Item 8.01.
Other Events
On July 16, 2007,
Universal American Financial Corp. filed with the Securities and Exchange
Commission a Registration Statement/Proxy Statement on Form S-4 (File No.
333-143822) in connection with our annual meeting and our previously announced
acquisition of MemberHealth, Inc., known as MemberHealth, a privately-held
pharmacy benefits manager and sponsor of CCRx, a national Medicare Part D Plan.
Also as previously announced, simultaneous with our entering into the merger agreement
for MemberHealth, on May 7, 2007, we entered into a stage 1 securities purchase
agreement, pursuant to which we agreed to issue and sell to the equity
investors named in the agreement, in a private placement, an aggregate of
30,473 shares of series A
participating convertible preferred stock, and 19,527 shares of series B
participating convertible preferred stock. The stage 1 sale closed on May
15, 2007. On May 7, 2007, we entered a stage 2 securities purchase agreement
pursuant to which we agreed to issue and sell to the equity investors an
aggregate of 125,000 shares of series B preferred stock or series A
preferred stock . The MemberHealth acquisition and the stage 2 securities
purchase agreement closed September 21, 2007. The Registration Statement/Proxy
Statement contains risk factors related to our business, some of which have
been updated from prior reports with recently available information and some of
which may remain relevant after the closing of the MemberHealth transaction and
the stage 2 securities purchase agreement. These updated risk factors are
included in this report below.
Unless the context
otherwise requires, references in this report to Universal American, our, we or
us means Universal American Financial Corp., together with its subsidiaries.
RISK FACTORS
This report includes both historical and forward-looking statements.
The forward-looking statements are made within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We intend the forward-looking statements in this
report or made by us elsewhere to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995, and we are including this statement for purposes of
complying with and relying upon these safe harbor provisions. We have based
these forward-looking statements on our current expectations and projections
about future events, trends and uncertainties. These forward-looking statements
are not guarantees of future performance and are subject to risks,
uncertainties and assumptions, including, among other things, the information
discussed below. If any of the following risks or uncertainties develops into
actual events, this could significantly and adversely affect our business,
prospects, financial condition or operating results. The risks and
uncertainties described below are not the only ones that we face. Additional
risks and uncertainties not presently known to us or that we currently believe
to be immaterial also may adversely affect our business. In making these
statements, we are not undertaking to address or update each factor in future
filings or communications regarding our business or results. Our business is
highly complicated, regulated and competitive with many different factors
affecting results. If any of the following risks or uncertainties develops into
actual events, this could significantly and adversely affect our business,
prospects, financial condition and operating results. In that case, the trading
price of our common stock could decline materially.
The integration of
MemberHealth with our current business may not be successful, which could have
a material adverse effect on our business, financial condition and results of
operations.
Our management will be
required to devote a significant amount of time and attention to the process of
integrating the operations of MemberHealths business with our historical
business. This may decrease the time they will have to service existing
customers, attract new customers and develop new services or strategies. The
integration of the businesses may present significant systems and operational
integration risks. We may be unable to integrate the MemberHealth business into
our historical operations in an efficient, timely and effective manner, which
could have a material adverse effect on our business, financial condition and
results of operations.
We may not realize
the anticipated synergies, cost savings and growth opportunities we anticipate
from the acquisition, which could result in a material adverse effect on our
financial position, results of operations and cash flows.
The success of the
acquisition will depend, in part, on our ability to realize synergies, cost
savings and growth opportunities that we anticipate from integrating our
historical businesses with those of MemberHealth. Our success in realizing
these synergies, cost savings and growth opportunities, and the timing of this
realization, depends on the successful integration of the two businesses and
operations. Even if we are able to integrate the businesses and operations
successfully, there can be no assurance that this integration will result in
the realization of the full benefits of synergies, cost savings and growth
opportunities that we would expect from this integration or that these benefits
will be achieved within the time frame we anticipate. For example, the
elimination of duplicative costs may not be possible or may take longer than
anticipated, the benefits from the merger may be offset by costs incurred or
delays in integrating the businesses and regulatory authorities could impose
conditions on the combined companys business.
The growth of our
Medicare Advantage and Medicare Part D business is an important part of our
business strategy. Any failure to achieve this growth may have a material
adverse effect on our financial position, results of operations or cash flows.
In addition, the expansion of our Medicare Advantage and Medicare Part D
business in relation to our other businesses may intensify the risks to us,
including regulatory risks, inherent in the Medicare Advantage and Medicare
Part D business, which we describe elsewhere in this
1
document. These expansion
efforts may result in less diversification of our revenue stream.
There can be no assurance
that we will be able to successfully implement our operational and strategic
initiatives that are intended to position us for future growth, or that the
products we design will be accepted or adopted in the time periods assumed. We
also make no assurance that investments in these initiatives will recoup their
costs or be profitable in the future. Failure to implement this strategy may
result in a material adverse effect on our financial position, results of
operations and cash flows.
The completion of
the acquisition could impact or cause disruptions in our businesses, which
could have an adverse effect on our results of operations and financial
condition.
Specifically:
our employees may
experience uncertainty about their future roles with the combined company,
which might adversely affect our and MemberHealths ability to retain and hire
key managers and other employees;
the potential
availability of change in control benefits could result in increased costs
for us and difficulties in retaining our officers and employees;
the direction of
the attention of our management toward the completion of the acquisition and
transaction-related considerations during the pendency of the transaction may
prove to have diverted their attention from the day-to-day business operations
of their respective companies, and the direction of the attention of our
management toward the integration of the acquisition may currently and in the
future divert their attention from the day-to-day business operations of their
respective companies; and
pharmaceutical
manufacturers, retail pharmacies, pharmacy benefit management, or PBM, companies
or other vendors or suppliers may seek to modify or terminate their business
relationships with us.
The acquisition of
MemberHealth may adversely impact our business relationship with PharmaCare
Management Services, Inc., which could, regardless of the acquisition, be
terminated after 2008.
On March 21, 2005, we
entered into a strategic alliance with PharmaCare Management Services, Inc., a
pharmacy benefits manager that is a wholly-owned subsidiary of CVS Caremark
Corporation, known as CVS, pursuant to which PharmaCare performs PBM services
for our Medicare Part D plans. Under the strategic alliance, we share equally
with PharmaCare in the results of the Medicare Part D business, excluding
MemberHealths Part D business and our Medicare Part D CCRx business, including
through (i) a 50% coinsurance funds withheld reinsurance agreement with
PharmaCares wholly-owned subsidiary, PharmaCare Captive Re, Ltd., and (ii)
Part D Management Services, L.L.C., or PDMS, the joint venture company owned
equally by us and PharmaCare, which principally performs Medicare Part D
marketing and risk management services for which it receives fees and other
remuneration from our Medicare Part D plans and PharmaCare Re.
The strategic alliance
continues in effect through December 2007, and, thereafter, automatically
renews annually for successive Medicare Part D coverage years beginning in
January 2008, unless either we or PharmaCare deliver to the other party a
notice of offer to purchase all of such other partys interest in one or more
of the regions approved by the Federal Centers for Medicare and Medicaid
Services, known as CMS, in which we sell our Medicare Part D plans. The
receiving party of the offer notice may elect to (a) sell its interest to the
initiating party for the price stated in the offer notice or (b) buy the
interest of the initiating party for the price stated in the offer notice. To
be effective, the offer notice must be delivered at least 11 months prior to
the beginning of the Medicare Part D coverage year to which the offering
applies. Neither party delivered any such notice for the 2008 coverage year.
Our strategic alliance
with PharmaCare will continue to be effective through 2008, but we cannot make
assurances that it will continue to be effective beyond 2008. We are uncertain
of the impact of the MemberHealth acquisition on PharmaCares willingness to
deliver such a notice, since MemberHealth potentially competes with PharmaCare,
particularly given CVSs recent acquisition of Caremark, also a Medicare Part D
Plan.
Following the
acquisition, we may not be able to continue for an indefinite period all of the
prescription drug plans that we currently operate.
Current CMS rules will
allow us to operate both our and MemberHealths historical Part D plans for a
period of up to the following three years for which contract bids may be
submitted to CMS to operate Part D Plans. After that we will only be allowed to
offer up to two basic benefit plans in each region. We may be allowed to offer
up to four plans in a given region if the four plans include two plans with gap
coverage and at least one plan that offers coverage of all generics and all
preferred brands through the entire gap period.
Sales of our common
stock and the ownership of common stock by the former shareholders of
MemberHealth and by the equity investors may negatively affect the market price
of our common stock.
The market price of our
common stock could decline as a result of sales of increased number of shares
of our common stock in the market after the completion of the acquisition or
upon the sale of shares by the equity investors, or the perception that these
sales could occur. All shares of our common stock received by MemberHealths
shareholders
in
the acquisition and not otherwise subject to the shareholders agreement (or
another agreement entered into with us) are freely transferable following the
consummation of the
2
acquisition. All shares
of our series A preferred stock and series B preferred stock received by the
equity investors pursuant to the securities purchase agreements, and common
shares issuable upon the direct or indirect conversion of those shares of
preferred stock, will be transferable after a period of one year following the
acquisition of such series A preferred stock and series B preferred stock by
the equity investors. These sales, or the possibility that these sales may
occur, may also make it more difficult for us to obtain additional capital by
selling equity securities in the future at a time and at a price that we deem
appropriate.
Following the acquisition
and the completion of the transactions contemplated by the stage 1 and stage 2
securities purchase agreements, the former shareholders of MemberHealth and the
equity investors will own a significant block of our voting shares and will
have the ability to appoint six of our thirteen directors. This may negatively
affect the market price of our common stock.
The acquisition may
not be accretive and may cause dilution to our earnings per share, which may
harm the market price of our common stock.
We currently anticipate
that the acquisition will be accretive to earnings per share during the first
full calendar year after the acquisition. This expectation is based on
preliminary estimates and assumptions which may materially change after the
completion of the acquisition.
The combined businesses could also encounter additional transaction and
integration-related costs or other factors such as the failure to realize all
of the benefits anticipated in the acquisition. All of these factors could
cause dilution to our earnings per share or decrease the expected accretive
effect of the acquisition and cause a decrease in the price of our common
stock.
Some of our directors
and executive officers may have interests that are different from, or in
addition to, the interests of our shareholders generally.
Some of our directors and
executive officers may have significant equity ownership in us, employment,
indemnification and severance benefit arrangements, potential rights to other
benefits on a change in control and rights to ongoing indemnification and
insurance that provide them with interests that may differ from the interests
of our shareholders generally. The receipt of compensation or other benefits by
our directors or executive officers in connection with the MemberHealth
acquisition may make it more difficult for the combined company to retain their
services after the acquisition, or require the combined company to expend
additional sums to continue to retain their services. In addition, consistent
with our compensation philosophy of senior executives being awarded
approximately 5% of our aggregate equity ownership, some of our executives are
likely to receive additional equity grants as a result of the increase in our
outstanding shares due to the acquisition and the investment by the equity
investors.
We may be unable to
continue to provide Medicare Advantage or Medicare Part D plans profitably.
Beginning in 2006,
organizations that offer Medicare Advantage plans of the type we currently
offer were required to offer a prescription drug benefit, as defined by CMS,
and Medicare Advantage enrollees were required to obtain their drug benefit
from their Medicare Advantage plan. Such combined managed care plans offering
drug benefits are, under the new law, called MA-PDs. Current enrollees may
prefer a stand-alone drug plan and may disenroll from the Medicare Advantage
plan altogether in order to participate in another drug plan, which could
reduce our profitability and membership enrollment.
