square feet of space for our corporate office in Bethesda, Maryland. We also leased 848,000 aggregate
where our health plans operate, of which 10% is subleased. Our leases expire at various dates from 2004
administrative services related to our health plan in that state, of which 46% is subleased. We believe
Cash and investments $ 1,405,922 $ 1,119,120 $ 952,491 $ 752,450 $ 614,603
(1)Operations Statement Data include the results of operations of acquisitions since the date of acquisition. Balance Sheet Data reflect acquisitions as of December 31, of the year of acquisition. See the notes to consolidated financial statements for detail on our acquisitions.
(2)Medical loss ratio excludes non-recurring charges and recoveries recorded in 2000 and 1999. For detail on these charges and recoveries, refer to the notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
primary focus is owning and operating health plans with a concentration on risk business with mid-sized
basis. Each of our health plans operates under its local market name and has local management, including
sales and marketing, medical management, contracting and provider relations personnel that design and
manage health benefits to meet the needs of our individual markets. We believe that our local focus
to meet competitive challenges by offering quality products at adequate rates while maintaining our
Cash flows from operations was $323.1 million, a 55% improvement over the prior year.
premiums for a broad range of managed care and management service products. Premiums for our commercial
services, for which we do not assume underwriting risk. The management services we provide typically
we rent our network of providers (“network rental”), including claims repricing and utilization review,
to other managed care plans or non-risk employers and assume no underwriting risk.
from acquisitions. We pursue acquisitions that fit into our local market strategy and that we feel are
and business climate and have the ability to add value to our company. Additionally, membership growth
Such commonality can help not only in properly administering benefit plans from day one, but also in
costs also include an estimate of claims incurred but not reported (“IBNR”).
that furnish health care services through contractual arrangements with physicians, hospitals and other
are provided through a formulary comprised of an extensive list of drugs. Drug prices are negotiated
covered by global capitation arrangements. Under the typical arrangement, the provider receives a fixed
percentage of premium to cover all the medical costs provided to the globally capitated members. Under
some capitated arrangements, physicians may also receive additional compensation from risk sharing and
medical costs, but expose us to risk as to the adequacy of the financial and medical care resources
for ancillary services, such as mental health care. We are ultimately responsible for the coverage of
availability, appropriateness and effectiveness of the patient care we provide. We collect utilization
showing each physician’s utilization profile for diagnostic tests, specialty referrals and hospitalization
that perform claims processing, premium billing and collection, enrollment and customer service functions
standardized management practices at each of our plans and capitalize on the benefits of our integrated
information technology systems. We centralize the underwriting and product pricing functions for our
at each of our plans. We believe our centralization of certain administrative functions at the corporate
and regional levels gives us a competitive advantage over local market health plans that lack our resources.
a profitable company in an industry that is not capital equipment intensive, we have not needed
to use financing methods to generate cash for operations. We have a low debt to capital ratio and while
not used to fund operations. Our primary use of cash is to pay medical claims. Any excess cash has historically
been used for acquisitions and for repurchases of our common stock.
are ones we consider critical in preparing our consolidated financial statements. Critical accounting
uncertainties affecting the application of these policies include significant estimates and assumptions
made by us using information available at the time the estimates are made. Actual results could differ
rate and the number of subscribers in our records at the time of billing. Premium billings are generally
sent to employers in the month preceding the month of coverage. Premium billings may be subsequently
to generating premium billings, historical trends, bad debt write-offs and the collectibility of specific
million and $2.9 million as of December 31, 2003 and 2002, respectively. The calculation for these reserves
Management (“OPM”) to provide managed health care services under the Federal Employee Health Benefits
rating arrangements for this program. The OPM conducts periodic audits of its contractors to, among
other things, verify that the premiums established under its contracts are in compliance with the community
rating and other requirements under FEHBP. The OPM may seek premium refunds or institute other sanctions
against health plans that participate in the program. Our contracts are periodically reconciled by us
with the OPM and could result in adjustments to revenue. Premiums for services to federal employee groups
are subject to audit and review by the OPM on a periodic basis. Such audits are usually a number of
years in arrears. We record reserves, on an estimated basis annually, based on appropriate guidelines.
