We do not own any real property. We lease office space in Virginia Beach, Virginia, where our primary headquarters, call, claims and data centers are located. We also lease real property in each of our health plan locations. We are obligated by various insurance and Medicaid regulatory authorities to have offices in the service areas where we provide managed care services.
The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Form 10-K. Selected financial data as of and for each of the years in the five-year period ended December 31, 2009 has been adjusted to reflect the changes resulting from adoption of new guidance related to convertible debt instruments effective January 1, 2009 and are derived from our Consolidated Financial Statements, which have been audited by KPMG LLP, independent registered public accounting firm. (See Note 2(q) to our audited Consolidated Financial Statements as of and for the year ended December 31, 2009 included in Item 8. of this Form 10-K.)
We believe this new presentation is more useful to the readers of our financial statements as the remaining selling, general and administrative expenses are more reflective of core operating expenses. These reclassifications had no affect on net income for current or prior periods.
We are a multi-state managed healthcare company focused on serving people who receive healthcare benefits through publicly sponsored programs, including Medicaid, CHIP, Medicaid expansion programs and Medicare Advantage. We operate in one business segment with a single line of business. We were founded in December 1994 with the objective of becoming the leading managed care organization in the U.S. focused on serving people who receive these types of benefits. We believe that we are better qualified and positioned than many of our competitors to meet the unique needs of our members and the government agencies with whom we contract because of our focus solely on recipients of publicly sponsored healthcare, our medical management programs and community-based education and outreach programs. We design our programs to address the particular needs of our members, for whom we facilitate access to healthcare benefits pursuant to agreements with applicable state and Federal government agencies. We combine medical, social and behavioral health services to help our members obtain quality healthcare in an efficient manner. Our success in establishing and maintaining strong relationships with government agencies, providers and members has enabled us to obtain new contracts and to establish and maintain a leading market position in many of the markets we serve. We continue to believe that managed healthcare remains the only proven mechanism that improves health outcomes for our members while helping our government customers manage the fiscal viability of their healthcare programs.
Total revenues increased to $5.2 billion, or 16.9%, over the year ended December 31, 2008;
Risk membership increased to 1,775,000, or 12.4%, compared to that as of December 31, 2008;
Began providing Medicaid managed care services to TANF and CHIP populations in Nevada effective February 1, 2009;
Closed the transaction to sell the contract rights of the Company’s South Carolina health plan on March 1, 2009;
Completed the statewide rollout to individuals of New Mexico’s Coordination of Long-Term Services (“CoLTS”) program in April 2009. This program constitutes one of the Nation’s first comprehensive programs to coordinate long-term care for individuals. We are one of two organizations that provide coverage to New Mexico’s approximately 38,000 CoLTS members;
Repaid the outstanding debt and terminated our Credit and Guaranty Agreement (the “Credit Agreement”), decreasing our debt to total capital ratio to 19.3%; and
Recorded a one-time tax benefit of $22.4 million, or $0.43 per diluted share, pursuant to a pre-filing agreement with the Internal Revenue Service (“IRS”) related to the tax treatment of the previously recorded qui tam litigation settlement relating to certain marketing practices of our former Illinois subsidiary.
Our financial results for 2009 have been significantly impacted by several factors, including increased membership and elevated medical costs. Membership has increased over the prior comparable periods as a result of our entry into new markets and growth in existing markets. Much of this increased membership has come from growth in the Medicaid eligible populations.
We are continually evaluating our operations and contracting arrangements with our providers in order to more effectively manage medical costs and we are working with the government agencies with which we contract to pursue appropriate premium rate increases when possible. Our ability to obtain adequate rate increases to match the increases in our medical costs is likely to be challenging in the near term because the government agencies with whom we contract continue to face potential budgetary shortfalls and there can be no assurance that we will obtain adequate premium rate increases.
We have a disciplined approach to evaluating the operating performance of our existing markets to determine whether to exit or continue operating in each market. As a result, in the past we have and may in the future decide to exit certain markets if they do not meet our long-term business goals. We also periodically evaluate acquisition opportunities to determine if they align with our business strategy. We continue to believe acquisitions can be an important part of our long-term growth strategy.
Effective November 1, 2009 and December 1, 2009, our Florida subsidiary, AMERIGROUP Florida, Inc., terminated its agreement and ceased participation in Lee County and Broward County, respectively, under the Company’s contract with AHCA. The decision to exit these counties was made due to the inability to obtain adequate premium rates. The exit from these counties is not expected to be material to our results of operations, financial position or cash flows in future periods.
On October 15, 2009, our Ohio subsidiary, AMERIGROUP Ohio, Inc., notified the State of Ohio of its intent to exit the ABD program in the Southwest Region due to the inability to obtain adequate premium rates for this product. The termination was effective as of February 1, 2010. AMERIGROUP Ohio, Inc. will continue to provide services to members in the Southwest and West Central regions for the TANF Medicaid population. The exit from this program is not expected to be material to our results of operations, financial position or cash flows in future periods.
On August 1, 2008, our New Mexico subsidiary, AMERIGROUP New Mexico, Inc., began serving individuals in New Mexico’s CoLTS program in six counties in the Metro/Central region. In November 2008, the second phase expanded coverage to include the Southwest region. In January 2009, the third phase expanded coverage to include the Northwest region and in April 2009 the final phase of the statewide rollout was completed to include the Southeast and Northeast regions. AMERIGROUP New Mexico, Inc. is one of two organizations that provide coverage to New Mexico’s approximately 38,000 CoLTS members. As of December 31, 2009, AMERIGROUP New Mexico, Inc. served approximately 20,000 members in New Mexico.