Some enrollees may have
chosen our Medicare Advantage plan in the past rather than a competitors
Medicare Advantage plan because of the added drug benefit that we offer with
our Medicare Advantage plans. Effective January 1, 2006, Medicare beneficiaries
began having the opportunity to obtain a drug benefit without joining a managed
care plan. Additionally, Medicare beneficiaries who participate in a Medicare
Advantage plan and enroll in a stand-alone Prescription Drug Plan, known as a
PDP, will be automatically disenrolled from their Medicare Advantage plan.
Accordingly, the existence of PDPs in the regions in which we sell Medicare
Advantage plans could result in our members intentionally disenrolling or
automatically being disenrolled from our Medicare Advantage plans and reduce
our membership and profitability.
We began marketing our
MA-PDs and PDPs in October 2005 and began enrolling members on November 15,
2005, effective as of January 1, 2006, as did MemberHealth with its PDPs. Our
ability to operate our MA-PDs and PDPs profitably will depend on a number of
factors, including our ability to attract members, to continue to develop the
necessary core systems and processes and to manage our medical expenses related
to these plans. Because there has only been one full and one partial year of
experience with CMSs Medicare Part D
program, there remains uncertainty as to the ultimate market size, consumer
demand, and related medical loss ratio. Accordingly, we are uncertain whether
we will be able to operate our MA-PDs or PDPs profitably or competitively in
the future, and our failure to do so could have a material adverse effect on
our results of operations and financial condition.
The Medicare Prescription
Drug, Improvement and Modernization Act of 2003, known as 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 per
member per month bids submitted to CMS in excess of 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%. We anticipate 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. 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 receive
reimbursement. In addition, as the risk corridors are designed to be
symmetrical, a plan whose actual costs fall below its expected costs would be
required to reimburse CMS based on a similar methodology as set forth
3
above. Furthermore,
reconciliation payments for estimated 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. We
anticipate settling with CMS on amounts related to the risk corridor adjustment
and subsidies for a given plan year in the following year.
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.
All of the Medicare
Advantage programs we offer are offered through Medicare. As a result, our
profitability is dependent, in large part, on continued funding for government
healthcare programs at or above current levels. The reimbursement rates paid to
health plans like ours by the Federal government are established by contract,
although the rates differ depending on a combination of factors such as a
members health status, age, gender, county or region, benefit mix, member
eligibility categories, and the plans risk scores.
CMS has implemented a
risk adjustment model which apportions premiums paid to Medicare health plans
according to health severity. A risk adjustment model pays more for enrollees
with predictably higher costs. By 2007, CMS has completely phased 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.
Under the risk adjustment
methodology, all Medicare health plans must capture, collect and submit the
necessary diagnosis code information from inpatient and ambulatory treatment
settings to CMS within prescribed deadlines. The CMS risk adjustment model uses
this diagnosis data to calculate the risk adjusted premium payment to Medicare
health plans. 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. Because
diagnosis coding is performed manually, there is the potential for human error
in the recording of codings, and there can be no assurance that our contracting
physicians and hospitals will be successful in improving the accuracy of
recording diagnosis code information thereby enhancing our risk scores.
Commensurate with
phase-in of the risk-adjustment methodology, CMS also adjust payments to
Medicare Advantage plans by a budget neutrality factor. CMS implemented the
budget neutrality factor to prevent overall health plan payments from being
reduced during the transition to the risk-adjustment payment model. CMS first
developed the payment adjustments for budget neutrality in 2002 and began to
use them with the 2003 payments. CMS will begin phasing out the budget
neutrality adjustment in 2007 and will fully eliminate it by 2011. The risk
adjustment methodology and phase-out of the budget neutrality factor will
reduce our plans premiums unless our risk scores increase. We do not know if
our risk scores will increase in the future or, if they do, that they will be
large enough to offset the elimination of this adjustment. As a result of the
CMS payment methodology described previously, the amount and timing of our CMS
monthly premium payments per member may change materially, either favorably or
unfavorably.
Our ability to
market some of our Part D plans is substantially dependent on two of our
strategic relationships with third parties.
Our ability to market
some of our Part D plans is substantially dependent on our strategic alliance
with the National Community Pharmacists Association, known as the NCPA, which
provides outreach and communications for our CCRx Part D plans to NCPAs
independent pharmacy membership. NCPA member pharmacies make up over one-third
of MemberHealths pharmacy network and, in 2006, accounted for approximately
60% of the prescriptions filled under MemberHealths Part D plans.
Additionally, we are substantially dependent on its strategic relationship with
Community Care Outreach Services LLC, or CCOS, an insurance marketing operation
that provides the historical MemberHealth business its primary outsourced
sales force. If either of these strategic relationships are terminated, or do
not provide us with the services and benefits we anticipate, our ability to
market CCRxPart D plans could be materially and adversely affected. Further, to
the extent that CMS or other regulatory authorities determine that any
provisions of our agreements with NCPA or CCOS conflict with any applicable
law, regulation or policy, we may not be able to realize fully the benefits we
anticipate from the acquisition, and we could potentially incur regulatory
liability.
There are
significant risks associated with our participation in the Medicare Part D
program, the occurrence of which could have an adverse effect on our results of
operations.
Effective January 1,
2006, we began offering Medicare-approved PDPs to Medicare-eligible
beneficiaries. MemberHealths business consists primarily of Medicare Part D
members. Our actual results may differ from our assumptions regarding the
Medicare Part D program. Our participation in the Medicare Part D program
involves a number of risks, including but not limited to the following, the
occurrence of any or all of which could have an adverse effect on our financial
condition, results of operations and cash flows:
CMS
continues to release regulations on Medicare Part D, including important
requirements related to the implementation and marketing of the Medicare Part D
prescription drug benefit plan. This may create challenges for planning,
implementing and operating the Medicare Part D program, and we can provide no
assurance that Congress or CMS will not alter the program in a manner that will
be detrimental to us.
CMS
has released call letters on Medicare Part D that impact the revenue that can
be earned by our joint venture, PDMS.
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We anticipate that the
level of earnings of PDMS will be significantly reduced beginning in 2009
resulting from CMSs indication in its recent call letter that amounts paid by
the PDP sponsors PBM to the retail pharmacy, rather than the amounts paid by
the PDP sponsor to its PBM, be reported as part of the risk corridor
calculation. We presently report only our share of this difference in our risk
corridor calculation but not the PharmaCare share. This expected change in risk
corridor reporting methodology is likely to reduce our revenues in 2009 and
beyond.
Our
contracts with CMS, as well as applicable Medicare Part D regulations and
Federal and state laws, require us, among other obligations, to:
comply with
specified disclosure, filing, record-keeping and marketing rules;
operate quality
assurance, drug utilization management and medication therapy management
programs;
support
e-prescribing initiatives;
implement
grievance, appeals and formulary exception processes;
comply with
payment protocols, which include the return of overpayments to CMS and, in
certain circumstances, coordination with state pharmacy assistance programs;
use approved
networks and formularies, and provide access to such networks to any willing
pharmacy;
provide
emergency out-of-network coverage; and
adopt a
comprehensive Medicare and fraud, waste and abuse compliance program.
Any contractual or
regulatory non-compliance on our part could entail significant sanctions and
monetary penalties, which in turn could negatively affect the market price of
our common stock.
We
cannot be certain that other regulatory changes, such as a restructuring of the
Medicare Part D program, will not affect our ability to operate under the Part D
program or increase our costs or reduce our reimbursement.
We
cannot be certain that our products will be competitive with the products
offered by other PDPs. We cannot be certain that our future bids will be
competitive with those bids submitted by other PDPs. We cannot be certain that
our future bids will be under the benchmark bids calculated by CMS.
We
are making actuarial assumptions about the utilization of benefits in our PDPs.
Because Medicare Part D is a relatively new program, there is little historical
basis for these assumptions, and we cannot be assured that these assumptions
will prove to be correct and that premiums will be sufficient to cover
benefits.
We
may experience higher benefit expenses as a result of an increase in the cost
of pharmaceuticals, possible changes in our pharmacy rebate program with drug
manufacturers, higher than expected utilization and new mandated benefits or
other regulatory changes that increase our costs.
As
of December 31, 2006, CMS had automatically assigned dual eligibles to our and
MemberHealths PDPs in regions where our price is under the regional
benchmarks. We cannot guarantee that all of these dual eligibles assigned to us
will continue to participate in our PDPs in the future. In addition, because
dual eligible beneficiaries can change their PDP each month, we cannot be
certain that the dual eligible beneficiaries who are automatically assigned to
our PDPs will remain in them.
Medicare
Part D is a relatively new program and the competitive landscape is uncertain.
We expect to encounter competition from other PDP sponsors, some of whom may
have significantly greater resources and brand recognition than we do. Our
marketing arrangement with CVS Caremark is non-exclusive, and CVS Caremark has entered
into marketing arrangements with competitors. We cannot predict whether we will
be able to effectively compete in this new market.
If
our current providers, including our pharmacy benefits manager, terminate their
contracts, we will have to contract with other providers to take their place.
CMS
and other service providers may not be able to deliver or process information
relating to our PDP, which could negatively impact our operations.
There
is uncertainty as to whether the dual eligibles auto-assigned to us for 2008
will be re-assigned to our PDPs in 2009 and beyond if our bids are not below
the benchmark bids calculated by CMS.
There
is uncertainty as to whether marketing practices will be restricted, which
could negatively impact our ability to market and sell our product.
There
may be other unforeseen occurrences that could negatively impact our PDP
operations.
Our inability to
collect receivables owed to us by other Medicare Part D PDPs may disrupt or
adversely affect our PDPs.
During 2006, we and
MemberHealth incurred Medicare Part D medical expenses on behalf of Medicare
beneficiaries who were not members of our PDPs. Likewise, we received notice of
claims from other plans that paid claims on behalf of our members. CMS established
a plan-to-plan, known as P2P, reconciliation process to address this condition
and provide a means of settlement between plans. Additionally, CMS recently
published its state-to-plan, known as S2P, reconciliation process whereby
health plans will settle with state Medicaid programs that paid claims on
behalf of Medicare beneficiaries. We and MemberHealth have recorded our
5
estimated liabilities
under P2P and S2P as of December 31, 2006. Ultimate resolution of the P2P and
S2P reconciliation processes could result in adjustments, positive or negative,
to the amounts currently estimated and recoverable.
Although CMS has
initiated a process for reconciling these errors in membership and drug costs,
there can be no assurance that we will be fully reimbursed for these costs by
CMS or another PDP sponsor. Although we intend to actively pursue amounts due
us in the CMS reconciliation process, we cannot assure you that we will receive
reimbursements from any other plan. Any amounts not collectible will be
reported as additional claim costs and are subject to both reinsurance and the
risk corridor adjustment.
The MemberHealth merger
agreement specifically provides that we are to adjust the acquisition
consideration to account for the CMS reconciliation process with respect to
MemberHealth for the year ended December 31, 2006.
Our liabilities
related to the CMS policy regarding the special transition period for
retroactive enrollment may result in an unknown amount of liability, which
could adversely affect our PDPs.
On May 25, 2007, CMS
issued a memorandum to clarify Medicare Part D sponsors obligations under
Prescription Drug Benefit Manual on Coordination of Benefits, Chapter 14,
Section 50.10, entitled Special Transition for Retroactive Enrollment
Situations. Under Section 50.10, Part D plans must provide a special
transition period in 2007 to accommodate specified claims incurred by or on
behalf of beneficiaries whom CMS has retroactively enrolled in a Part D plan.
Part D plans must accommodate claims incurred by or on behalf of these
beneficiaries during a no greater than seven-month retroactive eligibility
period, which may extend into 2006.