Any differences between actual results and estimates are recorded in the year the audits are finalized.
with employer groups where we pledge that we will meet certain standards. These standards vary widely
and could involve customer service, member satisfaction, claims processing, claims accuracy, telephone
potential exposure and record appropriate reserves. The penalties that we have incurred have been immaterial
and, although, we can not predict with precision the future effect on our results of operations of these
contractual requirements, historical utilization trends and payment patterns, benefits changes, medical
if required, for the probability that anticipated future health care costs and contract maintenance
are made or accruals adjusted, differences are reflected in current operations. Changes in assumptions
reserves, our models use credibility weighting of lag-based incurred claim estimates (traditional triangle
based completion factors) and incurred claims estimates calculated as authorized days multiplied by
per diem forecasts. For non-inpatient reserves, our models use credibility weighting of lag-based incurred
claim estimates and trended per member per month estimates. For both the inpatient and non-inpatient
months. Credibility factors are increased for older months within the lag models since those older months
have a higher completion factor and are the best indicator of our ultimate cost.
services, authorized days are used for utilization factors, while cost trend assumptions are incorporated
reflects anticipated changes in cost per service, provider contracts, utilization, and other factors.
moderately adverse conditions. Adverse conditions are situations in which the actual claims are expected
to be higher than the otherwise estimated value of such claims. In many situations, the claims paid
amount experienced will be less than the estimate that satisfies the actuarial standards of practice.
Medical claims liabilities are recorded at an amount we estimate to be appropriate. Adjustments
of prior years estimates may result in additional medical costs or, as we have experienced during the
were more than adequate to cover our ultimate liability for unpaid claims. We believe that this favorable
medical utilization, mix of provider rates and other components of medical cost trend.
Medical liabilities, Beginning of Period $ 558,599 $ 522,854 $ 444,887
1% variance between our December 31, 2003 estimates of medical liabilities and actual costs payable,
relating to the realizable value of a security. This evidence includes, but is not limited to, the following:
gross unrealized losses and fair value, at December 31, 2003, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss position (in thousands).
grade credit rating. The current unrealized loss is the result of interest rate increases and not unfavorable
a business’s fair value by analyzing the recent sales of similar companies. The market capitalization
impairment took place. We have not incurred an impairment charge related to goodwill. See
Note C to the consolidated financial statements for additional disclosure related to intangible assets.
and Disclosure” as an amendment to FASB statement No. 123, “Accounting for Stock-Based Compensation.”
of our interim and annual reports. Unless the accounting rules change, we currently do not expect to
statement did not affect our financial position or results of operations.
accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging
and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” and nullifies
a liability for a cost associated with an exit or disposal activity to be recognized and measured at
fair value only when the liability is incurred. This statement did not have a material impact on our
related to business combinations. The first statement, SFAS No. 141 - “Business Combinations,” requires
all business combinations initiated after June 30, 2001 to be accounted for using the purchase method
assets should be separately recognized upon meeting certain criteria. Such intangible assets include,
impairment by applying a fair-value-based test. Impairment charges may result in future write-downs
year beginning January 1, 2002, and, accordingly, goodwill was not amortized during 2002 nor 2003. Refer
to Note C of our consolidated financial statements for more information.
2003, we completed several business combinations and membership purchases. These business combinations
31, 2001, goodwill was amortized over a useful life of 35 years. In accordance with SFAS No. 142, effective
to identifiable intangible assets and is being amortized over a useful life of five to twenty years.
These estimates may be adjusted as actual expenses are incurred, thereby affecting the final purchase
purchase price shown for recent acquisitions, in thousands, is inclusive of all retroactive balance
as of December 31, 2003 and 2002 (rounded to the nearest thousand) and the percentage change in membership
primarily as a result of an auto-assignment of additional members by the State of Missouri due to the
comparison of our operations for each of the three years in the period ended December 31, 2003. On December
23, 2003, our Board of Directors approved a three-for-two stock split of our common stock, effective
January 30, 2004 for stockholders of record on January 9, 2004. The stock split is reflected retroactively
a result of changes being made to rate structures, as well as changes in demographics. The acquisitions
of Mid-America, PersonalCare, and Altius resulted in an increase in managed care premium revenue of
commercial business and is a result of the commercial premium rate increases mentioned above outpacing
January 1, 2003. Our Medicaid medical loss ratio increased as a result of changes in the geographical
markets in which we operate, and an increase in membership in a capitated service. We exited the Delaware
Medicaid market on July 1, 2002. Within our Pennsylvania market, membership in our capitated Medicaid
behavioral health program has increased significantly during 2002 and 2003. This program has a high
have increased due to annual salary increases, additional amortization expense related to restricted
salary expense related to our organic membership growth. As a percentage of revenue, selling, general
has increased in 2003. Due to the issuance of the notes on February 1, 2002, the prior year period represented
$0.5 million loss on the repurchase of a portion of our senior notes at a premium in the third quarter
the current year included a gain from our single derivative investment compared to a loss in the prior
year. This derivative investment was sold during the second quarter of 2003.
