The following selected consolidated financial data should be read in connection with the financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Form 10-K. Selected financial data as of and for each of the years in the five-year period ended December 31, 2004 are derived from our consolidated financial statements, which have been audited by KPMG, LLP, independent registered public accounting firm. All share and per share amounts included in the following consolidated financial data have been retroactively adjusted to reflect the two-for-one stock split effective January 18, 2005.
In 2004, we increased our total revenues by 12.4% over 2003. Total membership increased by 79,000 members, or 9.2%, to 936,000 members as of December 2004. Our 2004 revenue growth came from a number of factors including:
We successfully insourced our behavioral health benefits servicing eligible members in four states and the District of Columbia. We believe this strategy optimizes member health status, and reinforces our mission to coordinate our members’ physical and behavioral health and positions us well for future growth in existing states.
Our 2004 same-store premium revenues increased 11.2% over 2003 from expansion in existing service areas and new markets.
Selling, general and administrative expenses (SG&A) were 10.5% of total revenues for the year ended December 31, 2004 compared to 11.5% in 2003. This improvement is a result of a reduction in overall SG&A dollars, excluding the effect of premium tax, and an increased leverage of premium revenue due to favorable rate increases.
On September 14, 2004, we were informed that we were a successful bidder in a request for proposal from the State of Indiana for expansion of its managed care program in 2005. Because of limited expansion opportunities and provider network restrictions, we evaluated our market entry options and decided not to enter the market at this time.
In April 2004, the Maryland Legislature enacted a budget for the 2005 fiscal year beginning July 1, 2004 that included a provision to reduce the premium paid to managed care organizations that did not meet certain HEDIS scores and whose medical loss ratio was below 84% for the calendar year ended December 31, 2002. In May 2004, the Maryland Secretary of Health and Mental Hygiene, in consultation with Maryland’s legislative leadership, determined our premium recoupment to be $846,000. A liability for the recoupment was recorded with a corresponding charge to premium revenue during the year ended December 31, 2004. Additionally, the Legislature directed that the Department of Health and Mental Hygiene complete a study by September 2004 on the relevance of the medical loss ratio threshold as an indicator of quality. The results of this, which were released in October 2004, did not directly address what would happen in the future if a managed care organization reported a medical loss ratio below 84%. As a result, we believe the Maryland Legislature could enact similar legislation in 2005 as part of its fiscal year 2006 budget, requiring premium recoupment. We have recorded a reduction in premium in our financial statements of our best estimate of the outcome of this issue as of the year ended December 31, 2004. It is possible that the Maryland Legislature in 2006, as part of its fiscal year 2007 budget, could enact similar legislation relating to the year ended December 31, 2004. However, at this time we are unable to predict the regulatory, economic or political climate that might exist at that time. Accordingly, we have not recorded any liability for the twelve months ended December 31, 2004. However, if the Maryland Legislature were to enact legislation in April 2006 consistent with the legislation passed in April 2004 and we failed to meet the required quality measures, we could have a recoupment obligation for that period commencing on July 1, 2006 ranging from zero to approximately $757,000 with respect to the premium revenue for the twelve month period ended December 31, 2004.
In the fourth quarter of 2003, our Florida health plan implemented medical review procedures designed to reduce the incidence of inappropriate authorizations of speech therapy and occupational therapy services. In February of 2004, the health plan was informed by the applicable regulatory agency, Agency for Health Care Administration (AHCA), that the medical review procedures it had implemented were not compliant with the Medicaid contract and the state’s therapy services handbook. We were directed to reprocess and pay all denied
claims and to file a corrective action plan. Our Florida health plan disputed AHCA’s assessment of its medical review procedures. AHCA rejected the health plan’s corrective action plan and we appealed their decision. On January 18, 2005, the Florida health plan reached an agreement with AHCA to settle the issues relating to speech therapy and occupational therapy services. The settlement did not have a material impact on the fourth quarter results of operations.