In the May 25, 2007
memorandum CMS emphasized that Part D sponsors may not use the March 31, 2007
coverage year deadline, which is the cut-off date for the submission of claims
associated with payment reconciliation, to deny requests for reimbursement of
claims incurred during retroactive enrollment periods. Indeed, CMS noted that
Part D plans are liable for claims received after March 31st even if
retroactive enrollment is not an issue, subject to contractual provisions
regarding timely claims filing for network pharmacies. To ensure that third
party payors have the opportunity to request reimbursement for claims incurred
during a retroactive enrollment period on behalf of dual eligible
beneficiaries, CMS stated that Part D sponsors must use the date of Medicaid
notification to establish a new timely claims filing period. CMS also provided
an attachment describing how the special transition period policy applied in
various retroactive enrollment scenarios. We could face an unknown amount of
liability as a result of complying with this special transition policy on
retroactive enrollment, which could negatively affect our business.
Financial
accounting for the Medicare Part D benefits is complex.
The accounting and
regulatory guidance regarding the proper method of accounting for Medicare Part
D, particularly as it relates to the timing of revenue and expense recognition
and calculation of the risk corridor, taken together with the complexity of the
Medicare Part D product and recent challenges in reconciling CMS Medicare Part
D membership data with our records, may lead to variability in our reporting of
quarter-to-quarter earnings and to uncertainty among investors and research
analysts following us as to the impacts of our Medicare PDPs on our full year
results.
We rely on the
accuracy of information provided by CMS regarding the eligibility of an
individual to participate in our Medicare Part D plans, and any inaccuracies in
those lists could cause CMS to recoup premium payments from us with respect to
members who turn out not to be ours, which could reduce our revenue and
profitability.
Premium payments that we
receive from CMS are based upon eligibility lists produced by Federal and local
governments. From time to time, CMS requires us to reimburse them for premiums
that we received from CMS based on eligibility and dual-eligibility lists that
CMS later discovers contained individuals who were not in fact residing in our
service areas or eligible for any government-sponsored program or were eligible
for a different premium category or a different program. We may have already
provided services to these individuals and reimbursement of amounts paid on
behalf of services provided to such individuals may be unrecoverable. In
addition to recoupment of premiums previously paid, we also face the risk that
CMS could fail to pay us for members for whom we are entitled to payment. Our
profitability would be reduced as a result of such failure to receive payment
from CMS if we had made related payments to providers and were unable to recoup
such payments from them.
The mail-order pharmacy
and pharmacy benefit management components of our business are subject to
significant additional regulation.
The mail order pharmacy business is subject to
extensive Federal, state and local regulation, including the application of
state laws related to the operation of internet and mail-service pharmacies. In
addition, our PBM operations will be subject to a variety of Federal and state
laws. These laws include Medicare Part D regulations regarding treatment of
related entities, such as anti-kickback issues and compliance requirements
under Federal employee benefits laws. CMS has indicated that it will apply
greater scrutiny to arrangements between PDPs and related parties, especially
to rebate retention arrangements. Federal and state legislative proposals
regarding PBMs are frequently introduced, and these proposals, if adopted,
could affect a variety of industry practices, such as the receipt of rebates
and administrative fees from pharmaceutical manufacturers.
In addition, changes in existing Federal or state laws
or regulations or in their interpretation by courts and agencies, or the
adoption of new laws or regulations relating to patent term extensions,
purchase discount, administrative fee and rebate arrangements with
pharmaceutical manufacturers, as well as some of the formulary and other
services provided to pharmaceutical manufacturers, could reduce the discounts,
rebates or other fees received by PBMs and could adversely impact our business,
financial condition, liquidity and operating results.
6
If we are unable to
develop and maintain satisfactory relationships with the providers of care to
our members, our profitability could be adversely affected and we may be
precluded from operating in some markets.
We contract with physicians, hospitals and other
providers to deliver health care to our members. Our Medicare Advantage
products encourage or require our customers to use these contracted providers.
In some circumstances, these providers may share medical cost risk with us or
have financial incentives to deliver quality medical services in a
cost-effective manner. Our operations and profitability are significantly
dependent upon our ability to enter into appropriate cost-effective contracts
with hospitals, physicians and other healthcare providers that have convenient
locations for our members in our geographic markets.
In the long term,
our ability to contract successfully with a sufficiently large number of
providers in a particular geographic market will affect the relative
attractiveness of our Medicare Advantage and managed care products in that
market and could preclude us from renewing our Medicare contracts in those
markets or from entering into new markets. We will be required to establish
acceptable provider networks prior to entering new markets. We may be unable to
maintain our relationships with our network providers or enter into agreements
with providers in new markets on a timely basis or under favorable terms. In
any particular market, providers could refuse to contract with us, demand to
contract with us, demand higher payments, or take other actions that could
result in higher health care costs for us, less desirable products for
customers and members, disruption of benefits to our members, or difficulty
meeting regulatory or accreditation requirements. In some markets, some
providers, particularly hospitals, physician specialty groups,
physician/hospital organizations or multi-specialty physician groups, may have
significant market positions and negotiating power. In addition, physician or
practice management companies, which aggregate physician practices for
administrative efficiency and marketing leverage, may compete directly with us.
We believe that one of our significant provider groups recently has formed an
HMO in the southeastern Texas market. If this provider group refuses to
contract with us, use their market position to negotiate favorable contracts or
otherwise place us at a competitive disadvantage, our ability to market
products or to be profitable in that market could be adversely affected.
In some situations, we have contracts with individual
or groups of primary care physicians for an actuarially determined, fixed,
per-member-per-month fee under which physicians are paid an amount to provide
all required medical services to our members. This type of contract is referred
to as a capitation contract. The inability of providers to properly manage
costs under these capitation arrangements can result in the financial
instability of these providers and the termination of their relationship with
us. In addition, payment or other disputes between a primary care provider and
specialists with whom the primary care provider contracts can result in a
disruption in the provision of services to our members or a reduction in the
services available to our members. The financial instability or failure of a
primary care provider to pay other providers for services rendered could lead
those other providers to demand payment from us even though we have made our
regular fixed payments to the primary provider. There can be no assurance that
providers with whom we contract will properly manage the costs of services,
maintain financial solvency or avoid disputes with other providers. Any of
these events could have an adverse effect on the provision of services to our
members and our operations, including loss of membership or higher healthcare
costs.
Corporate practice
of medicine and fee-splitting laws may govern our business operations, and
violation of these laws could result in penalties and adversely affect our
arrangements with contractors and our profitability.
Several states have laws commonly known as corporate
practice of medicine that prohibit a business corporation from practicing
medicine, employing physicians to practice medicine, or exercising control over
medical treatment decisions by physicians. In these states, typically only
medical professionals or a professional corporation in which the shares are
held by licensed physicians or other medical professionals may provide medical
care to patients. Many states also have some form of fee-splitting law
prohibiting business arrangements that involve the splitting or sharing of
medical professional fees earned by a physician or another medical professional
for the delivery of healthcare services.
We perform only non-medical administrative and
business services for physicians and physician groups. We do not represent that
we offer medical services, and we do not exercise control over the practice of
medical care by providers with whom we contract. We do, however, monitor
medical services to ensure they are provided and reimbursed within the
appropriate scope of licensure. In addition, we have developed close
relationships with our network providers that include our review and monitoring
of the coding of medical services provided by those providers. We also have
compensation arrangements with providers that may be based on a percentage of
provider fees and in certain cases our network providers have agreed to
exclusivity arrangements.
Regulatory
authorities may assert that we are engaged in the corporate practice of
medicine or that our contractual arrangements with providers constitute
unlawful fee-splitting. Moreover, we cannot predict whether changes will be
made to existing laws or if new ones will be enacted, which could cause us to
be out of compliance with these requirements. If our arrangements are found to
violate corporate practice of medicine or fee-splitting laws, our provider or
independent physician association management contracts could be found to be
legally invalid and unenforceable, which could adversely affect our operations
and profitability, and we could be subject to civil or, in some cases,
criminal, penalties.
We may not have
adequate intellectual property rights in our brand names for our health plans,
and we may be unable to adequately enforce such rights.
Our success depends, in part, upon our ability to
market our health plans under our brand names, such as our Todays Options®,
Prescription Pathway
SM
, Senior Solutions®, and Texan Plus® family of products, and our Community Care
Rx®, Community Pharmacists Care Rx SM
, MemberHealth, MHRx, and Community CCRx® family of products. As part of a
2007 settlement in a litigation matter in Federal court in the State of
Oklahoma, MemberHealth agreed to cease using, effective at the end of
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the 2007 Medicare Part D
coverage year, the brand name Community Care Rx® in all 49 states, the District
of Columbia, Puerto Rico and the U.S. Virgin Islands where it marketed its PDP
under that brand name, and to cease using the brand name Community Pharmacists
Care Rx® in the State of Oklahoma where it marketed its PDP under that brand
name. We will market our PDP offering for 2008 under the Community CCRx® brand
name. We may not have taken enforcement action to prevent infringement of our marks
and may not have secured registrations of the other brand names that we use in
our business. Unauthorized parties may attempt to copy or otherwise obtain and
use our products or technology. Policing unauthorized use of our intellectual
property is difficult, and we cannot be certain that the steps we have taken
will prevent misappropriation of such intellectual property rights. Other
businesses may have prior rights in our brand names or in similar names, which
could cause market confusion or limit or prevent our ability to use these marks
or prevent others from using similar marks. If we are unable to prevent others
from using our brand names, or if others prohibit us from using them, our
revenues could be adversely affected. Even if we are able to protect our
intellectual property rights in such brands, we could incur significant costs
in doing so.
Competition in the
insurance, healthcare, PBM and pharmacy industries is intense, and if we do not
design and price our products properly and competitively, our membership and
profitability could decline.
We operate in a highly competitive industry. Some of
our competitors are more established in the insurance, health care and PBM
industries, with larger market share and greater financial resources than we have
in some markets. In addition, other companies may enter our markets in the
future. We believe that barriers to entry in many markets are not substantial,
so the addition of new competitors can occur relatively easily, and customers
enjoy significant flexibility in moving between competitors. Contracts for the
sale of commercial products are generally bid upon or renewed annually. We
compete for members in our health plans and PBM on the basis of many factors,
including the size, location, quality and depth of provider networks, benefits
provided, quality of service and reputation. We also expect that price will
continue to be a significant basis of competition.
In addition to the
challenge of controlling PBM and health care costs, we face intense competitive
pressure to contain premium prices. Factors such as business consolidations,
strategic alliances, legislative reform and marketing practices create pressure
to contain premium rate increases, despite being faced with increasing medical
costs. Premium increases, introduction of new product designs, and our
relationship with our providers in various markets, among other issues, could
also affect our membership levels. Other actions that could affect membership
levels include our possible exit from or entrance into additional markets.
We compete based on innovation and service, as well as
on price and benefit offering. To attract new clients and retain existing
clients, we must continually develop new products and services to assist
clients in managing their pharmacy benefit programs. We may not be able to
develop innovative products and services, including new Medicare Part D
offerings, which are attractive to clients. Moreover, although we need to
continue to expend significant resources to develop or acquire new products and
services in the future, we may not be able to do so. We cannot be sure that we
will continue to remain competitive, nor can we be sure that we will be able to
market our products and services, including PBM services, to clients successfully
at current levels of profitability.
Consolidation within the PBM industry, as well as the
acquisition of any of our competitors by larger companies, may lead to
increased competition. In March 2007, CVS Corporation and Caremark Rx, Inc.
announced that they had consummated the merger of the two companies which
merged the pharmacy chains with the Caremark PBM. This and other strategic
combinations could have an adverse effect on our business or results of
operations.