2002 from 2001 as a result of acquisitions. In particular, the Health Partners, Blue Ridge, NewAlliance
to 2001 due to membership growth, as discussed above and medical trend. Our commercial medical trend
2002 was 10.1%. Our medical loss ratio improved in 2002 in our Commercial and Medicare product lines
to the Mid-America acquisition and to create additional capacity for future acquisitions. As a percentage
with SFAS No. 142, we no longer amortize goodwill but rather test for impairment at least once a year.
were incurred in 2002 due to the issuance of our senior notes on February 1, 2002, as described below
2001 due primarily to the change in valuation of a derivative investment. We recorded a gain in 2001
and a loss in 2002 related to this derivative. The decrease is also related to a decrease in the amortization
million restricted under state regulations, increased $283.1 million to $1.4 billion at December 31,
December 31, 2003 were only slightly above that of the prior year. Projected capital investments in
costs associated with the development and implementation of improved operational and communication systems.
stock in 2003. On February 1, 2002, we completed the purchase of 7.1 million shares of
common stock, owned by Principal Health Care, Inc. The aggregate purchase price for the shares of common
stock and the warrant was $176.1 million. The purchase of the shares and warrant from
notes, we made interest payments of $14.2 million and $7.7 million during the years ended December 31,
2003 and 2002, respectively. In addition to the repurchase of our common stock from Principal we made
repurchases or our common stock, as described below in “Share Repurchase Program,” at an aggregate cost of $65.5
of our senior notes with a face value of $4.5 million and a weighted average premium of 8.9%.
and restrictions regarding incurring additional debt, limiting dividends or other restricted payments,
in total medical claims liabilities as a result of the timing of medical claims payments. Also, in 2001
we received 13 months worth of Medicare premium payments as a result of the timing of CMS payments and
grade fixed income instruments in order to provide liquidity to meet future payment obligations and
with an average quality rating of “AA+” and an average contractual duration of 3.1 years, as of December
We believe that because our long-term investments are available-for-sale, the amount of such investments
should be considered when assessing our liquidity. On such basis, current assets plus long-term investments
require higher minimum capitalization requirements for HMOs and other risk-bearing health care entities.
to support its overall business operations with consideration for its size and risk profile. This calculation,
approved by the NAIC, incorporates asset risk, underwriting risk, credit risk and business risk components.
health plans have adopted an RBC policy that recommends the health plans maintain statutory reserves
internal policy to maintain all of our regulated subsidiaries’ statutory capital and surplus at or above
information, as of December 31, 2003 and 2002 (in millions except percentage data).
our regulated subsidiaries is a result of income from 2003 and the acquisitions of PersonalCare and Altius, offset by dividends paid to the parent company.
primarily a result of dividends received from subsidiaries mentioned above and ordinary operating activities
to our recently acquired Altius Health Plan in order to increase capital and surplus to appropriate
Act of 1996, which, among other things, impose security and privacy requirements with respect to individually
identifiable patient data, including a member’s transactions with health care providers and payors,
as well as requirements for the standardization of certain electronic transaction code sets and provider
$2.6 million in 2004, of which approximately $1.0 million will be capitalized, related to improved functionality
of our electronic transaction code sets, improved provider identifier standards, and improved security
obligated to make the following payments within the next five years and thereafter (in thousands):
payment for related medical costs. The demand for our products and services are subject to many economic
in certain of our regulated subsidiaries will be sufficient to fund continuing operations, capital expenditures,
debt interest costs and any other reasonably likely future cash requirements.