We generate revenues primarily from premiums we receive from the states in which we operate to arrange for health benefit services for our members. We generally receive premiums in advance of arranging for services, and recognize premium revenue during the period in which we are obligated to provide services to our members. A fixed premium per member per month is paid to us to arrange for healthcare benefit services for our members pursuant to our contracts in each of our markets. These premium payments are based upon eligibility determined by the state governments with which we have contracted. Errors in this eligibility determination on which we rely can result in positive and negative premium adjustments to the extent this information is adjusted by the state. In all of our states, except Florida, we are eligible to receive supplemental payments for newborn obstetric deliveries. Each state contract is specific as to what is required before payments are generated. Upon delivery of a newborn, each state is notified according to our contract. Revenue is recognized in the period that the delivery occurs and the related services are provided to our member based on our authorization system for these services. Additionally, in some states we receive supplemental payments for certain services such as high cost drugs and early childhood prevention screenings. Any amounts that have not been received from the state by the end of the period are recorded on our balance sheet as premium receivables. We also generate income from investments.
We have used the same methodology for estimating our medical expenses and medical liabilities since our inception, and have refined our assumptions to take into account our maturing claims, product and market experience. As medical utilization patterns and cost trends change from year-to-year, our underlying claims payments reflect the variations in experience. Our estimates are revised based upon actual claims payments using
Monthly, we estimate our IBNR based on a number of factors, including prior claims experience and authorization data. Authorization data is information captured in our medical management system, which identifies services requested by providers or members. The medical cost related to these authorizations is estimated by pricing the approved services using contractual or historical amounts adjusted for known variables such as historical claims trends. These estimated costs are included as a component of IBNR in the more current months. As part of this review, we also consider the costs to process medical claims, and estimates of amounts to cover uncertainties related to fluctuations in claims payment patterns, membership, products and authorization trends. These estimates are adjusted as more information becomes available and any adjustments are included in current operations. We utilize the services of independent actuarial consultants, who are contracted to review our estimates quarterly. Judgments are made based on knowledge and experience about past and current events. There is a likelihood that actual results could be materially different if different assumptions or conditions prevail.
Also included in claims payable are estimates for provider settlements due to clarification of contract terms, out-of-network reimbursement and claims payment differences, as well as amounts due to or from contracted providers under risk-sharing arrangements.
The following table shows the components of the change in medical claims payable for the years ended December 31, 2004, 2003 and 2002 (in thousands):
The Company’s methodology includes adding a factor to compensate for normal claim uncertainty. The more precisely we have been able to predict claims patterns, the lower the required factor for uncertainty as a percentage of our medical liability. Due to the changing mix of members, products and markets, this factor is a necessary component of our medical liabilities. While our prior year development historically has been favorable, there is no guarantee this will continue and the factor for uncertainty mitigates the risk of emerging claims experience that is different from historical patterns. The health benefits expenses incurred during the period related to prior years relate almost entirely to revisions in estimates for the immediately preceding year. The application of our methodology has resulted in reversals of estimated incurred claims related to prior years in each of the years in the three-year period ended December 31, 2004. The resulting impact on operations is a function of the variation of the change in estimate from year-to-year. Included above was the impact on earnings of the change in our factor for uncertainty of a favorable development of $1.5 million in 2004, an unfavorable development of $3.5 million in 2003 and a favorable development of $4.3 million in 2002.
Changes in estimates are primarily the result of obtaining more complete claims information that directly correlates with the claims and provider reimbursement trends. Since our estimates are based upon the blended per-member per-month claims experience, changes cannot typically be explained by any single factor, but are the result of a number of interrelated variables, all influencing the resulting experience. These variables include fluctuations in claims payment patterns, changes in membership levels, number and mix of products, benefit structure, severity of illness and authorization trends. We believe there will be less volatility as we increase in size and gain more maturity in our markets.
We believe that the amount of claims payable is adequate to cover our ultimate liability for unpaid claims as of December 31, 2004; however, actual claim payments and other items may differ from established estimates. Assuming a hypothetical 1% difference between our December 31, 2004 estimates of claims payable and actual claims payable, net income for the year ended December 31, 2004 would increase or decrease by approximately $1.5 million and diluted earnings per share would increase or decrease by approximately $0.03 per share.
employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Proforma disclosure is no longer an alternative.
The following table sets forth selected operating ratios for the years ended December 31, 2004, 2003 and 2002. All ratios, with the exception of the health benefits ratio, are shown as a percentage of total revenues.
The following table sets forth the approximate number of our members in each of our service areas for the periods presented.