Under the terms of the contract between AMERIGROUP Florida, Inc. and AHCA, AMERIGROUP Florida, Inc. is required to have a process to identify members who are pregnant or newborn members so that the newborn can be enrolled as a member of the health plan as soon as possible after birth. This process is referred to as the “Unborn Activation Process.”
In October 2008, we submitted our response to the letters. In July 2009, we received another series of letters from the IG and AHCA stating that, based on a review of our response, they had determined that AMERIGROUP Florida, Inc. did not comply with the Unborn Activation Process and assessed a penalty against AMERIGROUP Florida, Inc. in the amount of $2,500 per newborn for an aggregate amount of approximately $6.0 million. The letters further reserved AHCA’s right to pursue collection of the amount paid for the fee-for-service claims. AMERIGROUP Florida, Inc. appealed these findings and submitted documentation to evidence its compliance with, and performance under, the Unborn Activation Process requirements of the contract. On January 14, 2010 AMERIGROUP Florida, Inc. appealed AHCA’s contract interpretation that anything less than 100% compliance with the Unborn Activation Process could result in sanctions. This appeal is pending.
Effective July 1, 2009, we have caused to be issued a collateralized irrevocable standby letter of credit in an aggregate principal amount of approximately $17.4 million to meet certain obligations under our Medicaid contract in the State of Georgia through our Georgia subsidiary, AMGP Georgia Managed Care Company, Inc. The letter of credit is collateralized through cash held by AMGP Georgia Managed Care Company, Inc.
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates and the differences could be significant. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
In all of the states in which we operate, with the exceptions of Florida, New Mexico, Tennessee and Virginia, we are eligible to receive supplemental payments to offset the health benefits expense associated with the birth of a baby. Each state contract is specific as to what is required before payments are collectible. Upon delivery of a baby, each state is notified in accordance with contract terms. Revenue is recognized in the period that the delivery occurs and the related services are provided to our member based on our authorization system for those services. Changes in authorization and claims data used to estimate supplemental revenues can occur as a result of changes in eligibility noted above or corrections of errors in the underlying data. Adjustments to revenue for corrections to authorization and claims data are recorded in the period in which the corrections become known.
Historically, the impact of adjustments from retroactivity, changes in authorizations and changes in claims data used to estimate supplemental revenues has represented less than 1.0% of annual revenue. This results in a negligible impact on annual earnings as changes in revenue are typically accompanied by corresponding changes in the related health benefits expense. We believe this historical experience represents what is reasonably likely to occur in future periods.
Additionally, delays in annual premium rate changes require that we defer the recognition of any increases to the period in which the premium rates become final. The time lag between the effective date of the premium rate increase and the final contract can and has been delayed one quarter or more. The value of the impact can be significant in the period in which it is recognized dependent on the magnitude of the premium rate change, the membership to which it applies and the length of the delay between the effective date and the final contract date.
We have used a consistent methodology for estimating our medical expenses and medical claims payable since inception, and have refined our assumptions to take into account our maturing claims, product and market experience. Our reserving practice is to consistently recognize the actuarial best point estimate within a level of confidence required by actuarial standards. Actuarial standards of practice generally require a level of confidence such that the liabilities established for IBNR have a greater probability of being adequate versus being insufficient, or such that the liabilities established for IBNR are sufficient to cover obligations under an assumption of moderately adverse conditions. Adverse conditions are situations in which the actual claims are expected to be
In developing our medical claims payable estimates, we apply different estimation methods depending on the month for which incurred claims are being estimated. For mature incurred months (generally the months prior to the most recent three months), we calculate completion factors using an analysis of claim adjudication patterns over the most recent 12-month period. A completion factor is an actuarial estimate, based upon historical experience, of the percentage of incurred claims during a given period that have been adjudicated as of the date of estimation. We apply the completion factors to actual claims adjudicated-to-date in order to estimate the expected amount of ultimate incurred claims for those months.
The analyses above include those outcomes that are considered reasonably likely based on our historical experience in estimating our medical claims payable.
Changes in estimates of medical claims payable are primarily the result of obtaining more complete claims information that directly correlates with the claims and provider reimbursement trends. Volatility in members’ needs for medical services, provider claims submission and our payment processes often results in identifiable patterns emerging several months after the causes of deviations from assumed trends. Since our estimates are based upon PMPM claims experience, changes cannot typically be explained by any single factor, but are the result of a number of interrelated variables, all influencing the resulting experienced medical cost trend. Deviations, whether positive or negative, between actual experience and estimates used to establish the liability are recorded in the period known.
recognized immediately upon the actuaries’ judgment that a portion of the prior period liability is no longer needed or that an additional liability should have been accrued.
The following table presents the components of the change in medical claims payable for the three years ended December 31 (in thousands):
The remaining reduction in health benefits expense incurred during the year, related to prior years, of approximately $50.9 million, $23.5 million and $37.8 million for the years ended December 31, 2009, 2008 and 2007, respectively, primarily resulted from obtaining more complete claims information for claims incurred for dates of service in the prior years. We refer to these amounts as net reserve development. We experienced lower medical trend than originally estimated in part due to claims processing initiatives that yielded increased claim payment recoveries and coordination of benefits in 2009, 2008 and 2007 related to prior year dates of services for all periods. These recoveries also caused our actuarial estimates to include faster completion factors than were originally established. The faster completion factors contributed to the net favorable reserve development in each respective period.
Establishing the liabilities for IBNR associated with health benefits expense incurred during a year related to that current year, at a level sufficient to cover obligations under an assumption of moderately adverse conditions, will cause incurred health benefits expense for that current year to be higher than if IBNR was established without sufficiency for moderately adverse conditions. In the above table, the health benefits expense incurred during the year related to the current year include an assumption to cover moderately adverse conditions.