If we do not compete effectively in our markets, if we
set rates too high or too low in highly competitive markets to maintain or
increase our market share, if membership and customers do not increase as we
expect, if membership declines, or if we lose accounts with favorable medical cost
experience while retaining or increasing membership in accounts with
unfavorable medical cost experience, our business and results of operations
could be materially adversely affected.
If the PBM that
supports our business does not continue to earn and retain purchase discounts
and rebates from manufacturers at current levels, our gross margins may
decline.
We have contractual relationships with pharmaceutical
manufacturers that provide us with purchase discounts on drugs dispensed from
our mail-order pharmacies and rebates on brand-name prescription drugs
dispensed through mail order and retail. These discounts and rebates are
generally passed on to clients in the form of steeper price discounts and
rebate pass-backs. Manufacturer rebates often depend on our ability to meet
contractual market share or other requirements. Pharmaceutical manufacturers
have also increasingly made rebate payments dependent upon our agreement to
include a broad array of their products in our formularies.
Competitive pressures in the PBM industry have also
caused us and many other PBMs to share with clients a larger portion of the
rebates received from pharmaceutical manufacturers and to increase the
discounts offered to clients.
Changes in existing Federal or state laws or regulations
or in their interpretation by courts and agencies or the adoption of new laws
or regulations relating to patent term extensions, purchase discount,
administrative fee and rebate arrangements with pharmaceutical manufacturers,
as well as some of the formulary and other services we provide to
pharmaceutical manufacturers, could also reduce the discounts or rebates we
receive and adversely impact our business, financial condition, liquidity and
operating results.
Changes in industry
pricing benchmarks could adversely affect our and MemberHealths financial
performance.
Contracts in the
prescription drug industry generally use published benchmarks to establish
pricing for prescription drugs. These benchmarks include average wholesale
price, known as AWP, average selling price, known as ASP, and wholesale
acquisition
8
cost, known as WAC, and
average manufacturer price, known as AMP.
Recent events have raised uncertainties as to whether
payors, pharmacy providers, PBMs and others in the prescription drug industry
will continue to utilize AWP as it has previously been calculated, or whether
they will adopt other pricing benchmarks for establishing prices within the
industry. Specifically, in the proposed settlement in the case of
New England Carpenters Health Benefits Fund, et al.
v. First DataBank, et al.
, a civil class action case brought
against McKesson Corporation and First DataBank, known as FDB, which is one of
several companies that report data on prescription drug prices, FDB has agreed
to reduce the reported AWP of certain drugs by 4% at a future time as
contemplated by the settlement. At this time, the proposed settlement has not
received final court approval. We cannot precisely predict the long-term effect
of the proposed settlement or the timing of any impact it may have on our PBM
business.
Demands by our
clients for enhanced service levels or possible loss or unfavorable
modification of contracts with our clients could negatively affect our
profitability.
As our clients face the continued rapid growth in
prescription drug costs, they may demand additional services and enhanced
service levels to help mitigate the increase in spending. We operate in a very
competitive PBM environment, and as a result, we may not be able to increase
our fees to compensate for these increased services, which could negatively
affect our profitability.
Our results of
operations could suffer if we lose our pharmacy network affiliations.
Our PBM operations are dependent to a significant
extent on our ability to obtain discounts on prescription purchases from retail
pharmacies that can be utilized by our clients and participants. Our contracts
with retail pharmacies, which are non-exclusive, are generally terminable by
either party on short notice. If one or more of our top pharmacy chains elects
to terminate its relationship with us or if we are only able to continue our
relationship on terms less favorable to us, access to retail pharmacies by our
clients and health plan participants, and our business, results of operations
and financial condition could suffer. In addition, some large retail pharmacy
chains either own or have strategic alliances with PBMs or could attempt to
acquire or enter into these kinds of relationships in the future. Ownership of,
or alliances with, PBMs by retail pharmacy chains, particularly large pharmacy
chains which control a significant amount of retail pharmacy business, could
have material adverse effects on our relationships with those retail pharmacy
chains, particularly the discounts they are willing to make available, and on
our business, results of operations and financial condition.
PBMs, including us,
could be subject to claims under ERISA if they are found to be fiduciaries of
health benefit plans governed by ERISA.
PBMs typically provide services to corporations and
other sponsors of health benefit plans. These plans are subject to the Employee
Retirement Income Security Act of 1974, as amended, known as ERISA, which
regulates employee pension benefit plans and employee welfare benefit plans,
including health and medical plans. The U.S. Department of Labor, which is the
agency that enforces ERISA, could assert that the fiduciary obligations imposed
by the statute apply to some or all of the services provided by a PBM.
MemberHealth is party to several lawsuits that claim it is a fiduciary under
ERISA. If a court were to determine, in litigation brought by a private party
or in a proceeding arising out of a position taken by the Department of Labor,
that MemberHealth was a fiduciary in connection with services it provides,
MemberHealth could potentially be subject to claims for breaching fiduciary
duties and/or entering into certain prohibited transactions under ERISA. In
addition, claims also might be made against our PBM under common law and state
fiduciary obligation theories.
We are subject to
extensive government regulation; compliance with laws and regulations is
complex and expensive, and any violation of the laws and regulations applicable
to us could reduce our revenues and profitability and otherwiseadversely affect
our operating results.
There is
substantial Federal and state governmental regulation of our business. Several
laws and regulations adopted by the Federal government, such as the
Sarbanes-Oxley Act of 2002, the Gramm-Leach-Bliley Act, the Health Insurance
Portability and Accountability Act, known as HIPAA, MMA, the USA PATRIOT Act,
and Do Not Call regulations, have created administrative and compliance requirements
for us. The requirements of these laws and regulations are still evolving, and
the cost of compliance may have an adverse effect on our profitability. If we
fail to comply with existing or future applicable laws and regulations, we
could suffer civil, criminal or administrative penalties. Different
interpretations and enforcement policies of these laws and regulations could
subject our current practices to allegations of impropriety or illegality, or
could require us to make significant changes to our operations. In addition, we
cannot predict the impact of future legislation and regulatory changes on our
business or assure you that we will be able to obtain or maintain the
regulatory approvals required to operate our business.
Laws in each of the states in which we operate our
health plans and insurance companies also regulate our sales practices,
operations, the scope of benefits, rate formulas, delivery systems, utilization
review procedures, quality assurance, complaint systems, enrollment requirements,
claim payments, marketing, and advertising. These state regulations generally
require, among other things, prior approval or notice of new products, premium
rates, benefit changes and specified material transactions, such as dividend
payments, purchases or sales of assets, inter-company agreements, and the
filing of various financial and operational reports.
We are also subject to various governmental reviews,
audits and investigations to verify our compliance with our contracts and
applicable laws and regulations. State departments of insurance audit our
health plans and insurance companies for financial and contractual compliance.
State departments of health audit our health plans for compliance with health
services. State attorneys general,
9
CMS, the Office of the
Inspector General of Health and Human Services, the Office of Personnel
Management, the Department of Justice, the Department of Labor, the Government
Accountability Office, and state departments of insurance and departments of
health also conduct audits and investigations of us. Several state attorneys
general, state departments of insurance and Congressional committees are
currently investigating the practices of insurance brokers, including some of
those used by companies in the health care industry.
Any adverse review, audit or investigation could
result in:
repayment of
amounts we have been paid pursuant to our government contracts;
imposition of
civil or criminal penalties, fines or other sanctions on us;
loss of
licensure or the right to participate in government-sponsored programs,
including Medicare;
damage to our
reputation in various markets; and
increased
difficulty in marketing our products and services.
Any of these events could make it more difficult for
us to sell our products and services, reduce our revenues and profitability and
otherwise adversely affect our operating results. For more information on
governmental regulation of our business, see the section captioned Regulation
in Part I, Item 1 of our Form 10-K for the year ended December 31, 2006.
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
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, such as 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, HIPAA does not preempt the state standards and laws.
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 ability to comply
with the HIPAA requirements is uncertain. Furthermore, a states ability to
promulgate stricter laws, and uncertainty regarding many aspects of 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.
Compliance with HIPAA regulations requires significant
systems enhancements, training and administrative effort. HIPAA could also
expose us to additional liability for violations by our business associates. A
business associate is a person or entity, other than a member of the work
force, who on behalf of an entity subject to HIPAA performs or assists in the
performance of a function or activity involving the use or disclosure of
individually identifiable health information, or provides legal, accounting,
consulting, data aggregation, management, administrative, accreditation or
financial services.
Changes in
governmental regulation or legislative reform could increase our costs of doing
business and adversely affect our profitability.
The Federal government and the states in which we
operate our extensively regulate health plans, insurance companies and other
business. The laws and regulations governing our operations are generally
intended to benefit and protect policyholders, health plan members and
providers rather than shareholders. From time to time, Congress has considered
various forms of Patients Bill of Rights legislation, which, if adopted,
could alter the treatment of coverage decisions under applicable federal
employee benefits laws. There have also been legislative attempts at the state
level to limit the preemptive effect of Federal employee benefits laws on state
laws. If adopted, these types of limitations could increase our liability
exposure and could permit greater state regulation of our operations. The
government agencies administering these laws and regulations have broad
latitude to enforce them. These laws and regulations, along with the terms of
our government contracts, regulate how we do business, what services we offer,
and how we interact with our policyholders, members, providers and the public.
Healthcare laws and regulations are subject to frequent change and differing
interpretations. Changes in the political climate or 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:
imposing
additional license, registration, or capital reserve requirements;
increasing
our administrative and other costs;
forcing us to
undergo a corporate restructuring;
10
increasing
mandated benefits without corresponding premium increases;
limiting our
ability to engage in inter-company transactions with our affiliates and
subsidiaries;
adversely
affecting our ability to operate under the Medicare program and to continue to
serve our members and attract new members;
forcing us to
alter or restructure our relationships with providers and agents, including
making changes to the deeming rules for Private Fee for Service Medicare
Advantage products;
restricting
our ability to market our products;
increasing
governmental regulation of healthcare and PBM services, including potential regulation
of the PBM industry by the U.S. Food and Drug Administration, or direct
regulation of pharmacies by regulatory and quasi-regulatory bodies;
requiring
that health plan members have greater access to non-formulary drugs;
expanding the
ability of health plan members to sue their plans;
requiring us
to implement additional or different programs and systems;
increasing
antitrust lawsuits challenging PBM pricing practices;
instituting
state legislation regulating PBMs or imposing fiduciary status on PBMs; and
instituting
drug pricing legislation, including most favored nation pricing and unitary
pricing legislation.
While it is not possible
to predict when and whether fundamental policy changes would occur, these could
include policy changes on the local, state and federal level that could
fundamentally change the dynamics of our industry, such as policy changes
mandating a much larger role of the government in the health care arena.
Changes in public policy could materially affect our profitability, our ability
to retain or grow business, or our financial condition. State and federal
governmental authorities are continually considering changes to laws and
regulations applicable to us and are currently considering regulations relating
to:
health
insurance access and affordability;
disclosure of
provider quality information;
electronic
access to pharmacy and medical records;
formation of
regional or national association health plans for small employers;
universal
health coverage; and
disclosure of
provider fee schedules and other data about payments to providers, sometimes
called transparency.
All of these proposals could apply to us and could result in new
regulations that increase the cost of our operations. Healthcare organizations
also may reduce or delay the purchase of PBM services, and manufacturers may
reduce administrative fees and rebates or reduce supplies of some products.