time at prevailing prices on the open market, by block purchase or in private transactions. As a part
been named as a defendant in various legal actions such as actions seeking payments for claims denied
by the Company, medical malpractice actions, employment related claims and other various claims seeking
million in professional liability coverage for each single claim and up to $10 million in coverage for
each class action claim. The captive professional liability policy has an aggregate limit of $20 million
professional liability claims. Additionally, the captive employment practices liability policy provides
$10 million. Each year we will re-evaluate the most cost effective method for insuring these types of
in the Managed Care Litigation filed in the United States District Court for the Southern District of
Florida, Miami Division, MDL No. 1334, styled in re: Humana, Inc., Charles B. Shane, MD, et al. vs.
and twelve other companies in the managed care industry. In its fourth amended complaint, the plaintiffs
We have filed a motion to dismiss each of these claims because they fail to state a cause of action
or, in the alternative, to compel arbitration pursuant to the arbitration provisions which exist in
the claims and ordered that all physicians who have an arbitration provision in their provider contracts
excluded from the scope of claims subject to arbitration, the plaintiffs’ claims of conspiracy, conspiracy
to violate RICO and aiding and abetting violations of RICO. The defendants, including the Company, have
filed an appeal to the 11th Circuit which has been argued. The appeals court has not yet issued its
plaintiffs. Both settlement agreements have been filed with the Court and have received final approval. Although we can not predict the outcome, management believes that this lawsuit will not have a material
the claims asserted in this lawsuit are without merit, and we intend to defend our position.
involving RICO and ERISA, generally claiming that managed care companies overcharge consumers and misrepresent
laws and rules governing the industry and interpretations of those laws and rules are subject to frequent
subject to extensive government regulation of our products and services. The laws and regulations affecting
our industry generally give state and federal regulatory authorities broad discretion in their exercise
of supervisory, regulatory and administrative powers. These laws and regulations are intended primarily
change. Existing or future laws could have significant effect on our operations.
has exceeded the general inflation rate. To reduce the effect of health care cost inflation on our business
increase future premium rates at a rate that equals or exceeds the health care cost inflation rate or
product offering, a disciplined underwriting process and superior customer service, we have an organic
increases of 10.7%, which was 5.7% from the original Adjusted Community Rating filings and 5% additional
general and administrative expenses as a percentage of revenue in 2004, excluding the effect of any
of operations could be materially adversely affected by any of these risks. Further, the trading price
of our common stock could decline due to any of these risks, and you may lose all or part of your investment.
based upon rates set months before we deliver services. As a result, our results of operations largely
depend on our ability to accurately estimate and control future health care costs. We base the premiums
which we call IBNR. The estimates for submitted claims and IBNR are made on an accrual basis. We believe
that our reserves for IBNR are adequate to satisfy our medical claims liabilities, but we can not assure
affected if we are unable to increase premiums to offset increases in our health care costs.
premiums we charge as a result of competition, government regulations and other factors. Our results
or adjust premium rates in the event our health care costs increase.
upon our ability to acquire additional health plans and successfully integrate those plans into our
we will be able to continue to locate suitable acquisition candidates, successfully integrate the plans
we acquire and realize anticipated operational improvements and cost savings. The plans we acquire also
may not achieve our anticipated levels of profitability. Our future growth rate will be adversely affected
that may affect our ability to attract new members and increase premium rates. We compete with other
health plans for members. We believe the principal factors influencing the choice among health care
companies, hospitals, health care facilities and other health care providers that may have broader geographical
coverage, more established reputations in our markets, greater market share, lower costs and greater
financial and other resources. We also may theoretically face increased rate competition from certain not-for-profit health insurance organizations that would potentially be required by state regulation to reduce capital surpluses that have been excessive.
agents and brokers to market our managed care products and services, particularly to small employer
group members. We do not have long term contracts with independent agents and brokers and they typically
ability to enter into cost-effective agreements with hospitals, physicians and other health care providers.
provider systems that have a major presence. Some of these large provider systems have operated their
health care industry generally or our company in particular could adversely affect our results of operations.
increase our costs of doing business and adversely affect our results of operations by:
or the managed care industry generally also may adversely affect our ability to attract and retain members.