We account for income taxes in accordance with current accounting guidance as prescribed under U.S. generally accepted accounting principles. On a quarterly basis, we estimate our required tax liability based on enacted tax rates, estimates of book to tax differences in income, and projections of income that will be earned in each taxing jurisdiction. Deferred tax assets and liabilities representing the tax effect of temporary differences between financial reporting net income and taxable income are measured at the tax rates enacted at the time the deferred tax asset or liability is recorded.
The qui tam litigation settlement payment in 2008 had a significant impact on tax expense and the effective tax rates for 2008 and 2009 due to the fact that a portion of the settlement payment is not deductible for income tax purposes. At December 31, 2008, the estimated tax benefit associated with the qui tam litigation settlement payment was approximately $34.6 million. In June 2009, we recorded an additional $22.4 million tax benefit regarding the tax treatment of the qui tam litigation settlement under an agreement in principle with the IRS which was formalized through a pre-filing agreement with the IRS in September 2009. The pre-filing agreement program permits taxpayers to resolve tax issues in advance of filing their corporate income tax returns. We do not anticipate that there will be any further material changes to the tax benefit associated with this litigation settlement in future periods.
For further information, please reference Note 8 to our audited Consolidated Financial Statements as of and for the year ended December 31, 2009 included in Item 8. of this Form 10-K.
The valuation of goodwill and intangible assets at acquisition requires assumptions regarding estimated discounted cash flows and market analyses. These assumptions contain uncertainties because they require management to use judgment in selecting the assumptions and applying the market analyses to the individual acquisitions. Additionally, impairment evaluations require management to use judgment to determine if impairment of goodwill and intangible assets is apparent. We have applied a consistent methodology in both the original valuation and subsequent impairment evaluations for all goodwill and intangible assets. We do not anticipate any changes to that methodology, nor has any impairment loss resulted from our analyses other than that recognized in connection with discontinued operations in West Tennessee and the District of Columbia in the prior year. Based on our analysis, we have concluded that a margin of 152.0% in fair value in excess of the carrying value of goodwill and other intangibles exists as of December 31, 2009. If the assumptions used to evaluate the value of goodwill and intangible assets change in the future, an impairment loss may be recorded and it could be material to our results of operations in the period in which the impairment loss occurs.
In May 2008, the Financial Accounting Standards Board issued new guidance related to convertible debt instruments which requires the proceeds from the issuance of convertible debt instruments that may be settled wholly or partially in cash upon conversion to be allocated between a liability component and an equity component in a manner reflective of the issuers’ nonconvertible debt borrowing rate. The amount allocated to the equity component represents a discount to the debt, which is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. The adoption of this new guidance on January 1, 2009, with retrospective application to prior periods, changed the accounting treatment for our 2.0% Convertible Senior Notes, which were issued effective March 28, 2007 (See Note 2(q) to our audited Consolidated Financial Statements as of and for the year ended December 31, 2009 included in Item 8. of this Form 10-K). To adopt the provisions of this new guidance, the fair value of the 2.0% Convertible Senior Notes was estimated, as of the date of issuance, as if they were issued without the conversion options. The difference between the fair value and the principal amounts of the 2.0% Convertible Senior Notes was $50.9 million. This amount was retrospectively applied to the financial statements from the issuance date of the 2.0% Convertible Senior Notes in 2007, and was retrospectively recorded as a debt discount and as a component of equity. The discount is being amortized over the expected five-year life of the 2.0% Convertible Senior Notes resulting in a non-cash increase to interest expense in historical and future periods.
The retrospective adoption of the provisions of this new guidance resulted in an increase to interest expense for the years ended December 31, 2008 and 2007, of $9.3 million and $6.7 million, respectively, representing the non-cash interest expense related to the amortization of the debt discount, which is in addition to $5.2 million and $3.9 million, respectively, representing cash interest expense related to the contractual coupon rate incurred in the periods. The impact, net of the related tax effects, was $0.11 and $0.08 per diluted share for the years ended December 31, 2008 and 2007, respectively.
The following table sets forth selected operating ratios for the years ended December 31, 2009, 2008 and 2007. All ratios, with the exception of the health benefits ratio, are shown as a percentage of total revenues.
program commencing with six counties in August 2008 and completing a full statewide rollout in April 2009 and entry into the Nevada market in February 2009; and (2) significant increases in full-risk membership driven by a surge in Medicaid eligibility in our existing products and markets partially due to the increase in unemployment as a result of current macroeconomic conditions. We expect membership increases to continue into 2010.
Membership includes approximately 13,000 members each in 2009 and 2007 under ASO contracts. There were no ASO contracts in effect as of December 31, 2008.
The contract with South Carolina terminated March 1, 2009 concurrent with the sale of our rights under the contract.
As of December 31, 2009, our total membership increased by 209,000 members, or 13.2%, to 1,788,000 members from 1,579,000 as of December 31, 2008. Our risk membership increased to 1,775,000, or 12.4%, as of December 31, 2009 compared to 1,579,000 as of December 31, 2008. The increase is primarily a result of membership growth in the majority of our products and markets driven by a surge in Medicaid eligibility, which we believe was driven by high unemployment and general adverse economic conditions. Additionally, our entry into the Nevada market in February 2009 and the commencement of the CoLTS program in New Mexico in August 2008 contributed to our membership growth.
At December 31, 2009, we served members who received healthcare benefits through contracts with the regulatory entities in the jurisdictions in which we operate. For the year ended December 31, 2009, the Texas contract represented approximately 25.0% of premium revenues and a significantly higher percentage of our net income. The Maryland, Tennessee, Georgia and Florida contracts individually accounted for over 10.0% of premium revenues. Our state contracts have terms that are generally one-to-two-years in length, some of which contain optional renewal periods at the discretion of the individual states. Some contracts also contain a termination clause with notification periods ranging from 30 to 180 days. At the termination of these contracts, re-negotiation of terms or the requirement to enter into a re-bidding or re-procurement process is required to execute a new contract. If these contracts were not renewed on favorable terms to us, our financial position, results of operations or cash flows could be materially adversely affected.