Income tax expense for 2004 was $55.2 million with an effective tax rate of 39.1% as compared to the $46.6 million for 2003 with an effective tax rate of 40.9%. The decrease in the effective tax rate is primarily attributable to a decrease in expenses that are not deductible for tax purposes, an increase in investments in tax advantaged securities and the resolution of potential tax issues from a prior year.
Premium revenue for the year ended December 31, 2003 increased $462.9 million, or 40.2%, from $1,152.6 million in 2002. The increase was primarily due to the acquisition of PHP (193,000 members) and St. Augustine (26,000 members), as well as internal growth in overall membership. Total membership increased 45.0% to 857,000 as of December 31, 2003 from 591,000 as of December 31, 2002.
SG&A increased $53.5 million to $186.9 million for the year ended December 31, 2003 compared to $133.4 million in 2002. The increase in SG&A was primarily due to an increase in wages and related expenses for additional staff to support our increased membership, expenses related to implementation of the HIPAA
guidelines, as well as expenses related to market development activities. Our SG&A ratio to revenue was 11.5% for both the years ended December 31, 2003 and 2002.
Interest expense was $1.9 million and $0.8 million for the years ended December 31, 2003 and 2002, respectively. The increase primarily related to increased average borrowings under our revolving credit facility to partially finance the PHP acquisition. On October 21, 2003, we used a portion of the net proceeds from our October 16, 2003 public offering to repay the outstanding balance under our revolving credit facility.
Net income for 2003 rose $20.3 million to $67.3 million, or $1.48 per diluted share, compared to $47.0 million, or $1.10 per diluted share in 2002. Diluted earnings per share rose 34.5% as compared to an increase in net income of 43.2%, due to the increase in shares outstanding primarily resulting from the issuance of 6,325,000 shares from our October 16, 2003 public offering.
a change of $48.9 million in unearned revenue due to the early receipt of premium revenue received for two states in 2003 versus one state in 2004 and 2002;
an increase of $9.7 million in the change of accounts payable, accrued and other due to an increase in premium tax payable and the accrual of a potential recoupment of premium in Maryland;
a decrease in the reduction of prepaid expenses and other current assets of $5.2 million due to the accrual of an experience rebate receivable in 2003 that remains in 2004; and
The following table summarizes our material contractual obligations, including both on- and off-balance sheet arrangements, and our commitments at December 31, 2004 (in thousands):
Lease Guarantee. In connection with our acquisition of PHP, we agreed to guarantee a certain lease for office space operated by the former management of PHP. The lease term ends on March 31, 2005.
While we currently believe our strategies to mitigate healthcare cost inflation will continue to be successful, competitive pressures, new healthcare and pharmaceutical product introductions, demands from healthcare providers and customers, applicable regulations or other factors may affect our ability to control the impact of healthcare cost increases.
Our off-balance sheet arrangements at December 31, 2004 include future minimum rental commitments of $57.0 million and a lease guarantee of $99,000, both of which are disclosed in Note 11(c) to the consolidated financial statements. We have no investments, loans or any other known contractual arrangements with special-purpose entities, variable interest entities or financial partnerships.
Effective January 1, 2003, we completed our acquisition of PHP Holdings, Inc. and its subsidiary, Physicians Healthcare Plans, Inc. The escrow deposit for pending acquisition and related costs of $124,133 was paid in 2003 and, as a result, we recorded the estimated fair values of the assets acquired and liabilities assumed (see note 5(c)).
During 1995, we incorporated wholly-owned subsidiaries in New Jersey, Illinois and Texas to develop, own and operate HMOs in those states. During 1996, we began enrolling Medicaid members in HMOs: AMERIGROUP New Jersey, Inc., AMERIGROUP Illinois, Inc. and AMERIGROUP Texas, Inc. During 1999, we incorporated a wholly-owned subsidiary in Delaware, AMERIGROUP Maryland, Inc., a Managed Care Organization, to develop, own and operate an MCO in Maryland and an HMO in the District of Columbia. Effective January 1, 2003, AMERIGROUP Maryland Inc., a Managed Care Organization, changed its domicile of incorporation to the District of Columbia. During 2001, we incorporated a wholly-owned subsidiary in Florida, AMERIGROUP Florida, Inc., an HMO, to develop, own and operate HMOs in Florida. Effective January 1, 2003, AMERIGROUP Corporation acquired PHP Holdings, Inc. and its subsidiary, Physicians Health Plans, Inc., (PHP) and merged it with AMERIGROUP Florida, Inc. During 2004, we incorporated a wholly-owned subsidiary in New York, AMERIGROUP Acquisition Corp., to effect the stock acquisition of CarePlus, LLC (CarePlus). Effective January 1, 2005, AMERIGROUP Corporation acquired CarePlus and merged it with AMERIGROUP Acquisition Corp. (note 14).