There can be no assurance that legislative or regulatory change will not affect
our ability to negotiate rebate and administrative fee arrangements with
manufacturers and will not have a material adverse effect on our business.
In addition, both
Congress and state legislatures are expected to consider legislation to
increase governmental regulation of managed care plans. Some of these
initiatives would, among other things, require that health plan members have
greater access to drugs not included on a plans formulary and give health plan
members the right to sue their health plans for malpractice when they have been
denied care. The scope of the managed care reform proposals under consideration
by Congress and state legislatures and enacted by states to date vary greatly,
and we cannot predict the extent of future legislation. However, these
initiatives could limit our business practices and impair our ability to serve
our clients.
Our reliance upon
third party administrators may disrupt or adversely affect our operations.
We depend on independent
third parties for significant portions of our systems-related support,
equipment, facilities and data, including data center operations, data network,
voice communication services and pharmacy data processing. This dependence
makes our operations vulnerable to the third parties failure to perform
adequately under the contract, due to internal or external factors.
We have outsourced the
operation of our data center, call centers and new business processing services
to independent third parties and may from time to time obtain additional
services or facilities from other independent third parties. Dependence on
third parties for these services and facilities may make our operations
vulnerable to their failure to perform as agreed. We also rely upon data from
CMS and our joint venture partner PharmaCare for information relating to
Medicare Part D and Medicare Advantage membership and claims administration.
MemberHealth also relies upon Computer Sciences Corporation, known as CSC, for
11
information relating to
Medicare Part D membership and claims administration. Incorrect information
from these entities could generate inaccurate or incomplete membership and
payment reports concerning our Medicare eligibility and enrollment. This could
cause us to incur additional expense to utilize additional resources to
validate, reconcile and correct the information. We have not been able to
independently test and verify some of these third party systems and data. There
can be no assurance that future third party data will not disrupt or adversely
affect our plans relationships with our members or our results of operations.
Additionally, as of November 2006, we ceased to utilize a third party
administrator, TMG Health, to manage our private fee-for-service claims, and
brought this function in-house. This has put new administrative burdens on us.
A change in service providers could result in a decline in service quality and
effectiveness, increased cost or less favorable contract terms which could
adversely affect our operating results. Some of our outsourced services are
being performed overseas. For 2008, CMS will require approval of the
performance of services overseas. Failing to obtain this approval could have a
material adverse effect on our results of operations and financial condition.
Reductions in
funding for Medicare programs could materially reduce our profitability.
Approximately 54% of our
total revenue for the fiscal year ended December 31, 2006 (76% of our total
revenue on a pro forma basis assuming the MemberHealth acquisition had been
consummated on January 1, 2006) was generated by the operation of our Medicare
Advantage HMO plans, Medicare Advantage private fee-for-service plans and
Medicare Part D PDPs. As a result, our revenue and profitability are dependent,
in part, on government funding levels for these programs. The rates paid to
Medicare Advantage health plans like ours are established by contract, although
the rates differ depending on a combination of factors, such as 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 rate levels may be affected by continuing
government efforts to contain prescription drug costs and other medical
expenses, and other federal budgetary constraints. Medicare Advantage health
plans like ours are currently being examined by the government in comparison to
Medicare fee-for-service payments, and this examination could result in a
reduction in payments to Medicare Advantage health plans like ours. Changes in
the Medicare program or Medicare funding may affect our ability to operate
under the Medicare program or 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.
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 existing and prospective
members.
The Medicare Prescription
Drug, Improvement and Modernization Act of 2003, known as MMA, substantially
changed the Medicare program and caused us to modify how we operate our
business. Although many of these changes are designed to benefit Medicare
Advantage plans generally, some 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.
Increased competition could
adversely affect our enrollment and results of operations.
The MMA
increased reimbursement rates for Medicare Advantage plans. Higher
reimbursement rates may induce the establishment of new plans that participate
in the Medicare program, creating new competition that could adversely affect
our profitability and cause increased lapsation in our Medicare Supplement in force
as policyholders choose to enroll in a competitors plan.
As of 2006, a
new regional Medicare Preferred Provider Organization, or Medicare PPO, program
and private fee-for-service plans were implemented pursuant to the MMA.
Medicare PPOs and private fee-for-service plans allow their members more
flexibility to select physicians than the current plans, which are HMOs that
require members to coordinate with a primary care physician. The regional
Medicare PPO program and private fee-for-service plans compete with local
Medicare Advantage programs and have affected, and may continue to affect, our
Medicare Advantage business.
The new competitive bidding process
may adversely affect our profitability.
As of January
1, 2006, the payments for the local Medicare Advantage HMO and regional
Medicare Advantage PPO programs 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.
The new limited annual enrollment
process may adversely affect our growth and ability to market our products.
Beginning in
2006, Medicare beneficiaries generally have a more limited annual enrollment
period during which they can choose to participate in a Medicare Advantage plan
or receive benefits under the traditional fee-for-service Medicare program.
After the annual enrollment period, most Medicare beneficiaries will not be
permitted to change their Medicare benefits until the next enrollment period.
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.
As a result
of the limited annual enrollment period and the subsequent lock-in provisions
of the MMA, our internal and external sales force may be limited in its ability
to market some of our products year-round. Our agents rely substantially on
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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.
We may be
responsible for the actions of our independent and career agents, and
restrictions on our ability to market would adversely affect our revenue.
In litigation against our
subsidiaries, our members sometimes claims that agents failed to comply with
applicable laws, regulations and rules, or acted improperly in other ways, and
that we are responsible for the alleged failure. We may be held liable for
contractual or extra-contractual damages on these claims. We cannot assure you that
any future claim will not result in material liability in the future. Federal
and state regulators increasingly scrutinize the marketing practices of
insurers, such as Medicare Advantage and private fee-for-service plans, MA-PDs
and PDPs and their marketing agents, and there is no guarantee that regulators
will not scrutinize the practices of our Medicare Advantage plans, PDPs and our
marketing agents, and will not expose us to liability.
We rely on our marketing
and sales efforts for a significant portion of our premium revenue growth. The
Federal government and state governments in the states in which we currently
operate permit marketing but impose strict requirements and limitations as to
the types of marketing activities that we may conduct. If our marketing efforts
were to be prohibited or curtailed, our ability to increase or sustain
membership would be significantly harmed, which would adversely affect our
revenue.
Similarly, Federal and
state governments and regulatory agencies have recently placed an increased
focus on the sales and marketing of private fee-for-service plans. Concerns
over the growing number of market conduct complaints regarding improprieties in
the sales of private fee-for-service planes have spawned stricter marketing standards
by CMS relating to such plans. This heightened focus on market conduct and
stricter standards in the marketing and sales of private fee-for-service plans
could require us to modify our systems, increase our costs and change our agent
training requirements, which could result in a material adverse effect on our
results of operations and financial condition.
For example, in 2005, the
Wisconsin Office of the Commissioner of Insurance, known as WI OCI, initiated
an investigation into the sales practices of the Pennsylvania Life sales agents
in the state.
If our government
contracts are not renewed or are terminated, our business could be
substantially impaired.
We provide our Medicare
and other services through a limited number of contracts with Federal government
agencies. These contracts generally have terms of one or two years and are
subject to non-renewal by the applicable agency. All of our government
contracts are terminable for cause if we breach a material provision of the
contract or violate relevant laws or regulations. In addition, a government
agency may suspend our right to add new members if it finds deficiencies in our
provider network or operations. If we are unable to renew, or to successfully
re-bid or compete for any of our government contracts, or if any of our
contracts are terminated, our business could be substantially impaired. If any
of those circumstances were to occur, we would likely pursue one or more
alternatives, including seeking to enter into contracts in other geographic markets,
seeking to enter into contracts for other services in our existing markets, or
seeking to acquire other businesses with existing government contracts. If we
were unable to do so, we could be forced to cease conducting business. In any
such event, our revenues and profits would decrease materially.
We have a
significant amount of debt outstanding that contains restrictive covenants, and
we may be unable to service and repay our debt obligations if our subsidiaries
cannot pay sufficient dividends or make other cash payments to us.
As of September 30, 2007,
we had $350 million of debt outstanding under the term portion of our credit
agreement. We have available borrowing capacity under the revolving portion of
our credit facility of $150 million. In March 2007, we issued $50 million of
our trust preferred securities bringing our total trust preferred securities to
$125 million at September 30, 2007, of which we are redeeming $15 million on
December 4, 2007. Upon the occurrence of specified events all of the capital
stock of the guarantor subsidiaries under the credit agreement will be pledged
to our bank lenders. Because our principal outstanding indebtedness has been
incurred by our parent company, our ability to make interest and principal
payments on our outstanding debt is dependent upon the ability of our
subsidiaries to pay cash dividends or make other cash payments to our parent
company. Our subsidiaries will be able to pay dividends to our parent company
only if they earn sufficient profits and, in the case of our insurance company
and health plan subsidiaries, they satisfy the requirements of the state
insurance laws relating to dividend payments and the maintenance of required
surplus.
Our debt service
obligations will require us to use a portion of our operating cash flow to pay
interest and principal on indebtedness before use for other corporate purposes,
such as funding future expansion of our business and ongoing capital
expenditures. If our operating cash flow and capital resources are insufficient
to service our debt obligations, we may be forced to sell assets, seek
additional equity or debt capital or restructure our debt. However, these
measures might be unsuccessful or inadequate in permitting us to meet scheduled
debt service obligations. We may also incur additional indebtedness in the
future. Our indebtedness could have additional adverse consequences, such as:
increasing
our vulnerability to adverse economic, regulatory and industry conditions, and
placing us at a disadvantage compared to our competitors that are less
leveraged;
limiting our
ability to compete and our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
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limiting our
ability to borrow additional funds for working capital, capital expenditures,
acquisitions and general corporate or other purposes; and
exposing us
to greater interest rate risk since the interest rate on borrowings under our
senior credit facilities is variable.
Capital constraints
could restrict our ability to support our premium growth.
Our continued growth is
dependent upon our ability to support premium revenue growth through the
expansion of our markets and our network of agents while at the same time
maintaining sufficient levels of capital and surplus to support that growth.
Our new business growth typically results in reduced income caused by costs
related to new market expansion and, on some insurance products, net losses
during the early years of a policy, called statutory surplus strain. The
resulting reduction in capital and surplus can limit our ability to generate
new business due to statutory restrictions on premium to surplus ratios and
other required statutory surplus parameters. In addition, some states, such as
Florida and Texas, limit an insurers ability to write specified lines of
business if gross or net premiums written would exceed a specified percentage
of capital and surplus. Likewise, we are required to maintain adequate risk
based capital ratios as prescribed by each state. Moreover, we need
substantially more capital than the statutory minimums to support our level of
premium growth and to finance acquisitions. If we cannot generate sufficient
capital and statutory surplus to maintain minimum statutory requirements and to
support our growth, we could be restricted in our ability to generate new
premium revenue.
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 ability to obtain funds from our subsidiaries may
be restricted and our cash flows and liquidity may be adversely affected.
Because Universal
American operates as a holding company, it is dependent upon dividends and
administrative expense reimbursements from its subsidiaries to fund its
obligations, including payment of principal and interest on our debt
obligations. These subsidiaries generally are regulated by state departments of
insurance. Our health plan and insurance company subsidiaries are subject to
laws and regulations that limit the amount of dividends and distributions they
can pay for purposes other than to pay income taxes related to their earnings.
These laws and regulations also limit the amount of management fees our
subsidiaries may pay to their affiliates, including our management
subsidiaries, without prior notification to, or in some cases approval of,
state regulators.