Expenses relating to health benefits for the year ended December 31, 2009, increased $789.0 million, or 21.8%, to $4.4 billion compared to $3.6 billion for the year ended December 31, 2008. HBR increased to 85.4% for the year ended December 31, 2009 compared to 82.9% for the prior year. The increase in health benefits expense as it compares to premium revenue for the year ended December 31, 2009 resulted primarily from increased outpatient costs experienced across the majority of our markets and membership base. We believe these increased outpatient costs are related to increased utilization and intensity of services. The primary drivers of the increase in outpatient costs were emergency room services, ambulatory surgery and physician services. While health benefits expense increased commensurate with the significant increase in our membership, it was further increased by the larger proportion of new members. Historical experience indicates that new members generally utilize more services during the first two quarters of enrollment. Additionally, our 2009 results reflect a significant increase in flu-related costs. We believe this increase is directly related to the onset of a severe off-season flu outbreak associated with the H1N1 virus, which has been noted to be particularly virulent among children, pregnant women, and other high-risk populations, all of whom together represent a significant portion of our membership. Additionally, our entry into the New Mexico market, with a higher HBR due to the benefit structure of the CoLTS program, contributed to the increase in HBR overall. In total, the increases in health benefits expense exceeded growth in premium revenues, thereby negatively impacting HBR for the year ended December 31, 2009.
SG&A increased $58.9 million, or 15.6%, for the year ended December 31, 2008 compared to 2007. Our SG&A ratio for the year ended December 31, 2008 was 9.8% compared to 9.6% in 2007. The increase in SG&A was primarily due to an increase in salaries and benefits primarily due to wage rate increases, increases in employee healthcare benefit expenses, and increased earnings-based compensation as a result of favorable operating performance as well as the write-off of goodwill related to our market exits in West Tennessee and the District of Columbia.
Interest expense was $16.3 million, $20.5 million and $19.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. The decrease in interest expense in 2009 compared to 2008 is a result of scheduled and voluntary payments resulting in payment in full of all outstanding balances under our Credit Agreement as of July 2009, as well as fluctuating interest rates for previous borrowings under the Credit Agreement. The decrease in interest expense in 2008 compared to 2007 is a result of decreased interest rates in 2008 compared to 2007 and principal payments on outstanding borrowings under the Credit Agreement reducing the balance on which interest was paid.
Income tax expense for 2009 and 2008 was $52.1 million and $54.4 million, respectively. The effective tax rate for the year ended December 31, 2009 was significantly decreased due to a pre-filing agreement reached with the IRS in 2009 regarding the tax treatment of the 2008 qui tam litigation settlement payment resulting in an additional tax benefit of $22.4 million over what was recorded in 2008. Additionally, the effective tax rate excluding this benefit decreased due to the decrease in the blended state income tax rate compared to 2008.
Net income for 2009 was $149.3 million, or $2.85 per diluted share, compared to a net loss of $56.6 million, or $1.07 per diluted share in 2008. Net income for 2007 was $112.2 million or $2.08 per diluted share. Net income increased from 2008 to 2009 and decreased from 2007 to 2008 primarily as a result of the one-time expense recorded in 2008 in connection with the settlement of the qui tam litigation equal to $234.2 million before the related tax benefit. The trend in earnings of the underlying business reflects a higher HBR due to increased outpatient costs, flu-related costs as well as increased utilization and intensity of services for the year ended December 31, 2009 compared to December 31, 2008. For the year ended December 31, 2008 compared to December 31, 2007, the impact of the litigation settlement was mitigated in part by a lower HBR due to retroactive premium adjustments.
As of December 31, 2009, we had $260.0 million outstanding in aggregate principal amount of 2.0% Convertible Senior Notes due May 15, 2012. In May 2007, we filed an automatic shelf registration statement on Form S-3 with the SEC covering the resale of the 2.0% Convertible Senior Notes and common stock issuable upon conversion. The 2.0% Convertible Senior Notes are governed by an Indenture dated as of March 28, 2007 (the “Indenture”). The 2.0% Convertible Senior Notes are senior unsecured obligations of the Company and rank equally with all of our existing and future senior debt and senior to all of our subordinated debt. The 2.0% Convertible Senior Notes are effectively subordinated to all existing and future liabilities of our subsidiaries and to any existing and future secured indebtedness. The 2.0% Convertible Senior Notes bear interest at a rate of 2.0% per year, payable semiannually in arrears in cash on May 15 and November 15 of each year, beginning on May 15, 2007. The
Upon conversion of the 2.0% Convertible Senior Notes, we will pay cash up to the principal amount of the 2.0% Convertible Senior Notes converted. With respect to any conversion value in excess of the principal amount, we have the option to settle the excess with cash, shares of our common stock, or a combination thereof based on a daily conversion value, as defined in the Indenture. The initial conversion rate for the 2.0% Convertible Senior Notes will be 23.5114 shares of common stock per one thousand dollars of principal amount of 2.0% Convertible Senior Notes, which represents a 32.5% conversion premium based on the closing price of $32.10 per share of our common stock on March 22, 2007 and is equivalent to a conversion price of approximately $42.53 per share of common stock. The conversion rate is subject to adjustment in some events but will not be adjusted for accrued interest. In addition, if a “fundamental change” occurs prior to the maturity date, we will in some cases increase the conversion rate for a holder of 2.0% Convertible Senior Notes that elects to convert their 2.0% Convertible Senior Notes in connection with such fundamental change.
