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 the 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 connection with the Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Form 10-K. Selected financial data as of and for each of the years in the five-year period ended December 31, 2008 are derived from our Consolidated Financial Statements, which have been audited by KPMG LLP, independent registered public accounting firm. All share and per share amounts included in the following consolidated financial data have been retroactively adjusted to reflect the two-for-one stock split effective January 18, 2005.
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 and Medicare Advantage programs. 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 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 $4.5 billion, or 14.5% over the year ended December 31, 2007;
Risk membership increased to 1,579,000, or 3.3% compared to that as of December 31, 2007;
Concluded our ASO contract in West Tennessee effective October 31, 2008;
Reached a comprehensive settlement agreement concluding the civil qui tam litigation relating to certain marketing practices of the Company’s former Illinois subsidiary.
Our premium revenue increased approximately $572.4 million or 14.8% for the year ended December 31, 2008, primarily due to the full year impact of operations in Tennessee whose contract began in April 2007 as well as premium rate increases and yield increases resulting from membership mix changes in that market. This includes the impact of a $35.5 million retroactive premium rate adjustment in Tennessee received in 2008, which related to operations in 2007. Additionally, our entry into the New Mexico market, under the CoLTS program beginning in August 2008, contributed significantly to premium growth in 2008. The remaining growth in 2008 is a result of premium rate increases, including a retroactive premium rate adjustment in Georgia of approximately $10.4 million related to operations in 2007, and yield increases resulting from changes in membership mix across many of our markets.
As of December 31, 2008, our total membership decreased by 132,000 members, or 7.7%, to 1,579,000 members. This decrease resulted primarily from the conclusion of our operations in West Tennessee effective October 31, 2008, under which we provided ASO services to approximately 170,000 members as of December 31, 2007. Our risk membership increased to 1,579,000 as of December 31, 2008 compared to 1,528,000 as of December 31, 2007, or 3.3%. This increase is primarily a result of growth in our Florida, Maryland and South Carolina markets, in addition to our entry into the New Mexico market.
The current economic recession has and is expected to continue to put pressure on state budgets as tax and other state revenues decrease while the Medicaid eligible population increases creating more need for funding. We anticipate this will require the government agencies with whom we contract to find funding alternatives, which may result in reductions in funding for current programs and program expansions, contraction of covered benefits,
limited or no premium rate increases or premium rate decreases. These or other similar actions could materially adversely affect our results of operations and liquidity in future periods.
Our investment portfolio generated approximately $50.9 million in pre-tax income for the year ended December 31, 2008 compared to $68.7 million in 2007. The decrease is primarily a result of declining investment yields over the period due to changes in interest rates in the current economic recession. We anticipate that interest rates will remain at or below the current rates as of December 31, 2008 for the foreseeable future which would result in reduced returns on our investment portfolio. The performance of our portfolio is interest rate driven, and consequently, changes in interest rates affects our investment returns on, and the market value of our portfolio. This factor or any further disruptions in the credit markets could materially adversely affect our results of operations or liquidity in future periods.
On August 13, 2008, we finalized the settlement of qui tam litigation relating to certain marketing practices of our former Illinois health plan for a cash payment of $225.0 million without any admission of wrongdoing by the Company or its subsidiaries or affiliates. We also paid approximately $9.2 million to the Relator for legal fees. Both payments were made during the three months ended September 30, 2008. As a result, we recorded a one-time expense in the amount of $234.2 million in the year ended December 31, 2008 and reported a net loss. Net of the related tax benefit, our earnings were reduced $199.6 million or $3.78 per diluted share.
On August 1, 2008, our New Mexico subsidiary, AMERIGROUP New Mexico, Inc., began serving individuals in New Mexico’s new CoLTS program in six counties in the Metro/Central region: Bernalillo, Sandoval, Torrance, Valencia, Santa Fe and Los Alamos. In November 2008, the second phase of membership expanded coverage to include the Southwest region. The remaining regions will phase in during 2009, ultimately expanding coverage statewide. We were one of two organizations chosen to participate in New Mexico’s CoLTS program that will provide coverage to approximately 38,000 members statewide upon completion of the program roll-out. As of December 31, 2008, we served approximately 11,000 members in New Mexico.
Following execution of the Purchase Agreement but prior to closing, the State notified UHP of (a) its final periodic risk score for its TANF and CHIP Medicaid members; and (b) the amount of the corresponding premium rate reduction effective January 1, 2009. Upon learning of UHP’s final periodic risk score and the amount of the rate reduction, AMERIGROUP New Jersey, Inc., notified Centene and UHP in writing that: (i) the rate reduction constituted a Material Adverse Effect, as defined in the Purchase Agreement; (ii) the occurrence of a Material Adverse Effect was a breach of the representations and warranties of Centene and UHP in the Purchase Agreement; (iii) the absence of any Material Adverse Effect was a precondition to the obligation of AMERIGROUP New Jersey, Inc. to proceed to closing under the Purchase Agreement; and (iv) pursuant to the terms of the Purchase Agreement, Centene and UHP had ten days to cure the breach or AMERIGROUP New Jersey, Inc., would terminate the Purchase Agreement in accordance with its terms. Centene and UHP failed to cure the breach within the ten day period, and, on December 30, 2008, AMERIGROUP New Jersey, Inc. notified Centene and UHP in writing that the Purchase Agreement was terminated.