timely and accurate information. Failure to maintain effective and efficient information systems or
is regulated at the federal, state and local level. The Health Insurance Portability and Accountability
Act of 1996, for example, imposed significant new requirements relating to maintaining the privacy of
medical information. Various agencies of the federal government have issued regulations to implement
under the law continues to evolve. Consequently, our efforts to measure, monitor and adjust our business
will not adversely affect our results of operations or cause us to change our operations significantly.
industry and changes in laws or regulations or violations of regulations could adversely affect our
imposed on us or that changes the way we currently do business may in the future adversely affect our
limit contractual terms with providers, including audit, payment and termination provisions; and
to obtain or maintain these approvals could adversely impact our results of operations. Federal, state
governmental agencies to provide managed health care services. Pursuant to these contracts, we are subject
subject to a variety of legal actions relating to our business operations including claims relating
disputes with our providers over compensation and termination of provider contracts;
disputes related to our non-risk business, including actions alleging breach of fiduciary duties, claim administration errors and failure to disclose network rate discounts and other fee and rebate arrangements;
activity increase our exposure to these types of claims. In some cases, plaintiffs may seek class action
status and substantial economic, non-economic or punitive damages. The loss of even one of these claims,
reasonable settlements of claims more difficult to obtain. We can not determine with any certainty what
new theories of recovery may evolve or what their impact may be on the managed care industry in general
insurance coverage for some of the potential legal liabilities we may incur. Currently, the professional
our insurers may be unable to meet their obligations or the amount of our insurance coverage may be
volume of our common stock, as well as the stock of other companies in the health care industry may
experience periods of significant volatility. Company-specific issues and developments generally in
the health care industry (including the regulatory environment) and the capital markets may cause this
volatility. Our stock price and trading volume may fluctuate in response to a number of events and factors,
operating and stock price performance of other companies that investors may deem comparable;
company, we will be required, subject to certain conditions, to offer to purchase all of our outstanding
the change of control to make the required repurchase of the senior notes or that restrictions in any
may have a material adverse effect on our financial condition and results of operations.
of incorporation and bylaws and Delaware law could delay, discourage or prevent a change in control
have the effect of discouraging unsolicited takeover proposals. The rights issued under the stockholder
not approved in advance by our board of directors. In addition, provisions in our certificate of incorporation
and bylaws and Delaware law may delay, discourage or prevent a merger, acquisition or change in control
provide for a classified board of directors with staggered three-year terms so that no more than one-third of our directors can be replaced at any annual meeting;
could provide for the payment of a premium over prevailing market prices for our common stock and also
could limit the price that investors are willing to pay in the future for shares of our common stock.
increased utilization of health care services including, without limitation, hospital and physician services, ancillary testing and procedures, vaccinations, prescriptions for drugs, mental health services and other services;
loss of membership as the result of lay-offs or other in force reductions of employment;
in those states in which we offer Medicaid plans, and increase taxes and assessments on our activities.
Although we could attempt to mitigate or cover our exposure from such increased costs through, among
other things, increases in premiums, there can be no assurance that we will be able to mitigate or cover
to diversify our product offerings to address the changing needs of our membership, there can be no
coverage alternatives that we do not offer or will not result in significant membership loss, lower
the related consolidated statements of operations, shareholders’ equity, and cash flows for the years
auditing standards generally accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
presentation. We believe that our audits provide a reasonable basis for our opinion.