On December 15, 2008, we filed a universal automatic shelf registration statement with the SEC which enables us to sell, in one or more public offerings, common stock, preferred stock, debt securities and other securities at prices and on terms to be determined at the time of the applicable offering. The shelf registration provides us with the flexibility to publicly offer and sell securities at times we believe market conditions make such an offering attractive. Because we are a well-known seasoned issuer, the shelf registration statement was effective upon filing. No securities have been issued under the shelf registration.
year ended December 31, 2009. As of December 31, 2009, we had authorization to purchase up to an additional $162.8 million of common stock under the repurchase program.
Cash from operations was $147.0 million for the year ended December 31, 2009 compared to $74.3 million for the year ended December 31, 2008. The increase in cash flows was primarily due to cash flows generated by an increase in net income as a result of the prior year litigation settlement resulting in a net loss for the year ended December 31, 2008. Additionally, 2009 net income benefited from a tax adjustment to decrease income tax related to a pre-filing agreement reached in 2009 regarding the deductibility of the 2008 settlement.
Our investment policies are designed to preserve capital, provide liquidity and maximize total return on invested assets. As of December 31, 2009, our investment portfolio consisted primarily of fixed-income securities. The weighted-average maturity is approximately 25 months excluding our auction rate securities which are discussed below. We utilize investment vehicles such as auction rate securities, commercial paper, certificates of deposit, corporate bonds, debt securities of government sponsored entities, Federally insured corporate bonds, money market funds, municipal bonds and U.S. Treasury securities. The states in which we operate prescribe the types of instruments in which our subsidiaries may invest their funds. The weighted-average taxable equivalent yield on consolidated investments as of December 31, 2009 was approximately 1.14%. As of December 31, 2009, we had total cash and investments of approximately $1.5 billion.
The following table shows the types, percentages and average Standard and Poor’s ratings of our holdings within our investment portfolio at December 31, 2009:
Effective July 1, 2009, we began reporting all of the debt securities in our investment portfolio as available-for-sale, other than certain auction rate securities subject to a forward contract, discussed below, that continue to be classified as trading securities. The change resulted in the transfer to available-for-sale of $397.4 million in held-to-maturity securities and $80.8 million in held-to-maturity investments-on-deposit, with unrealized gains of $4.6 million and $0.5 million, respectively and the transfer to available-for-sale of $26.9 million in held-to-maturity securities and $17.7 million in held-to-maturity investments-on-deposit, with unrealized losses of $0.2 million and $0.1 million, respectively. The unrealized gains and losses, net of the related tax effects, were recorded to accumulated other comprehensive income. The decision to reclassify the securities as available-for-sale is intended to provide us with the opportunity to improve liquidity and increase investment returns through prudent investment management while providing financial flexibility in determining whether to hold those securities to maturity.
Our auction rate securities are classified as either available-for-sale or trading securities and reflected at fair value. In periods prior to 2008, due to the auction process which took place every 28-35 days for most securities, quoted market prices were readily available, which would qualify as Level 1 under the current guidance related to fair value measurements. However, the auction events for these securities failed during early 2008 and have not resumed. Observable and relevant market data for valuing auction rate securities is limited at this time. Due to these events, we reclassified these instruments as Level 3 during 2008 and recorded a temporary unrealized decline in fair value to accumulated other comprehensive income of $6.4 million at that time. For the year ended December 31, 2009, we have recorded an unrealized gain of $2.2 million to accumulated other comprehensive income as a result of moderate recoveries in fair value for auction rate securities classified as available-for-sale. We currently believe that the net unrealized loss position that remains at December 31, 2009 is primarily due to liquidity concerns and not the creditworthiness of the underlying issuers. In addition, our holdings of auction rate securities represented less than four percent of our total cash, cash equivalent, and investment balance at December 31, 2009, which we believe allows us sufficient time for the securities to return to full value. Because we believe that the current decline in fair value is temporary and based primarily on liquidity issues in the credit markets, any difference between our fair value estimates and an estimate that would be arrived at by another party would have no impact on our earnings, since such difference would also be recorded to accumulated other comprehensive income. We will re-evaluate each of these factors as market conditions change in subsequent periods.
The forward contract is included in other long-term assets. As the trading securities increased in value, a corresponding decrease in fair value for the forward contract of $0.8 million for the year ended December 31, 2009 was recorded to earnings.
Our access to additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity, as well as the possibility that lenders could develop a negative perception of our long- or short-term financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. If a combination of these factors were to occur, our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on favorable terms. This could restrict our ability to: (1) acquire new businesses or enter new markets, (2) service or refinance our existing debt, (3) make necessary capital investments, (4) maintain statutory net worth requirements in the states in which we do business, and (5) make other expenditures necessary for the ongoing conduct of our business.
We have no investments, loans or any other known contractual arrangements with special-purpose entities, variable interest entities or financial partnerships. Effective July 1, 2009, we have caused to be issued a collateralized irrevocable standby letter of credit in an aggregate principal amount of approximately $17.4 million to meet certain obligations under our Medicaid contract in the State of Georgia through our Georgia subsidiary, AMGP Georgia Managed Care Company, Inc. The letter of credit is collateralized through investments held by AMGP Georgia Managed Care Company, Inc.
Although healthcare cost inflation has stabilized in recent years, the national healthcare cost inflation rate still significantly exceeds the general inflation rate. We use various strategies to reduce the negative effects of healthcare cost inflation. Specifically, our health plans try to control medical and hospital costs through contracts with independent providers of healthcare services. Through these contracted care providers, our health plans emphasize preventive healthcare and appropriate use of specialty and hospital services.
