounts and transactions have been eliminated in consolidation. For
purposes of these financial statements and notes, where appropriate the term Company includes
HealthSpring, Inc. and Predecessor. The Company considers its businesses and related operating
structure as one reporting segment.
On February 8, 2006, the Company completed an underwritten initial public offering of its
common stock. See Note 23.
(b) Use of Estimates
The preparation of the consolidated financial statements requires management of the Company to
make a number of estimates and assumptions relating to the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the period. The most
significant item subject to estimates and assumptions is the actuarial calculation for obligations
related to medical claims. Actual results could differ from those estimates.
(c) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly
liquid investments that have maturities of three months or less at the date of purchase to be cash
equivalents. Cash equivalents include such items as certificates of deposit.
(d) Investment Securities and Restricted Investments
The Company classifies its debt and equity securities in one of three categories: trading,
available for sale, or held to maturity. Trading securities are bought and held principally for the
purpose of selling them in the near term. Held-to-maturity securities are those securities in which
the Company has the ability and intent to hold the security until maturity. All securities not
included in trading or held to maturity are classified as available for sale.
64
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
Trading and available-for-sale securities are recorded at fair value. Held to maturity debt
securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums
or discounts. Unrealized holding gains and losses on trading securities are included in earnings.
Unrealized holding gains and losses, net of the related tax effect, on available for sale
securities are excluded from earnings and are reported as a separate component of other
comprehensive income until realized. Realized gains and losses from the sale of available for sale
securities are determined on a specific identification basis. Purchases and sales of investments
are recorded on their trade dates. Dividend and interest income are recognized when earned.
A decline in the market value of any available-for-sale or held-to-maturity security below
cost that is deemed to be other than temporary results in a reduction in its carrying amount to
fair value. The impairment is charged to earnings and a new cost basis for the security is
established. To determine whether an impairment is other than temporary, the Company considers
whether it has the ability and intent to hold the investment until a market price recovery and
considers whether evidence indicating the cost of the investment is recoverable outweighs evidence
to the contrary. Evidence considered in this assessment includes the reasons for the impairment,
the severity and duration of the impairment, changes in value subsequent to year end, and
forecasted performance of the investee.
Restricted investments include U.S. Government securities and certificates of deposit held by
the various state departments of insurance to whose jurisdiction the Companys subsidiaries are
subject.
All of the Companys restricted investments were classified as held-to-maturity at December
31, 2005 and 2004.
(e) Accounts Receivable
Accounts receivable consist primarily of unpaid health plan enrollee premiums due to the
Company. These accounts receivable are recorded during the period the Company is obligated to
provide services to enrollees and do not bear interest. The allowance for doubtful accounts is the
Companys best estimate of the amount of probable losses in the Companys existing accounts
receivable and is based on a number of factors, including a review of past due balances, with a
particular emphasis on past due balances greater than 90 days old. Account balances are charged off
against the allowance after all means of collection have been exhausted and the potential for
recovery is considered remote. The Company does not have any off balance sheet credit exposure
related to its health plan enrollees.
(f) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation on
property and equipment is calculated on the straight line method over the estimated useful lives of
the assets. The estimated useful life of property and equipment ranges from 1 to 5 years. Leasehold
improvements for assets under operating leases are amortized over the lesser of their useful life
or the base term of the lease. Maintenance and repairs are charged to operating expense when
incurred. Major improvements that extend the lives of the assets are capitalized.
(g) Impairment of Long Lived Assets
Long lived assets, such as property and equipment and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to estimated future
undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which
the carrying amount of the asset exceeds the estimated future cash flows. Assets to be disposed of
would be separately presented in the balance sheet and reported at the lower of the carrying amount
or fair value less costs to sell, and are no longer depreciated. As of December 31, 2005,
management believes that there are no indicators of impairment to the value of long-lived assets.
65
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
(h) Income Taxes
HealthSpring, Inc. is taxed as a corporation on a consolidated basis. The Predecessor operated
as a limited liability company and was taxed as a partnership; therefore, no federal income tax
expense was recognized by the Predecessor. Certain subsidiaries of Predecessor were subject to
federal and state income taxes.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
(i) Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over fair value of assets of businesses acquired.
Goodwill and intangible assets acquired in a purchase business combination and determined to have
an indefinite useful life are not amortized, but instead are tested for impairment at least
annually. The Company has selected December 31 as its annual testing date. Intangible assets with
estimable useful lives are amortized over their respective estimated useful lives and are reviewed
for impairment whenever events or changes in circumstances indicate that an intangible assets
carrying value may not be recoverable. No impairment losses were recognized during either of the
2005 accounting periods or for the years ended December 31, 2004 and 2003.
(j) Medical Claims Liability and Medical Expenses
Medical claims liability represents the Companys liability for services that have been
performed by providers for its Medicare Advantage and commercial HMO members that have not been
settled as of any given balance sheet date. The liability includes medical claims reported to the
plans as well as an actuarially determined estimate of claims that have been incurred but not yet
reported to the plans, or IBNR.
Medical expenses consist of claim payments, capitation payments, and pharmacy costs, net of
rebates, as well as estimates of future payments of claims provided for services rendered prior to
year-end. Capitation payments represent monthly contractual fees disbursed to physicians and other
providers who are responsible for providing medical care to members. Pharmacy costs represent
payments for members prescription drug benefits, net of rebates from drug manufacturers. Rebates
are recognized when the rebates are earned according to the contractual arrangements with the
respective vendors. Premiums the Company pays to reinsurers are reported as medical expenses and
related reinsurance recoveries are reported as deductions from medical expenses.
(k) Stockholders and Members Equity
At December 31, 2005, 37,000,000 of HealthSpring, Inc.s common shares were authorized,
32,283,950 of which were issued and 32,083,950 were outstanding. During 2005 the Company bought
back 200,000 shares of restricted stock.
At December 31, 2004, 20,000,000 NewQuest, LLC membership units were authorized, consisting of
2,000,000 founders units, 700,000 of which were issued and outstanding at December 31, 2004,
3,500,000 Series A units, 3,055,000 of which were issued and outstanding at December 31, 2004,
232,000 Series B units, all of which were issued and outstanding at December 31, 2004, 625,000
Series C units, 591,176.47 of which were issued and outstanding at December 31, 2004, and 500,000
Series D units, 306,025.28 of which were issued and outstanding at December 31, 2004. Series A
units and B units had liquidation preferences of $1.00 per unit and $0.001 per unit, respectively,
net of dividends received, to the founders units and the Series C units. At December 31, 2004,
there was no liquidation preferences with respect to the membership units as a result of dividends
received. Series C units participate only in the distribution of the consolidated profits of
NewQuest, LLC subsequent to December 21, 2001, the Series C issue date. All founders and membership
units had substantially similar voting and dividend participation rights.
66
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
On January 1, 2004, the minority investors of a consolidated entity converted their ownership
into 500,000 Series A units in NewQuest, LLC, which had a book value on the date of conversion of
$3,572.
(l) Premium Revenue
Health plan premiums are due monthly and are recognized as revenue during the period in which
the Company is obligated to provide services to the members. Deferred revenue consists of premium
payments received by the Company for covered lives for which the services will be rendered and
revenue recognized in future months.
(m) Fee Revenue
Fee revenue includes amounts paid to the Company for management services provided to
independent physician associations and health plans. The Companys management subsidiaries
typically generate this fee revenue on one of three principal bases: (1) as a percentage of revenue
collected by the relevant health plan; (2) as a fixed PMPM payment or percentage of revenue for
members serviced by the relevant independent physician association; or (3) as fees the Company
receives for offering access to its provider networks and for administrative services it offers to
self-insured employers. Fee revenue is recognized in the month in which services are provided. In
addition, pursuant to certain of our management agreements with independent physician associations,
we receive additional fees based on a share of the profits of the independent physician
association, which are recognized monthly as either fee revenue or as a reduction to medical
expense dependent upon whether the profit relates to members of one of the Companys HMO
subsidiaries.
The Company characterizes its management arrangements with independent physician associations
servicing the Companys HMO subsidiaries membership as reciprocal-based arrangements. Accordingly,
profits payments to the Company management subsidiaries are evaluated to determine whether they
are a partial return of the capitation-based advance payment made by the Company HMO subsidiary. If
so, the profits payments are recognized as a reduction to medical expense when the Company can
readily determine that such profits have been earned.
(n) Comprehensive Income
Comprehensive income consists of net income and unrecognized holding gains or losses on
investment securities available for sale.
(o) Reinsurance and Capitation
The Companys HMO subsidiaries have reinsurance arrangements with well-capitalized,
highly-rated reinsurance providers. These arrangements include maximum amounts per member per year
and per such members lifetime. Premiums paid and amounts recovered under these agreements have not
been material in any period covered by these financial statements. See
Note 16.
The Companys HMO subsidiaries also maintain risk-sharing arrangements with its providers,
including independent physician associations. See Note 7.
(p) Net Income Per Common Share and Member Unit
Net income per common share and member unit is measured at two levels: basic net income per
common share and member unit and diluted net income per common share and member unit. Basic net
income per common shares and member unit is computed by dividing net income available to common
stockholders and members by the weighted average number of common shares or member units
outstanding during the period. Diluted net income per member unit is computed by dividing net
income by the weighted average number of member units outstanding after considering dilution
related to warrants to purchase 500,000 Series A units of NewQuest, LLC. Diluted net income per
common share is computed by dividing net income available to common stockholders by the weighted
average number of common shares outstanding after considering the dilution related to stock
options.
67
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
(q) Stock Based Compensation
The Company applies the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25)
and related interpretations including Financial Accounting Standards Board (FASB) Interpretation
No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this
method, compensation expense is recorded only if the current market price of the underlying stock
exceeds the exercise price on the date of grant. SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), and SFAS No. 148, Accounting for Stock-Based Compensation
Transition and Disclosure, an amendment to FASB Statement No. 123 (SFAS No. 148), established
accounting and disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As permitted by existing accounting standards, the Company
has elected to continue to apply the intrinsic-value-based method of accounting described above,
and has adopted only the disclosure requirements of SFAS No. 123, as amended. Because the Company
had only 195,000 shares subject to options outstanding at December 31, 2005, which were granted in
September 2005, the effect on net income if the fair-value-based method had been applied to all
outstanding and unvested options is immaterial.