On January 8, 2009, Centene and UHP filed a civil action complaint (the “Complaint”) against AMERIGROUP New Jersey, Inc. and the Company in the Superior Court of New Jersey, Essex County, Chancery Division, Docket No. C-8-09. The Complaint asserts breach of contract and tortious interference with contractual relations claims against AMERIGROUP New Jersey, Inc. and the Company. The Complaint seeks specific performance compelling AMERIGROUP New Jersey, Inc. to perform its obligations under the Purchase Agreement, consequential and incidental damages to be determined at trial, and other relief as the court may deem just and proper.
We generate revenues primarily from premiums and ASO fees we receive from the states in which we operate to arrange for healthcare services for our TANF, CHIP, ABD and FamilyCare members. We receive premiums from CMS for our Medicare Advantage members. We recognize premium and ASO fee revenue during the period in which we are obligated to provide services to our members. A fixed amount per member per month is paid to us to arrange for healthcare services for our members pursuant to our contracts in each of our markets. These premium
The most judgmental accounting estimate in our Consolidated Financial Statements is our liability for medical claims payable. At December 31, 2008, this liability was $536.1 million and represented 48% of our total consolidated liabilities. Included in this liability and the corresponding health benefits expenses for IBNR claims are the estimated costs of processing such claims. Health benefits expenses have two main components: direct medical expenses and medically-related administrative costs. Direct medical expenses include amounts paid to hospitals, physicians and providers of ancillary services, such as laboratories and pharmacies. Medically-related administrative costs include items such as case and disease management, utilization review services, quality assurance and on-call nurses.
We do not believe that completion factors are fully credible for estimating claims incurred for the most recent two to three months which constitute the majority of the amount of the medical claims payable. Accordingly, we estimate health benefits expenses incurred by applying observed medical cost trend factors to the average per member per month (“PMPM”) medical costs incurred in a more complete time period. Medical cost trend factors are developed through a comprehensive analysis of claims incurred in prior months for which more complete claim data is available. The average PMPM is also adjusted for known changes in hospital authorization data, provider contracting changes, changes in benefit levels, age and gender mix of members, and seasonality. The incurred estimates resulting from the analysis of completion factors, medical cost trend factors and other known changes are weighted together using actuarial judgment.
Many aspects of the managed care business are not predictable with consistency. These aspects include the incidences of illness or disease state (such as cardiac heart failure cases, cases of upper respiratory illness, the length and severity of the flu season, diabetes, the number of full-term versus premature births and the number of neonatal intensive care babies). Therefore, we must rely upon our historical experience, as continually monitored, to reflect the ever-changing mix, needs and growth of our members in our assumptions. Among the factors considered by management are changes in the level of benefits provided to members, seasonal variations in utilization, identified industry trends and changes in provider reimbursement arrangements, including changes in the percentage of reimbursements made on a capitated, as opposed to a fee-for-service, basis. These considerations are aggregated in the medical cost trend. Other external factors such as government-mandated benefits or other regulatory changes, catastrophes and epidemics may impact medical cost trends. Other internal factors such as system conversions and claims processing interruptions may impact our ability to accurately establish estimates of historical completion factors or medical cost trends. Medical cost trends potentially are more volatile than other segments of the economy. Management is required to use considerable judgment in the selection of health benefits expense trends and other actuarial model inputs.
Completion factors are the most significant factors we use in developing our medical claims payable estimates for older periods, generally periods prior to the most recent three months. The following table illustrates the sensitivity of these factors and the estimated potential impact on our medical claims payable estimates for those periods as of December 31, 2008:
The analyses above include those outcomes that are considered reasonably likely based on the Company’s historical experience in estimating its medical claims payable.
Health benefits expenses incurred during the year, was reduced by approximately $60.8 million and $68.2 million for the years ended December 31, 2008 and 2007, respectively, for amounts related to prior years. As noted above, the actuarial standards of practice generally require that the liabilities established for IBNR be sufficient to
cover obligations under an assumption of moderately adverse conditions. We did not experience moderately adverse conditions in either period. Therefore included in the amounts related to prior years are approximately $37.3 million and $30.4 million for the years ended December 31, 2008 and 2007, respectively, related to amounts included in the medical claims payable as of January 1 of each respective year in order to establish the liability at a level adequate for moderately adverse conditions. The increase in the absolute dollar value of this estimate for the year ended December 31, 2008 compared to the year ended December 31, 2007, is due to the increased value of the medical claims payable on which this assumption is applied.
The remaining reduction in health benefits expenses incurred during the year, related to prior years, of approximately $23.5 million and $37.8 million for the years ended December 31, 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. Claims processing initiatives yielded increased claim payment recoveries and coordination of benefits in 2008 and 2007 related to prior year dates of services for both periods. These recoveries also caused our actuarial estimates to include faster completion factors than were originally established. The faster completion factors account for the remaining net favorable reserve development in each respective period.
Health benefits expenses incurred during the year, related to prior years, for the year ended December 31, 2006 was approximately $62.8 million which includes approximately $25.9 million that was included in the medical claims payable as of January 1, 2006 in order to establish the liability at a level adequate for moderately adverse conditions. We did not experience moderately adverse conditions. The remaining reduction in health benefits expenses incurred during the year, related to prior years, of approximately $36.9 million was due to cost trends not remaining at elevated levels as previously anticipated.
Establishing the liabilities for IBNR, associated with health benefits expenses 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 expenses 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 expenses incurred during the year related to the current year include an assumption to cover moderately adverse conditions.
Similar to other companies, we sometimes face challenges from the tax authorities regarding the amount of taxes due. Positions taken on our tax returns are evaluated and benefits are recognized only if it is more likely than
not that our position will be sustained on audit. Based on our evaluation of tax positions, we believe that we have appropriately accounted for potential tax exposures.
The qui tam litigation settlement payment had a significant impact on tax expense and the effective tax rate for 2008 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 settlement payment was approximately $34.6 million. The Company has requested a pre-filing agreement with the IRS regarding the tax treatment of the qui tam settlement. As the Company works to resolve this issue with the IRS, it is possible that there will be changes to the tax benefit associated with the qui tam settlement that will have a material impact on income tax expense and the effective tax rate in future accounting periods.
For further information, please reference Note 7 to our audited Consolidated Financial Statements as of and for the year ended December 31, 2008 included in this Form 10-K.
On July 13, 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109. This interpretation provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For a tax benefit to be recognized, a tax position must be more likely than not to be sustained upon examination by applicable taxing authorities. The benefit recognized is the amount that has a greater than 50% likelihood of being realized upon final settlement of the tax position. We adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption of FIN 48, we recorded a $9.2 million increase to retained earnings as of January 1, 2007.
In May 2008, the FASB issued FASB Staff Position (“FSP APB 14-a”), Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-a requires the proceeds from the issuance of convertible debt instruments that may be settled in cash upon conversion to be allocated between a liability component and an equity component. The resulting debt discount will be amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. FSP APB 14-a is effective for fiscal years beginning after December 15, 2008, and is applied retrospectively to prior periods. FSP APB 14-a will change the accounting treatment for our $260.0 million 2.0% Convertible Senior Notes due May 15, 2012, which were issued effective March 28, 2007. The impact of this new accounting treatment will be significant to our results of operations and will result in an increase to non-cash interest expense beginning in 2009 for financial statements covering past and future periods. We estimate that our 2007, 2008 and 2009 reported earnings per diluted share will decrease by approximately $0.08, $0.11 and $0.12, respectively, as a result of the adoption of FSP APB 14-a.
Premium revenue for the year ended December 31, 2008 increased $572.4 million, or 14.8%. The increase was primarily due to two factors: (1) the full year impact of operations in Tennessee which originally commenced in April 2007 as well as premium rate and yield increases in that market and (2) entry into the New Mexico market under the CoLTS program beginning in August 2008. The remaining growth in 2008 is a result of premium rate
The following table sets forth the approximate number of our members in each state as of December 31, 2008, 2007 and 2006. Because we receive two premiums for members that are in both the Medicare Advantage and ABD products, these members have been counted twice in the states where we offer these plans.
Included in the Texas membership are approximately 13,000 and 14,000 members under an ASO contract in 2007 and 2006, respectively. This contract terminated February 29, 2008.
Included in the Tennessee membership are approximately 170,000 members under an ASO contract in 2007. This contract terminated October 31, 2008.
The contract with the District of Columbia terminated June 30, 2008.
Expenses relating to health benefits for the year ended December 31, 2008 increased $402.2 million, or 12.5%. The HBR for the year ended December 31, 2008 was 81.4% compared to 83.1% in 2007. The decrease in HBR was primarily as a result of retroactive premium rate adjustments in Tennessee and Georgia totaling approximately $45.9 million in addition to premium rate increases and yield increases in our other markets.
Premium taxes were $93.8 million, $85.2 million and $47.1 million for the years ended December 31, 2008, 2007 and 2006, respectively. The increase in premium tax expense in 2008 compared to 2007 is a result of our entry into New Mexico in August 2008 and growth in premium revenues in the markets where premium tax is levied. The increase in premium tax expense in 2007 compared to 2006 is due to our entry into the Georgia and Tennessee markets in 2007.
In 2009, the Company will make certain reclassifications to its income statement format. Beginning in the first quarter of 2009, the Company will remove the Texas experience rebate expense from selling, general and administrative expenses and include the amount as a reduction to premium revenue, as this amount is effectively a premium rebate to the State. In addition, premium tax expense will be reported on a separate line following selling, general and administrative expenses and before depreciation and amortization expense. The change will have the effect of increasing our health benefits ratio and reducing our selling, general and administrative expense ratio.
and our growth strategy for at least 12 months. Our debt-to-total capital ratio at December 31, 2008 was 26.4%. The financial markets have been experiencing extreme volatility and disruption. In the event we need access to additional capital, our ability to obtain such capital may be limited and the cost of any such capital may be significantly higher than in past periods. While we have not attempted to access the credit markets recently, we believe that if credit could be obtained, the terms and costs of such credit would be significantly less favorable to us than what was obtained in our most recent financings.
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 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.
As of December 31, 2008, we believe our subsidiaries were in compliance with all minimum statutory capital requirements. We anticipate the parent company may be required to fund minimum net worth shortfalls during 2009 using unregulated cash, cash equivalents and investments. We believe as a result that we will continue to be in compliance with these requirements at least through the end of 2009.
our Credit Agreement, but have caused to be issued irrevocable letters of credit in the aggregate face amount of $16.5 million.
The borrowings under the Credit Agreement accrue interest at our option at a percentage, per annum, equal to the adjusted Eurodollar rate plus 2.0% or the base rate plus 1.0%. We are required to make payments of interest in arrears on each interest payment date (to be determined depending on interest period elections made by the Company) and at maturity of the loans, including final maturity thereof. The applicable interest rate was 2.50% at December 31, 2008.
The Credit Agreement includes customary covenants and events of default. If any event of default occurs and is continuing, the Credit Agreement may be terminated and all amounts owing there under may become immediately due and payable. The Credit Agreement also includes the following financial covenants: (i) maximum leverage ratios as of specified periods, (ii) a minimum interest coverage ratio and (iii) a minimum statutory net worth ratio. As of December 31, 2008, we were in compliance with all of our debt covenants.
Borrowings under the Credit Agreement are secured by substantially all of our assets and the assets of our wholly-owned subsidiary, PHP Holdings, Inc., including a pledge of the stock of each of our respective wholly-owned managed care subsidiaries, in each case, subject to carve-outs.
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 of the 2.0% Convertible Senior Notes converted, we have the option to settle the excess with cash, shares of our common stock, or a combination of cash and shares of our common stock based on a daily conversion value, as defined in the Indenture. If an “accounting event” (as defined in the Indenture) occurs, we have the option to elect to settle the converted notes exclusively in shares of our common stock. 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” (as defined in the Indenture) occurs prior to the maturity date, we will in some cases increase the conversion rate for a holder of Notes that elects to convert its Notes in connection with such fundamental change.
The convertible note hedges and warrants are separate transactions which will not affect holders’ rights under the Notes.
Cash provided by investing activities was $307.2 million for the year ended December 31, 2008 compared to cash used in investing activities of $431.5 million for the year ended December 31, 2007. This increase in cash provided by investing activities was primarily a result of net purchases of restricted investments in 2007 subsequently released in 2008. Additionally, the Company executed net purchases of hedge and warrant instruments in 2007 that did not recur in 2008. We currently anticipate total capital expenditures for 2009 of approximately $40.0 million to $45.0 million related to technological infrastructure development and the expansion of our medical management system.
As discussed in Note 2 to the Consolidated Financial Statements, the Company adopted the provisions of FASB Statement No. 157 effective January 1, 2008. We have determined that we utilize unobservable (Level 3) inputs in determining the fair value of certain auction rate securities totaling $71.6 million at December 31, 2008.
Our auction rate securities are classified as either available-for-sale or trading securities and reflected at fair value. In prior periods, 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 FASB Statement No. 157. However, the auction events for these securities failed during early 2008 and have not resumed. Therefore, we have determined the estimated fair values of these securities utilizing a discounted cash flow analysis or other type of valuation model as of December 31, 2008. These analyses consider, among other items, the creditworthiness of the issuer, the timing of the expected future cash flows, including the final maturity, associated with the securities, and an assumption of when the next time the security is expected to have a successful auction. These securities were also compared, when possible, to other observable and relevant market data which 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 of approximately $6.4 million, with a corresponding increase to other comprehensive loss of approximately $4.0 million which is net of the related tax benefit. We currently believe that this temporary decline in fair value is primarily due to liquidity concerns, because the underlying assets for the majority of these securities are student loans supported and guaranteed by the United States Department of Education. In addition, our holdings of auction rate securities represented less than five percent of our total cash, cash equivalent, and investment balance at December 31, 2008, 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 estimate 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 loss. We will re-evaluate each of these factors as market conditions change in subsequent periods.
During the fourth quarter of 2008, we were notified by several of our brokers from whom we purchased auction rate securities that they would be repurchasing those securities over the course of 2009 and 2010. We entered into a forward contract with one of these brokers in accordance with its terms for auction rate securities totaling $15.6 million as of December 31, 2008, at no cost to the Company. This forward contract provides the Company with the ability to sell these auction rate securities to the broker at par within a defined timeframe. As a result of this transaction, these securities have been reclassified to trading because the Company no longer intends to hold these securities until final maturity. Trading securities are carried at fair value. Changes in fair value are recorded in earnings. As of December 31, 2008, a realized loss of $2.2 million was recorded related to these trading securities. Additionally, the value of the forward contract of $2.0 million was estimated using a discounted cash flow analysis taking into consideration the creditworthiness of the counterparty to the agreement. This forward contract was recognized as of December 31, 2008 at its estimated fair value and is included in other long-term assets with a corresponding increase to earnings.
The weighted-average life of our auction rate securities portfolio, based on the final maturity, is approximately 24 years. We currently have the ability to hold our auction rate securities to maturity, if required, or if and when market stability is restored with respect to these investments.
Cash used in financing activities was $105.8 million for the year ended December 31, 2008 and cash provided by financing activities was $391.7 million for the year ended December 31, 2007. The decrease in cash provided by financing activities was primarily related to repayments on the Credit Agreement of $84.0 million and stock repurchases of $30.6 million in 2008 compared to net proceeds from the issuance of $260.0 million of 2.0% Convertible Senior Notes and borrowings under our Credit Agreement in 2007.
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 Company was incorporated in 1994 and began operations of its wholly owned subsidiaries to develop, own and operate as managed healthcare companies.
We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. We had cash equivalents of $711,826 and $436,280 at December 31, 2008 and 2007, respectively, which consist of commercial paper and money market funds in 2008 and commercial paper, money market funds, U.S. Treasury Securities, debt securities of government sponsored entities and municipal bonds in 2007.
Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. A decline in the market value of any held-to-maturity security below cost that is deemed other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective-interest method. Dividend and interest income is recognized when earned.
Auction rate securities are comprised of municipal note investments with an auction reset feature. These notes are issued by various state and local municipal entities for the purpose of financing student loans, public projects and other activities. All of these securities carry at least an A credit rating with the majority carrying a AAA credit rating. Liquidity for these auction rate securities was historically provided by an auction process which allowed holders to sell their notes and the interest rate was reset at pre-determined intervals, usually every 28 or 35 days. An
auction failure may occur if parties wishing to sell their securities cannot be matched with an adequate volume of buyers. In the event that there is a failed auction the indenture governing the security requires the issuer to pay interest at a contractually defined rate. As of December 31, 2007, auction rate securities totaling $104,575 were included in short-term investments. These securities were classified as available-for-sale and carried at fair value. Changes in fair value are reported in other comprehensive income until realized through the sale or maturity of the security. As of December 31, 2007, the Company had no unrealized gains or losses related to available-for-sale securities.
The auction rate securities held by us at December 31, 2008 were in securities issued by student loan corporations which are municipalities of various U.S. state governments. The majority of the student loans backing these securities fall under the Federal Family Education Loan program which is supported and guaranteed by the United States Department of Education. During the first quarter of 2008, the auction events for these securities failed and have not resumed. As we cannot predict the timing of future successful auctions, if any, available-for-sale auction rate securities totaling $56,028 have been reclassified to long-term as of December 31, 2008. Additionally, due to the absence of an active market, the fair values of these securities as of December 31, 2008 are estimated utilizing a discounted cash flow analysis or other type of valuation model. These analyses consider, among other items, the collateral underlying the security, the creditworthiness of the issuer, the timing of the expected future cash flows, including the final maturity, and an assumption of when the next time the security is expected to have a successful auction. These securities were also compared, when possible, to other observable and relevant market data which is limited at this time. As of December 31, 2008, unrealized losses recorded to other comprehensive loss related to available-for-sale securities totaled $6,372 or $4,022 net of the related tax benefit. Any future fluctuations in the fair value related to these securities that we deem to be temporary, including any recoveries of previous write-downs, will be recorded to accumulated other comprehensive loss. If we determine that any future valuation adjustment was other than temporary, we will record a charge to earnings as appropriate.
During the fourth quarter of 2008, we were notified by several of our brokers from whom we purchased auction rate securities that they would be repurchasing those securities over the course of 2009 and 2010. We entered into a forward contract with one of the brokers for auction rate securities totaling $15,612 as of December 31, 2008, at no cost to the Company. This forward contract provides the Company with the ability to sell these auction rate securities to the broker at par within a defined timeframe. As a result of this transaction, these securities have been reclassified to trading because the Company no longer intends to hold these securities until final maturity. Trading securities are carried at fair value. Changes in fair value are recorded in earnings. As of December 31, 2008, a realized loss of $2,238 was recorded related to these trading securities. Additionally, the value of the forward contract of $2,014 was estimated using a discounted cash flow analysis taking into consideration the creditworthiness of the counterparty to the agreement. This forward contract was recognized as of December 31, 2008 at its estimated fair value and is included in other long-term assets with a corresponding increase to earnings.
The Company’s assets measured at fair value on a recurring basis subject to the disclosure requirements of Financial Accounting Standards Board (“FASB”) Statement No. 157 at December 31, 2008, were as follows:
Based on market conditions, we changed our valuation methodology for auction rate securities to a discounted cash flow analysis or other type of valuation model during the first quarter of 2008. Accordingly, these securities changed from Level 1 to Level 3 within FASB Statement No. 157’s hierarchy since our initial adoption of FASB Statement No. 157 at January 1, 2008. Additionally, the forward contract on certain auction rate securities is included in Level 3.
The following table presents the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in FASB Statement No. 157 at December 31, 2008:
Goodwill represents the excess of cost over fair value of businesses acquired. In accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets (“FASB Statement No. 142”), goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. FASB Statement No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
Other assets include cash on deposit for payment of claims under administrative services only arrangements, deposits, debt issuance costs, cash surrender value of life insurance policies and forward contract rights related to certain auction rate securities.
Taxes based on premium revenues are currently paid by our health plan subsidiaries in the States of Georgia, Maryland, New Jersey, New Mexico, New York, Ohio, Tennessee and Texas. Premium tax expense totaled $93,757, $85,218 and $47,100 in 2008, 2007 and 2006, respectively, and is included in selling, general and administrative expenses. As of December 31, 2008, premium taxes range from 2% to 5.5% of revenues or are calculated on a per member per month basis.
We record premium revenue based on membership and premium information from each government agency with whom we contract to provide services. Premiums are due monthly and are recognized as revenue during the period in which we are obligated to provide services to members. In all of our states except New Mexico, Tennessee and Virginia, we are eligible to receive supplemental payments for newborns and/or obstetric deliveries. Each state contract is specific as to what is required before payments are generated. Upon delivery of a newborn, each state is notified according to our contract. Revenue is recognized in the period that the delivery occurs and the related services are provided to our member. Additionally, in some states we receive supplemental payments for certain services such as high cost drugs and early childhood prevention screenings. Any amounts that have been earned and have not been received from the state by the end of the period are recorded on our balance sheet as premium receivables.
Health benefits expenses incurred during the year was reduced by approximately $60,800 and $68,200 for the years ended December 31, 2008 and 2007, respectively, for amounts related to prior years. As noted above, the actuarial standards of practice generally require that the liabilities established for IBNR be sufficient to cover obligations under an assumption of moderately adverse conditions. We did not experience moderately adverse conditions in either period. Therefore included in the amounts related to prior years are approximately $37,300 and $30,400 for the years ended December 31, 2008 and 2007, respectively, related to amounts included in the medical claims payable as of January 1 of each respective year in order to establish the liability at a level adequate for moderately adverse conditions. The increase in the absolute dollar value of this estimate for the year ended December 31, 2008 compared to the year ended December 31, 2007, is due to the increased value of the medical claims payable on which this assumption is applied.
Stop-loss premiums, net of recoveries, are included in health benefits expenses in the accompanying consolidated income statements of operations.
Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period to prepare these Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates.
On July 13, 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109. This interpretation provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For a tax benefit to be recognized, a tax position must be more likely than not to be sustained upon examination by applicable taxing authorities. The benefit recognized is the amount that has a greater than 50% likelihood of being realized upon final settlement of the tax position. We adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption of FIN 48, we recorded a $9,185 increase to retained earnings as of January 1, 2007.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (“FASB Statement No. 157”). FASB Statement No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. The Company has adopted the provisions of FASB Statement No. 157 as of January 1, 2008, for financial instruments.
FASB Statement No. 157 establishes 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. In October 2008, the FASB issued FASB Staff Position 157-3 (“FSP 157-3”), Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, which clarifies the application of FASB Statement No. 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The Company’s assumptions underlying our adoption of FASB Statement No. 157 were not materially impacted by the provisions of FSP 157-3. FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, delays the effective date of FASB Statement No. 157 until fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis which would include the following:
On January 1, 2009, the Company will be required to apply the provisions of FASB Statement No. 157 to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company is in the process of evaluating the impact, if any, of applying these provisions on its financial position and results of operations.
In May 2008, the FASB issued FASB Staff Position APB 14-a (“FSP APB 14-a”), Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-a requires the proceeds from the issuance of convertible debt instruments that may be settled in cash upon conversion
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations (“FASB Statement No. 141(R)”). FASB Statement No. 141(R) establishes principles and requirements for how an acquirer determines and recognizes in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired. FASB Statement No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. FASB Statement No. 141(R) is effective for any transaction occurring in fiscal years beginning after December 15, 2008; therefore, it had no impact on our current results of operations and financial condition; however, future acquisitions will be accounted for under this guidance.
Our profitability depends in large part on accurately predicting and effectively managing health benefits expenses. We continually review our premium and benefit structure to reflect its underlying claims experience and revised actuarial data; however, several factors could adversely affect our health benefits expense. Certain of these factors, which include changes in healthcare practices, cost trends, inflation, new technologies, major epidemics, natural disasters and malpractice litigation, are beyond any health plan’s control and could adversely affect our ability to accurately predict and effectively control healthcare costs. Costs in excess of those anticipated could have a material adverse effect on our results of operations.
At December 31, 2008, 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, 2008, our Texas contract represented 27% of our premium revenues and our Georgia, Maryland and Tennessee contracts individually accounted for over 10% of our 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 state. 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.
creditworthiness of the counterparty to the agreement. This forward contract was recognized as of December 31, 2008 at its estimated fair value and is included in other long-term assets with a corresponding increase to earnings.
As a condition for licensure by various state governments to operate HMOs, health insuring corporations (“HICs”) or prepaid health services plans (“PHSPs”) we are required to maintain certain funds on deposit, in specific dollar amounts based on either formulas or set amounts, with or under the control of the various departments of insurance. We purchase interest-based 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
The temporary declines in value as of December 31, 2008 and 2007, are primarily due to fluctuations in short-term market interest rates.
Property, equipment and software, net at December 31, 2008 and 2007 is summarized as follows:
In November 2008, we entered into an agreement to sell substantially all assets of AMERIGROUP Community Care of South Carolina, Inc. As of December 31, 2008, AMERIGROUP Community Care of South Carolina, Inc. served approximately 16,000 members in South Carolina. This transaction is expected to close in the first quarter of 2009.
Our administrative services only arrangement for the West Tennessee region terminated on October 31, 2008 pursuant to its terms. However, we have certain claims run-out and transition obligations that will continue into 2009. Additionally, we received a purchase price adjustment that reduced the purchase price by $1,500 for early termination of the administrative services only contract which was recorded as an adjustment to goodwill. The resulting goodwill of $6,544, or $0.08 per diluted share net of the related income tax effect for the year ended December 31 2008, was written off to selling, general and administrative expenses. Additional costs recorded and to be recorded to discontinue operations in West Tennessee are not material.
Total income taxes for the years ended December 31, 2008, 2007 and 2006 were allocated as follows:
Income tax expense (benefit) for the years ended December 31, 2008, 2007 and 2006 consists of the following:
Income tax payable was $10,119 at December 31, 2008 and is included in accrued expenses and other current liabilities. Prepaid income tax was $14,277 at December 31, 2007, and is included in prepaid expenses and other current assets.
The Company is subject to U.S. Federal income tax, as well as income taxes in multiple state jurisdictions. We have substantially concluded all U.S. Federal income tax matters for years through 2005. Substantially all material state matters have been concluded for years through 2004.