The consolidated financial statements include the financial statements of AMERIGROUP Corporation and our five wholly-owned subsidiaries: AMERIGROUP Florida, Inc., AMERIGROUP Illinois, Inc., AMERIGROUP New Jersey, Inc. and AMERIGROUP Texas, Inc., each an HMO; AMERIGROUP Maryland, Inc., a Managed Care Organization, and PHP Holdings, Inc., a holding company that is the parent company of AMERIGROUP Florida, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
We consider all highly liquid temporary investments with original maturities of three months or less to be cash equivalents. We had cash equivalents of $2,513 at December 31, 2004 which consist of commercial paper. There were no cash equivalents at December 31, 2003.
Included in short-term and long-term investments are auction rate securities totaling $187,157 and $336,993 at December 31, 2004 and 2003, respectively. Auction rate securities are securities with an underlying component of a long-term debt or an equity instrument. These auction rate securities trade or mature on a shorter term than the underlying instrument based on an auction bid that resets the interest rate of the security. The auction or reset dates occur at intervals that are typically less than three months providing high liquidity to otherwise longer term investments. The Company had previously classified its auction rate securities as held-to-maturity and as cash equivalents, short-term investments or long-term investments based on the period from the purchase date to the first reset date. In 2004, the Company reclassified auction rate securities from cash equivalents to short-term investments because the underlying instruments have maturity dates exceeding 3 months. Additionally, the Company reclassified these securities to available-for-sale as the securities are not held to the maturity date of the underlying security. Prior periods have been reclassified to provide consistent presentation.
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Property and equipment held under leasehold improvements are amortized on the straight-line method over the shorter of the lease term or estimated useful life of the asset. Depreciation and amortization expense on property and equipment was $12,495, $14,389 and $10,769 for the years ended December 31, 2004, 2003 and 2002, respectively. The estimated useful lives are as follows:
Software is stated at cost less accumulated amortization in accordance with Statement of Position 98-1, Accounting for the Costs of Software Developed or Obtained for Internal Use. Software is amortized over its
estimated useful life of three years, using the straight-line method. Amortization expense on software was $4,121, $2,972 and $2,064 for the years ended December 31, 2004, 2003 and 2002, respectively.
SFAS No. 123 for both annual and interim financial statements. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition.
measures as well as medical results. Estimates relating to risk-sharing arrangements are calculated as a percentage, typically 25% to 50%, of the differences between actual results and specified targets of medical expense and may include a sharing of profits in excess of the targeted medical and administrative expenses, typically 7% to 10% of total premiums covered under the contract.
Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. No impairment of goodwill was recorded in 2004, 2003 or 2002.
Basic net income per share has been computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share reflects the potential dilution that could occur assuming the inclusion of dilutive potential common shares and has been computed by dividing net income attributable to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares include all outstanding stock options after applying the treasury stock method to the extent the options are dilutive.
Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates.
Our profitability depends in large part on accurately predicting and effectively managing health benefits expense. We continually review our premium and benefit structure to reflect its underlying claims experience and revised actuarial data; however, several factors could adversely affect the health benefits expense. Certain of these factors, which include changes in healthcare practices, inflation, new technologies, major epidemics, natural disasters and malpractice litigation, are beyond any health plan’s control and could adversely affect our ability to
The carrying amount, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale and held-to-maturity short-term investments are as follows at December 31, 2004 and 2003:
The carrying amount, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale and held-to-maturity long-term investments are as follows at December 31, 2004 and 2003:
Property and equipment, net at December 31, 2004 and 2003 is summarized as follows:
Effective July 1, 2002, we purchased the Medicaid contracts and related assets of Capital Community Health Plan (CCHP) in Washington, D.C. for $6,970, including acquisition costs. The assets purchased consisted primarily of CCHP’s rights to provide managed care services to its Medicaid members. During 2003, we settled on the final purchase price as provided under the asset purchase agreement and reduced goodwill by $963. Goodwill and other intangibles totaling $6,007 included $423 for identifiable intangibles allocated to the membership purchased, all of which is deductible for income tax purposes. Identifiable intangibles with definite useful lives are being amortized based on the timing of related cash flows over eight years.
Established in 1992, PHP served 193,000 Medicaid and SCHIP members at December 31, 2002 in 12 counties, including the metropolitan areas of Orlando, Tampa and Ft. Lauderdale/ Miami. PHP also served Medicare and commercial members which were spun off from PHP prior to December 31, 2002 and not acquired by us.
Of the $124,260 acquisition cost which includes transaction costs, approximately $50,000 was financed through our credit facility with the balance funded through unregulated cash. Goodwill and other intangibles totaling $116,075 includes $8,990 of identifiable intangibles allocated to the rights to membership and a non-compete agreement, none of which is deductible for tax purposes. Intangible assets related to the non-compete agreement and rights to membership are being amortized based on the timing of related cash flows. A portion of the purchase price remains in escrow pending various settlement provisions between us and the former shareholders of PHP Holdings, Inc. During 2004, $512 of the escrow was returned to us as part of an interim settlement provision. Goodwill was reduced accordingly by $512. During 2003, as part of the finalization of our fair value analysis, purchase price adjustments totaling $127 were recorded and reflected as a reduction in goodwill in the period. Further, purchase price adjustments may arise in the future as a result of the settlement provisions.
The following unaudited proforma summary information presents the consolidated income statement information for the twelve month period ended December 31, 2002 as if the PHP transaction had been consummated on January 1, 2002, and does not purport to be indicative of what would have occurred had the acquisition been made at that date or of the results which may occur in the future.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003 are presented below:
To assess the recoverability of deferred tax assets, we consider whether it is more likely than not that deferred tax assets will be realized. In making this determination, we take into account the scheduled reversal of deferred tax liabilities and whether projected future taxable income is sufficient to permit deduction of the deferred tax assets. Based on the level of historical taxable income and projections for future taxable income, we believe it is more likely than not that we will fully realize the benefits of the gross deferred tax assets of $17,897. State net operating loss carryforwards that expire in 2023 and 2024 comprise $1,616 of the gross deferred tax assets.
Pursuant to the Credit Agreement, we must meet certain financial covenants. These financial covenants include meeting certain financial ratios, a limit on annual capital expenditures, and a minimum net worth requirement. Additionally, under the terms of our Credit Agreement, we are limited in the amount of dividends that we may pay to our stockholders without the consent of our lenders.
In 1994, we established the 1994 Stock Plan (1994 Plan), which provides for the granting of either incentive stock options or nonqualified options to purchase shares of our common stock by employees, directors and consultants of the Company for up to 4,199,000 shares of common stock as of December 31, 1999. On February 9, 2000, we increased the number of options available for grant to 4,499,000.
We apply APB Opinion No. 25 and related interpretations in accounting for our stock plans. Accordingly, compensation cost related to stock options issued to employees would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. During 2000, we recorded deferred charges of $1,833, representing the difference between the exercise price and the deemed fair value of our common stock for the options granted in 2000. The deferred compensation has been amortized to expense over the period the options vested, generally four to five years. We recognized $57, $360 and $358 in non-cash compensation expense related to the amortization of deferred compensation during 2004, 2003 and 2002, respectively.
Cash and cash equivalents, premium receivables, prepaid expenses and other current assets, deposits, accounts payable, unearned revenue, accrued payroll and related liabilities, accrued expenses and other current liabilities and claims payable: The carrying amounts approximate fair value because of the short maturity of these items.