(r) Recent Accounting Pronouncements
In December 2004, the FASB revised SFAS No. 123, which established the fair-value based method
of accounting as preferable for share-based compensation awarded to employees, and encouraged, but
did not require, entities to adopt it until July 1, 2005. On April 14, 2005, the Securities and
Exchange Commission announced that it would provide a phased-in implementation process that allowed
non-small business registrants with a fiscal year ending December 31, 2005 an extension until
January 1, 2006 to adopt SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) eliminates the
alternative to use APB Opinion No. 25, which allowed entities to account for share-based
compensation arrangements with employees according to the intrinsic value method. SFAS No. 123(R)
requires the measurement of the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. The cost will be recognized
over the period during which an employee is required to provide service in exchange for the award.
No compensation cost is recognized for equity instruments for which employees do not render
service. The Company will adopt SFAS No. 123(R) effective January 1, 2006, using the modified
prospective method, which will require compensation cost to be recorded as expense, over the
remaining vesting period, for the portion of outstanding unvested awards at January 1, 2006, based
on the grant-date fair value of those awards. The effect of adoption of SFAS No. 123(R) on the
unvested stock options outstanding at December 31, 2005 is estimated to be approximately $27 after
tax in 2006. The Companys actual equity-based compensation expense in 2006 will depend on a number
of factors, including the amount of awards granted in 2006 and the fair value of those awards at
the time of the grant.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections A
Replacement of APB Opinion No. 20, Accounting Changes (APB 20), and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements (SFAS No. 154). APB 20 previously
required that most voluntary changes in accounting principles be recognized by including in net
income of the period of the change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 requires retrospective application to prior periods financial statements
of changes in accounting principles, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that
retrospective application of a change in accounting principle be limited to the direct effects of
the change. Indirect effects of a change in an accounting principle, such as a change in
nondiscretionary profit-sharing payments resulting from an accounting change, should be recognized
in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change
in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005. The Company will adopt the provisions of SFAS No. 154 effective January 1, 2006. The impact
of SFAS No. 154 will depend on the accounting change, if any, in a future period.
68
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
(2) Recapitalization
HealthSpring, Inc. was formed in October 2004 in connection with a recapitalization
transaction involving NewQuest, LLC and its members, certain investment funds affiliated with GTCR
and certain other investors. The recapitalization was completed on March 1, 2005. Prior to the
recapitalization, NewQuest was owned 43.9% by its officers and employees, 38.2% by the non-employee
directors of NewQuest, and 17.9% by outside investors.
In connection with the recapitalization, HealthSpring, Inc., NewQuest, LLC, the members of
NewQuest, LLC, GTCR, and certain other investors entered into a purchase and exchange agreement and
other related agreements pursuant to which GTCR and certain other investors purchased an aggregate
of 136,072 shares of HealthSpring, Inc.s preferred stock and 18,237,587 shares of HealthSpring,
Inc.s common stock for an aggregate purchase price of $139,719. The members of NewQuest, LLC
exchanged their ownership interests in NewQuest, LLC for an aggregate of $295,399 in cash
(including $17,200 placed in escrow to secure contingent post-closing indemnification liabilities),
91,082 shares of HealthSpring, Inc.s preferred stock, and 12,207,631 shares of
HealthSpring, Inc.s common stock. In addition, upon the closing of the recapitalization,
HealthSpring, Inc. issued an aggregate of 1,286,250 shares of restricted common stock to employees
of HealthSpring, Inc. for an aggregate purchase price of $258. HealthSpring, Inc. used the proceeds
from the sale of preferred and common stock and $200,000 of borrowings under new credit facilities
to fund the cash payments to the members of NewQuest, LLC and to pay expenses and certain other
payments relating to the transaction. Immediately following the recapitalization, HealthSpring,
Inc. was owned 55.1% by GTCR, 28.7% by executive officers and employees of HealthSpring, Inc., and
16.2% by outside investors, including HealthSpring, Inc.s non-employee directors.
Prior to the recapitalization, approximately 15% of the ownership interests in two of
NewQuest, LLCs Tennessee management subsidiaries and approximately 27% of the membership interests
of NewQuest, LLCs Texas HMO subsidiary, Texas HealthSpring, LLC, were owned by outside investors.
Contemporaneously with the recapitalization, HealthSpring, Inc. purchased all of the minority
interests in the Tennessee subsidiaries for an aggregate consideration of approximately $27,546 and
a portion of the membership interests held by the minority investors in Texas HealthSpring, LLC for
aggregate consideration of approximately $16,812. Following the purchase, the outside investors in
Texas HealthSpring, LLC owned an approximately 9% ownership interest. In June 2005, Texas
HealthSpring, LLC completed a private placement pursuant to which it issued new membership
interests to existing and new investors for net proceeds of $7,875, which was accounted for as a
capital transaction and no gain was recognized due to the fact that it was an integral part of the
recapitalization. Following this private placement, and as of December 31, 2005, the outside
investors own an approximately 15.9% interest in Texas HealthSpring, LLC. The minority interest was
automatically exchanged for shares of the Companys common stock immediately prior to the initial
public offering transaction completed on February 8, 2006.
The recapitalization was accounted for using the purchase method. The aggregate transaction
value for the recapitalization was $438,576, which reflected a multiple of operating earnings and
was substantially in excess of NewQuest, LLCs book value. The transaction value included $5,295 of
capitalized acquisition related costs and $6,366 of deferred financing costs. In addition,
NewQuest, LLC incurred $6,941 of transaction costs which were expensed during the two-month period
ended February 28, 2005 and the Company incurred $4,000 of transaction costs which were expensed
during the ten-month period ended December 31, 2005. As a result of the recapitalization, the
Company acquired $438,576 of net assets, including $91,200 of identifiable intangible assets, and
goodwill of $315,057. Of the $91,200 of identifiable intangible assets recorded, $24,500 has an
indefinite life, and the remaining $66,700 is being amortized over periods ranging from two to
fifteen years.
69
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
The following table summarizes the estimated fair value of the net assets acquired:
|
|
|
|
|
Cash |
|
$ |
75,441 |
|
Other current assets |
|
|
38,704 |
|
Property and equipment |
|
|
3,249 |
|
Investment securities |
|
|
31,782 |
|
|
Other assets |
|
|
2,293 |
|
Identifiable intangible assets |
|
|
91,200 |
|
Goodwill |
|
|
315,057 |
|
|
|
|
|
Total assets |
|
|
557,726 |
|
|
|
|
|
|
|
|
|
|
Current liabilities assumed |
|
|
80,199 |
|
Long-term liabilities assumed |
|
|
38,951 |
|
|
|
|
|
Total liabilities |
|
|
119,150 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
438,576 |
|
|
|
|
|
A breakdown of the identifiable intangible assets, their assigned value and expected lives is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Life |
|
|
|
Assigned Value |
|
|
(Years) |
|
Trade name |
|
$ |
24,500 |
|
|
indefinite |
Noncompete agreements |
|
|
800 |
|
|
|
5 |
|
Provider network |
|
|
7,100 |
|
|
|
15 |
|
Medicare member network |
|
|
48,500 |
|
|
|
12 |
|
Customer relationships |
|
|
10,300 |
|
|
|
2 to 10 |
|
|
|
|
|
|
|
|
|
Total amount of identified intangible assets |
|
$ |
91,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) Investment Securities
There were no investment securities classified as trading as of December 31, 2005 or 2004.