We are also required by
law to maintain specific prescribed minimum amounts of capital in these
subsidiaries. The levels of capitalization required depend primarily upon the
volume of premium generated. A significant increase in premium volume will
require additional capitalization from our parent company. In most states, we
are required to seek prior approval by these state regulatory authorities
before we transfer money or pay dividends that exceed specified amounts from
these subsidiaries, or, in some states, any amount. The pre-approval and notice
requirements vary from state to state, and the discretion of the state
regulators, if any, in approving or disapproving a dividend is not always
clearly defined. Subsidiaries that declare non-extraordinary dividends must
usually provide notice to the regulators in advance of the intended
distribution date. 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 affiliates, the funds available to us would be limited, which could
impair our ability to implement our business and growth strategy and satisfy
our debt obligations, or we could be required to incur additional indebtedness
to fund these strategies.
In addition, one or more
of these states could increase the statutory capital level from time to time.
States have also adopted risk-based capital requirements based on guidelines
adopted by the National Association of Insurance Commissioners, which tend to
be, although are not necessarily, higher than existing statutory capital
requirements. Regardless of whether the states in which we operate maintain or
adopt risk-based capital requirements, the state departments of insurance can
require our 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
reserve requirements. In addition, as we continue to expand our plan offerings
in new states or pursue new business opportunities, such as our recent
offerings of PDPs and expansion of private fee for service products and health
plans in new markets, we may be required to maintain additional statutory
capital reserves. In either case, our available funds could be materially
reduced, which could harm our ability to implement our business strategy.
In the event that we are
unable to provide sufficient capital to fund the debt obligations of Universal
American, our operations or financial position may be adversely affected.
Downgrades in our
debt ratings, should they occur, may adversely affect our business, financial
condition and results of operations.
Increased public and
regulatory concerns regarding the financial stability of insurance companies
and health plans have resulted in consumers placing greater emphasis upon
financial strength ratings. Claims paying ability, financial strength, and debt
ratings by recognized rating organizations are increasingly important factors
in establishing the competitive position of insurance companies and health
plans. Ratings information is broadly disseminated and generally used
throughout the industry. Our ability to expand and to attract new business is
affected by the financial strength ratings assigned to our subsidiaries by
independent industry rating agencies, such as A.M. Best Company, Inc. Some
distributors such as financial institutions, unions, associations and affinity groups
may not sell our products to these groups unless the rating of our subsidiary
writing the business improves to at least an A- from its B++. The lack of
higher A.M. Best ratings for our subsidiaries could adversely affect sales of
our products.
14
Our debt ratings
affect both the cost and availability of future borrowings. Each of the rating
agencies reviews its ratings periodically and there can be no assurance that
current ratings will be maintained in the future. Our ratings reflect each
rating agencys opinion of our financial strength, operating performance, and
ability to meet our debt obligations or obligations to policyholders, but are
not evaluations directed toward the protection of investors in our common stock
and should not be relied upon as such. Following announcement of the
MemberHealth acquisition, Standard & Poors indicated that it will maintain
its BBB- investment grade rating on our debt, and A.M. Best indicated that it
will maintain its B++ rating on our core insurance subsidiaries. There is no
assurance, however, that the rating agencies will maintain these ratings in the
future. Any future downgrade in our ratings may cause our policyholders and
members to lapse, and may cause some of our agents to sell less of our products
or to cease selling our products altogether. Increased lapse rates would reduce
our premium revenue and net income. Thus, downgrades in our ratings, should
they occur, may adversely affect our business, financial condition and results
of operations.
If we fail to
properly maintain the integrity of our data and information systems, our
business could be materially adversely affected.
Our business depends significantly on efficient,
effective and secure information systems and the integrity and timeliness of the
data we use to run our business. We have various information systems which
support our operating segments. 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.
Our information systems and applications require an
ongoing commitment of significant resources to maintain, protect and enhance
existing systems and develop new systems to keep pace with continuing changes
in information processing technology, evolving industry and regulatory
standards, and changing customer preferences. If the information we rely upon
to run our businesses were to be found to be inaccurate or unreliable, if we
fail to properly maintain our information systems and data integrity, or if we
fail to successfully update or expand processing capability or develop new
capabilities to meet our business needs in a timely manner, we could have
operational disruptions, have problems in determining medical cost estimates
and establishing appropriate pricing, have customer and physician and other
health care provider disputes, lose our ability to produce timely and accurate
reports, have regulatory or other legal problems, have increases in operating
and administrative expenses, lose existing customers, have difficulty in
attracting new customers or in implementing our growth strategies, or suffer
other adverse consequences.
To the extent we fail to maintain effective
information systems, 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. In addition, we
have outsourced the operation of our data centers to independent third parties
and may from time to time obtain additional services or facilities from other
independent third parties. Dependence on third parties for these services and
facilities may make our operations vulnerable to their failure to perform as
agreed.
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.
There can be no assurance that our process of
improving existing systems, developing new systems to support our expanding
operations, integrating new systems, protecting our proprietary information,
and improving service levels will not be delayed or that additional systems
issues will not arise in the future. Failure to adequately protect and maintain
the integrity of our information systems and data may result in a material
adverse effect on our financial positions, results of operations and cash
flows.
Any failure by us
to manage our growing operations or to successfully integrate acquisitions and
other significant transactions could harm our financial results, business and
prospects.
As part of our business strategy, we frequently engage
in discussions with third parties regarding possible investments, acquisitions,
strategic alliances, joint ventures and outsourcing transactions and often
enter into agreements relating to such transactions that are designed to
enhance our business objectives. In order to pursue this strategy successfully,
we must identify suitable candidates for, and successfully complete,
transactions as well as effectively integrate any acquired companies into our
operations. If we fail to identify and successfully complete transactions that
further our strategic objectives, we may be required to expend resources to
develop products and technology internally, we may be unable to sustain our
historical growth rates, we may be put at a competitive disadvantage or we may
be adversely affected by negative market perceptions, any of which may have a
material adverse effect on our results of operations, financial position or
cash flows.
Acquisition risk
The rapid growth in the size and complexity of our
operations has placed, and will continue to place, significant demands on our
management, operations systems, accounting systems, internal control systems
and financial resources. As part of our strategy, we have experienced, and
expect to continue to experience, considerable growth through acquisitions.
Acquisitions involve numerous additional risks, some
of which we have experienced in the past, including:
15
difficulties in
the integration of operations, technologies, products, systems and personnel of
the acquired company;
diversion of
financial and management resources from existing operations;
potential
increases in policy lapses;
potential losses
from unanticipated litigation or levels of claims;
inability to
generate sufficient revenue to offset acquisition costs;
loss of key
customer accounts: and
loss of key
provider contracts or renegotiation of existing contracts on less favorable
terms.
In addition, we generally are required to obtain
regulatory approval from one or more governmental 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, such as 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 acquisitions on
terms favorable to us, or at all.
To the extent we complete an acquisition, we may be
unable to realize the anticipated benefits from it because of operational
factors or difficulties in integrating the following or other aspects of
acquisitions with our existing businesses
additional
employees who are not familiar with our operations;
new provider
networks, which may operate on terms different from our existing networks;
additional
members, who may decide to transfer to other healthcare providers or health
plans;
disparate
information technology, claims processing, and record keeping systems; and
accounting
policies, some of which require a high degree of judgment or complex estimation
processes, such as estimates of reserves, IBNR claims, valuation and accounting
for goodwill and intangible assets, stock-based compensation, and income tax
matters.
For all of the above reasons, we may not be able to
implement our acquisition strategy successfully.
Furthermore, in
the event of an acquisition or investment, you should be aware that we may
issue stock that would dilute 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 or
our historical business.
Internal growth and expansion risk
Additionally, we are likely to incur additional costs
if we develop new product offerings or 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:
our inability to
raise sufficient capital;
the time and
costs associated with designing and filing new product forms and recruiting
related sales forces to offer products in the new area;
the time and costs
associated with obtaining regulatory approval to operate in the new area or
expanding our licensed service area, as the case may be;
our inability to
develop a network of physicians, hospitals, and other healthcare providers that
meets our requirements and those of the applicable regulators;
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;
the cost of
providing healthcare services in those areas;
the cost of
implementation and on-going administration of newly developed programs and
services,
our inability to
achieve sufficient scale of operations to cover the administration and
marketing costs associated with
16
entering new markets, and
demographics and
population density.
Our ability to manage our growth and compete
effectively will depend, in part, on our success in addressing these demands
and risks. Any failure by us to effectively manage our growth could have a
material adverse effect on our business, financial condition or results of
operations.
Any failure to
manage sales and administrative costs could impair profitability.
The level of our sales and administrative expenses
affects our profitability. While we proactively attempt to manage such expenses
effectively, increases in the cost of sales and marketing, staff-related
expenses, investment in new products, including our opportunities in the
Medicare programs, greater emphasis on small group and individual health
insurance products, acquisitions, and implementation of regulatory
requirements, among others, may occur from time to time.
There can be no assurance that we will be able to
contain our sales expenses in line with our actual levels of production and our
administrative expenses in line with our membership base. This may result in a
material adverse effect on our financial position, results of operations and
cash flows.
Most of our assets
are invested in fixed income securities and are subject to market fluctuations.
Our investment portfolio consists almost entirely of
fixed income securities. The fair market value of these assets and the
investment income from these assets fluctuate depending on general economic and
market conditions. The fair market value of our investments in fixed income
securities generally increases or decreases in an inverse relationship with
fluctuations in interest rates, while net investment income realized by us from
future investments in fixed income securities will generally increase or
decrease with interest rates. In addition, actual net investment income or cash
flows from investments that carry prepayment risk, such as mortgage-backed and
other asset-backed securities, may differ from those anticipated at the time of
investment as a result of interest rate fluctuations. Because substantially all
of our fixed income securities are classified as available for sale, changes in
the market value of our securities are reflected in our balance sheet. Similar
treatment is not available for liabilities. Therefore, interest rate
fluctuations could adversely affect our results of operations and financial
condition.
Legal and
regulatory investigations and actions are increasingly common in the insurance
and managed care business and may result in financial losses and harm our
reputation.
We face a significant risk of litigation and
regulatory investigations and actions in the ordinary course of operating our
businesses, including the risk of class action lawsuits. Due to the nature of
our businesses, we are subject to a variety of legal and regulatory actions
relating to our business operations, including the design, management and
offering of products and services. The following are examples of the types of
potential litigation and regulatory investigations we face:
claims relating
to sales or underwriting practices;
claims relating
to the methodologies for calculating premiums;
claims relating
to the denial or delay of health care benefit payments;
claims relating
to claims payments and procedures;
additional
premium charges for premiums paid on a periodic basis;
claims relating
to the denial, delay or rescission of insurance coverage;
challenges to
the use of software products used in administering claims;
claims relating
to our administration of our Medicare Part D and other healthcare and insurance
offerings and PBM;
claims by
government agencies relating to compliance with laws and regulations;
medical
malpractice or negligence actions based on our medical necessity decisions or
brought against us on the theory that we are liable for our providers alleged
malpractice or negligence;
claims relating
to product design;
allegations of
anti-competitive and unfair business activities;
provider
disputes over compensation and termination of provider contracts;
allegations of
discrimination;
claims related
to the failure to disclose business practices;
17
allegations of
breaches of duties to customers;
claims relating
to inadequate disclosure in our public filings;
allegations of
agent misconduct;
claims relating
to suitability of annuity products;
claims relating
to customer audits and contract performance; and
claims relating
to dispensing of drugs associated with our in-house mail order pharmacy.