Health Care, Inc. and subsidiaries as of December 31, 2003 and 2002, and the consolidated results of
statements of Coventry Health Care, Inc. as of December 31, 2001, and for the year ended December 31,
financial statements have been revised to include the transitional disclosures required by Statement
adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in
issued financial statements and the adjustments to reported net earnings representing amortization expense
recognized in those periods related to goodwill to the Company’s underlying records obtained from management,
Note C are appropriate. However, we were not engaged to audit, review, or apply any procedures to the
The following report is a copy of a report previously issued by Arthur Andersen LLP (“Andersen”),
which has not been reissued by Andersen. Certain financial information for the year ended December 31, 2001 was not reviewed by Andersen and includes additional disclosures
31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash
Care, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and
principle - SFAS No. 133, net of tax effect of $561 --
Balance, December 31, 2003 $ 1,048 $ (204,274) $ 565,734 $ 17,838 $ 548,652 $ 928,998
its subsidiaries, the “Company” or Coventry) is a managed health care company operating health plans
under the names Altius Health Plans, Carelink Health Plans, Coventry Health Care, Coventry Health and
health maintenance organization (“HMO”), preferred provider organization (“PPO”) and point of service
with the acquisition of the American Service Companies entities, including Coventry Health and Life
below lists all of the Company’s acquisitions. See Note B to consolidated financial statements for additional
Kaiser Foundation Health Plan of North Carolina (“Kaiser - NC”) North Carolina HMO
Kaiser Foundation Health Plan of Kansas City, Inc. (“Kaiser - KC”) Kansas HMO
statements in conformity with accounting principles generally accepted in the United States requires
disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those
business is diversified across a large customer base and there are no commercial groups that make up
10% or more of managed care premiums. For the years ended 2003, 2002 and 2001, the Company received
program throughout its various markets. The Company also received 11.8%, 13.1% and 12.4% of its managed
equivalents consist principally of money market funds, commercial paper and certificates of deposit.
in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 - “Accounting for Certain
The Company invests primarily in fixed income securities and classifies all its investments as available-for-sale.
classified as available-for-sale are netted with unrealized gains and reported as a net amount in a
separate component of stockholders’ equity. A decline in fair value below amortized cost that is judged
excess of three months and less than one year are classified as short-term investments and generally
FASB issued SFAS No. 133 - “Accounting for Derivative Instruments and Hedging Activities.” Effective
January 1, 2001, the Company adopted SFAS No. 133. Accordingly, a transition gain of $0.9 million, net
derivative in nature. The adjustment is shown separately as a cumulative effect of a change in accounting
was recorded as other income, net in the consolidated financial statements.
interest receivables, reinsurance claims receivables, receivables from providers and suppliers and any
over the estimated lives of the related assets or, if shorter, over the terms of the respective leases.
and Other Intangibles - In June 2001, the FASB issued two standards related to business combinations.
after June 30, 2001 to be accounted for using the purchase method and prohibits the pooling-of-interest
and service marks, non-compete agreements, customer lists and licenses. The Company was not significantly
and other intangible assets that have indefinite lives will be subject to a periodic assessment for
impairment by applying a fair-value-based test. The Company uses three approaches to identifying the
approach and the income approach. The market approach estimates a business’s fair value by analyzing
the Company’s total shares outstanding. The income approach is based on the present value of expected
year beginning January 1, 2002, and, accordingly, goodwill was not amortized during 2002 nor 2003. See
services incurred but not reported. The estimated claims incurred but not reported are based on historical
membership, product characteristics, geographic territories and provider network. The Company also considers
utilization frequency and unit costs of inpatient, outpatient, pharmacy and other medical expenses,
as well as claim payment backlogs and the timing of provider reimbursements. The Company also establishes
reserves, if required, for the probability that anticipated future health care costs and contract maintenance
a per subscriber contract rate and the subscribers in the Company’s records at the time of billing.
Premium billings are generally sent to employers in the month preceding the month of coverage. Premium
billings may be subsequently adjusted to reflect changes in membership as a result of retroactive terminations,
additions, or other changes. The Company also receives premium payments from the Centers for Medicare
and Medicaid Services (“CMS”) on a monthly basis for its Medicare+Choice membership. Membership and
Premiums collected in advance are recorded as deferred revenue. Employer contracts are typically on
an annual basis, subject to cancellation by the employer group or by the Company upon 30 days notice.
to premium billings being sent, historical trends, bad debt write-offs and the collectibility of specific
accounts, the Company estimates, on a monthly basis, the amount of bad debt and future retroactivity
standards. These standards vary widely and could involve customer service, member satisfaction, claims
processing, claims accuracy and telephone on-hold time. Under these performance guarantees, the Company
of premium, or percentage of administration fees. Performance levels are evaluated at least quarterly.
for Stock Issued to Employees,” and complies with the disclosure requirements for SFAS No. 123 - “Accounting
with SFAS No. 109 - “Accounting for Income Taxes.” The deferred tax assets and/or liabilities are determined
their effective date of acquisition. The purchase price for each business combination was allocated
to the assets, including the identifiable intangible assets, and liabilities based on estimated fair
price of the Company’s membership purchases is allocated to identifiable intangible assets and is being
Transition costs are initial estimates of future expenses based on historical experience and known costs.