The experience rebate related to a contract with the State of Texas has been reclassified out of selling, general and administrative expenses and is now reflected as a reduction to premium revenue. The experience rebate amounts reflected as a reduction to premium revenue were $51,727, $78,264, and $36,756, respectively, for the years ended December 31, 2009, 2008 and 2007.
Premium tax has been reclassified out of selling, general and administrative expenses and is now reported on a separate line following selling, general and administrative expenses and before depreciation and amortization. By isolating premium tax, the impacts of changing business volumes on premium tax expense will become more apparent.
The Company believes this new presentation is more useful to the readers of its financial statements as the remaining selling, general and administrative expenses are more reflective of core operating expenses. These reclassifications had no affect on net income for current or prior periods. Certain other reclassifications have been made to prior year amounts to conform to the current year presentation.
Effective July 1, 2009, the Company began reporting all of the debt securities in its investment portfolio as available-for-sale, other than certain auction rate securities subject to a forward contract that continue to be classified as trading securities. The decision to reclassify the securities as available-for-sale is intended to provide the Company with the opportunity to improve liquidity and increase investment returns through prudent investment management while providing financial flexibility in determining whether to hold those securities to maturity. Additional information regarding the reclassification of debt securities is included in Note 4, Short and Long-Term Investments and Investments on Deposit for Licensure.
Cash and cash equivalents, premium receivables, provider and other receivables, prepaid expenses, other current assets, claims payable, accounts payable, unearned revenue, accrued payroll and related liabilities, and accrued expenses and other current liabilities: These financial instruments are carried at cost which approximates fair value because of the short maturity of these items.
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the shorter of the lease term or estimated useful lives of the assets. Depreciation and amortization expense on property and equipment was $15,506, $16,321 and $16,372 for the years ended December 31, 2009, 2008 and 2007, respectively. The estimated useful lives are as follows:
Similar to other companies, the Company sometimes faces challenges from the tax authorities regarding the amount of taxes due. Positions taken on the tax returns are evaluated and benefits are recognized only if it is more likely than not that the position will be sustained on audit. Based on the Company’s evaluation of tax positions, it is believed that potential tax exposures have been recorded appropriately.
such, will vigorously defend its positions on audit. The Company believes that it has adequately provided for any reasonable foreseeable outcome related to these matters. Although the ultimate resolution of these audits may require additional tax payments, it is not anticipated that any additional tax payments would have a material impact to earnings.
Taxes based on premium revenues are currently paid by all of the Company’s health plan subsidiaries except the states of Georgia, Florida and Virginia. The State of Georgia repealed its premium tax levy effective October 1, 2009. Prior to the repeal of premium tax, our Georgia subsidiary was subject to premium tax at 5.5% of revenue. As of December 31, 2009, premium taxes range from 2.0% to 7.5% of revenue or are calculated on a per member per month basis.
Stock-based compensation expense related to share-based payments are recorded in accordance with U.S. generally accepted accounting principles, whereby it is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The fair value of employee share options and similar instruments is estimated using option-pricing models. That cost is recognized over the period during which an employee is required to provide service in exchange for the award, which is generally quarterly over four years.
can be significant in the period in which it is recognized dependent on the magnitude of the premium rate change, the membership to which it applies and the length of the delay between the effective date and the final contract date.
Accrued medical expenses for claims associated with the provision of services to the Company’s members (including hospital inpatient and outpatient services, physician services, pharmacy and other ancillary services) include amounts billed and not paid and an estimate of costs incurred for unbilled services provided. These estimates are principally based on historical payment patterns while taking into consideration variability in those patterns using actuarial techniques. In addition, claims processing costs are accrued based on an estimate of the costs necessary to process unpaid claims. Claims payable are reviewed and adjusted periodically and, as adjustments are made, differences are included in current operations.
The following table presents the components of the change in medical claims payable for the years ended December 31:
Stop-loss premiums, net of recoveries, are included in health benefits expense in the accompanying Consolidated Statements of Operations.
Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet. No impairment of long-lived assets was recorded in 2009, 2008 or 2007.
Basic net income (loss) per share has been computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share reflects the potential dilution that could occur assuming the inclusion of dilutive potential common shares and has been computed by dividing net income
The retrospective adoption of the provisions of this new guidance resulted in an increase to interest expense for the years ended December 31, 2008 and 2007, of $9,344 and $6,671, respectively, representing the non-cash interest expense related to the amortization of the debt discount, which is in addition to $5,200 and $3,900, respectively, representing cash interest expense related to the contractual coupon rate incurred in the periods.
The following table reflects the amortization of the debt discount (non-cash interest) component and the contractual interest (cash interest) component for the 2.0% Convertible Senior Notes for each of the years presented subsequent to the retrospective adoption of the provisions of the new guidance described above:
The following tables reflect the Company’s previously reported amounts, along with the adjusted amounts as required by the provisions of the new guidance described above:
In May 2009, the FASB issued new guidance related to subsequent events which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Entities are required to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. The adoption of this guidance in 2009 did not impact the Company’s financial position, results of operations or cash flows.
The Company’s profitability depends in large part on accurately predicting and effectively managing health benefits expense. Premium and benefit structure is continually reviewed to reflect the underlying claims experience and revised actuarial data; however, several factors could adversely affect the health benefits expense. Certain of these factors, which include changes in healthcare practices, cost trends, inflation, new technologies, major epidemics or pandemics, natural disasters and malpractice litigation, are beyond any health plan’s control and could adversely affect the Company’s ability to accurately predict and effectively control healthcare costs. Costs in excess of those anticipated could have a material adverse effect on the Company’s results of operations.
During the first quarter of 2009, the Company established an estimate for pharmacy rebates which the Company expects to receive, associated with pharmaceuticals that have been dispensed to members. Previously, the Company recognized pharmacy rebates when payment was received. The receipt of rebate payments generally lags the period in which the pharmaceuticals were actually dispensed. With the more recent availability of stable historical information, the Company believes a reliable basis for estimation of the rebates exists. This change resulted in a one-time reduction to health benefits expense of approximately $8,000, or $0.10 per diluted share net of the related tax effect.
Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Effective July 1, 2009, the Company began reporting all of the debt securities in its investment portfolio as available-for-sale, other than certain auction rate securities subject to a forward contract that continue to be classified as trading securities. The change resulted in the transfer to available-for-sale of $397,369 in held-to-maturity securities and $80,761 in held-to-maturity investments on deposit, with unrealized gains of $4,648 and $464, respectively, and the transfer to available-for-sale of $26,868 in held-to-maturity securities and $17,697 in held-to-maturity investments on deposit, with unrealized losses of $193 and $54, respectively. The unrealized gains and losses, net of the related tax effects, were recorded to accumulated other comprehensive income.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale and held-to-maturity short-term investments were as follows at December 31, 2009 and 2008:
The purchase amount, realized gains, realized losses and fair value for trading securities held at December 31, 2009 and 2008 were as follows:
investments with a fair value equal to or greater than the required dollar amount. The interest that accrues on these investments is not restricted and is available for withdrawal. The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for these available-for-sale and held-to-maturity securities were as follows at December 31, 2009 and 2008:
The following table shows the fair value of the Company’s available-for-sale and held-to-maturity securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2009 and 2008:
Property, equipment and software, net at December 31, 2009 and 2008 is summarized as follows:
AMERIGROUP Corporation’s South Carolina subsidiary, AMERIGROUP Community Care of South Carolina, Inc. was licensed as a HMO and became operational in November 2007 with the Temporary Assistance for Needy Families population, followed by a separate CHIP contract in May 2008. On March 1, 2009, AMERIGROUP Community Care of South Carolina, Inc. sold its rights to serve Medicaid members pursuant to the contract with the State of South Carolina for $5,810, and recorded a gain, which is included in investment income and other revenues for the year ended December 31, 2009. As a result of this transaction, the Company’s South Carolina subsidiary does not currently serve any members. Certain claims run-out and transition obligations exist that will continue into 2010. Costs recorded and additional costs to be recorded to discontinue operations in South Carolina are not expected to be material to the Company’s results of operations, financial position or cash flows in future periods.
On March 10, 2008, AMERIGROUP Corporation’s Maryland subsidiary, AMERIGROUP Maryland, Inc. d/b/a AMERIGROUP Community Care of the District of Columbia, was notified that it was one of four successful bidders in the reprocurement of the District of Columbia’s Medicaid managed care business for the contract period beginning May 1, 2008. On April 2, 2008, AMERIGROUP Maryland, Inc. elected not to participate in the District’s new contract due to premium rate and programmatic concerns. Accordingly, its contract with the District of Columbia, as amended, terminated on June 30, 2008. As a result of exiting this market, the Company wrote off goodwill of $2,264 during the year ended December 31, 2008.
The changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2008 are as follows:
The effective tax rate is based on expected taxable income, statutory tax rates, and estimated permanent book to tax differences. Filed income tax returns are periodically audited by state and Federal authorities for compliance with applicable state and Federal tax laws. The effective tax rate is computed taking into account changes in facts and circumstances, including progress of audits, developments in case law and other applicable authority, and emerging legislation. The increase in non-deductible expenses for 2009 compared to 2008 and 2007 is primarily attributable to a decrease in Federal tax exempt interest income and an increase in expenses that are not deductible for tax purposes.
Income tax payable was $8,938 and $10,119 at December 31, 2009 and December 31, 2008, respectively, and is included in accrued expenses and other current liabilities.
Of the total $882 of unrecognized tax benefits, $593, net of the Federal benefit on state issues, represents the total amount of tax benefits that, if recognized, would reduce the annual effective rate. The Company recognizes interest and any penalties accrued related to unrecognized tax benefits in income tax expense. Potential interest of $7 was accrued relating to these unrecognized tax benefits during 2009. As of December 31, 2009, the Company has recorded a liability for potential gross interest of $317.
As of December 31, 2009, the Company had $260,000 outstanding in aggregate principal amount of 2.0% Convertible Senior Notes due May 15, 2012, the carrying amount of which was $235,104. The unamortized discount of $24,896 will continue to be amortized over the remaining period until maturity. In May 2007, an automatic shelf registration statement was filed on Form S-3 with the SEC covering the resale of the 2.0% Convertible Senior Notes and common stock issuable upon conversion. The 2.0% Convertible Senior Notes are governed by an Indenture dated as of March 28, 2007 (the “Indenture”). The 2.0% Convertible Senior Notes are senior unsecured obligations of the Company and rank equally with all of its existing and future senior debt and senior to all of its subordinated debt. The 2.0% Convertible Senior Notes are effectively subordinated to all existing and future liabilities of the Company’s subsidiaries and to any existing and future secured indebtedness. The 2.0% Convertible Senior Notes bear interest at a rate of 2.0% per year, payable semiannually in arrears in cash on May 15 and November 15 of each year, beginning on May 15, 2007. The 2.0% Convertible Senior Notes mature on May 15, 2012, unless earlier repurchased or converted in accordance with the Indenture.
Upon conversion of the 2.0% Convertible Senior Notes, the Company will pay cash up to the principal amount of the 2.0% Convertible Senior Notes converted. With respect to any conversion value in excess of the principal amount, the Company has the option to settle the excess with cash, shares of its common stock, or a combination thereof based on a daily conversion value, as defined in the Indenture. The initial conversion rate for the 2.0% Convertible Senior Notes is 23.5114 shares of common stock per one thousand dollars of principal amount of 2.0% Convertible Senior Notes, which represents a 32.5% conversion premium based on the closing price of $32.10 per share of the Company’s common stock on March 22, 2007 and is equivalent to a conversion price of approximately $42.53 per share of common stock. The conversion rate is subject to adjustment in some events but will not be adjusted for accrued interest. In addition, if a “fundamental change” occurs prior to the maturity date, the
Company will in some cases increase the conversion rate for a holder of the 2.0% Convertible Senior Notes that elects to convert their 2.0% Convertible Senior Notes in connection with such fundamental change.