Investment securities classified as available for sale by major security type and class of
security as of December 31, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Holding Gains |
|
|
Holding Losses |
|
|
Fair Value |
|
Repurchase agreements |
|
$ |
8,646 |
|
|
|
|
|
|
|
|
|
|
|
8,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities classified as available for sale by major security type and class of
security as of December 31, 2004 were as follows (Predecessor):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Holding Gains |
|
|
Holding Losses |
|
|
Fair Value |
|
Repurchase agreements |
|
$ |
8,460 |
|
|
|
|
|
|
|
|
|
|
|
8,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
Investment securities classified as held to maturity by major security type and class of
security classified as current assets as of December 31, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Holding Gains |
|
|
Holding Losses |
|
|
Fair Value |
|
U.S. Treasury securities |
|
$ |
743 |
|
|
|
|
|
|
|
(2 |
) |
|
|
741 |
|
Municipal bonds |
|
|
11,348 |
|
|
|
|
|
|
|
(64 |
) |
|
|
11,284 |
|
Government agencies |
|
|
800 |
|
|
|
|
|
|
|
(2 |
) |
|
|
798 |
|
Corporate debt securities |
|
|
1,422 |
|
|
|
|
|
|
|
(6 |
) |
|
|
1,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,313 |
|
|
|
|
|
|
|
(74 |
) |
|
|
14,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities classified as held to maturity by major security type and class of
security classified as long-term assets as of December 31, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Holding Gains |
|
|
Holding Losses |
|
|
Fair Value |
|
U.S. Treasury securities |
|
$ |
149 |
|
|
|
|
|
|
|
(2 |
) |
|
|
147 |
|
Municipal bonds |
|
|
20,924 |
|
|
|
|
|
|
|
(185 |
) |
|
|
20,739 |
|
Government agencies |
|
|
711 |
|
|
|
|
|
|
|
(9 |
) |
|
|
702 |
|
Corporate debt securities |
|
|
1,209 |
|
|
|
|
|
|
|
(13 |
) |
|
|
1,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,993 |
|
|
|
|
|
|
|
(209 |
) |
|
|
22,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities classified as held to maturity by major security type and class of
security classified as current assets as of December 31, 2004 were as follows (Predecessor):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Holding Gains |
|
|
Holding Losses |
|
|
Fair Value |
|
U.S. Treasury securities |
|
$ |
1,167 |
|
|
|
|
|
|
|
|
|
|
|
1,167 |
|
Municipal bonds |
|
|
5,041 |
|
|
|
10 |
|
|
|
(37 |
) |
|
|
5,014 |
|
Government agencies |
|
|
1,480 |
|
|
|
|
|
|
|
(16 |
) |
|
|
1,464 |
|
Corporate debt securities |
|
|
1,622 |
|
|
|
|
|
|
|
(17 |
) |
|
|
1,605 |
|
Foreign bonds |
|
|
103 |
|
|
|
|
|
|
|
(2 |
) |
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,413 |
|
|
|
10 |
|
|
|
(72 |
) |
|
|
9,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities classified as held to maturity by major security type and class of
security classified as long-term assets as of December 31, 2004 were as follows (Predecessor):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Holding Gains |
|
|
Holding Losses |
|
|
Fair Value |
|
Municipal bonds |
|
$ |
18,905 |
|
|
|
21 |
|
|
|
(91 |
) |
|
|
18,835 |
|
Government agencies |
|
|
510 |
|
|
|
|
|
|
|
(8 |
) |
|
|
502 |
|
Corporate debt securities |
|
|
833 |
|
|
|
|
|
|
|
(11 |
) |
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,248 |
|
|
|
21 |
|
|
|
(110 |
) |
|
|
20,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of debt securities classified as held to maturity were as follows at December
31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
Due within one year |
|
$ |
14,313 |
|
|
|
14,238 |
|
Due after one year through five years |
|
|
20,195 |
|
|
|
20,026 |
|
Due after five years through ten years |
|
|
854 |
|
|
|
847 |
|
Due after ten years |
|
|
1,944 |
|
|
|
1,912 |
|
|
|
|
|
|
|
|
|
|
$ |
37,306 |
|
|
|
37,023 |
|
|
|
|
|
|
|
|
71
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
Gross unrealized losses on investment securities and the fair value of the related securities,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, at December 31, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
More Than |
|
|
|
|
|
|
12 Months |
|
|
12 Months |
|
|
Total |
|
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
U.S. Treasury securities |
|
$ |
4 |
|
|
|
888 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
888 |
|
Municipal bonds |
|
|
102 |
|
|
|
15,269 |
|
|
|
147 |
|
|
|
16,754 |
|
|
|
249 |
|
|
|
32,023 |
|
Government agencies |
|
|
7 |
|
|
|
796 |
|
|
|
4 |
|
|
|
704 |
|
|
|
11 |
|
|
|
1,500 |
|
Corporate debt securities |
|
|
19 |
|
|
|
2,612 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
2,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
132 |
|
|
|
19,565 |
|
|
|
151 |
|
|
|
17,458 |
|
|
|
283 |
|
|
|
37,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses on investment securities and the fair value of the related
securities, aggregated by investment category and length of time that individual securities have
been in a continuous unrealized loss position, at December 31, 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
More Than |
|
|
|
|
|
|
12 Months |
|
|
12 Months |
|
|
Total |
|
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
Municipal bonds |
|
$ |
127 |
|
|
|
16,307 |
|
|
|
|
|
|
|
|
|
|
|
127 |
|
|
|
16,307 |
|
Government agencies |
|
|
24 |
|
|
|
1,814 |
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
1,814 |
|
Corporate debt securities |
|
|
29 |
|
|
|
1,638 |
|
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
1,638 |
|
Foreign bonds |
|
|
2 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
182 |
|
|
|
19,862 |
|
|
|
|
|
|
|
|
|
|
|
182 |
|
|
|
19,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds and Government Agencies: The unrealized losses on investments in
municipal bonds and government agencies were caused by interest rate increases. The contractual
terms of these investments do not permit the issuer to settle the securities at a price less than
the amortized cost of the investment. Because the Company has the ability and intent to hold these
investments until a market price recovery or maturity, these investments are not considered
other-than-temporarily impaired.
Corporate Debt Securities: The unrealized losses on corporate debt securities were caused by
interest rate increases. The contractual terms of the bonds do not allow the issuer to settle the
securities as a price less than the face value of the bonds. Because the decline in fair value is
attributable to changes in interest rates and not credit quality, and because NewQuest has the
intent and ability to hold these investments until a market price recovery or maturity, these
investments are not considered other-than-temporarily impaired.
(4) Property and Equipment
A summary of property and equipment at December 31, 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
2005 |
|
|
2004 |
|
Furniture and equipment |
|
$ |
5,066 |
|
|
|
3,603 |
|
Computer equipment |
|
|
9,723 |
|
|
|
5,988 |
|
|
|
|
|
|
|
|
|
|
|
14,789 |
|
|
|
9,591 |
|
Less accumulated depreciation and amortization |
|
|
(10,502 |
) |
|
|
(7,715 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,287 |
|
|
|
1,876 |
|
|
|
|
|
|
|
|
72
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
(5) Goodwill and Intangible Assets
Goodwill and intangible assets at December 31, 2005 and 2004 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
2005 |
|
|
2004 |
|
Goodwill |
|
$ |
315,057 |
|
|
|
6,478 |
|
Intangible assets |
|
|
87,675 |
|
|
|
350 |
|
|
|
|
|
|
|
|
Total |
|
$ |
402,732 |
|
|
|
6,828 |
|
|
|
|
|
|
|
|
Changes to goodwill during 2005 and 2004 are as follows:
|
|
|
|
|
Predecessor: |
|
|
|
|
Balance at December 31, 2003 |
|
$ |
7,395 |
|
Reduction in deferred income tax valuation allowance for
preacquisition net operating loss carryforwards |
|
|
(917 |
) |
|
|
|
|
Balance at December 31, 2004 |
|
$ |
6,478 |
|
|
|
|
|
There was no change in the Predecessors goodwill during the period from January 1, 2005 to
February 28, 2005.
|
|
|
|
|
HealthSpring, Inc.: |
|
|
|
|
Recapitalization transaction |
|
$ |
315,057 |
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
315,057 |
|
|
|
|
|
A breakdown of the identifiable intangible assets, their assigned value and accumulated
amortization at December 31, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name |
|
$ |
24,500 |
|
|
|
|
|
Noncompete agreements |
|
|
800 |
|
|
|
133 |
|
Provider network |
|
|
7,100 |
|
|
|
394 |
|
Medicare member network |
|
|
48,500 |
|
|
|
3,368 |
|
Customer relationships |
|
|
10,300 |
|
|
|
1,132 |
|
Management contract right |
|
|
1,554 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
$ |
92,754 |
|
|
|
5,079 |
|
|
|
|
|
|
|
|
Amortization expense on identifiable intangible assets for the ten months ended December 31,
2005, the two months ended February 28, 2005, and the years ended December 31, 2004 and 2003 was $5,027,
$52, $250 and $63, respectively.
Amortization expense expected to be recognized during fiscal years subsequent to December 31, 2005
is as follows:
|
|
|
|
|
2006 |
|
$ |
7,450 |
|
2007 |
|
|
6,146 |
|
2008 |
|
|
5,494 |
|
2009 |
|
|
5,494 |
|
2010 |
|
|
5,361 |
|
Thereafter |
|
|
33,230 |
|
|
|
|
|
Total |
|
$ |
63,175 |
|
|
|
|
|
73
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
(6) Restricted Investments
Restricted investments at December 31, 2005 and 2004 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Holding |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
$ |
2,563 |
|
|
|
|
|
|
|
|
|
|
|
2,563 |
|
U.S. governmental securities |
|
|
3,089 |
|
|
|
|
|
|
|
(55 |
) |
|
|
3,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,652 |
|
|
|
|
|
|
|
(55 |
) |
|
|
5,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
$ |
2,400 |
|
|
|
|
|
|
|
|
|
|
|
2,400 |
|
U.S. governmental securities |
|
|
2,919 |
|
|
|
11 |
|
|
|
|
|
|
|
2,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,319 |
|
|
|
11 |
|
|
|
|
|
|
|
5,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
unrealized losses on investments in government securities were caused by
interest rate increases. The contractual terms of these investments do not permit the issuer to
settle the securities at a price less than the amortized cost of the investment. Because the
Company has the ability and intent to hold these investments until a market price recovery or
maturity, these investments are not considered other-than-temporarily impaired.
(7) Related Party Transactions
Renaissance Physician Organization (RPO) is a Texas non-profit corporation the members of
which are GulfQuest L.P., one of the Companys wholly owned HMO management subsidiaries, and 13
affiliated independent physician associations, comprised of over 1,000 physicians, providing
medical services primarily in and around counties surrounding and including the Houston, Texas
metropolitan area. Texas HealthSpring, LLC, has contracted with RPO to provide professional medical
and covered medical services and procedures to members of one of the Companys Medicare Advantage
plans. Pursuant to that agreement, RPO shares risk relating to the provision of such services, both
upside and downside, with the Company on a 50%/50% allocation. Another agreement the Company has
with RPO delegates responsibility to GulfQuest L.P. for medical management, claims processing,
provider relations, credentialing, finance, and reporting services for RPOs Medicare and
commercial members. Pursuant to that agreement, GulfQuest L.P. receives a management fee,
calculated as a percentage of Medicare premiums, plus a dollar amount per member per month for
RPOs commercial members, plus 25% of the profits from RPOs operations. Both agreements have a ten
year term that expires on December 31, 2014 and automatically renews for additional one to three
year terms thereafter, unless notice of non-renewal is given by either party at least 180 days
prior to the end of the then-current term. The agreements also contain certain restrictions on the
Companys ability to enter into agreements with delegated physician networks in certain counties
where RPO provides services. Likewise, RPO is subject to restrictions regarding providing coverage
to plans competitive with Texas HealthSpring, LLCs Medicare Advantage plan.
For
the ten months ended December 31, 2005, the two months ended February 28, 2005 and the
year ended December 31, 2004, RPO paid GulfQuest L.P. management and other fees of
approximately $11,359, $2,060, and $10,412, respectively. In addition, Texas HealthSpring,
LLC paid RPO approximately $67,172, $11,398, and $53,846 for the
ten months ended December 31, 2005, two months ended February 28,
2005, and the year ended December 31, 2004, respectively, to provide medical
services to its members.
The Company provides management services to its subsidiaries. For providing management
services, the Company is paid a monthly management fee which is calculated based on each HMOs
total membership enrollment. Prior to consolidating HealthSpring Management, Inc. (HSMI), the
Predecessor recorded management fee revenue of $153 for the three
months ended March 31, 2003. See
Note 9. The Predecessor had a note payable to a minority investor in HSMI that had a balance of
$5,475 as of December 31, 2004. In connection with certain agreements made by RPO and its related
physician groups as a condition to the recapitalization, the Predecessor and RPO agreed to the
issuance to RPO of approximately 1% of the common equity in the Company following the
recapitalization. It was understood and agreed that this equity would be issued based on RPO
achieving certain performance goals over the five year period following the recapitalization. In
February 2006, the Company and RPO negotiated a settlement of the obligation by a cash payment to
RPO which would eliminate the future performance requirements. See
Note 23. The Company accrued an
additional transaction expense of $4.0 million in the ten month period ended December 31, 2005
relating to this commitment.
Under a professional services agreement, dated March 1, 2005, between the Company and GTCR,
the Company engaged GTCR as a financial and management consultant. Two of the Companys directors
are principals of GTCR. During the term of its engagement, GTCR agreed to consult on business and
financial matters, including corporate strategy, budgeting of future corporate investments,
acquisition and divestiture strategies, and debt and equity
74
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
financings for an annual management fee
of $500, payable in equal monthly installments, and reimbursement for certain related expenses.
GTCR was paid approximately $375 under this agreement through December 31, 2005. Additionally, GTCR
was paid a placement fee of approximately $1,341 under the professional services agreement in
connection with the sale of the Companys securities in the recapitalization. The placement fee was
included in capitalized transaction expenses in connection with the recapitalization. The professional
services agreement was terminated in connection with the IPO in February 2006.
(8) Lease Obligations
The Company leases certain facilities and equipment under noncancelable operating lease
arrangements with varying terms. The facility leases generally contain renewal options of five
years. For the ten months ended December 31, 2005, the two
months ended February 28, 2005, and the years ended December 31, 2004 and 2003, the Company recorded
lease expense of $3,274, $501, $2,746, and $3,188, respectively.
Future payments under these lease obligations as of December 31, 2005 were as follows:
|
|
|
|
|
2006 |
|
$ |
4,576 |
|
2007 |
|
|
4,061 |
|
2008 |
|
|
2,306 |
|
2009 |
|
|
2,294 |
|
2010 |
|
|
2,061 |
|
|
|
|
|
|
|
$ |
15,298 |
|
|
|
|
|
(9) Consolidation of HSMI
Through March 31, 2003, the Predecessor owned 50% of HSMI and accounted for it under the
equity method. On April 1, 2003, the Predecessor exercised its option agreements to acquire an
additional 33% interest in HSMI for $620. As a result of this transaction, the value of the HSMI
net assets acquired exceeded the purchase price by $4,641, which represented negative goodwill. The
amount of negative goodwill was allocated as a reduction to property and equipment and certain
other long-term assets acquired. As a result of the acquisition, NewQuest, LLC held 83% of the
ownership in HSMI and consolidated the assets and liabilities of HSMI as of April 1, 2003 and the
results of its operations for the period from April 1, 2003 through December 31, 2003. Also, on
December 19, 2003, HSMI redeemed approximately 1.5% of its outstanding ownership interest for
$1,133, which brought the Predecessors ownership to 85% of HSMI.
The following table summarizes the value of HSMIs assets and liabilities consolidated by the
Predecessor on April 1, 2003.
|
|
|
|
|
Cash |
|
$ |
38,592 |
|
Other Current assets |
|
|
10,734 |
|
Property and equipment |
|
|
373 |
|
Other assets |
|
|
4,139 |
|
|
|
|
|
Total assets consolidated |
|
|
53,838 |
|
Current liabilities |
|
|
37,270 |
|
Long-term debt |
|
|
1,759 |
|
|
|
|
|
Total liabilities consolidated |
|
|
39,029 |
|
|
|
|
|
Net assets consolidated |
|
$ |
14,809 |
|
|
|
|
|
75
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
The condensed results of operations of HSMI for the period from January 1, 2003 through March
31, 2003 are summarized as follows (unaudited):
|
|
|
|
|
Revenue: |
|
|
|
|
Premium |
|
|
|
|
Medicare premiums |
|
$ |
58,794 |
|
Commercial premiums |
|
|
20,187 |
|
|
|
|
|
Total premiums |
|
|
78,981 |
|
Fee revenue |
|
|
(52 |
) |
Investment income |
|
|
136 |
|
|
|
|
|
Total revenue |
|
|
79,065 |
|
Expenses: |
|
|
|
|
Medical expense: |
|
|
|
|
Medicare expense |
|
|
51,385 |
|
Commercial expense |
|
|
15,772 |
|
|
|
|
|
Total medical expense |
|
|
67,157 |
|
Selling, general and administrative |
|
|
7,507 |
|
Depreciation and amortization |
|
|
412 |
|
|
|
|
|
Total expenses |
|
|
75,076 |
|
|
|
|
|
Net income |
|
$ |
3,989 |
|
|
|
|
|
(10) Acquisitions
On September 1, 2003, the Predecessor acquired 100% of the outstanding shares of Signature
Health Alliance, a preferred provider organization, for the purchase price of $1,802. The
Predecessor recorded $761 of goodwill as a result of this acquisition.
The following table summarizes the estimated fair value of the assets acquired and liabilities
assumed at September 1, 2003:
|
|
|
|
|
Cash |
|
$ |
948 |
|
Other current assets |
|
|
95 |
|
Property and equipment |
|
|
103 |
|
Goodwill |
|
|
761 |
|
|
|
|
|
Total assets acquired |
|
|
1,907 |
|
Current liabilities |
|
|
7 |
|
Deferred tax liabilities |
|
|
98 |
|
|
|
|
|
Total liabilities assumed |
|
|
105 |
|
Net assets acquired |
|
$ |
1,802 |
|
|
|
|
|
Also on September 1, 2003, the Predecessor acquired 100% of the outstanding shares of
Community PPO, a preferred provider organization, for the purchase price of $643. The Predecessor
recorded $170 of goodwill as a result of this acquisition.
The following table summarizes the estimated fair value of the Community assets acquired and
liabilities consolidated at September 1, 2003:
|
|
|
|
|
Cash |
|
$ |
396 |
|
Other current assets acquired |
|
|
78 |
|
Goodwill |
|
|
170 |
|
|
|
|
|
Total assets acquired |
|
|
644 |
|
Current liabilities assumed |
|
|
1 |
|
|
|
|
|
Net assets acquired |
|
$ |
643 |
|
|
|
|
|
76
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
(11) Long-Term Debt
Long-term debt at December 31, 2005 and 2004 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Senior secured term loan |
|
$ |
152,625 |
|
|
|
|
|
Senior subordinated notes |
|
|
35,901 |
|
|
|
|
|
Unsecured notes payable |
|
|
|
|
|
$ |
5,475 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
188,526 |
|
|
|
5,475 |
|
Less current portion of long-term debt |
|
|
16,500 |
|
|
|
700 |
|
|
|
|
|
|
|
|
|
|
Long-term debt less current portion |
|
$ |
172,026 |
|
|
$ |
4,775 |
|
|
|
|
|
|
|
|
|
|
In connection with the recapitalization, the Company entered into a senior credit facility and
issued senior subordinated notes. The borrowings under the senior credit facility and proceeds from
the issuance of the senior subordinated notes, net of $6.4 million of fees recorded as deferred
financing costs, as well as proceeds from the issuance of the preferred and common stock were used
to fund the cash payments to the members of the Predecessor in the recapitalization and for other
related expenses and payments.
The senior credit facility provided for borrowings in an aggregate principal amount of up to
$180.0 million, which included:
|
|
|
A senior secured term loan facility in an aggregate principal amount of up to $165.0
million, (the term loan facility), which had $152.6 million principal amount outstanding as
of December 31, 2005, and which was repaid with proceeds from
the IPO in February 2006 and terminated; and |
|
|
|
|
A senior secured revolving credit facility in an aggregate principal amount of up to
$15.0 million, none of which had been drawn as of December 31, 2005. |
Following the initial public offering, the senior secured revolving credit facility remains in
effect, under which the Company may borrow up to $15.0 million aggregate principal amount, which
amount may be increased by up to $25.0 million, subject to certain conditions, through March 1,
2010. The obligation under the senior credit facility is guaranteed by the Company and all of its
non-HMO subsidiaries and is secured by substantially all of the Companys assets.
Amounts borrowed by the Company under the term loan facility bore interest at floating rates,
which could be either a base rate, or, at the Companys option, a LIBOR rate plus, in each case, an
applicable margin. On July 1, 2005, the Company elected the base rate option and amounts borrowed
under the term loan facility bore interest at an annual rate of 6.66% for the period through
December 31, 2005 and 7.53% from January 1, 2006 until it was repaid in February 2006. As required
by the term loan facility, the Company entered into an interest rate swap agreement in July 2005,
pursuant to which $25.0 million of the principal amount outstanding under the term loan facility
would bear interest at a fixed annual rate of 4.25% plus the then applicable margin (3.00%) for the
period from January 1, 2006 to June 30, 2006. The swap does not qualify for hedge accounting and
accordingly, the Company recorded the change in its fair market value as a component of earnings.
At December 31, 2005, the swap had a fair market value of $51. This swap was settled in
connection with the IPO and the Company received a breakage payment of
$54 in February 2006.
The senior credit facility contains various financial covenants, including covenants with
respect to leverage ratio, interest and fixed charge coverage ratio, and capital expenditures, as
well as restrictions on undertaking specified corporate actions including, among others, asset
dispositions, acquisitions, payment of dividends, changes in control,
incurrence of additional indebtedness, creation of liens, and transactions with affiliates.
The Company was in compliance with these financial and restrictive covenants as of December 31,
2005.
77
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
The senior subordinated notes, issued by the Company, bore interest at an annual rate of 15%,
12% of which was payable quarterly in cash and 3% of which accrued quarterly and was added to the
outstanding principal amount. Approximately $35.9 million aggregate principle amount and $368
of accrued and unpaid interest was outstanding at December 31, 2005. These amounts, together with a
prepayment premium of approximately $1.1 million were repaid with proceeds from the initial public
offering. The notes were guaranteed by the Company and its non-HMO subsidiaries on a basis
subordinated to the senior credit facility. The agreements governing the notes contained financial
and restrictive covenants substantially similar to those of the senior credit facility.
At December 31, 2004, the Predecessor had an unsecured note payable to the minority investor
in HSMI totaling $5,475 bearing interest at 2.2% plus 30 day LIBOR (or an aggregate interest rate
of 4.04% at December 31, 2004), payable monthly with principal, through July 1, 2007. This note
along with all accrued interest was repaid in conjunction with the recapitalization.
Future payments on the debt as of December 31, 2005 were as follows:
|
|
|
|
|
2006 |
|
$ |
16,500 |
|
2007 |
|
|
16,500 |
|
2008 |
|
|
16,500 |
|
2009 |
|
|
16,500 |
|
2010 |
|
|
16,500 |
|
Thereafter |
|
|
106,026 |
|
|
|
|
|
Total debt |
|
|
188,526 |
|
Less current portion |
|
|
16,500 |
|
|
|
|
|
Long-term debt, less current portion |
|
$ |
172,026 |
|
|
|
|
|
(12) Medical Claims Liability
Medical claims liability represents the liability for services that have been performed by
providers for the Companys Medicare Advantage and commercial HMO members. The liability includes
medical claims reported to the plans as well as an actuarially determined estimate of claims that
have been incurred but not yet reported to the plans, or IBNR. The IBNR component is based on our
historical claims data, current enrollment, health service utilization statistics, and other
related information.
The following table presents the components of the medical claims liability as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Incurred but not reported (IBNR) |
|
$ |
74,393 |
|
|
|
50,432 |
|
Reported claims |
|
|
8,252 |
|
|
|
2,755 |
|
|
|
|
|
|
|
|
Total medical claims liability |
|
$ |
82,645 |
|
|
|
53,187 |
|
|
|
|
|
|
|
|
The Company develops its estimate for IBNR by using standard actuarial developmental
methodologies, including the completion factor method. This method estimates liabilities for claims
based upon the historical lag between the month when services are rendered and the month claims are
paid and takes into consideration factors such as expected medical cost inflation, seasonality
patterns, product mix, and membership changes. The completion factor is a measure of how complete
the claims paid to date are relative to the estimate of the total claims for services rendered for
a given reporting period. Although the completion factors are generally reliable for older service
periods, they are more volatile, and hence less reliable, for more recent periods given that the
typical billing lag for services can range from a week to as much as 90 days from the date of
service. As a result, for the most recent two to four months, the estimate for incurred claims is
developed from a trend factor analysis based on per member per month claims trends experienced in
the preceding months. The liability includes estimates of premium deficiencies. At December 31,
2005 and 2004, the Company had estimated premium deficiency liabilities of approximately $1,460 and
$1,129, respectively.
Each period, the Company re-examines the previously established medical claims liability
estimates based on actual claim submissions and other relevant changes in facts and circumstances.
As the liability estimates recorded in prior periods become more exact, the Company increases or
decreases the amount of the estimates, and includes
78
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
the changes in medical expenses in the period
in which the change is identified. In every reporting period, the Companys operating results
include the effects of more completely developed medical claims liability estimates associated with
prior periods.
The following table provides a reconciliation of changes in the medical claims liability for
the ten-month period ended December 31, 2005 and the Predecessor for the two-month period ended
February 28, 2005 and the years ended 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Ten month period |
|
|
Two month period |
|
|
Year ended |
|
|
Year ended |
|
|
|
ended December |
|
|
ended February 28, |
|
|
December 31, |
|
|
December 31, |
|
|
|
31, 2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in thousands) |
|
Balance at beginning of period |
|
$ |
|
|
|
|
53,187 |
|
|
|
47,729 |
|
|
|
7,661 |
|
Purchase of NewQuest, LLC |
|
|
59,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation of HSMI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,367 |
|
Incurred related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period |
|
|
576,180 |
|
|
|
97,843 |
|
|
|
467,289 |
|
|
|
295,864 |
|
Prior period |
|
|
(6,844 |
) |
|
|
(7,000 |
) |
|
|
(3,914 |
) |
|
|
(4,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred |
|
|
569,336 |
|
|
|
90,843 |
|
|
|
463,375 |
|
|
|
291,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period |
|
|
493,902 |
|
|
|
44,397 |
|
|
|
415,136 |
|
|
|
253,682 |
|
Prior period |
|
|
51,806 |
|
|
|
40,617 |
|
|
|
42,781 |
|
|
|
30,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid |
|
|
545,708 |
|
|
|
85,014 |
|
|
|
457,917 |
|
|
|
283,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
82,645 |
|
|
|
59,016 |
|
|
|
53,187 |
|
|
|
47,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13) Income Taxes
Income tax expense (benefit) attributable to income before income taxes consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
Deferred |
|
|
Total |
|
Ten-month period ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal |
|
$ |
17,396 |
|
|
|
(1,127 |
) |
|
|
16,269 |
|
State and local |
|
|
808 |
|
|
|
67 |
|
|
|
875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,204 |
|
|
|
(1,060 |
) |
|
|
17,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor: |
|
|
|
|
|
|
|
|
|
|
|
|
Two-month period ended February 28, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal |
|
$ |
2,108 |
|
|
|
122 |
|
|
|
2,230 |
|
State and local |
|
|
427 |
|
|
|
(29 |
) |
|
|
398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,535 |
|
|
|
93 |
|
|
|
2,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal |
|
$ |
5,390 |
|
|
|
2,225 |
|
|
|
7,615 |
|
State and local |
|
|
1,640 |
|
|
|
(62 |
) |
|
|
1,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,030 |
|
|
|
2,163 |
|
|
|
9,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal |
|
$ |
4,716 |
|
|
|
(1,011 |
) |
|
|
3,811 |
|
State and local |
|
|
1,480 |
|
|
|
232 |
|
|
|
1,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,196 |
|
|
|
(779 |
) |
|
|
5,417 |
|
|
|
|
|
|
|
|
|
|
|
79
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
Income tax expense attributable to income before income taxes differs from the amounts
computed by applying the applicable U.S. Federal income tax rate of 35% as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
Ten month |
|
Two month |
|
|
|
|
period ended |
|
period ended |
|
Year Ended December |
|
|
December 31 |
|
February 28 |
|
31, |
|
|
2005 |
|
2005 |
|
2004 |
|
2003 |
U.S. Federal statutory rate on income before income taxes |
|
|
$15,293 |
|
|
|
1,867 |
|
|
|
11,729 |
|
|
|
8,566 |
|
Income not subject to federal income tax due to partnership
status |
|
|
|
|
|
|
423 |
|
|
|
(4,316 |
) |
|
|
(4,928 |
) |
State income taxes, net of Federal tax effect |
|
|
569 |
|
|
|
259 |
|
|
|
1,026 |
|
|
|
1,044 |
|
Other |
|
|
1,282 |
|
|
|
79 |
|
|
|
754 |
|
|
|
735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
$17,144 |
|
|
|
2,628 |
|
|
|
9,193 |
|
|
|
5,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the period from March 1, 2005 to December 31, 2005, we recorded deferred tax liabilities of
approximately $25,064 related to the net assets acquired in the
recapitalization of the Company. This resulted in a corresponding increase in goodwill.
Additionally, an income tax benefit of $295 was recorded related to the change in tax status of the
Company and certain of its subsidiaries.
The tax effects of temporary differences that give rise to significant portions of the
deferred income tax assets and deferred income tax liabilities at December 31, 2005 and 2004 are
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
2005 |
|
|
2004 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Medical claims liabilities, principally due to medical loss reserves discounted for
tax purposes |
|
$ |
1,098 |
|
|
|
823 |
|
Amortization |
|
|
|
|
|
|
238 |
|
Property and equipment |
|
|
1,809 |
|
|
|
1,583 |
|
Accrued compensation |
|
|
3,031 |
|
|
|
28 |
|
Lease agreements |
|
|
123 |
|
|
|
30 |
|
Allowance for doubtful accounts |
|
|
137 |
|
|
|
33 |
|
Alternative minimum tax credit |
|
|
|
|
|
|
396 |
|
Federal net operating loss carryover |
|
|
2,872 |
|
|
|
2,137 |
|
State net operating loss carryover |
|
|
260 |
|
|
|
216 |
|
Unearned revenue due to differences in timing of recognition for income tax purposes |
|
|
26 |
|
|
|
41 |
|
Other liabilities and accruals |
|
|
703 |
|
|
|
125 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
10,059 |
|
|
|
5,650 |
|
Less valuation allowance |
|
|
(734 |
) |
|
|
(1,811 |
) |
|
|
|
|
|
|
|
Deferred tax assets |
|
|
9,325 |
|
|
|
3,839 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Income from subsidiary |
|
|
|
|
|
|
(116 |
) |
Amortization |
|
|
(32,494 |
) |
|
|
|
|
Prepaid contract cost |
|
|
(835 |
) |
|
|
(536 |
) |
|
|
|
|
|
|
|
Net deferred tax (liabilities) / assets |
|
$ |
(24,004 |
) |
|
|
3,187 |
|
|
|
|
|
|
|
|
Deferred income taxes were allocated on the balance sheet at December 31, 2005 and 2004 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
2005 |
|
|
2004 |
|
Current
assets |
|
$ |
5,778 |
|
|
|
868 |
|
Long-term
assets |
|
|
|
|
|
|
2,319 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
5,778 |
|
|
|
3,187 |
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities |
|
|
29,782 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred tax (liabilities) assets |
|
$ |
(24,004 |
) |
|
|
3,187 |
|
|
|
|
|
|
|
|
80
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
In assessing the realizability of deferred income tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over the periods which the deferred tax
assets are deductible, management does not believe that it is more likely than not the Company will
realize the benefits of all these deductible differences. As of December 31, 2005 and 2004, the
Company carried a valuation allowance against deferred tax assets of $734 and $1,811, respectively.
This amount relates principally to the deferred tax assets at the Alabama HMO and HSMI. The changes
in the valuation allowance during 2005 and 2004 were ($1,077) and ($917), respectively, which
relates primarily to changes in the expected utilization of net operating loss carryforwards.
(14) Retirement Plan
Until December 2003, certain subsidiaries of the Predecessor maintained defined contribution
plans for all eligible employees. Contributions were discretionary and were allocated based upon a
fixed percentage of annual compensation plus a fixed percentage of voluntary employee
contributions. Employees were eligible to contribute immediately and were eligible for employer
contributions after six months of service. During December 2003, these plans were combined to form
the NewQuest 401K plan. In total, the Company contributed
approximately $898, $111, $961, and $456
to the defined contribution plans during the ten-months
ended December 31, 2005, the two-months ended
February 28, 2005 and the years ended December 31, 2004 and 2003, respectively.