Plaintiffs in class action and other lawsuits against
us may seek very large or indeterminate amounts, and punitive and treble damages,
which may remain unknown for substantial periods of time. We are also subject
to various regulatory inquiries, such as information requests, subpoenas and
books and record examinations, from state, Federal and international regulators
and other authorities. A substantial legal liability or a significant
regulatory action against us could have an adverse effect on our business,
financial condition and results of operations.
A description of material legal actions in which we
are currently involved is included under Item 3Legal Proceedings and Commitments
and Contingencies in Note 15 to the consolidated financial statements included
in Item 8.Financial Statements and Supplementary Data of our Form 10-K for the
year ended December 31, 2006. We update this description in a note to the
consolidated financial statements contained in each Quarterly Report on Form
10-Q that we file, and investors should review the most recently available
Quarterly Report for the status of our material legal proceedings.
We cannot predict the outcome of actions we face with
certainty, and we are incurring expenses in the defense of our current matters.
We also may be subject to additional litigation in the future. Litigation could
materially adversely affect our business or results of operations because of
the costs of defending these cases, the costs of settlement or judgments
against us, or the changes in our operations that could result from litigation.
The defense of any such actions may be time-consuming and costly, and may
distract our managements attention. In addition, we could suffer significant
harm to our reputation, which could have an adverse effect on our business,
financial condition and results of operations. As a result, we may incur
significant expenses and may be unable to effectively operate our business.
Potential liabilities may not be covered by insurance
or indemnity, insurers or indemnifying parties may dispute coverage or may be
unable to meet their obligations or the amount of our insurance or indemnification
coverage may be inadequate. In addition, some types of damages, like punitive
damages or damage for willful acts, may not be covered by insurance. The cost
of business insurance coverage has increased significantly. Insurance coverage
for all or some forms of liability may become unavailable or prohibitively
expensive in the future. 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.
The health care industry continues to receive
significant negative publicity regarding the publics perception of it. This
publicity and public perception have been accompanied by increased litigation,
including some large jury awards, legislative activity, regulation and
governmental review of industry practices. These factors, as well as any
negative publicity about us in particular, could adversely affect our ability
to market our products or services and to attract and retain members, may require
us to change our products or services, may increase the regulatory burdens
under which we operate and may require us to pay large judgments or fines. Any
combination of these factors could further increase our cost of doing business
and adversely affect our financial position, results of operations and cash
flows.
The occurrence of
natural or man-made disasters could adversely affect our financial condition
and results of operation.
We are exposed to various risks arising out of natural
disasters, including earthquakes, hurricanes, floods and tornadoes, and
pandemic health events such as avian influenza, as well as man-made disasters,
including acts of terrorism and military actions. For example, a natural or
man-made disaster could lead to unexpected changes in persistency rates as
policyholders and members who are affected by the disaster may be unable to
meet their contractual obligations, such as payment of premiums on our
insurance policies. The continued threat of terrorism and ongoing military actions
may cause significant volatility in global financial markets, and a natural or
man-made disaster could trigger an economic downturn in the areas directly or
indirectly affected by the disaster. These consequences could, among other
things, result in a decline in business and increased claims from those areas.
Disasters also could disrupt public and private infrastructure, including
communications and financial services, which could disrupt our normal business
operations.
A natural or man-made disaster also could disrupt the
operations of our counterparties or result in increased prices for the products
and services they provide to us. In addition, a disaster could adversely affect
the value of the assets in our investment portfolio if it affects companies
ability to pay principal or interest on their securities.
Our business may
suffer if we are not able to hire and retain sufficient qualified personnel or
if we lose our key personnel.
Our future success depends partly on the continued
contribution of our senior management and other key employees. While we
18
currently have employment
agreements with key executives, these do not guarantee that the services of
these executives will continue to be available to us. The loss of the services
of any of our senior management, or other key employees, could harm our
business. In addition, recruiting and retaining the personnel we require to
effectively compete in our markets may be difficult. If we fail to hire and
retain qualified employees, we may not be able to maintain and expand our
business.
If we fail to
effectively execute our operational and strategic initiatives, including our
Medicare initiatives, our business could be materially adversely affected.
Our future performance depends in large part upon our
management teams ability to execute our strategy to position us for the
future. This strategy includes opportunities created by the MMA. The MMA offers
new opportunities in our Medicare programs, including our HMO and private
fee-for-service Medicare Advantage products, as well as Medicare Part D plans.
We have made substantial investments in our Medicare programs to enhance our
ability to participate in these programs. Over the past few years we have
increased the size of our Medicare geographic reach since the enactment of the
MMA through expanded Medicare product offerings. We offer both stand-alone
Medicare Part D plans and Medicare Advantage plans with prescription drug
coverage in addition to our other product offerings. For 2007, we offer
Medicare Part D plans in 38 states as well as the District of Columbia. We
offer private fee-for-service plans in 35 states, up from 15 states in 2006.
The growth in our Medicare membership and revenues impacts the pattern of our
quarterly earnings, including the timing of membership enrollment and the speed
with which the individual members meet their deductibles and cost-sharing
obligations.
Our contracts with CMS, as well as applicable Medicare
Part D regulations and federal and state laws, requires us to, among other
obligations:
comply with
disclosure, filing, record-keeping and marketing rules;
operate quality
assurance, drug utilization management and medication therapy management
programs;
support
e-prescribing initiatives;
implement
grievance, appeals and formulary exception processes;
comply with
payment protocols, which include the return of overpayments to CMS and, in
specified circumstances, coordination with state pharmacy assistance programs;
use approved
networks and formularies, and provide access to these networks to any willing
pharmacy;
provide
emergency out-of-network coverage; and
adopt a
comprehensive Medicare and Fraud, Waste and Abuse compliance program.
Any contractual or regulatory non-compliance on our part could entail
significant sanctions and monetary penalties.
CMS has announced that the 2008 PFFS selling season
will run from November 15, 2007 through March 31, 2008, which is shorter than
the 2007 selling season, which was extended by CMS beyond March 31, 2007. The
shorter than anticipated 2008 selling season could have a material adverse
effect on our business and results of operations.
Because our
Medicare Advantage premiums, which generate most of our Medicare Advantage
revenues, are fixed by contract, we are unable to increase our Medicare
Advantage premiums during the contract term if our corresponding medical
benefits expense exceeds our estimates.
Most of our
Medicare Advantage revenues are generated by premiums consisting of fixed
monthly payments per member. We use a significant portion of our revenues to
pay the costs of health care services delivered to our members. The principal
costs consist of claims payments, capitation payments and other costs incurred
to provide health insurance coverage to our members. Generally, premiums in the
health care business are fixed on an annual basis by contract, and we are
obligated during the contract period to provide or arrange of the provision of
healthcare services as established by the Federal government.
We are unable to increase the premiums we receive
under these contracts during the then-current terms. If our medical expenses
exceed our estimates, except in very limited circumstances or as a result of risk
score adjustments for member acuity, we generally cannot recover costs we incur
in excess of our medical cost projections in the contract year through higher
premiums. 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. Accordingly, the failure to
adequately predict and control medical expenses and to make reasonable
estimates and maintain adequate accruals for incurred but not reported, claims,
known as IBNR, may have a material adverse effect on our financial condition,
results of operations, or cash flows. If our estimates of reserves are
inaccurate, our ability to take timely correction actions or to otherwise
establish appropriate premium pricing could be adversely affected. Failure to
adequately price our products or to estimate sufficient medical claim reserves
may result in a material adverse effect on our financial position, results of
operations and cash flows. In addition, to the extent that CMS or Congress
takes action to reduce the levels of payments to
19
Medicare Advantage
providers, our revenues would be adversely affected.
We estimate the costs of our future medical claims and
other expenses using actuarial methods and assumptions based upon claim payment
patterns, cost trends, product mix, seasonality, medical inflation, historical
developments, such as claim inventory levels and claim receipt patterns, and
other relevant factors. We continually review estimates of future payments
relating to medical claims costs for services incurred in the current and prior
periods and make necessary adjustments to our reserves. However, historically,
our medical expenses as a percentage of premium revenue have fluctuated. The
principal factors that may cause medical expenses to exceed our estimates are:
increased
utilization of medical facilities and services, including prescription drugs;
increased cost
of services;
our membership
mix;
variances in
actual versus estimated levels of cost associated with new products, benefits
or lines of business, product changes or benefit level changes;
periodic
renegotiation of hospital, physician and other provider contracts, or the
consolidation of such entities;
membership in
markets lacking adequate provider networks;
changes in the
demographics of our members and medical trends affecting them;
termination of
capitation arrangements resulting in the transfer of membership to
fee-for-service arrangements;
possible changes
in our pharmacy rebate program with drug manufacturers;
the occurrence
of catastrophes, including acts of terrorism, public health epidemics, or
severe weather events;
the introduction
of new or costly treatments, including new technologies;
medical cost
inflation;
government
mandated benefits or other regulatory changes; and
contractual
disputes with hospitals, physicians and other providers.
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 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.
We derive a
substantial portion of our Medicare Advantage health plan revenues and profits
from Medicare Advantage health plan operations in Texas, and legislative
actions, economic conditions or other factors that adversely affect those
operations could materially reduce our revenues and profits.
We derive a substantial portion of our Medicare
Advantage health plan revenues and profits from Medicare Advantage health plan
operations in Texas. If we are unable to continue to operate in Texas, or if we
must significantly curtail our current operations in any portion of Texas, our
revenues will decrease materially. Our reliance on our operations in Texas
could cause our revenues and profitability to change suddenly and unexpectedly,
depending on legislative actions, economic conditions and similar factors. In
addition, our market share in Texas may make it more difficult for us to expand
our membership in existing markets in Texas. Our inability to continue to
operate in Texas, or a decrease in the revenues or profitability of our Texas
operations, would harm our overall operating results.
Our net income may
decline if our insurance premium rates are not adequate.
We set the premium rates on our insurance policies
based on facts and circumstances known at the time we issue the policies and on
assumptions about numerous variables, including the actuarial probability of a
policyholder incurring a claim, the severity and duration of the claim, the mortality
rate of our policyholder base, the persistency or renewal rate of our policies
in force, our commission and policy administration expenses, and the interest
rate earned on our investment of premiums. In setting premium rates, we
consider historical claims information, industry statistics and other factors.
If our actual claims experience proves to be less favorable than we assumed and
we are unable to raise our premium rates, our net income may decrease. We
generally cannot raise our premiums in any state unless we first obtain the
approval of the insurance regulator in that state. We review the adequacy of
our accident and health premium rates regularly and file rate increases on our
products when we believe permitted premium rates are too low. When determining
whether to approve or disapprove our rate increase filings, the various state
insurance departments take into consideration our actual claims experience
compared to expected claims experience, policy persistency (which means the
percentage of policies that are in-force at certain intervals from the issue
date compared to the total amount originally issued), investment income and
medical cost inflation. If the regulators do not believe these factors warrant
a rate increase, it is possible that we will not be able to
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obtain approval for
premium rate increases from currently pending requests or requests filed in the
future. If we are unable to raise our premium rates because we fail to obtain
approval for rate increases in one or more states, our net income may decrease.
If we are successful in obtaining regulatory approval to raise premium rates,
the increased premium rates may reduce the volume of our new sales and cause
existing policyholders to let their policies lapse. This would reduce our
premium income in future periods. Increased lapse rates also could require us
to expense all or a portion of the deferred policy costs relating to lapsed
policies in the period in which those policies lapse, reducing our net income
in that period.
We hold reserves
for expected claims, which are estimated, and these estimates involve an
extensive degree of judgment; if actual claims exceed reserve estimates, our
results could be materially adversely affected.