These estimates may be adjusted as actual expenses are incurred in effect modifying the final purchase
price of the acquisition. In addition, the Company’s acquisition agreements contain a provision for
Kaiser Foundation Health Plan of Kansas City, Inc. (“Kaiser-KC”) April 2, 2001
assets are not allocated to specific products, and, accordingly, goodwill can not be reported by segment.
amount of goodwill for the year ended December 31, 2003 and 2002 were as follows (in thousands):
and earnings per share amounts restated to exclude goodwill amortization for the years ended December
31, 2003, 2002 and 2001 (in thousands, except per share data).
Estimated intangible amortization expense is $2.5 million for the years ending December 31, 2004 through
2006 and $2.4 million for the years ending December 31, 2007 and 2008. The weighted-average amortization
of short-term and long-term investments by contractual maturity were as follows at December 31, 2003
gross investment losses of $2.2 million on these sales for the year ended December 31, 2001.
category and length of time that individual securities have been in a continuous unrealized loss position
various acquisitions. The net operating loss carryforwards can be used to reduce future taxable income
from the federal statutory rate of 35% as a result of the following:
give rise to significant portions of the deferred tax assets and deferred tax liabilities at December
assets is due to the Company’s belief that the realization of the deferred tax asset resulting from
grant either incentive stock options or nonqualified stock options, stock appreciation rights, restricted
and conditions of option grants are established on an individual basis with the exercise price of the
granted under the Stock Incentive Plan for the three years ended December 31, 2003 were as follows (shares
shares of restricted stock with varying vesting periods through 2007. The fair value of the restricted
shares, at the grant date, is amortized over the vesting period. The restricted stock shares were granted
year, the Company issues the stock to participating employees at an issue price equal to 85% of the
three defined contribution retirement plans qualifying under the Internal Revenue Code Section 401(k):
All employees of Coventry Health Care, Inc. and employees of its subsidiaries can elect to participate
defer up to 15% of their eligible compensation, limited by the maximum compensation deferral amount
permitted by applicable law. The Company makes matching contributions in the Company’s common stock
and equal to 50% of the participant’s contribution on the second 3% of the participant’s eligible compensation.
Participants will vest in the Company’s matching contributions in 50% increments annually on their anniversary
Immediately upon participation in the Savings Plan, all participant account balances included in the
were permitted to commence participation in the Savings Plan, except for participants of the former
remain until the earlier of (i) termination of employment with Coventry or one of it’s affiliates; or
Plan. No contributions were made to the MAH Plan after December 1, 2002. The MAH Plan assets are held
December 1, 2002. All costs of the MAH Plan are funded by the Company and participants as they are incurred.
All employees of Altius were eligible to participate in the Savings Plan effective January 1, 2004.
the Savings Plan on February 2, 2004. No contributions were made to the Altius Plan after December 31,
2003. The Altius Plan assets are held by Reliance Trust Company, as funding agent of the assets held
under the terms of the Plan and Trust. All participants in the Altius Plan were 100% vested in employer
Health Care, Inc. Supplemental Executive Retirement Plan. Under the SERP, participants may defer up
contributions, of the Savings Plan and the SERP charged to operations for 2003, 2002 and 2001 was $7.3
proceeds from the sale of senior notes were used to purchase, from Principal Health Care, Inc., 7.1
was $176.1 million. Interest on the notes is payable on February 15 and August 15 each year.
a portion of its senior notes with a face value of $4.5 million and a weighted average premium of 8.9%.
The senior notes contain certain covenants and restrictions regarding incurring additional debt, limiting dividends or other restricted payments,
make the following payments within the next five years and thereafter (in thousands):
Net contractual obligations $ 362,291 $ 28,974 $ 54,130 $ 44,215 $ 234,972
facilities with original lease terms of up to ten years with options for renewal. Through its acquisitions,
million and $15.3 million, for the years ended December 31, 2003, 2002 and 2001, respectively.
monetary damages. The claims are in various stages of proceedings and some may ultimately be brought
to trial. Incidents occurring through December 31, 2003 may result in the assertion of additional claims.