Employees are always 100% vested in their contributions and vest in employer contributions at a
rate of 50% after each year of the first two years of service.
(15) Statutory Capital Requirements
The HMOs are required to maintain satisfactory minimum net worth requirements established by
their respective state departments of insurance. At December 31, 2005, the statutory minimum net
worth requirements and actual net worth were $8,055 and $16,204 for the Tennessee HMO; $1,112 and
$2,918 for the Alabama HMO; and $4,871 and $40,450 for Texas HMO, respectively. Each of these
subsidiaries were in compliance with applicable statutory requirements as of December 31, 2005. The
HMOs are restricted from making dividend payments to the Company without appropriate regulatory
notifications and approvals or to the extent such dividends would put them out of compliance with
statutory capital requirements. At December 31, 2005, $148.2 million of the Companys $161.7
million of cash, cash equivalents, investment securities and restricted investments were held by
the Companys HMO subsidiaries and subject to these dividend restrictions.
(16) Commitments and Contingencies
Legal
Proceedings
The
Company is from time to time involved in routine legal matters and other
claims incidental to its business, including employment-related
claims, claims relating to our relationships with providers and
members, and claims relating to marketing practices of sales agents
that are employed by, or independent contractors to, the Company.
When it appears probable in managements judgment that the Company
will incur monetary damages or other costs in connection with any
claims or proceedings, and such costs can be reasonably estimated,
liabilities are recorded in the financial statements and charges are
recorded against earnings. Although there can be no assurances, the
Company does not believe that the resolution of such routine matters
and other incidental claims, taking into account accruals and insurance,
will have a material adverse effect on the Companys consolidated
financial position or results of operations.
Reinsurance
Arrangements
Alabama
The
Companys Alabama HMO has a reinsurance agreement with Munich American Reassurance Company
which is administered by Reinsurance Managers & Underwriters. HMO-related services are reinsured
to $2,000 per member per year in excess of maximum loss retention of $175 for hospital services per
commercial member per year. The maximum lifetime reinsurance indemnification for each member is
$5,000. HealthSpring of Alabama paid reinsurance premiums of
approximately $242 for the ten-month
period ended December 31, 2005, $52 for the two-month period ended February 28, 2005 and $416 and
$459 for the years ended December 31, 2004 and 2003, respectively. Reinsurance recoveries were
approximately $4 for the ten-month period ended December 31, 2005 and $490 and $83 for the years
ended December 31, 2004 and 2003, respectively.
Tennessee
The
Companys Tennessee HMO has a reinsurance agreement with Companion Life which is administered
by Reinsurance Managers & Underwriters. HMO related services are reinsured to $2,000 per member
per year in excess of maximum loss retention of $200 for hospital services per commercial member
per year. The maximum
81
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
lifetime reinsurance indemnification for each member is $5,000. HealthSpring of Tennessee paid
reinsurance premiums of approximately $487 for the ten-month period ended December 31, 2005, $80
for the two-month period ended February 28, 2005 and $416 and $459 for the years ended December
31, 2004 and 2003, respectively. Reinsurance recoveries were
approximately $133 for the ten-month
period ended December 31, 2005 and $1,065 and $781 for the years ended December 31, 2004 and 2003,
respectively.
(17) Concentrations of Business and Credit Risks
The Companys primary lines of business, operating health maintenance organizations and
managing independent physician associations, are significantly impacted by health care cost trends.
The health care industry is impacted by health trends as well as being significantly impacted
by government regulations. Changes in government regulations may significantly affect managements
medical claims estimates and the Companys performance.
Most of the Companys customers are located in Tennessee, Texas, Alabama, and Illinois.
Concentrations of credit risk with respect to commercial premiums receivable are limited as a
result of the large number of customers. Approximately 84.7% and 74.7% of premium revenue was
received from CMS in 2005 and 2004, respectively.
Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of investments in investment securities and receivables generated in the ordinary
course of business. Investments in investment securities are managed by professional investment
managers within guidelines established by the Company that, as a matter of policy, limit the
amounts that may be invested in any one issuer. Receivables include premium receivables from
individual and commercial customers, rebate receivables from pharmaceutical manufacturers,
receivables related to prepayment of claims on behalf of customers under the Medicare program and
receivables owed to the Company from providers under risk-sharing arrangements. The Company had no
significant concentrations of credit risk at December 31, 2005.
(18) Fair Value of Financial Instruments
The Companys consolidated balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, investment securities, restricted investments, accounts
payable, medical claims liabilities, and long-term debt. The carrying amounts of accounts
receivable, accounts payable and medical claims liabilities approximate their fair value because of
the relatively short period of time between the origination of these instruments and their expected
realization. The fair value of the investment securities and restricted investments are presented
at notes 3 and 6. The carrying value of the long-term debt is estimated by management to
approximate fair value based upon the term and nature of the
obligations.
(19) Phantom Membership Agreements
The Predecessor entered into Phantom Membership Agreements in 2003 for the benefit of certain
officers and senior executives of the Predecessor. Pursuant to the Phantom Membership Agreements
(Agreement) executed with each participant, the officers and senior executives would generally only
receive a benefit, which benefit was required to be settled by the Predecessor in cash, if the
Predecessor had a change of control as defined in the Agreement or upon an initial public offering
of the Predecessor. On November 10, 2004, the Predecessor entered into the recapitalization
agreement with HealthSpring, Inc., see Note 2. In connection with the recapitalization, the parties
to the Agreements agreed to convert their phantom membership units (and forfeit their cash-based
right in the event of a change of control) into actual membership units of the Predecessor as of
December 31, 2004. Accordingly, the Predecessor recognized $24,200 of compensation expense related
to the conversion of the phantom shares into the Predecessor Series D membership units and the
subsequent cancellation of the Agreements. The conversion ratio and related compensation expense
was determined based on the proposed per unit value of the recapitalization transaction.
82
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
As part of the cancellation of the Agreements, NewQuest loaned the phantom members, which
included a number of officers and directors or the equivalent, an amount of money sufficient to pay
the tax liability incurred as a result of the conversion. Each phantom member signed a promissory
note in the amount of the tax liability (and related interest thereon) to be paid by the
Predecessor on their behalf. These loans totaled $8,900, and were subject to repayment as of the
closing of the recapitalization transaction, which occurred on March 1, 2005. Each of the loans has
been repaid in full subsequent to the transaction closing.
(20) Preferred Stock
In conjunction with the recapitalization, the Company sold 227,200 shares of preferred stock
to GTCR, members of the Predecessor, and certain other new investors. The holders of the preferred
stock were entitled to an 8% cumulative dividend per year, which accrued on a daily basis and
accumulated quarterly commencing on March 31, 2005 on the sum of $1 per share plus all
accumulated and unpaid dividends. The dividends were to be paid when declared by the board of
directors, provided that these dividends accrue whether or not they have been declared. As of
December 31, 2005, accrued but unpaid dividends totaled $15,607. The preferred stock and accrued
but unpaid dividends thereon were converted into 12,522,905 shares of the Companys common stock on
February 8, 2006 in conjunction with the initial public offering, see Note 23.
(21) Restricted Stock and Stock Options
As
of December 31, 2005, the Company had sold (net of repurchases)
1,638,750 shares of restricted common stock to
certain employees at a price of $0.20 per share, the same price at which the GTCR Funds, an
unrelated party at the time, purchased 17,500,000 shares of the Companys common stock in
connection with the recapitalization. Each employees shares of restricted common stock are subject
to the terms and conditions of a restricted stock purchase agreement. The restrictions on these
shares lapse based on time and in the event of certain changes in control. All the outstanding
shares of restricted stock have the same voting and dividend rights as the other holders of common
stock. Pursuant to the restricted stock purchase agreements, the Company has the right to purchase
all or any portion of an employees restricted stock if his or her employment is terminated. The
purchase price for securities purchased pursuant to this repurchase option will be:
|
|
|
in the case of shares where the restrictions have not lapsed, the lesser of the
original cost and the fair market value of such shares; and |
|
|
|
|
in the case of shares where the restrictions have lapsed, the fair market value of such shares;
provided that, if employment is terminated with cause, then the purchase price
shall be the lesser of the original cost and the fair market value of such shares. |
Based on a valuation completed shortly after the recapitalization, the Company determined that
the fair market value of the common stock on the dates of purchase of the restricted stock was
$1.58 per share. The difference between the $0.20 per share purchase price and the $1.58 per share
fair market value totaled $2,261 and was recorded as unearned compensation as a component of
stockholders equity. The unearned compensation is amortized as compensation expense over a period
of four to five years (the period over which the restrictions lapse), as applicable. The Company
recognized $377 of compensation expense associated with the restricted stock agreements, included
in selling, general, and administrative expense, for the ten months ended December 31, 2005.
The Company adopted the 2005 Stock Option Plan on March 1, 2005. Nonqualified stock options to
purchase an aggregate of 195,000 shares of common stock at an exercise price of
$2.50 per share were outstanding under the 2005 Stock Option Plan at December 31, 2005. These
options vest and become exercisable generally over a five-year period. In the event
of a change in control of the Company, all options shall immediately vest and become exercisable in
full. None of the options were vested at December 31, 2005. No additional options may be granted
under the 2005 Stock Option Plan. See Note 23 regarding the Companys 2006 Equity Incentive Plan.