We also lease office space under operating leases which expire at various dates through 2019. Future minimum payments by year and in the aggregate under all non-cancelable leases are as follows at December 31, 2004:
During 2003, we added a long-term cash incentive award designed to retain certain key executives. Each eligible participant is assigned a cash target, the payment of which is deferred for three years. The amount of the target is dependent upon the participant’s performance against individual major job objectives in the first year of the program. The target award amount is funded over the three-year period, with the funding being dependent upon the Company meeting its financial goals each year. An executive is eligible for payment of a long-term incentive earned in any one year only if the executive remains employed with the Company and is in good standing at the beginning of the third following year. The expense recorded for the long-term cash incentive awards was $1,754 and $1,326 in 2004 and 2003, respectively. The related liability of $3,051 and $1,326 at December 31, 2004 and 2003, respectively, was included in deferred income taxes and other long-term liabilities.
In 2002, Cleveland A. Tyson, a former employee of AMERIGROUP Illinois, Inc., filed a federal Qui Tam or whistleblower action against our Illinois subsidiary, the United States of America and the State of Illinois, es rel., Cleveland A. Tyson v. AMERIGROUP Illinois, Inc., in the U.S. District Court of the Northern District, Eastern Division, alleging the submission of false claims under the Medicaid program. The United States is not a party to the action. Mr. Tyson’s amended complaint was unsealed and served on AMERIGROUP Illinois, Inc., in June 2003. Mr. Tyson alleges that AMERIGROUP Illinois, Inc. maintained a scheme to discourage or avoid the enrollment of pregnant women and members with special needs. In his suit, Mr. Tyson seeks an unspecified amount of damages and statutory penalties of no less than $5,000 and no more than $11,000 per violation. Mr. Tyson’s complaint does not specify the number of alleged violations. The court denied AMERIGROUP Illinois, Inc.’s motion to dismiss on September 26, 2004. AMERIGROUP Illinois, Inc.’s motion for summary judgment was filed in December 2004. That motion is fully briefed, and is ready for disposition by the court. On February 15, 2005, we received a motion filed by Mr. Tyson on February 10, 2005, seeking permission to amend his complaint and add AMERIGROUP Corporation as a defendant. On February 15, 2005, we also received the motion filed by the State of Illinois on February 10, 2005, seeking court approval to intervene on Mr. Tyson’s behalf. On March 2, 2005, the Court granted the State’s motion to intervene and denied Mr. Tyson’s motion to amend to add AMERIGROUP Corporation as a defendant. On March 3, 2005, AMERIGROUP Illinois, Inc. filed a motion to dismiss for lack of subject matter jurisdiction, based upon a recent opinion of the United States Court of Appeals for the District of Columbia Circuit.
At this time, discovery is ongoing. Although it is possible that the outcome of this case will not be favorable to us, no range of liability can be estimated. Accordingly, we have not recorded any liability at December 31, 2004. There can be no assurance that the ultimate outcome of this matter will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.
In April 2004, the Maryland Legislature enacted a budget for the 2005 fiscal year beginning July 1, 2004 that included a provision to reduce the premium paid to managed care organizations that did not meet certain HEDIS
Effective January 1, 2005, we completed our stock acquisition of CarePlus pursuant to the terms of the merger agreement entered into on October 26, 2004 for $126,766, including acquisition costs. Additional consideration may be paid contingent upon the achievement of specific criteria or earnings thresholds during 2005 and 2006. If the criteria are met and additional payments become due, they will be accounted for as an additional cost of the acquisition. The assets acquired and liabilities assumed consist primarily of cash, receivables, property and equipment, claims payable, accounts payable and accrued expenses.
At December 31, 2004, CarePlus served approximately 115,000 New York State Medicaid, Child Health Plus and Family Health Plus members in New York City (Brooklyn, Manhattan, Queens and Staten Island) and Putman County. CarePlus is also authorized to offer a managed long-term care program in New York City subject to final regulatory approval and other considerations.
This acquisition was accounted for under the purchase method of accounting and was funded through unregulated cash. Goodwill and other intangibles total $106,722 which includes $13,980 of specifically identifiable intangibles allocated to the rights to membership, the provider network, non-compete agreements and trademarks. Intangible assets related to the rights to membership are being amortized based on the timing of the related cash flows with an expected amortization of ten years. Intangible assets related to the provider network are being amortized over ten years. Intangible assets related to the trademarks and non-compete agreements are being amortized over 12 to 36 months. We have not yet finalized our fair value analysis. Therefore, the allocation of the acquisition costs is subject to adjustment.
In our opinion, the financial statement schedule, Schedule II - Schedule of Valuation and Qualifying Accounts, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.