The Company carries general liability insurance for each of the Company’s operations on a claims-made
basis with varying deductibles for which the Company maintains reserves. The Company maintains general
liability, professional liability and employment practices liability insurance in amounts that the Company
believes is appropriate. The professional liability and employment practices liability insurances are
up to $5 million in professional liability coverage for each single claim and up to $10 million in coverage
for each class action claim. The captive professional liability policy has an aggregate limit of $20
for professional liability claims. Additionally, the captive employment practices liability policy provides
against Coventry and twelve other companies in the managed care industry. In its fourth amended complaint,
Organizations (“RICO”), conspiracy to violate RICO and aiding and abetting a scheme to violate RICO.
various state prompt payment laws and equitable claims for unjust enrichment and quantum meruit. Coventry
has filed a motion to dismiss each of these claims because they fail to state a cause of action or,
subclasses of physicians; however, Coventry is not subject to the class certification order because
the motion to certify was filed before Coventry was joined as a defendant. The plaintiffs have now filed
The trial court has not yet issued a ruling on the motion. The defendants who were subject to the certification
order filed an appeal to the 11th Circuit which has been argued. The appeals court has not yet issued
its decision. Subsequent to this appeal, two companies have entered into settlement agreements with
care companies overcharge consumers and misrepresent that they deliver quality health care. Although
is covered by global capitation arrangements. Under the typical arrangement, the provider receives a
the Company has capitation arrangements for ancillary services, such as mental health care. The Company
the respective provider organization faces financial difficulties or otherwise is unable to perform
its obligations under the capitation arrangements, the Company will be required to perform such obligations.
the original global or ancillary capitation arrangements. Medical costs associated with capitation arrangements
made up approximately 9.9%, 8.9%, and 8.8% of the Company’s total medical costs for the years ended
was approximately 145,000, 116,000 and 84,000 as of December 31, 2003, 2002 and 2001, respectively.
Personnel Management (“OPM”) to provide managed health care services under the Federal Employee Health
$31.1 million of subscription charges that were paid to HealthAmerica under the FEHBP for contract years
U.S. Department of Justice. The final settlement payment of $29.0 million was fully reserved by HealthAmerica
and therefore had no impact on 2003 earnings, the regulated capital of HealthAmerica, or the Company’s
and agency securities, mortgage-backed securities, asset-backed securities, corporate debt and other
invested in any one issuer. The fair value of the Company’s financial instruments is equivalent to their
adequately provides for estimated losses as of December 31, 2003. The Company has a risk of incurring
subsidiaries are required by state regulatory agencies to maintain minimum surplus balances, thereby
care organization to support its overall business operations with consideration for its size and risk
risk and business risk components. The Company’s health plans are required to submit an RBC report to
if the health plan’s statutory net worth is adequate to support the amount of its calculated risk profile.
reserves at or above the ‘Company Action Level’ which is currently equal to 200% of their RBC.
statutory reserves at or above 250% of their RBC. Some states in which the Company’s regulated subsidiaries
operate, require deposits to be maintained with the respective states’ departments of insurance. The
table below summarizes the Company’s statutory reserve information, as of December 31, 2003 and 2002
the Company’s regulated subsidiaries is a result of income during 2003 and the acquisitions of PersonalCare and Altius, offset by dividends paid to the
to regulation, the Company had cash and investments of approximately $209.5 million and $86.7 million
is primarily a result of dividends received from subsidiaries mentioned above and ordinary operating
activities offset by payments for acquisitions. During the year ended December 31, 2003, Coventry made
and the average number of common shares used in the calculation of basic and diluted earnings per share
time to time at prevailing prices on the open market, by block purchase or in private transactions.
the program, including the new authorization, is approximately 3.8 million as of December 31, 2003.
Commercial, Medicare and Medicaid products. The products are provided to a cross section of employer
groups and individuals throughout the Company’s health plans. Commercial products include HMO, PPO and
POS products. HMO products provide comprehensive health care benefits to members through a primary care
reportable segments through gross margin and include a medical loss ratio (“MLR”) calculation:
that its Illinois subsidiary, PersonalCare Health Management, Inc. (“PersonalCare”), had entered into
a renewal rights agreement with Rockford Health Systems whereby PersonalCare will serve as the carrier
of choice for the transition of Rockford Health Plans’ business. Rockford Health Plans, a for-profit