Concurrent with the issuance of the 2.0% Convertible Senior Notes, the Company purchased convertible note hedges covering, subject to customary anti-dilution adjustments, 6,112,964 shares of its common stock. The convertible note hedges allow the Company to receive shares of its common stock and/or cash equal to the amounts of common stock and/or cash related to the excess conversion value that the Company would pay to the holders of the 2.0% Convertible Senior Notes upon conversion. These convertible note hedges will terminate at the earlier of the maturity date of the 2.0% Convertible Senior Notes or the first day on which none of the 2.0% Convertible Senior Notes remain outstanding due to conversion or otherwise.
the expected life of each award granted was calculated using the “simplified method”, which uses the vesting period, generally quarterly over four years, and the option term, generally seven years, to calculate the expected life of the option;
Total intrinsic value of options exercised was $5,036, $6,970 and $12,561, for the years ended December 31, 2009, 2008 and 2007, respectively.
Non-vested restricted stock includes grants conditioned upon service and/or performance based vesting. Service-based awards generally vest annually over a period of four years contingent only on the employees’ continued employment. Performance based awards vest annually over a period of four years from the date of grant with an additional vesting condition and based upon the extent of achievement of certain operating goals relating to the Company’s earnings per share, with up to 25% vesting on the first anniversary of the grant date and up to an additional 25% vesting on each of the second, third and fourth anniversaries of the grant date. The shares in each of the respective four tranches vest in full if earnings per share for each of the four calendar years after the date of grant equals or exceeds 115% of earnings per share for the preceding calendar year, as adjusted for any changes in measurement methods; provided that 50% of each tranche will vest if earnings per share for the year is between 113.50% and 114.24% (inclusive) of adjusted earnings per share for the preceding year, and 75% of each tranche will vest if earnings per share for the year is between 114.25% and 114.99% (inclusive) of adjusted earnings per share for the preceding year. Performance based awards represent 5,880 shares of outstanding non-vested restricted stock awards.
As of December 31, 2009, there was $30,704 of total unrecognized compensation cost related to non-vested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.54 years.
The per share fair value of those purchase rights granted in each of the six month offering periods during 2009, 2008 and 2007 were as follows:
Under the authorization of our Board of Directors, the Company maintains an on-going share repurchase program that allows it to repurchase up to $200,000 of shares of its common stock from and after August 5, 2009. Pursuant to this on-going share repurchase program, the Company repurchased 2,713,567 shares of its common stock and placed them into treasury during the year ended December 31, 2009 for an average per share cost of $25.70 and an aggregate cost of $69,751. As of December 31, 2009, the Company had authorization to purchase up to an additional $162,847 of common stock under the share repurchase program.
The shares issuable upon the conversion of the Company’s 2.0% Convertible Senior Notes due May 15, 2012, which were issued effective March 28, 2007 in an aggregate principle amount of $260,000 (See Note 9), were not included in the computation of diluted net income (loss) per share for the years ended December 31, 2009, 2008 and 2007 because to do so would have been anti-dilutive.
We lease office space under operating leases which expire at various dates through 2021. Future minimum payments by year and in the aggregate under all non-cancelable leases are as follows at December 31, 2009:
These leases have various escalations, abatements and tenant improvement allowances that have been included in the total cost of each lease and amortized on a straight-line basis. Total rent expense for all office space and office equipment under non-cancelable operating leases was $18,246, $18,351 and $15,846 in 2009, 2008 and 2007, respectively, and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The Company had no capital leases obligations at December 31, 2009.
Certain employees have the option to participate in a non-qualified deferred compensation plan sponsored by the Company. Participants may contribute a percentage of their income subject to maximum plan limits. The Company does not match any employee contributions; however, the Company’s obligation to the employee is equal to the employees’ deferrals plus or minus any return on investment the employee earns through self-selected investment allocations. Included in other long-term liabilities at December 31, 2009 and 2008, respectively was $6,178 and $4,526 related to this plan.
The Company believes that AMERIGROUP Florida, Inc. has substantial defenses to the claims asserted by AHCA and will defend against the claims vigorously. However, there can be no assurances that the ultimate outcome of this matter will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
and Release resolving all claims related to the amended petition and counterclaim. The effect of this Settlement Agreement was not material to the Company’s results of operations.
On November 21, 2007, Memorial Hermann Hospital System (“Memorial Hermann”) filed an Original Petition in the District Court of Harris County, Texas against AMERIGROUP Texas, Inc. alleging, inter alia, that AMERIGROUP Texas failed to pay claims for healthcare services rendered to members in accordance with the terms set forth in the contract between the parties. The Original Petition asserted a breach of contract claim and requested damages in the principal amount of $723, plus interest, punitive damages, attorneys’ fees, costs, and other relief. On December 3, 2009, Memorial Hermann filed a Second Amended Petition asserting claims for breach of contract and quantum meruit and requesting damages in the principal amount of $38,400, plus pre-judgement and post-judgment interest, statutory damages, attorneys’ fees, and costs. AMERIGROUP Texas has denied that it is indebted to Memorial Hermann as alleged in the petitions. The case is currently scheduled for trial on August 23, 2010.
Differences between net income (loss) and total comprehensive income (loss) resulted from net unrealized gains (losses) on the investment portfolio as follows: