We lease office space in a number of locations for our business operations. We believe our facilities are adequate for our present and currently anticipated needs. The following are our significant leased offices:
The following tables present selected historical financial data and other information for the Company. We derived the selected historical statement of income, cash flow, and balance sheet data for each of the five years ended December 31, 2010 from the audited consolidated financial statements of the Company.
The selected consolidated financial data and other information set forth below should be read in conjunction with the audited consolidated financial statements and notes included in this report and “
Net income increased $60.6 million, or 45.4%, in 2010 to $194.2 million compared to 2009.
Our diluted earnings per share, or EPS, was $3.39 for 2010 compared with $2.41 for 2009.
Medicare (including Medicare Advantage and PDP) premium revenue for 2010 was approximately $3.1 billion; an increase of 17.9% over 2009 results.
Medicare Advantage (including MA-PD) premiums were $2.6 billion for 2010, reflecting an increase of 14.0% over the prior year. Stand-alone PDP premiums increased $147.5 million, or 45.3%, to $472.9 million in 2010.
Total cash flow from operations was $221.1 million, or 1.1 times net income for 2010, compared with $170.0 million, or 1.3 times net income for 2009.
HealthSpring’s acquisition of Bravo Health was funded by borrowings of approximately $480.0 million under a new credit facility and the use of cash on hand. The Company’s new credit facility is further discussed under “- Indebtedness” below.
Bravo Health was selected for a Risk Adjustment Data Validation Audit (“RADV Audit”) by the United States Department of Health & Human Services, Office of Inspector General (OIG) in connection with risk-adjusted payments received by one of Bravo Health’s Medicare Advantage plans for contract year 2007. In June 2010, the OIG issued a draft report of its findings. The draft report included a recommendation that approximately $20.2 million of calculated premium overpayments be refunded to CMS. OIG’s purported premium overpayment was calculated by extrapolating the results of its audit sample and findings across the specific Medicare Advantage plan’s entire population for the 2007 contract year. Bravo Health issued a written response to the draft report and is vigorously challenging the OIG’s audit process, methodology, and preliminary findings and recommendations. No final report has been issued by OIG. OIG has no authority to recoup overpayments. Accordingly, it will be within the authority of CMS to determine what actions, if any, to take in response to any OIG audit findings and recommendations. Because of the uncertainties associated with (i) the validity of the OIG’s audit process and methods, (ii) the OIG’s response to Bravo Health’s challenges, (iii) the status of OIG’s final report, and (iv) the probable actions of CMS based on the OIG’s recommendations, among other uncertainties, the Company is currently unable to reasonably estimate the probability of CMS’s assertion of a claim for recoupment of overpaid premiums or the amount of loss, or range of potential losses, associated with the resolution of the OIG audit. Accordingly, the Company has not made an accrual related thereto at December 31, 2010.
General. Our revenue consists primarily of (i) premium revenue we generate from our Medicare line of business, (ii) fee revenue we receive for management and administrative services provided to independent physician associations, health plans, and self-insured employers, and (iii) investment income.
Premium Revenue. Our Medicare contracts entitle us to premium payments from CMS on behalf of each Medicare beneficiary enrolled in our plans, generally on a per member per month, or PMPM, basis. For our Medicare plans, we recognize premium revenue during the month in which the Company is obligated to provide services to an enrolled member. Premiums we receive in advance of that date are recorded as deferred revenue.
Because of the Part D product benefit design, the Company incurs prescription drug costs unevenly throughout the year, resulting in fluctuations in quarterly MA-PD and PDP earnings. As a result of product features such as co-payments and deductibles, the coverage gap, risk corridors, and reinsurance, we generally expect to incur a disproportionate amount of prescription drug costs in the first half of the year. As a result, our Part D-related earnings are generally expected to increase in the second half of the year as compared to the first half of the year.
Our largest expense is the cost of medical services we arrange for our members, or medical expense. Medical expense for our Medicare plans primarily consists of payments to physicians, hospitals, pharmacies, and other health care providers for services and products provided to our Medicare members. We generally pay our providers on one of three bases: (1) risk-sharing arrangements, whereby we advance a capitated PMPM amount and share the risk of the medical costs of our members with the provider based on actual experience as measured against pre-determined sharing ratios; (2) capitated arrangements, generally on a fixed PMPM payment basis, whereby the provider generally assumes some or all of the medical expense risk; and (3) fee-for-service contracts based on negotiated fee schedules. Pharmacy costs are recognized as incurred and represent payments for members’ prescription drug benefits, net of rebates from drug manufacturers, if any. Rebates are recognized when earned, according to the contractual arrangements with the respective manufacturers.
One of our primary tools for managing our business and measuring our profitability is our medical loss ratio, or MLR, the ratio of our medical expenses to the premiums we receive. Small changes in the ratio of our medical expenses relative to the premium we receive can result in significant changes in our financial results. Changes in the MLR from period to period result from, among other things, changes in Medicare funding, changes in benefits offered by our plans, our ability to manage utilization and medical expense, changes in accounting estimates related to incurred but not reported claims, or IBNR, and our Part-D-related earnings relative to CMS’ risk corridors. We use MLRs both to monitor our management of medical expenses and to make various business decisions, including what plans or benefits to offer, what geographic areas to enter or exit, and our selection of healthcare providers. We analyze and evaluate our Medicare Advantage and PDP MLRs separately.
In connection with CMS’s continuing statutory obligation to review risk score coding practices by Medicare Advantage plans, CMS is conducting regular audits of Medicare Advantage plans for compliance by the plans and their providers with proper coding practices (sometimes referred to as “Risk Adjustment Data Validation Audits” or “RADV Audits”). The Company’s Tennessee Medicare Advantage plan was selected by CMS for a RADV Audit of the 2006 risk adjustment data used to determine 2007 premium rates. In late 2009, the Company’s Tennessee plan received from CMS the RADV Audit member sample, which CMS will use to calculate a payment error rate for 2007 Tennessee plan premiums. In February 2010, the Company responded to the RADV Audit request by retrieving and submitting medical records supporting member sample diagnoses codes and risk scores and, where appropriate, provider attestations. CMS has not indicated a schedule for processing or otherwise responding to the Company’s submissions.
Medicare Advantage. Our Medicare Advantage membership increased by 61.0% to 304,604 members at December 31, 2010 from 189,241 members at December 31, 2009, with membership gains in all of our health plans except Alabama and Texas (not including new Texas Bravo Health membership). Our Medicare Advantage net membership gain of 115,363 members since December 31, 2009 reflects the inclusion of members in Bravo Health health plans (105,455 members as of the acquisition date) and better retention rates in HealthSpring plans resulting from, we believe, the relative attractiveness of our various plans’ benefits. The increase in membership from December 31, 2008 to December 31, 2009 was primarily the result of organic growth in our markets through increased penetration in existing service areas and to a lesser extent our expansion into new service areas. Medicare Advantage (including MA-PD) membership as of February 1, 2011 was approximately 329,000, reflecting increases across all of our markets.
PDP. PDP membership increased by 131.4% to 724,394 members at December 31, 2010 from 313,045 at December 31, 2009, primarily as a result of the inclusion of members in Bravo Health’s PDP (300,969 members as of the acquisition date) and the auto-assignment of members in HealthSpring’s PDP at the beginning of the year. Our PDPs, including the Bravo Health PDP, are not actively marketed as we primarily rely on CMS auto-assignments of dual-eligible beneficiaries for membership. PDP membership as of February 1, 2011 was approximately 832,000 and consisted of members in 30 of the 34 CMS PDP regions.
Final CMS settlement amounts for any given plan year should not be considered indicative of amounts to be received for any future plan year.
Results for the year ended December 31, 2010 include the results of Bravo Health from November 30, 2010.
Depreciation and amortization expense was $33.3 million in the year ended December 31, 2010 as compared with $30.7 million in 2009, representing an increase of $2.6 million, or 8.4%. The increase in the current year was the result of incremental amortization and depreciation expense associated with the acquisition of Bravo Health on November 30, 2010. As a result of the Bravo Health acquisition, the Company expects increases in depreciation and amortization for 2011 as compared to 2010.
Interest expense was $21.0 million for the year ended December 31, 2010, compared with $15.6 million in 2009. The Company’s interest expense in the 2010 period includes debt extinguishment costs of $7.1 million resulting from the Company’s entering into a new credit facility and terminating its prior credit facility during the first quarter of 2010 and bank fees of $1.7 million incurred in connection with the Company’s entering into its amended and restated credit facility in the fourth quarter of 2010. Net of these costs, interest expense decreased $3.4 million in 2010, reflecting lower average debt amounts outstanding and lower interest rates, offset by an increase in commitment and other bank fees in 2010 compared to 2009. The weighted average effective interest rate incurred on our borrowings during the years ended December 31, 2010 and 2009 was 6.1% and 6.0%, respectively (3.8% and 4.8%, respectively, exclusive of amortization of deferred financing costs and credit facility fees).
The Company expects an increase in interest expense for 2011 as compared to 2010 as a result of its incurring a full year of interest on incremental debt borrowed in November 2010 to fund the Bravo Health acquisition and as a result of increases in interest rates spreads under the Company’s amended credit facilities for 2011 as compared to 2010.
For the twelve months ended December 31, 2010, income tax expense was $115.0 million, reflecting an effective tax rate of 37.2%, as compared with $76.3 million, reflecting an effective tax rate of 36.4%, for 2009. The higher rate in 2010 was the result of a number of factors including transaction expenses that were capitalized for tax purposes as well as a greater concentration of the Company’s profitability in entities taxed at a higher state tax rate.
Total revenue was $2.7 billion for the year ended December 31, 2009 as compared with $2.2 billion in 2008, representing an increase of $0.5 billion, or 21.8%. The components of revenue were as follows:
Investment Income. Investment income was $4.3 million for 2009 as compared to $15.0 million in 2008, reflecting a decrease of $10.7 million, or 71.5%. The decrease is primarily attributable to a decrease in the average yield on invested and cash balances.
PDP. PDP medical expense for the year ended December 31, 2009 increased $33.1 million to $270.9 million, from $237.8 million in 2008. PDP MLR for 2009 was 83.3%, compared to 89.6% in 2008. The decrease in PDP MLR for 2009 was primarily attributable to higher PDP PMPM revenue and higher utilization of generic prescription drugs. PDP medical expense on a PMPM basis increased 2.4% in 2009 as compared to 2008.
Depreciation and amortization expense was $30.7 million in the year ended December 31, 2009 as compared with $28.5 million in 2008, representing an increase of $2.2 million, or 7.6%. The increase in 2009 was the result of incremental amortization expense associated with the acquisition in October 2008 of a Medicare Advantage contract from Valley Baptist Health Plans (“Valley Plans”) operating in the Rio Grande Valley and incremental depreciation on property and equipment additions.
We report our business in three segments: Medicare Advantage, stand-alone PDP, and Corporate. Medicare Advantage (“MA-PD”) consists of Medicare-eligible beneficiaries receiving healthcare benefits, including prescription drugs, through a coordinated care plan qualifying under Part C and Part D of the Medicare Program. Stand-alone PDP consists of Medicare-eligible beneficiaries receiving prescription drug benefits on a stand-alone basis in accordance with Medicare Part D. The Corporate segment consists primarily of corporate expenses not allocated to the other reportable segments. These segment groupings are also consistent with information used by our chief executive officer in making operating decisions.
The results of each segment are measured and evaluated by earnings before interest expense, depreciation and amortization expense, and income taxes (“EBITDA”). We do not allocate certain corporate overhead amounts (classified as SG&A expense) or interest expense to our segments. We evaluate interest expense, income taxes, and asset and liability details on a consolidated basis as these items are managed in a corporate shared service environment and are not the responsibility of segment operating management.
We finance our operations primarily through internally generated funds. We generate cash primarily from premium revenue and our primary use of cash is the payment of medical and SG&A expenses and principal and interest on indebtedness. We also rely on distributions and receipt of management fees from our subsidiaries, most of which are subject to regulatory restrictions. We anticipate that our current level of cash on hand, internally generated cash flows, and borrowings available under our revolving credit facility will be sufficient to fund our anticipated working capital needs, our debt service, and capital expenditures over at least the next 12 months.
During the year ended December 31, 2010, the Company’s financing activities consisted primarily of the receipt of $680.0 million in proceeds from borrowings under our credit agreements, the expenditure of $290.1 million for the repayment of existing long-term debt, $115.9 million of funds withdrawn in excess of funds received from CMS for Medicare Part D claim subsidies for which we do not assume risk, payments of $26.8 million for financing costs associated with the issuance of debt, $14.3 million expended for the repurchase of Company stock, and $12.1 million in proceeds received from the exercise of stock options.
During the year ended December 31, 2008, the Company’s financing activities consisted primarily of $122.4 million of funds withdrawn in excess of funds received from CMS for the benefit of members, $47.2 million expended for the repurchase of Company stock, and $28.2 million for the repayment of long-term debt.
Each of these subsidiaries was in compliance with applicable statutory requirements as of December 31, 2010. Notwithstanding the foregoing, the state departments of insurance can require our regulated insurance subsidiaries to maintain minimum levels of statutory capital in excess of amounts required under the applicable state law if they determine that maintaining additional statutory capital is in the best interest of the Company’s members. Effective December 31, 2010, we merged our Texas HMO into our Texas-domiciled Accident and Health subsidiary.
The Company’s regulated insurance subsidiaries are restricted from making distributions without appropriate regulatory notifications and approvals or to the extent such distributions would put them out of compliance with statutory net worth requirements. At December 31, 2010, $688.4 million of our $771.8 million of cash, cash equivalents, investment securities, and restricted investments were held by our regulated insurance subsidiaries, and subject to these dividend restrictions. Subsidiary contributions from the parent company for 2010, 2009 and 2008 were $10.0 million, $2.5 million and $0, respectively.
$175.0 million of term loan A indebtedness as “Existing Term Loan A” ($166.3 million of which was outstanding prior to the acquisition);
$200.0 million of new term loan B indebtedness maturing in November 2016 (“New Term Loan B” which was funded at the closing).
Maturities of long-term debt under the Restated Credit Agreement are as follows:
The following table sets forth information regarding our contractual obligations as of December 31, 2010:
Interest includes the estimated interest payments under our credit facility assuming no change in the LIBOR rate as of December 31, 2010. Includes the annual commitment fee for the Company’s revolving credit agreement.
Medical expense is recognized in the period in which services are provided and includes an estimate of the cost of medical expense that has been incurred but not yet reported, or IBNR. Medical expense includes claim payments, capitation payments, risk sharing payments and pharmacy costs, net of rebates, as well as estimates of future payments of claims incurred, net of reinsurance. Capitation payments represent monthly contractual fees disbursed to physicians and other providers who are responsible for providing medical care to members. Premiums we pay to reinsurers are reported as medical expense and related reinsurance recoveries are reported as deductions from medical expense.
Medical claims liability includes medical claims reported to the plans but not yet paid as well as an actuarially determined estimate of claims that have been incurred but not yet reported.
The IBNR component of total medical claims liability is based on our historical claims data, current enrollment, health service utilization statistics, and other related information. Estimating IBNR is complex and involves a significant amount of judgment. Accordingly, it represents our most critical accounting estimate. The development of the IBNR includes the use of standard actuarial developmental methodologies, including completion factors and claims trends, which take into account the potential for adverse claims developments, and considers favorable and unfavorable prior period developments. Actual claims payments will differ, however, from our estimates. A worsening or improvement of our claims trend or changes in completion factors from those that we assumed in estimating medical claims liabilities at December 31, 2010 would cause these estimates to change in the near term and such a change could be material.
Adjustments of prior period estimates will result in additional medical costs or, as we have experienced during the last several years, a reduction in medical costs in the period an adjustment was made. As reflected in the table below our reserve models developed favorably in 2010, 2009, and 2008 and the accrued liabilities calculated from the models for each of the periods were more than our ultimate liabilities for unpaid claims.
Amounts incurred related to prior years vary from previously estimated claims liabilities as the claims ultimately are settled. As discussed previously, medical claims liabilities are generally settled and paid within several months of the member receiving service from the provider. Accordingly, the 2010, 2009, and 2008 prior year favorable development relates primarily to fee-for-service claims incurred in previous calendar year. The negative amounts reported in the table above for incurred related to prior periods result from fee-for-service claims estimates being ultimately settled for amounts less than originally anticipated (a favorable development). A positive amount reported for incurred related to prior periods would result from claims estimates being ultimately settled for amounts greater than originally anticipated (an unfavorable development).
Actual claims trends ultimately being lower than original estimates resulting in $8.4 million of favorable development, primarily attributable to lower than anticipated cost increases and utilization in both our Medicare and commercial lines of business;
As reflected in the immediately preceding table, claims estimates at December 31, 2008 ultimately settled during 2009 for $8.8 million (or 0.5% of total 2008 medical expense) less than the amounts originally estimated. This favorable prior period reserve development was primarily as a result of the following factors:
Actual amounts ultimately owed for 2008 services and paid to providers in 2009 under risk-sharing and quality care management initiatives being less than the related liabilities recorded at December 31, 2008 resulting in $2.7 million of favorable development.
Our medical claims liability also considers premium deficiency situations and evaluates the necessity for additional related liabilities. There were no required premium deficiency accruals at December 31, 2010 or December 31, 2009.
We generate revenues primarily from premiums we receive from CMS to provide healthcare benefits to our members. We receive premium payments on a PMPM basis from CMS to provide healthcare benefits to our Medicare members, which premiums are fixed (subject to retroactive risk adjustment) on an annual basis by contracts with CMS. Although the amount we receive from CMS for each member is fixed, the amount varies among Medicare plans according to, among other things, plan benefits, demographics, geographic location, age, gender, and the relative risk score of the member.
Our Medicare premium revenue is subject to periodic adjustment under what is referred to as CMS’s risk adjustment payment methodology based on the health risk of our members. Risk adjustment uses health status indicators to correlate the payments to the health acuity of the member, and consequently establishes incentives for plans to enroll and treat less healthy Medicare beneficiaries. Under the risk adjustment payment methodology, coordinated care plans must capture, collect, and report diagnosis code information to CMS. After reviewing the respective submissions, CMS establishes the payments to Medicare plans generally at the beginning of the calendar year, and then adjusts premium levels on two separate occasions on a retroactive basis. The first retroactive risk premium adjustment for a given fiscal year generally occurs during the third quarter of such fiscal year. This initial settlement represents the updating of risk scores for the current year based on the prior year’s dates of service. CMS then issues a final retroactive risk premium adjustment settlement for that fiscal year in the following year. We estimate and record on a monthly basis both the initial CMS settlement and the final CMS settlement.
Differences (as a percent of total revenue) between estimated final settlement amounts and actual final settlement amounts were notably less significant in 2010 and 2009 as compared to previous years. There can be no assurances, however, that any such differences will not have a material effect on any future quarterly or annual results of operations. The following table illustrates the sensitivity of the final 2010 CMS settlement for 2010 and the impact on premium revenue caused by differences between actual and estimated settlement amounts that management believes are reasonably likely, based on our historical experience and December 31, 2010 data:
Our risk adjustment payments are subject to review and audit by CMS. CMS has announced that it would regularly audit Medicare Advantage plans, primarily targeted based on risk score growth, for compliance by the plans and their providers with proper coding practices (sometimes referred to as “Risk Adjustment Data Validation Audits” or “RADV Audits”). CMS audits can potentially take several years to resolve completely. Any adjustment to premium revenue and the related medical expense for risk-sharing arrangements with providers as a result of such review and audit would be recorded when estimable. There can be no assurance that any retroactive adjustment to previously recorded revenue or expenses will not have a material effect on future results of operations.
Our finite-lived intangible assets primarily relate to acquired Medicare member networks and provider contracts and are amortized over the estimated useful life, based upon the distribution of economic benefits realized from the asset. This sometimes results in an accelerated method of amortization for member networks because the asset tends to dissipate at a more rapid rate in earlier periods. Other than member networks, our finite-lived intangible assets are amortized using the straight-line method. We review finite-lived intangible assets for impairment under our long-lived asset policy.
Goodwill represents the excess of cost over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually. 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, the Company determines the fair value of the reporting unit and compares it to its carrying amount. Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the 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 units in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit’s goodwill. Goodwill exists at seven of our reporting units - Alabama, Bravo Health Insurance Company, Florida, Pennsylvania, Tennessee, Texas-Bravo Health, andTexas-HealthSpring.
We conducted an annual impairment test as of October 1, 2010 and concluded that the carrying value of the reporting units did not exceed their fair value. The estimated fair value of each reporting unit tested exceeded its carrying value by a substantial margin. In addition, no events have occurred subsequent to the 2010 testing date which would indicate any impairment may have occurred.
In December 2010, the FASB provided additional guidance on disclosure of supplementary pro forma information for business combinations. The guidance provided by the FASB resolves uncertainty related to pro forma disclosures by indicating that revenue and earnings of the combined entity should be presented as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. These rules are effective on or after the beginning of the first annual reporting period beginning on or after December 15, 2010; with early adoption permitted. As these rules pertain to disclosure items only, the adoption of such rules will not have an impact on the Company’s consolidated results of operations or financial condition.
In December 2010, the FASB adopted new guidance for testing the impairment of goodwill belonging to reporting units with zero or negative carrying amounts. The new guidance amends the FASB Codification to provide guidance for reporting entities with zero or negative carrying values. The previous guidance is amended to provide that goodwill should be tested on an interim or annual basis if an event occurs, or circumstances exist, that indicate that it is more likely than not that a goodwill impairment exists. Therefore, the trigger for testing relates not to the overall value of the reporting entity, but relates directly to the value of the goodwill. In addition, the new guidance provides that the second step of the test will be applied to such a reporting unit when it is more likely than not that goodwill impairment exists. As the Company does not expect that its reporting units will include zero or negative carrying amounts, it does not expect the adoption of such rules to have an impact on the Company’s consolidated results of operations or financial condition.
We have audited the accompanying consolidated balance sheets of HealthSpring, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2010. In connection with our audits of the consolidated financial statements, we also have audited financial statement Schedule I - Condensed Financial Information of HealthSpring, Inc. (Parent only). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), HealthSpring, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
We have audited HealthSpring, Inc. (the Company’s) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Part II, Item 9A). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
A Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
In our opinion, HealthSpring, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
HealthSpring, Inc, a Delaware corporation (the Company), was organized in October 2004 and began operations in March 2005. The Company is a managed care organization that focuses primarily on Medicare, the federal government sponsored health insurance program primarily for U.S. citizens aged 65 and older, qualifying disabled persons, and persons suffering from end-stage renal disease. Through its health maintenance organization (HMO) and regulated insurance subsidiaries, the Company operates Medicare Advantage plans in Alabama, Delaware, Florida, Georgia, Illinois, Maryland, Mississippi, New Jersey, Pennsylvania, Tennessee, Texas, and the District of Columbia and also offers both national and regional stand-alone Medicare prescription drug plans to persons in 30 of 34 CMS regions.
The Company refers to its Medicare Advantage plans, including plans providing Part D prescription drug benefits, or “MA-PD” plans, as “Medicare Advantage” plans. The Company refers to its stand-alone prescription drug plans as “PDPs.” In addition to standard coverage plans, the Company offers supplemental benefits in excess of the standard coverage.
The Company leases facilities and equipment under non-cancelable operating agreements, which include scheduled increases in minimum rents and renewal provisions at the option of the Company. The lease term used in lease accounting calculations generally begins with the date the Company takes possession of the facility or the equipment and ends on the expiration of the primary lease term or the expiration of any renewal periods that are deemed to be reasonably assured at the inception of the lease. Rent holidays and escalating payment terms are recognized on a straight-line basis over the lease term. For certain facility leases, the Company receives allowances from its landlords for improvement or expansion of its properties. Tenant improvement allowances are recorded as a deferred rent liability and recognized ratably as a reduction to rent expense over the remaining lease term.
The acquisition method of accounting requires companies to assign values to assets and liabilities acquired based upon their fair value. In most instances there is not a readily defined or listed market price for individual assets and liabilities acquired in connection with a business, including intangible assets. The determination of fair value for individual assets and liabilities commonly requires a high degree of estimation. The valuation of intangible assets, in particular, is very subjective. The use of different valuation methods and assumptions could change the amounts allocated to the assets and liabilities acquired, including goodwill and other intangible assets.
The Company conducted its annual impairment test as of October 1, 2010 and concluded that the carrying value of the reporting units as of that date did not exceed their fair value. The estimated fair value of each reporting unit exceeded its carrying value by a substantial margin. In addition, no events have occurred subsequent to the 2010 testing date which would indicate any impairment may have occurred.
Fee revenue primarily includes amounts earned by the Company for management services provided to independent physician associations and health plans. The Company’s management subsidiaries typically generate this fee revenue on one of two bases: (1) as a percentage of revenue collected by the relevant health plan; or (2) as a fixed per member, per month or “PMPM” payment or percentage of revenue for members serviced by the relevant independent physician association. Fee revenue is recognized in the month in which services are provided. In addition, pursuant to certain of the Company’s management agreements with independent physician associations, the Company receives additional fees based on a share of the profits of the independent physician association, which are recognized monthly as either fee revenue or as a reduction to medical expense depending upon whether the profit relates to members of one of the Company’s Medicare Advantage plans.
Net income per common share is measured at two levels: basic net income per common share and diluted net income per common share. Basic net income per common shares is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding after considering the dilution related to stock options and restricted stock.
The Company uses print and other advertising to promote its products. The cost of advertising is expensed as incurred and totaled $23.1 million, $17.5 million and $14.5 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Share-based compensation costs are recognized based on the estimated fair value of the respective equity awards and the period during which an employee is required to provide service in exchange for the award. The Company recognizes share-based compensation costs on a straight-line basis over the requisite service period for the entire award.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance for determining whether an entity is a VIE and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. The guidance requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. The guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures, and eliminates the scope exclusion for qualifying special-purpose entities. The adoption of the new guidance on January 1, 2010 did not impact the Company’s financial statements.
Certain amounts in previously issued financial statements were reclassified to conform to the 2010 presentation. The reclassifications did not change net income or stockholders’ equity.
The purchase price was based upon arms-length negotiations between the Company and Bravo Health and resulted in a premium to the fair value of net assets acquired (including identifiable intangible assets) and, correspondingly, goodwill. Factors considered by the Company in agreeing to the purchase price included the historical and prospective membership, reimbursement rates, earnings, cash flows and growth rates of Bravo Health and the combined companies and the expected cost savings to be realized from combining the operations of the Company and Bravo Health. The amount recorded for goodwill is consistent with the Company’s intentions for the acquisition of Bravo Health. The primary reason for the acquisition of Bravo Health was to enable the Company to solidify its strength in the Medicare Advantage and PDP businesses through expanding its operations and diversifying its geographic presence.
Bravo Health was selected for a Risk Adjustment Data Validation Audit (RADV Audit) by the United States Department of Health & Human Services, Office of Inspector General (OIG) in connection with risk-adjusted payments received by one of Bravo Health’s Medicare Advantage plans for contract year 2007. In June 2010, the OIG issued a draft report of its findings. The draft report included a recommendation that approximately $20.2 million of calculated premium overpayments be refunded to CMS. OIG’s purported premium overpayment was calculated by extrapolating the results of its audit sample and findings across the specific Medicare Advantage plan’s entire population for the 2007 contract year. Bravo Health issued a written response to the draft report and is vigorously challenging the OIG’s audit process, methodology, and preliminary findings and recommendations. No final report has been issued by OIG. OIG has no authority to recoup overpayments. Accordingly, it will be within the authority of CMS to determine what actions, if any, to take in response to any OIG audit findings and recommendations. Because of the uncertainties associated with (i) the validity of the OIG’s audit process and methods, (ii) the OIG’s response to Bravo Health’s challenges, (iii) the status of OIG’s final report, and (iv) the probable actions of CMS based on the OIG’s recommendations, among other uncertainties, the Company is currently unable to reasonably estimate the probability of CMS’s assertion of a claim for recoupment of overpaid premiums or the amount of loss, or range of potential losses, associated with the resolution of the OIG audit. Accordingly, the Company has not made an accrual related thereto at December 31, 2010.
In connection with the acquisition of Bravo Health, the Company established a $55.0 million escrow for purposes of satisfying the post-closing indemnification obligations of the former Bravo Health stockholders, if any, $23.0 million of which will be held for three years following closing with respect to certain specified claims, including the OIG RADV Audit. Consequently, although no assurances can be made, we do not expect the liability resulting from the OIG RADV Audit, if any, to have a material adverse effect on the results of operations, cash flows, or financial condition of the Company. No escrow-related liabilities or assets are included in the Company’s balance sheet at December 31, 2010.
The total preliminary purchase price and the fair value of contingent consideration were allocated to the net tangible and intangible assets based upon their fair values as of November 30, 2010 as set forth below. The excess of the preliminary purchase price over the net tangible and intangible assets was recorded as goodwill. The aggregate consideration for the acquisition is $555.0 million (inclusive of the $10.0 million contingent consideration discussed previously). The Company acquired $555.0 of net assets, including $182.2 million of identifiable intangible assets, and goodwill of $214.5 million. Approximately $167.2 million of the identifiable intangible assets recorded is being amortized over periods ranging from 5-15 years. Approximately $15.0 million of the identifiable intangible assets consist of trade name assets with indefinite lives and are not amortizable. All intangible assets, including goodwill, are non-deductible for income tax purposes. The areas of the preliminary purchase price allocation that are not yet finalized relate to both current and non-current deferred taxes which are subject to change, pending the finalization of certain tax returns.
The following table summarizes the estimated fair value (as of November 30, 2010) of the net assets acquired:
-$15.0 million of $18.8 million in trade name assets were determined to have an indefinite life and are not amortized.
Some of the more significant estimates and assumptions inherent in the estimate of the fair value of the identifiable acquired intangible assets include all those associated with forecasting cash flows and profitability. The primary assumptions used for the determination of the fair value of the purchased intangible assets were generally based upon the present value of anticipated cash flows discounted at rates generally ranging from 13.5% to 16.0%. Estimated years of future cash flows and earnings generally follow the range of estimated remaining useful lives for each intangible asset.
Rebates for drug costs represent estimated rebates owed to the Company from prescription drug companies. The Company has entered into contracts with certain drug manufacturers which provide for rebates to the Company based on the utilization of specific prescription drugs by the Company’s members.
Due from providers primarily includes management fees receivable as well as amounts owed to the Company for the refund of certain medical expenses paid by the Company under risk sharing arrangements.
There were no held to maturity securities at December 31, 2010. Held to maturity securities classified as current assets at December 31, 2009 were as follows (in thousands):
Realized gains or losses related to investment securities for the years ended December 31, 2010, 2009, and 2008 were immaterial.
Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2010, were as follows (in thousands):
Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2009, were as follows (in thousands):
The Company reviews fixed maturities and equity securities with a decline in fair value from cost for impairment based on criteria that include duration and severity of decline; financial viability and outlook of the issuer; and changes in the regulatory, economic and market environment of the issuer’s industry or geographic region.
A summary of property and equipment at December 31, 2010 and 2009 is as follows (in thousands):
Changes to the carrying value of identifiable intangible assets during 2010 and 2009 are as follows (in thousands):
The weighted-average amortization periods of the acquired intangible assets are as follows:
At December 31, 2010, all intangible assets are amortized using a straight-line method except for member network intangible assets which are amortized using an accelerated method. Also see Note 1(f).
A provider contract relating to a provider network intangible asset with cost of $126.7 million at December 31, 2010 comes up for renewal in October 2017. This contract includes a five-year renewal term at the Company’s option. Such renewal has been assumed in the amortization period of the provider network intangible asset.
Amortization expense on identifiable intangible assets for the years ended December 31, 2010, 2009, and 2008, was $20.1 million, $18.3 million, and $19.2 million, respectively.
Restricted investments at December 31, 2010 and 2009 are summarized as follows (in thousands):
In October 2008, the Company entered into two interest rate swap agreements, which were effective October 31, 2008 and which the Company designated as cash flow hedges. The notional amount covered by the agreements was $100.0 million. In February 2010, the Company terminated its interest rate swap agreements in connection with the termination of the 2007 credit agreement. As a result of terminating the interest rate swap agreements, the Company settled the swap obligations with the counterparties for approximately $2.0 million ($1.3 million net of income taxes) and reclassified such amount from other comprehensive income to interest expense during the first quarter of 2010. The changes in the fair value of the interest rate swaps during the years ended December 31, 2010, 2009, and 2008 resulted in an other comprehensive gain (loss) of $38,000 ($23,000 net of income taxes), $1.2 million ($756,000 net of income taxes), and $(3.3) million ($(2.0) million net of income taxes), respectively. In addition, changes in the fair value of available for sale securities during the years ended December 31, 2010, 2009, and 2008 resulted in unrealized gains recorded as other comprehensive income of $1.9 million ($1.3 million net of income taxes), $240,000 ($155,000 net of income taxes), and $120,000 ($77,000 net of income taxes), respectively.
The weighted average fair value of options granted in 2010, 2009, and 2008 is provided below. The fair value for all options as determined on the date of grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
The fair value of options vested during the years ended December 31, 2010, 2009, and 2008 was $8.1 million $7.3 million, and $7.0 million, respectively. The total intrinsic value of stock options exercised during 2010, 2009, and 2008 was $6.3 million, $49,000, and $189,000, respectively. Cash received from stock option exercises for the years ended December 31, 2010, 2009, and 2008 totaled $12.1 million, $13,000, and $1.0 million, respectively. Total compensation expenses related to nonvested options not yet recognized was $7.4 million at December 31, 2010. The Company expects to recognize this compensation expense over a weighted average period of 2.4 years.
During the year ended December 31, 2010, the Company awarded 45,753 shares of restricted stock to non-employee directors pursuant to the Amended Plan, all of which were outstanding at December 31, 2010. The restrictions relating to the restricted stock awarded in 2010 generally lapse one year from the grant date. In the event a director resigns or is removed prior to the lapsing of the restriction, or if the director fails to attend 75% of the board and applicable committee meetings during the one-year period, shares will be forfeited unless resignation or failure to attend is caused by death or disability.
Diluted earnings per share (“EPS”) reflects the potential dilution that could occur if stock options or other share-based awards were exercised or converted into common stock. The dilutive effect is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used by the Company to purchase common stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. Options to purchase 3.3 million shares, 4.0 million shares, and 3.8 million shares were antidilutive and therefore excluded from the computation of EPS for the years ended December 31, 2010, 2009, and 2008, respectively.
Renaissance Physician Organization (RPO) is a Texas non-profit corporation the members of which are GulfQuest, L.P., one of the Company’s wholly owned management subsidiaries, and 13 affiliated independent physician associations, comprised of over 1,300 physicians providing medical services primarily in and around counties surrounding and including the Houston, Texas metropolitan area. The Company’s Texas regulated insurance subsidiary has contracted with RPO to provide professional medical and covered medical services and procedures to members of its Medicare Advantage plan. Pursuant to that agreement, RPO shares risk relating to the provision of such services, both upside and downside, with the Company on a 50%/50% allocation. Another agreement the Company has with RPO delegates responsibility to GulfQuest, L.P. for medical management, claims processing, provider relations, credentialing, finance, and reporting services for RPO’s Medicare and commercial members. Pursuant to that agreement, GulfQuest, L.P. receives a management fee, calculated as a percentage of Medicare premiums, plus a dollar amount per member per month for RPO’s commercial members. In addition, RPO pays GulfQuest, L.P. 25% of the profits from RPO’s operations. Both agreements have 10 year terms that expire on December 31, 2014 and automatically renew for additional one to three year terms thereafter, unless notice of non-renewal is given by either party at least 180 days prior to the end of the then-current term. The agreements also contain certain restrictions on the Company’s ability to enter into agreements with delegated physician networks in certain counties where RPO provides services. Likewise, RPO is subject to restrictions regarding providing coverage to plans competing with the Company’s Texas Medicare Advantage plans.