We adopted the provisions of FIN 48 on January 1, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Of the total unrecognized tax benefits of $952, $649 (net of the Federal benefit on state issues) represents the total amount of tax benefits that, if recognized, would reduce our annual effective rate. The Company recognizes interest and any penalties accrued related to unrecognized tax benefits in income tax expense. We accrued potential interest of $39 related to these unrecognized tax benefits during 2008. As of December 31, 2008, the Company has recorded a liability for potential gross interest of $304.
The Company has requested a pre-filing agreement with the IRS regarding the tax treatment of the qui tam settlement. As the Company works to resolve this issue with the IRS, it is reasonably possible that there could be a material change in the gross amount of unrecognized tax benefits within the next twelve months.
Our Credit and Guaranty Agreement (the “Credit Agreement”) entered into on March 26, 2007 has an outstanding balance of $44,332 under the term loan facility and has available up to $50,000 of financing under a senior secured revolving credit facility. The Credit Agreement terminates on March 15, 2012. During 2008, the Company paid $84,028 in scheduled and voluntary principal payments of outstanding balances under the Credit Agreement. The Company elected to make voluntary payments of principal as a result of cash received from the release of restricted investments held as collateral in excess of the amount needed to fund the qui tam litigation settlement. Additionally, the Company purchased in the open-market and retired approximately $5,541 of its outstanding principal at approximately 88% of par resulting in a gain of $665 for the year ended December 31, 2008.
The Credit Agreement includes customary covenants and events of default. If any event of default occurs and is continuing, the Credit Agreement may be terminated and all amounts owing there under may become immediately due and payable. The Credit Agreement also includes the following financial covenants: (i) maximum leverage ratios as of specified periods, (ii) a minimum interest coverage ratio and (iii) a minimum statutory net worth ratio.
As of December 31, 2008, we had no outstanding borrowings under the senior secured revolving credit facility portion of our Credit Agreement but have caused to be issued irrevocable letters of credit in the aggregate face amount of $16,500.
Effective March 28, 2007, we issued an aggregate of $260,000 in principal amount of 2.0% Convertible Senior Notes due May 15, 2012 (the “2.0% Convertible Senior Notes”). 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 of the 2.0% Convertible Senior Notes. We incurred offering expenses totaling approximately $6,900 in connection with the offering of the 2.0% Convertible Senior Notes which are included in other long-term assets in the accompanying Consolidated Financial Statements and are being amortized over the term of the 2.0% Convertible Senior Notes. 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, including the obligations under our Credit Agreement. 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.
The convertible note hedges are expected to reduce the potential dilution upon conversion of the 2.0% Convertible Senior Notes in the event that the market value per share of our common stock, as measured under the convertible note hedges, at the time of exercise is greater than the strike price of the convertible note hedges, which corresponds to the initial conversion price of the 2.0% Convertible Senior Notes and is subject to certain customary adjustments. If, however, the market value per share of our common stock exceeds the strike price of the warrants (discussed below) when such warrants are exercised, we will be required to issue common stock. Both the convertible note hedges and warrants provide for net-share settlement at the time of any exercise for the amount that the market value of our common stock exceeds the applicable strike price.
The convertible note hedges and sold warrants are separate transactions which do not affect holders’ rights under the 2.0% Convertible Senior Notes.
In May 2005, our shareholders adopted and approved our 2005 Equity Incentive Plan (“2005 Plan”), which provides for the granting of stock options, restricted stock, restricted stock units, stock appreciation rights, stock bonuses and other stock-based awards to employees and directors. We reserved for issuance a maximum of 3,750,000 shares of common stock under the 2005 Plan. In addition, shares remaining available for issuance under our 2003 Stock Plan (described below), our 2000 Stock Plan (described below) and our 1994 Stock Plan (described below) will be available for issuance under the 2005 Plan. Under all plans, an option’s maximum term is ten years. As of December 31, 2008, we had a total 1,398,589 shares available for issuance under our 2005 Plan.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions for the year ended December 31, 2008, 2007 and 2006:
Assumptions used in estimating the fair value at date of grant were based on the following:
The weighted-average fair value per share of options granted during the years ended December 31, 2008, 2007 and 2006 was $11.79, $14.08 and $11.08, respectively. The total fair value of options vested during the years December 31, 2008, 2007 and 2006 was $6,324, $8,526 and $6,706, respectively. The following table provides information related to options exercised during the years ended December 31, 2008, 2006, and 2005:
Total intrinsic value of options exercised was $6,970, $12,561 and $10,634, for the years ended December 31, 2008, 2007 and 2006, respectively.
Non-vested restricted stock for the twelve months ended December 31, 2008 is summarized below:
As of December 31, 2008, there was $26,990 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005, 2003, 2000 and 1994 Plans, which is expected to be recognized over a weighted-average period of 2.9 years.
On September 30, 2007, we entered into a Retirement and Consulting Agreement with Jeffrey L. McWaters, the Company’s former Chairman of the Board and Chief Executive Officer. Under the terms of the agreement, certain equity grants were modified to accelerate vesting and extend the exercise period. As a result, additional compensation expense of approximately $3,700 was recorded in 2007.
The fair value of the employees’ purchase rights granted in each of the six months offering periods during 2008, 2007 and 2006 was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
The Company recognized $853, $753 and $537 of compensation expense during the years ended December 31, 2008, 2007 and 2006, respectively, for the purchase rights granted during these years.
In 2008, our Board of Directors approved a stock repurchase program and authorized the repurchase of up to two million shares, subject to limits imposed by our Credit Agreement and otherwise. We repurchased 1,163,027 shares of our common stock and placed them into treasury during the year ended December 31, 2008 for a total cost of approximately $30,600. As of December 31, 2008, the Company’s share repurchase program had 836,973 shares remaining under the limit authorized to be repurchased. In February 2009, our Board of Directors authorized the repurchase of an additional three million shares under the program.
Cash and cash equivalents, restricted cash held as collateral, premium receivables, provider and other receivables, prepaid expenses and other current assets, deposits, accounts payable, unearned revenue, accrued payroll and related liabilities, accrued expenses and other current liabilities and claims payable: The carrying amounts approximate fair value because of the short maturity of these items.
Regulations governing our managed care operations in each of our licensed subsidiaries require the applicable subsidiaries to meet certain minimum net worth requirements. Each subsidiary was in compliance with its requirements at December 31, 2008.
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, 2008 and 2007, respectively was $4,526 and $6,336 related to this plan.
Certain employees are eligible for a long-term cash incentive award designed to retain key executives. Each eligible participant is assigned a cash target, the payment of which is deferred for three years. The amount of the target is dependent upon the participant’s performance against individual major job objectives in the first year of the program. The target award amount is funded over the three-year period, with the funding at the discretion of the Compensation Committee of the Board of Directors. An executive is eligible for payment of a long-term incentive award earned in any one year only if the executive remains employed with the Company and is in good standing on the date the payment is made following the third year of the three-year period. The expense recorded for the long-term cash incentive awards was $5,232, $5,542 and $1,766 in 2008, 2007 and 2006, respectively. The related current portion of the liability of $4,868 at December 31, 2008 is included in accrued payroll and related liabilities for the amounts due under the 2006 plan payable in 2009. The Company did not meet its financial targets in 2005; therefore at December 31, 2007 no liability was included in the current liabilities for amounts due under the 2005 plan year payable in 2008. The related long-term portion of the liability of $8,476 and $7,007 at December 31, 2008 and 2007, respectively, is included in other long-term liabilities.
On November 19, 2008, AMERIGROUP New Jersey, Inc., entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Centene Corporation (“Centene”) and its wholly-owned subsidiary University Health Plans, Inc. (“UHP”), whereby AMERIGROUP New Jersey, Inc., would purchase certain assets of UHP related to its Medicaid business, including the right to serve UHP’s members who are beneficiaries of the New Jersey Medicaid program. Prior to the execution of the Purchase Agreement, the State of New Jersey announced that it would begin using periodic risk scores to establish the premium rates to be paid to managed care organizations with respect to their TANF and CHIP Medicaid members effective as of January 1, 2009. Prior to the execution of the Purchase Agreement, the State had neither disclosed its methodology for calculating the periodic risk score for TANF and CHIP beneficiaries applicable to each managed care organization nor the date on which the periodic rate scores would be announced.
AMERIGROUP Texas, Inc. previously had an exclusive risk-sharing arrangement in the Fort Worth service area with Cook Children’s Health Care Network (“CCHCN”) and Cook Children’s Physician Network (“CCPN”), which includes Cook Children’s Medical Center (“CCMC”), that expired by its own terms as of August 31, 2005. Under this risk-sharing arrangement the parties had an obligation to perform annual reconciliations and settlements of the risk pool for each contract year. The contract with CCHCN prescribes reconciliation procedures all of which
have been completed. CCHCN subsequently engaged external consultants to review all medical claim payments made for the 2005 contract year and the preliminary results challenged payments made on certain claims. The parties participated in voluntary non-binding mediation but were unable to resolve this matter. Following the conclusion of the mediation, on August 27, 2008, AMERIGROUP Texas, Inc. filed suit against CCHCN and CCPN in the District Court for the 153rd Judicial District in Tarrant County, Texas, case no. 153-232258-08, alleging breach of contract and seeking compensatory damages in the amount of $10,800 plus pre-and post-judgment interest and attorney’s fees and costs. On October 3, 2008, CCHCN and CCPN filed a counterclaim against AMERIGROUP Texas, Inc. alleging breach of contract and seeking an amount to be determined at trial plus pre- and post-judgment interest and attorney’s fees and costs. A trial is set for September 14, 2009 and the parties are currently engaged in discovery.
On August 13, 2008, we finalized the settlement of qui tam litigation relating to certain marketing practices of our former Illinois health plan for a cash payment of $225,000 without any admission of wrongdoing by us or our subsidiaries or affiliates. We also paid approximately $9,205 to the Relator for legal fees. Both payments were made during the three months ended September 30, 2008. As a result, we recorded a one-time expense in the amount of $234,205 in the year ended December 31, 2008 and reported a net loss. Net of the related tax benefit, our earnings were reduced $199,638 or $3.78 per diluted share.
A Florida Statute (the “Statute”) gives the Florida Agency for Health Care Administration (“AHCA”) the right to contract with entities to provide comprehensive behavioral healthcare services, including mental health and substance abuse services. The Statute further requires the contractor to use at least 80% of the capitation for the provision of certain behavioral healthcare services, with any shortfall in the 80% expenditure being refunded to the State. In April 2007, our Florida subsidiary AMERIGROUP Florida Inc., and AHCA resolved the disagreement regarding this matter for the 2004 and 2005 contract years and AMERIGROUP Florida, Inc. paid approximately $5,300 to AHCA.