83
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
(22) Quarterly Financial Information (unaudited)
Selected unaudited quarterly financial data in 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
HealthSpring, Inc. |
|
|
For the Two Month |
|
For the One Month |
|
For the Three Month Period Ended |
|
|
Period Ended |
|
Period Ended |
|
|
|
|
|
September |
|
December |
|
|
February 28, 2005 |
|
March 31, 2005 |
|
June 30, 2005 |
|
30, 2005 |
|
31, 2005 |
Total revenues |
|
$ |
119,390 |
|
|
|
61,947 |
|
|
|
196,243 |
|
|
|
233,121 |
|
|
|
246,062 |
|
Income before income taxes |
|
|
5,334 |
|
|
|
482 |
|
|
|
15,581 |
|
|
|
14,638 |
|
|
|
12,993 |
|
Net income available to common stockholders |
|
|
2,706 |
|
|
|
(635 |
) |
|
|
4,325 |
|
|
|
4,113 |
|
|
|
3,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share basic |
|
$ |
|
|
|
|
(0.02 |
) |
|
|
0.13 |
|
|
|
0.13 |
|
|
|
0.10 |
|
Income per share diluted |
|
$ |
|
|
|
|
(0.02 |
) |
|
|
0.13 |
|
|
|
0.13 |
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per unit basic |
|
|
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per unit diluted |
|
|
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
For the Three Month Period Ended |
|
|
March 31, 2004 |
|
June 30, 2004 |
|
September 30, 2004 |
|
December 31, 2004 |
Total revenues |
|
$ |
138,609 |
|
|
|
147,990 |
|
|
|
153,587 |
|
|
|
159,229 |
|
Income before income taxes |
|
|
16,237 |
|
|
|
14,347 |
|
|
|
14,165 |
|
|
|
(11,239 |
) |
Net income |
|
|
13,673 |
|
|
|
12,075 |
|
|
|
11,925 |
|
|
|
(13,356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per unit basic |
|
$ |
2.99 |
|
|
|
2.64 |
|
|
|
2.60 |
|
|
|
(2.92 |
) |
Income per unit diluted |
|
$ |
2.99 |
|
|
|
2.64 |
|
|
|
2.60 |
|
|
|
(2.92 |
) |
(23) Subsequent Events (unaudited)
Initial Public Offering
On February 8, 2006, the Company completed an initial public offering of its common stock. In
connection with the initial public offering, the Company sold 10,600,000 shares of common stock at
a price of $19.50 per share. Net proceeds to the Company were
$188.8 million, following payment of $17.9
million of offering expenses and underwriting commissions. Additionally, the Company issued
12,552,905 shares of common stock in exchange for all of the outstanding preferred stock, including
cumulative dividends. From the proceeds of the offering and available cash, the Company repaid all
of its long-term debt and accrued interest, including a $1.1 million prepayment penalty, totaling
$189.9 million.
The Company also issued 2,040,194 shares of common stock in exchange for all the minority
interest in the membership units of its Texas HMO subsidiary. The total value of the purchase of
the minority interest was approximately $39.8 million, which resulted in additional goodwill of
approximately $27.9 million.
2006 Equity Incentive Plan
The Company adopted the 2006 Equity Incentive Plan effective as of February 2, 2006. A total
of 6,250,000 shares of common stock are available for issuance under the 2006 Equity Incentive
Plan. Nonqualified stock options to purchase an aggregate of (i)
2,065,500 shares of common stock at an exercise price of $19.50 per
share were issued in connection with the IPO and (ii) 101,500 shares of common stock at an
exercise price of $22.15 per share were issued in March 2006. These
options vest and become exercisable based on time, generally over a four-year period.
84
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and share data)
Also, in connection with the IPO, the Company issued 2,500 restricted shares to each of its
five non-employee directors, or an aggregate of 12,500 restricted shares. These restricted shares
vest on the first anniversary of their grant date.
Related Party Transactions
In connection with certain agreements made by Renaissance Physicians Organization (RPO) and
its related physician groups as a condition to the recapitalization, the Company and RPO agreed to
the issuance to RPO of approximately 1% of the common equity in the Company following the
recapitalization. It was understood and agreed that this equity would be issued based on RPO
achieving certain performance goals over the five year period following the recapitalization. In
February 2006, the Company settled this commitment by a cash payment of $4.0 million, all of which
had been accrued during the year ended December 31, 2005.
85
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31, 2005 and 2004
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
2005 |
|
|
2004 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,253 |
|
|
|
10,827 |
|
Accounts receivable |
|
|
|
|
|
|
9,249 |
|
Prepaid
expenses and other current assets |
|
|
1,908 |
|
|
|
352 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
5,161 |
|
|
|
20,428 |
|
Investment in subsidiaries |
|
|
263,418 |
|
|
|
43,957 |
|
Property and equipment, net |
|
|
231 |
|
|
|
|
|
Goodwill and other intangible assets |
|
|
668 |
|
|
|
3,291 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
269,478 |
|
|
|
67,676 |
|
|
|
|
|
|
|
|
Liabilities
and Stockholders and Members Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Due to related parties |
|
$ |
4,989 |
|
|
|
3,772 |
|
Accounts payable and accrued expenses |
|
|
3,336 |
|
|
|
4,511 |
|
Short-term notes payable |
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
8,325 |
|
|
|
8,783 |
|
Notes payable |
|
|
|
|
|
|
3,458 |
|
Deferred tax liabilities |
|
|
609 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
8,934 |
|
|
|
12,241 |
|
|
|
|
|
|
|
|
Stockholders
and members equity: |
|
|
|
|
|
|
|
|
Founders and membership units |
|
|
|
|
|
|
31,787 |
|
Redeemable convertible preferred stock |
|
|
2 |
|
|
|
|
|
Common stock |
|
|
322 |
|
|
|
|
|
Additional paid in capital |
|
|
251,202 |
|
|
|
|
|
Unearned compensation |
|
|
(1,885 |
) |
|
|
|
|
Retained earnings |
|
|
10,943 |
|
|
|
23,648 |
|
Treasury Stock |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders and members equity |
|
|
260,544 |
|
|
|
55,435 |
|
|
|
|
|
|
|
|
Total
liabilities and stockholders and members equity |
|
$ |
269,478 |
|
|
|
67,676 |
|
|
|
|
|
|
|
|
See
accompanying report of independent registered public accounting firm.
86
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Ten months |
|
|
Two months |
|
|
|
|
|
|
ended |
|
|
ended |
|
|
|
|
|
|
December 31, |
|
|
February 28, |
|
|
Year ended December 31, |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees from affiliates |
|
$ |
|
|
|
|
122 |
|
|
|
793 |
|
|
|
2,683 |
|
Investment income |
|
|
|
|
|
|
16 |
|
|
|
48 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
|
|
|
|
138 |
|
|
|
841 |
|
|
|
2,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
377 |
|
|
|
1,261 |
|
|
|
24,236 |
|
|
|
847 |
|
Administrative expenses |
|
|
6,577 |
|
|
|
5,760 |
|
|
|
611 |
|
|
|
1,184 |
|
Interest expense |
|
|
|
|
|
|
30 |
|
|
|
151 |
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
6,954 |
|
|
|
7,051 |
|
|
|
24,998 |
|
|
|
2,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before equity in
subsidiaries earnings and income
taxes |
|
|
(6,954 |
) |
|
|
(6,913 |
) |
|
|
(24,157 |
) |
|
|
484 |
|
Equity in subsidiaries earnings |
|
|
31,070 |
|
|
|
9,623 |
|
|
|
48,286 |
|
|
|
18,662 |
|
Income before income taxes |
|
|
24,116 |
|
|
|
2,710 |
|
|
|
24,129 |
|
|
|
19,146 |
|
Income tax benefit (expense) |
|
|
2,434 |
|
|
|
(4 |
) |
|
|
188 |
|
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
26,550 |
|
|
|
2,706 |
|
|
|
24,317 |
|
|
|
19,060 |
|
Preferred dividends |
|
|
15,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
available to common stockholders and members |
|
$ |
10,943 |
|
|
|
2,706 |
|
|
|
24,317 |
|
|
|
19,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying report of independent registered public accounting firm.
87
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
|
|
Two |
|
|
|
|
|
|
Ten months |
|
|
months |
|
|
|
|
|
|
ended |
|
|
ended |
|
|
|
|
|
|
December |
|
|
February |
|
|
|
|
|
|
31, |
|
|
28, |
|
|
Year ended December 31, |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,550 |
|
|
|
2,706 |
|
|
|
24,317 |
|
|
|
19,060 |
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense related to phantom stock plan
cancellation |
|
|
|
|
|
|
|
|
|
|
24,200 |
|
|
|
|
|
Equity in
subsidiaries earnings |
|
|
(31,070 |
) |
|
|
(9,623 |
) |
|
|
(48,286 |
) |
|
|
(18,662 |
) |
Amortization of unearned compensation |
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
197 |
|
Increase (decrease) in cash equivalents due to change in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
(1 |
) |
|
|
(9,249 |
) |
|
|
|
|
Interest receivable |
|
|
|
|
|
|
2 |
|
|
|
(9 |
) |
|
|
|
|
Prepaid expenses and other current assets |
|
|
(1,908 |
) |
|
|
(178 |
) |
|
|
(480 |
) |
|
|
213 |
|
Due to related parties |
|
|
89,459 |
|
|
|
(5,597 |
) |
|
|
4,575 |
|
|
|
1,677 |
|
Accounts payable, accrued expenses, and other current
liabilities |
|
|
3,336 |
|
|
|
8,335 |
|
|
|
3,853 |
|
|
|
(245 |
) |
Other long-term liabilities |
|
|
609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) operating activities |
|
|
87,542 |
|
|
|
(4,356 |
) |
|
|
(1,079 |
) |
|
|
2,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions received from subsidiaries |
|
|
|
|
|
|
15,851 |
|
|
|
31,546 |
|
|
|
8,182 |
|
Purchase of property and equipment |
|
|
(420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired |
|
|
(219,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(220,378 |
) |
|
|
15,851 |
|
|
|
31,546 |
|
|
|
8,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on notes payable to members |
|
|
(3,958 |
) |
|
|
(83 |
) |
|
|
(500 |
) |
|
|
(500 |
) |
Proceeds from issuance of common and preferred stock |
|
|
140,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of
treasury stock |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to members |
|
|
|
|
|
|
|
|
|
|
(19,546 |
) |
|
|
(10,878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
136,089 |
|
|
|
(83 |
) |
|
|
(20,046 |
) |
|
|
(11,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
3,253 |
|
|
|
11,412 |
|
|
|
10,421 |
|
|
|
(956 |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
10,827 |
|
|
|
406 |
|
|
|
1,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,253 |
|
|
|
22,239 |
|
|
|
10,827 |
|
|
|
406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying report of independent registered public accounting firm.
88
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Our senior management carried out an evaluation required by Rule 13a-15 under the Securities
Exchange Act of 1934, as amended (the Exchange Act), under the supervision and with the
participation of our President and Chief Executive Officer (CEO) and Chief Financial Officer
(CFO), of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15
and 15d-15 under the Exchange Act (Disclosure Controls). Based on the evaluation, our senior
management, including our CEO and CFO, concluded that, subject to the limitations noted herein, as
of December 31, 2005, our Disclosure Controls are effective in timely alerting them to material
information required to be included in our reports filed with the SEC.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting identified in
connection with the evaluation that occurred during the quarter ended December 31, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our Disclosure Controls and
internal controls will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, with the Company
have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error and mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people or by management override of controls.
The design of any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, a control may become
inadequate because of changes in conditions or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected.
Item 9B. Other Information
None.
89
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Company, set forth in the Companys
Definitive Proxy Statement for the Companys 2006 Annual Meeting of Stockholders to be held on or
about June 6, 2006 (the Proxy Statement), under the caption Election of Directors, is
incorporated herein by reference. Pursuant to General Instruction G(3), information concerning
executive officers of the Registrant is included in Item 1 of this Annual Report on Form 10-K under
the caption Executive Officers of the Company.
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of
1934, set forth in the Proxy Statement, under the caption Section 16(a) Beneficial Ownership
Reporting Compliance, is incorporated herein by reference.
Information with respect to our code of ethics, set forth in the Proxy Statement, under the
caption Code of Conduct, is incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to executive officers of the Company, set forth in the Proxy
Statement, under the caption Executive Compensation, is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with respect to security ownership of certain beneficial owners and management and
related stockholder matters, set forth in the Proxy Statement, under the captions Stock Ownership
and Equity Compensation Plan Information, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions, set forth in the
Proxy Statement, under the caption Certain Relationships and Related Transactions, is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information with respect to the fees paid to and services provided by our principal
independent registered public accounting firm, set forth in the Proxy Statement, under the caption
Fees Billed to Us by KPMG LLP During 2005, is incorporated herein by reference.
90
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) |
|
Financial Statements and Financial Statement Schedules |
|
(1) |
|
Financial Statements are listed in the Index to Consolidated Financial Statements on
page 56 of this report. |
|
|
(2) |
|
Financial Statement Schedules are listed in the Index to Consolidated Financial
Statements on page 56 of this report. |
|
|
(3) |
|
Exhibits See the Exhibit Index at end of this report which is incorporated herein by
reference. |
(b) |
|
Exhibits |
|
|
|
See the Exhibit Index at end of this report which is incorporated herein by reference. |
|
(c) |
|
Financial Statements |
|
|
|
We are filing as part of this report the financial schedule listed on the index immediately
preceding the financial statements in Item 8 of this report. |
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
|
|
HEALTHSPRING, INC. |
|
|
|
|
|
Date: March 31, 2006
|
|
By
|
|
/s/ Kevin M. McNamara |
|
|
|
|
|
|
|
|
|
Name: Kevin M. McNamara |
|
|
|
|
Title: Executive Vice President, Chief
Financial Officer, and Treasurer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Herbert A. Fritch
|
|
Chairman of the Board of
Directors, President and
Chief Executive Officer
(Principal Executive Officer)
|
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Kevin M. McNamara
|
|
Executive Vice President,
Chief Financial Officer and
Treasurer (Principal
Financial and Accounting
Officer)
|
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Martin S. Rash
|
|
Director
|
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Joseph P. Nolan
|
|
Director
|
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Daniel L. Timm
|
|
Director
|
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Russell K. Mayerfeld
|
|
Director
|
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Robert Z. Hensley
|
|
Director
|
|
March 31, 2006 |
|
|
|
|
|
INDEX OF EXHIBITS
|
|
|
Exhibits |
|
Description |
3.1
|
|
Form of Amended and Restated Certificate of Incorporation of HealthSpring, Inc. (1) |
|
3.2
|
|
Form of Second Amended and Restated Bylaws of HealthSpring, Inc. (1) |
|
4.1
|
|
Reference is made to Exhibits 3.1 and 3.2 |
|
4.2
|
|
Specimen of Common Stock Certificate (1) |
|
4.3
|
|
Registration Agreement, dated as of March 1, 2005, by and among HealthSpring, Inc., GTCR Fund
VIII, L.P., GTCR Fund VIII/B, L.P., GTCR Co-Invest II, L.P., and each of the other
stockholders of HealthSpring, Inc. whose names appear on the schedules thereto or on the
signature pages or joinders to the Registration Rights Agreement (1) |
|
4.4
|
|
Amended and Restated Stockholders Agreement, to be entered into by and among HealthSpring,
Inc., GTCR Fund VIII, L.P., GTCR Fund VIII/B, L.P., GTCR Co-Invest II, L.P., and each of the
other stockholders of HealthSpring, Inc. whose names appear on the schedules thereto or on the
signature pages or joinders to the Stockholders Agreement (1) |
|
10.1
|
|
Purchase and Exchange Agreement, dated as of November 10, 2004, by and among NewQuest, LLC,
HealthSpring, Inc., NewQuest, Inc., the stockholders representative and each of the other
stockholders of HealthSpring, Inc. whose names appear on the schedules or signature pages
thereto, as amended (1) |
|
10.2
|
|
Stock Purchase Agreement, dated as of March 1, 2005, among GTCR Fund VIII, L.P., GTCR Fund
VIII/B, L.P., GTCR Co-Invest II, L.P., and each of the other stockholders thereto (1) |
|
10.3
|
|
Form of HealthSpring, Inc. Amended and Restated Restricted Stock Purchase Agreement* (1) |
|
10.4
|
|
HealthSpring, Inc. 2005 Stock Option Plan* (1) |
|
10.5
|
|
Form of Non-Qualified Stock Option Agreement (Option Plan)* (1) |
|
10.6
|
|
HealthSpring, Inc. 2006 Equity Incentive Plan* (1) |
|
10.7
|
|
Form of Non-Qualified Stock Option Agreement (Equity Incentive Plan)* (1) |
|
10.8
|
|
Form of Incentive Stock Option Agreement (Equity Incentive Plan)* (1) |
|
10.9
|
|
Form of Restricted Stock Award Agreement (Employees and Officers) (Equity Incentive Plan)* (1) |
|
10.10
|
|
Form of Restricted Stock Award Agreement (Directors) (Equity Incentive Plan)* (1) |
|
10.11
|
|
Amended and Restated Employment Agreement between Registrant and Herbert A. Fritch* (1) |
|
10.12
|
|
Amended and Restated Employment Agreement between Registrant and Jeffrey L. Rothenberger* (1) |
|
10.13
|
|
Amended and Restated Employment Agreement between Registrant and J. Murray Blackshear* (1) |
|
10.14
|
|
Amended and Restated Employment Agreement between Registrant and Kevin M. McNamara* (1) |
|
10.15
|
|
Form of Indemnification Agreement (1) |
|
10.16
|
|
Contract H4454 between Centers for Medicare & Medicaid Services and HealthSpring of Tennessee,
Inc. (1) |
|
10.17
|
|
Contract H4513 between Centers for Medicare & Medicaid Services and Texas HealthSpring I, LLC
(1) |
|
10.18
|
|
Contract H0150 between Centers for Medicare & Medicaid Services and HealthSpring of Alabama,
Inc. (1) |
|
10.19
|
|
Contract H1415 between Centers for Medicare & Medicaid Services and HealthSpring of Illinois
(1) |
|
10.20
|
|
Contract H4407 between Centers for Medicare & Medicaid Services and HealthSpring of Tennessee,
Inc. (d/b/a HealthSpring of Mississippi) (1) |
|
10.21
|
|
Amended and Restated IPA Services Agreement dated March 1, 2003 by and between Texas
HealthSpring, LLC and Renaissance Physician Organization, as amended (1) |
|
10.22
|
|
Full-Service Management Agreement dated April 16, 2001 by and between GulfQuest, L.P. and
Renaissance Physician Organization, as amended (1) |
|
10.23
|
|
Agreement dated May 28,1993 between the Baptist Hospital and DST Health Solutions, Inc. (f/k/a
CSC Healthcare Systems, Inc.), as amended (1) |
|
10.24
|
|
Master Service Agreement dated June 13, 2003 between OAO HealthCare Solutions, Inc. and
TexQuest, LLC, on behalf of GulfQuest, L.P. (1) |
|
10.25
|
|
Credit Agreement dated as of March 1, 2005 among NewQuest, Inc., as borrower, HealthSpring,
Inc. and the other guarantors party thereto, the lenders party thereto and UBS Securities LLC,
as lead arranger and sole bookrunner, General Electric Capital Corporation, as syndication
agent, LaSalle |
|
|
|
|
Exhibits |
|
Description |
|
|
Bank National Association, as documentation agent, Bank of America, N.A., as
documentation agent, UBS AG, Stamford Branch, as issuing bank, administrative agent and
collateral agent, and UBS Loan Finance LLC, as swingline lender (1) |
|
10.26
|
|
Stand-Alone PDP Contract between Centers for Medicare & Medicaid Services and HealthSpring,
Inc. and HealthSpring of Alabama, Inc. |
|
10.27
|
|
Stand-Alone PDP Contract between Centers for Medicare & Medicaid Services and Texas
HealthSpring I, LLC |
|
10.28
|
|
Stand-Alone PDP Contract between Centers for Medicare & Medicaid Services and HealthSpring of
Mississippi |
|
10.29
|
|
Stand-Alone PDP Contract between Centers for Medicare & Medicaid Services and HealthSpring of
Illinois |
|
10.30
|
|
Executive and Director Compensation Summary * |
|
21.1
|
|
Subsidiaries of the Registrant |
|
23.1
|
|
Consent of KPMG LLP |
|
24.1
|
|
Power of attorney (included on the signature page) |
|
31.1
|
|
Certification of President and Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002 |
|
31.2
|
|
Certification Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
|
32.1
|
|
Certification of President and Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002 |
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
|
|
|
|
* |
|
Indicates management contract or compensatory plan, contract or arrangement. |
|
(1) |
|
(Previously filed as an Exhibit to the Companys Registration Statement on Form S-1 (File No.
333-128939), filed October 11, 2005, as amended) |