Pursuant to the terms of the amended merger agreement and his existing agreements with Bravo Health, Mr. Folick received approximately $25.6 million in cash in equity proceeds and bonus and severance payments in connection with the Bravo Health transaction and, depending on the outcome of certain post-closing adjustments, may receive an additional $0.9 million. Additionally, approximately $5.2 million is being held in escrow to fund Bravo Health’s stakeholders’ post-closing indemnification obligations, if any. As of December 31, 2010, there were no amounts owed by the Company to Mr. Folick.
On October 1, 2007, the Company completed the acquisition of all the outstanding capital stock of LMC Health Plans. Prior to the closing, Benjamin Leon, Jr., who was elected as a director of the Company at closing, owned a majority of LMC Health Plans’ outstanding capital stock. The acquisition of LMC Health Plans included the release of contingent consideration of 2.67 million shares of HealthSpring common stock in November 2009 to the former stockholders of LMC Health Plans, including Mr. Leon.
On October 1, 2007, LMC Health Plans entered into the Leon Medical Services Agreement with Leon Medical Centers (“LMC”) pursuant to which LMC provides or arranges for the provision of certain medical services to LMC Health Plans’ members. The Leon Medical Services Agreement is for an initial term of approximately 10 years with an additional five-year renewal term at LMC Health Plans’ option. Mr. Leon is the majority owner and chairman of the board of directors of LMC.
Payments for medical services under the Leon Medical Services Agreement are based on agreed upon rates for each service, multiplied by the number of plan members as of the first day of each month. Total payments made to LMC by the Company for medical services for the years ended December 31, 2010, 2009, and 2008 were $212.5 million, $186.7 million, and $138.9 million, respectively. There is also a sharing arrangement with regard to LMC Health Plans’ annual medical loss ratio (“MLR”) whereby the parties share equally any surplus or deficit of up to 5% with regard to agreed-upon MLR benchmarks. The initial target for the annual MLR is 80.0%, which increases to 80.5% for 2010 and 2011 and again to 81.0% beginning in 2012 for the remaining term of the agreement. The Company had accrued $1.4 million and $3.0 million for amounts due to LMC under the Leon Medical Services Agreement at December 31, 2010 and 2009, respectively.
The Company leases certain facilities and equipment under noncancelable operating lease arrangements with varying terms. The facility leases generally have original terms of five to 10 years and contain renewal options of five to 20 years. For the years ended December 31, 2010, 2009, and 2008, the Company recorded lease expense of $8.3 million, $7.9 million, and $7.6 million respectively.
Future non-cancellable payments under these lease obligations as of December 31, 2010 are as follows:
On February 11, 2010, the Company entered into a $350.0 million credit agreement (the “Prior Credit Agreement”), which, subject to the terms and conditions set forth therein, provided for a five-year, $175.0 million term loan credit facility and a four-year, $175.0 million revolving credit facility (the “Prior Credit Facilities”). Proceeds from the Prior Credit Facilities, together with cash on hand, were used to fund the repayment of $237.0 million in term loans outstanding under the Company’s 2007 credit agreement and transaction expenses related thereto.
Borrowings under the Prior Credit Agreement accrued interest on the basis of either a base rate or a LIBOR rate plus, in each case, an applicable margin depending on the Company’s debt-to-EBITDA leverage ratio. The Company also paid a commitment fee of 0.375% on the actual daily unused portions of the Prior Credit Facilities.
In connection with the acquisition of Bravo Health (see Note 2- Acquisitions), the Company and its existing lenders and certain additional lenders amended and restated the Prior Credit Agreement in the form of the Amended and Restated Credit Agreement (“Restated Credit Agreement”) on November 30, 2010 to provide for, among other things, the acquisition financing. As amended, the Restated Credit Agreement provides for the following:
$355.0 million in term loan A indebtedness maturing in February 2015 comprised of:
The net proceeds from certain asset sales, casualty and condemnation events, and certain incurrences of indebtedness (subject, in the cases of asset sales and casualty and condemnation events, to certain reinvestment rights), a portion of the net proceeds from equity issuances and, under certain circumstances, the Company’s excess cash flow, are required to be used to make prepayments in respect of loans outstanding under the Credit Facilities. Under such excess cash flow provisions, a prepayment in the amount of $25.0 million is due to be paid on or before April 15, 2011. Such prepayment amount is net of a voluntary prepayment of $15.0 million paid by the Company in December 2010 and is included in the current portion of long-term debt outstanding on the Company’s balance sheet at December 31, 2010.
The Restated Credit Agreement also contains conditions precedent to extensions of credit thereunder as well as representations, warranties, and covenants, including financial covenants, customary for transactions of this type. Financial covenants include (i) a maximum total debt to adjusted EBITDA ratio of 2.25 to 1.00 (reducing to 2.00 at December 31, 2011 and 1.75 to 1.00 on June 30, 2012), (ii) minimum net worth requirements for each regulated insurance subsidiary calculated by reference to applicable regulatory requirements, and (iii) maximum capital expenditures, in each case as more specifically provided in the Restated Credit Agreement.
Maturities of long-term debt under the Restated Credit Facilities are as follows:
Medical claims liability primarily represents the liability for services that have been performed by providers for the Company’s members. The liability includes medical claims reported to the plans as well as an actuarially determined estimate of claims that have been incurred but not yet reported to the plans, or IBNR. The IBNR component is based on the Company’s historical claims data, current enrollment, health service utilization statistics, and other related information. The medical liabilities also include amounts owed to physician providers under risk-sharing and quality management programs.
Approximately $2.0 million paid to providers under risk sharing and capitation arrangements related to 2009 premiums is included in the incurred related to current period amounts in 2010. Such amount does not relate to fee-for-service medical claims estimates. Similarly, $2.2 million and $10.1 million paid to providers under risk sharing and capitation arrangements related to prior year premiums are included in the 2009 and 2008 incurred related to current period, respectively. Most of these amounts are the result of additional retroactive risk adjustment premium payments recorded that pertain to the prior year’s premiums.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2010 and 2009 is as follows (in thousands):
The Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized. As of December 31, 2010 and 2009, the Company carried a valuation allowance against deferred tax assets of $4.2 million and $327,000 respectively. Of the $4.2 million valuation allowance, $3.9 million related to the Bravo Health acquisition during 2010 which was recorded as a component of goodwill.
The Company’s continuing accounting policy is to recognize interest and penalties related to income tax matters as a component of tax expense in the condensed consolidated statements of income. Accrued interest and penalties were approximately $265,000 and $25,000 as of December 31, 2010 and December 31, 2009, respectively. The Company had unrecognized tax benefits of $995,000 and $526,000 as of December 31, 2010 and December 31, 2009, respectively, all of which, if recognized, would affect the Company’s effective income tax rate. In addition, the Company does not anticipate that unrecognized tax benefits will significantly increase or decrease within the next 12 months.
In October 2008, the Company entered into two interest rate swap agreements in a total notional amount of $100.0 million, relating to the floating interest rate component of the term loan agreement under its 2007 credit agreement. In February 2010, the Company terminated its interest rate swap agreements in connection with the termination of the 2007 credit agreement. The interest rate swap agreements were classified as cash flow hedges. See Note 22 for a discussion of fair value accounting related to the swap agreements.
A summary of the effect of cash flow hedges on the Company’s financial statements for the periods presented is as follows (in thousands):
The Company reports its business in three segments: Medicare Advantage, stand-alone PDP, and Corporate. Medicare Advantage (“MA-PD”) consists of Medicare-eligible beneficiaries receiving healthcare benefits, including prescription drugs, through a coordinated care plan qualifying under Part C and Part D of the Medicare Program. Stand-alone PDP consists of Medicare-eligible beneficiaries receiving prescription drug benefits on a stand-alone basis in accordance with Medicare Part D. The Corporate segment consists primarily of corporate expenses not allocated to the other reportable segments. These segment groupings are also consistent with information used by the Company’s chief executive officer in making operating decisions.
The accounting policies of each segment are the same and are described in Note 1. The results of each segment are measured and evaluated by earnings before interest expense, depreciation and amortization expense, and income taxes (or “EBITDA”). The Company has not historically allocated certain corporate overhead amounts (classified as SG&A) or interest expense to the Company’s segments. The Company evaluates interest expense, income taxes, and asset and liability details on a consolidated basis as these items are managed in a corporate shared service environment and are not the responsibility of segment operating management.
The Company’s regulated insurance subsidiaries are restricted from making dividend payments to the Company without appropriate regulatory notifications and approvals or to the extent such dividends would put them out of compliance with statutory capital requirements. At December 31, 2010, $688.4 million of the Company’s $771.8 million of cash, cash equivalents, investment securities, and restricted investments were held by the Company’s regulated insurance subsidiaries and subject to these dividend restrictions.
In December 2010, CMS published for public comment its proposed methodology for payment adjustments determined as a result of its various RADV Audits, including its methods for sampling, payment error calculation, and extrapolation of the error rate across the relevant plan population. Numerous comments challenging CMS’s methodologies were submitted to CMS by participants in the Medicare Advantage program, including the Company, in January 2011. It is unclear when and how CMS will respond to these comments and what form the RADV Audit methodologies, including extrapolation and payment error calculations, will ultimately take. Because of the uncertainty, the Company is currently unable to reasonably estimate the probability of CMS’s assertion of a claim for recoupment of overpaid Tennessee plan 2007 premiums or the amount of loss, or range of potential losses, associated with the pending RADV Audit of the Tennessee plan. Accordingly, the Company has not made an accrual related thereto.
Over 99% of the Company’s premium revenue in each of 2010 and 2009 was derived from a limited number of contracts with CMS, which are renewable annually and are terminable by CMS in the event of material breach or a violation of relevant laws or regulations. In addition, substantially all of the Company’s membership in its stand-alone PDPs results from automatic enrollment by CMS of members in CMS regions where the Company’s Part D premium bid is below the relevant benchmark. If future Part D premium bids are not below the benchmark, or the Company violates relevant laws, regulations or program requirements relating to Part D, CMS may not assign additional PDP members to the Company and may reassign PDP members previously assigned to the Company. Beginning in 2011, PDPs may also waive de minimis premium amounts bid in excess of the low income benchmark in order to avoid the reassignment of members.
The Company’s 2010 and 2009 consolidated balance sheets include the following financial instruments: cash and cash equivalents, accounts receivable, investment securities, restricted investments, accounts payable, medical claims liabilities, interest rate swap agreements, funds held (or due) for CMS for the benefit of members, and long-term debt. The carrying amounts of accounts receivable, funds held (or due) for CMS for the benefit of members, accounts payable and medical claims liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization. The fair value of the Company’s long-term debt (including the current portion) was $615.3 million and $220.7 million at December 31, 2010 and 2009, respectively, and consisted solely of non-tradable bank debt. The Company obtains the fair value of its debt from a third party that uses market observations to determine fair value.
Cash and cash equivalents consist of such items as certificates of deposit, money market funds, and certain U.S. Government securities with an original maturity of three months or less. The original cost of these assets approximates fair value due to their short-term maturity. In February 2010, the Company terminated its interest rate swap agreements in connection with the termination of the related credit agreement. See Note 13 -“Debt” and Note 16 -“Derivatives”. The fair value of the Company’s interest rate swaps at December 31, 2009 reflected a current liability of approximately $2.1 million in the accompanying consolidated balance sheet. The fair value of investment securities is determined by pricing models developed using market data provided by a third party vendor. The fair value of the Company’s restricted investments was $29.3 million and $16.6 million at December 31, 2010 and 2009, respectively (See Note 7).
Selected unaudited quarterly financial data in 2010 and 2009 is as follows (in thousands, except per share data):
Results for the quarter ended December 31, 2010 include one month’s contribution from the operations of Bravo Health, which was acquired by the Company on November 30, 2010.