Our benefits incurred expense includes estimates of
IBNR. We, together with our internal and consulting actuaries, estimate our
claim 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 assumed in the estimation process, and those
differences could be material. Due to the uncertainties associated with the
factors used in these assumptions, the actual amount of benefit expense that we
incur may be materially more or less than the amount of IBNR originally
estimated, and materially different amounts could be reported in our financial
statements for a particular period under different conditions or using
different assumptions. We make adjustments, if necessary, to benefits incurred
expense when the criteria used to determine IBNR change and when we ultimately
determine actual claim costs. If our estimates of IBNR are inadequate in the
future, our reported results of operations will be adversely affected. 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.
Our reserves for
future insurance policy benefits and claims may prove to be inadequate,
requiring us to increase liabilities and resulting in reduced net income and
shareholders equity.
We calculate and maintain reserves for the estimated
future payment of claims to our insurance policyholders using the same
actuarial assumptions that we use to set our premiums. For our accident and
health insurance business, we establish active life reserves for expected
future policy benefits, plus a liability for due and unpaid claims, claims in
the course of settlement, and incurred but not reported claims. Many factors
can affect these reserves and liabilities, such as economic and social
conditions, inflation, hospital and medical costs, changes in doctrines of
legal liability and extra-contractual damage awards. Therefore, we necessarily
base our reserves and liabilities on extensive estimates, assumptions and prior
years statistics. When we acquire other insurance companies or blocks of
insurance, our assessment of the adequacy of acquired policy liabilities is
subject to similar estimates and assumptions. Establishing reserves involves
inherent uncertainties, and it is possible that actual claims could materially
exceed our reserves and have a material adverse effect on our results of
operations and financial condition. Our net income depends significantly upon
the extent to which our actual claims experience is consistent with the
assumptions we used in setting our reserves and pricing our policies. If our
assumptions with respect to future claims are incorrect, and our reserves are
insufficient to cover our actual losses and expenses, we would be required to
increase our liabilities resulting in reduced net income, statutory surplus and
shareholders equity.
The availability of
reinsurance on acceptable terms and the financial stability of our reinsurers
could impact our ability to manage risk and increase the volume of insurance
that we sell.
We utilize reinsurance agreements with larger,
financially sound and highly-rated reinsurers to mitigate insurance risks that
we underwrite. We enter into reinsurance arrangements with unaffiliated
reinsurance companies to limit our exposure on individual claims and to limit
or eliminate risk on our non-core or under-performing blocks of business. As of
June 30, 2007, we ceded to reinsurers approximately 13% of our gross annualized
insurance premium in force, excluding the State of Connecticut employee business,
which is 100% ceded to PharmaCare Re. Reinsurance arrangements leave us exposed
to two risks: credit risk and replacement risk. Credit risk exists because
reinsurance does not relieve us of our direct liability to our insureds for the
portion of the risks ceded to reinsurers. We are exposed to the risk of a
reinsurers failure to pay in full and in a timely manner the claims we make
against them in accordance with the terms of our reinsurance agreements, which
could expose our insurance company subsidiaries to liabilities in excess of
their reserves and surplus and could expose them to insolvency proceedings. The
failure of a reinsurer to make timely claims payments to us could materially
and adversely affect our results of operations and financial condition and our
ability to make payments to our policyholders. Replacement risk exists because
a reinsurer may cancel its participation on new business issued on advance
notice. As a result, we would need to find reinsurance from another source to
support our level of new business. The amount and cost of reinsurance available
to us is subject, in large part, to prevailing market conditions beyond our
control. Because our current reinsurance agreements are non-cancelable for
business in force, non-renewal or cancellation of a reinsurance arrangement
affects only new business and the reinsurer remains liable on business
reinsured prior to non-renewal or cancellation. In the event that current
reinsurers cancel their participation on new business, we would seek to replace
them, possibly at higher rates. If we are not able to reinsure our life
insurance products on acceptable terms, we would consider limiting the amount
of this new business we issue. A failure to obtain reinsurance on acceptable
terms would allow us to underwrite new business only to the extent that we are
willing and able to bear the exposure to the new business on our own.
We may experience
future lapsation in our Medicare Supplement business, requiring faster
amortization of the deferred acquisition costs.
We experienced higher than expected lapsation in our
Medicare Supplement business beginning in the third quarter of 2005, which
continued through the second quarter of 2007. We believe that there are a
number of factors contributing to the lapsation, including competitive pressure
from other Medicare Supplement companies and Medicare Advantage products, as
well as the
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departure of some of our
sales managers. This excess lapsation required us to accelerate the
amortization of the deferred acquisition cost and present value of future
profits assets associated with the business that lapsed. We cannot give
assurances that lapsation of our Medicare Supplement business will decline from
the levels experienced from 2005 to 2007, requiring faster amortization of the
deferred costs.
We may experience
higher than expected loss ratios in our Medicare Supplement business, which
could materially adversely affect our results of operations.
We may experience higher than expected loss ratios on
our Medicare Supplement business. In the past, as a result of higher than
anticipated Part B costs, relating to outpatient doctors, and skilled nursing
facility incidence, we did not see our historical pattern of seasonal reduction
in loss ratios in the latter part of the year. We actively seek to obtain
appropriate rate action in an effort to reverse the trend in these numbers;
however, we can make no assurances that future rate increases will be obtained,
or if obtained, will be sufficient. We also cannot give assurance that our
Medicare Supplement loss ratio will not continue to increase beyond what we
currently anticipate.
We may not be able
to compete successfully if we cannot recruit and retain insurance agents, which
could materially adversely affect our business
and ability to compete.
We distribute our products principally through career
agents and independent agents who we recruit and train to market and sell our
products. We also engage managing general agents from time to time to recruit
agents and develop networks of agents in various states. We compete with other
insurance companies for productive agents, primarily on the basis of our
financial position, support services, compensation and product features. It can
be difficult to successfully compete for productive agents with larger
insurance companies that have higher financial strength ratings than we do. Our
business and ability to compete will suffer if we are unable to recruit and
retain insurance agents or if we lose the services provided by our managing
general agents.
We may be required
to refund or reduce premiums if our premium rates are determined to be too
high.
Insurance regulators require that we maintain minimum
statutory loss ratios on some of the insurance products that we sell. We must
therefore pay out, on average, a specified minimum percentage of premiums as
benefits to policyholders. State regulations also mandate the manner in which
insurance companies may compute loss ratios and the manner in which compliance
is measured and enforced. If our insurance products are not in compliance with
state mandated minimum loss ratios, state regulators may require us to refund
or reduce premiums.
We have stopped
selling annuities and long term care insurance and the premiums that we charge
for the long term care policies that remain in force may not be adequate to
cover the claims expenses that we incur.
We have concluded that the sale of long term care
insurance and annuities does not fit within our strategic or financial goals.
We began to curtail the sale of new long-term care business in 2003, and
stopped all new sales at the end of 2004. As of June 30, 2007, approximately,
$36.2 million of annualized premium remains in force, of which we retain approximately
$24.1 million. The overall block of business continues to generate losses; a
portion of the losses we have incurred relates to a specific block of Florida
home health care business that we stopped selling in 1999. We stopped selling
new annuity business in 2006. There can be no assurance that current premiums
we charge will be adequate to cover the claims expenses that we will incur in
the future. There is also no assurance that rate increases that we may seek
will be approved by the applicable state regulators or, if approved, will be
adequate to fully mitigate adverse loss experience.
A reduction in the
number of members in our health plans could adversely affect our results of
operations.
A reduction in the number of members in our health plans
could adversely affect our results of operations. The principal factors that
could contribute to the loss of membership are:
competition in
premium or plan benefits from other health care benefit companies;
reductions in
the number of employers offering health care coverage;
competition from
physicians or other provider groups who may elect to form their own health
plans;
reductions in
work force by existing customers;
our increases in
premiums or benefit changes;
our exit from a
market or the termination of a health plan;
negative
publicity and news coverage relating to our company or the managed health care
industry generally; and
catastrophic
events, such as epidemics, natural disasters and man-made catastrophes, and
other unforeseen occurrences.
We have incurred
and may in the future incur significant expenses in connection with the
implementation and expansion of our new Medicare Advantage plans, which could
adversely affect our operating results.
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For the 2007 selling season, we expanded the markets
in which we offer our Medicare Advantage products, including expansion of our
private fee-for-service plans from 15 to 35 states and expansion of our HMO
plans to new markets in Florida, North Texas and Wisconsin. We expect to expand
the number of markets for 2008 as well. In connection with this expansion, we
have incurred expenses to upgrade and improve our infrastructure, technology,
and systems to manage these products, and will in the future incur additional
expenses. In particular, we incurred the following expenses in connection with
the implementation and expansion of our Medicare Advantage program:
hiring and
training of personnel to establish and manage systems, operations, regulatory
relationships, and materials;
systems
development and upgrade costs, including hardware, software and development
resources;
marketing and
sales;
enrolling new
members;
developing and
distributing member materials such as ID cards and member handbooks; and
handling sales
inquiry and customer service calls.
There can be no assurance that we will recoup such
expenditures or that they will result in profitable operations, currently, or
in the future.
Our stock price and
trading volume may be volatile, which could result in a decrease in the price
of our common stock.
From time to
time, the price and trading volume of our common stock may experience periods
of significant volatility. Company-specific issues and developments generally
in the health care and insurance industries, the regulatory environment and the
capital markets may cause this volatility. The principal events and factors
that we have identified that may cause our stock price and trading volume to
fluctuate are:
variations in
our operating results;
changes in the
markets expectations about our future operating results;
changes in
financial estimates and recommendations by securities analysts concerning our
company or the health care or insurance industries generally;
operating and
stock price performance of other companies that investors may deem comparable;
news reports
relating to trends in our markets;
changes in the
laws and regulations affecting our business;
acquisitions and
financings by us or others in our industry; and
sales of
substantial amounts of our common stock by our directors and executive officers
or principal shareholders, or the perception that these sales could occur.
If we are unable to
maintain 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.
Because of our status as a public company, 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. These
control systems relate to our corporate governance, corporate control, internal
audit, disclosure controls and procedures, and financial reporting and
accounting systems. Our disclosure
controls and procedures and our internal control over financial reporting may
not prevent or detect all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. 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. Further,
because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that misstatements due to error or
fraud will not occur or that all control issues and instances of fraud, if any,
within 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 or mistake. Controls can also be circumvented
by the individual acts of some persons or by collusion of two or more people.
The design of any system of controls is based in part on 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.
Projections of any evaluation of controls effectiveness to future periods are
subject to risks. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with policies or procedures.
If we are unable to timely identify, implement, and
conclude that we have effective internal controls over financial reporting or
if our
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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 material weaknesses, significant deficiencies or other issues with
these controls that could also result in adverse investor reaction. These
results may also subject us to adverse regulatory consequences.
State insurance laws
and anti-takeover provisions in our organizational documents could make an
acquisition of us more difficult and may prevent attempts by our shareholders
to replace or remove our current management.
Provisions of
state insurance laws, the business corporation law of the State of New York,
where we are incorporated, and our certificate of incorporation and bylaws, as
well as the percentage of our common stock owned by our management, directors
and private equity investors, including the equity investors, may delay or
prevent an acquisition of us or a change in our management or similar change in
control transaction, including transactions in which shareholders might
otherwise receive a premium for their shares over then current prices or that
shareholders may deem to be in their best interests. In addition, these
provisions may frustrate or prevent any attempts by our shareholders to replace
or remove our current management by making it more difficult for shareholders
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 shareholders to replace current members
of our management team.
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