To improve presentation and comparability, we have made certain reclassifications to our statement of operations format. Amounts previously reported in the selected financial data as of and for each of the years in the five-year period ended December 31, 2009 have been reclassified to conform to the current-year presentation.
The experience rebate under our 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.
HBR of 85.4% compared to 82.9% for the year ended December 31, 2008.
Our medical costs have been elevated over the prior comparable period in excess of our growth in premium revenues thereby increasing our health benefits ratio over such periods. The elevated costs are primarily due to increases in outpatient services, for both new and existing members. Increased costs for emergency room services, ambulatory surgery and physician services as well as an early onset of a severe flu season related to the H1N1 virus have been the most significant drivers of increased outpatient services. The cost for healthcare benefits has also increased due in part to a larger proportion of new members who historically utilize more services during the first two quarters of membership. The rate of increase in health benefits expense as it compares to premium revenue has
been higher than our experience in recent years. As such, it is difficult to predict at this time whether outpatient costs will continue to increase at the current rate or abate in 2010.
Though we cannot predict the outcomes of potential legislation, if any, we anticipate the subject of healthcare reform will continue to be debated by the United States Congress and that any changes to existing Medicaid and Medicare programs could have significant impacts on our business.
Investment income on our fixed-income securities portfolio has been significantly impacted by decreased investment yields over the past year. Investment income is a significant component of our operating results and fluctuations in investment yields such as that we have experienced can have and have had a material adverse affect on our results of operations. We do not anticipate a return of investment yields to normalized levels in the near term.
In November 2009, the Texas Health and Human Services Commission (“HHSC”) issued a request for proposal to provide managed care services for ABD clients in the Dallas and Tarrant Service Areas under the Texas Medicaid STAR+PLUS program. HHSC intends to select no less than four managed care organizations (two per service area) to serve approximately 77,000 eligibles. We submitted a bid to the HHSC on February 11, 2010. We anticipate a contract start date in May 2010 and an operational start date in early 2011. We can make no assurance that we will be awarded this contract or that such business will be favorable to our results of operations, financial position or cash flows in future periods.
The State of Tennessee received approval from the CMS to expand its Medicaid managed care program to long-term care recipients. The expansion program is offered through amendments to existing Medicaid managed care contracts and is effective March 1, 2010. We can make no assurance that our entry into this business will be favorable to our results of operations, financial position or cash flows in future periods.
On October 23, 2009, AMERIGROUP Corporation and AMERIGROUP New Jersey, Inc. settled litigation with Centene and its wholly-owned subsidiary, UHP, regarding AMERIGROUP New Jersey, Inc.’s termination of an agreement to purchase certain assets of UHP. Pursuant to the terms of the confidential settlement, the parties dismissed the litigation with prejudice and an amended and modified asset purchase agreement was reinstated. The
parties will move forward with the transaction contemplated by the amended and modified asset purchase agreement, as modified in connection with the settlement, and expect the transaction, which is subject to regulatory approval and other closing conditions, to close in the early part of 2010. Costs associated with the transaction are not expected to be material to our results of operations, financial position or cash flows. We can make no assurance that entry into such business will be favorable to our results of operations, financial position or cash flows in future periods.
On February 1, 2009, our Nevada subsidiary, AMERIGROUP Nevada, Inc., began serving TANF and CHIP members under a contract to provide Medicaid managed care services through June 30, 2011. AMERIGROUP Nevada, Inc. is one of two organizations that provide managed care services across the urban service areas of Washoe and Clark counties. As of December 31, 2009, AMERIGROUP Nevada, Inc. served approximately 62,000 members in Nevada.
Beginning in July 2008, AMERIGROUP Florida, Inc. received a series of letters from the Florida Office of the Inspector General (“IG”) and AHCA stating that AMERIGROUP Florida, Inc. had failed to comply with the Unborn Activation Process and, as a result, AHCA had paid approximately $10.6 million in Medicaid fee-for-service claims that should have been paid by AMERIGROUP Florida, Inc. The letters requested that AMERIGROUP Florida, Inc. provide documentation to evidence it’s compliance with the terms of the contract with AHCA with respect to the Unborn Activation Process. It is our belief that AHCA and the IG sent similar letters to the other Florida Medicaid managed care organizations during this time period.
We believe 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 our financial position, results of operations or liquidity.
We are involved in various legal proceedings in the normal course of business. Based upon our evaluation of the information currently available, we believe that the ultimate resolution of any such proceedings will not have a material adverse effect, either individually or in the aggregate, on our financial position, results of operations or cash flows. Additionally, we have been involved in specific litigation in the current year, the details of which are disclosed in Part I, Item 3. entitled Legal Proceedings.
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 (“PMPM”) is paid to us to arrange for healthcare services for our members pursuant to our contracts in each of our markets. These premium payments are based upon eligibility lists produced by the government agencies with whom we contract. Errors in this eligibility determination on which we rely can result in positive and negative revenue adjustments to the extent this information is adjusted by the state. Adjustments to eligibility data received from these government agencies result from retroactive application of enrollment or disenrollment of members or classification changes of members between rate categories that were not known by us in previous months due to timing of the receipt of data or errors in processing by the government agencies. These changes, while common, are not generally large. Retroactive adjustments to revenue for corrections in eligibility data are recorded in the period in which the information becomes known. We estimate the amount of outstanding retroactivity each period and adjust premium revenue accordingly, if appropriate.
The most judgmental accounting estimate in our Consolidated Financial Statements is our liability for medical claims payable. At December 31, 2009, this liability was $529.0 million and represented 52.1% of our total consolidated liabilities. Included in this liability and the corresponding health benefits expense for IBNR claims are the estimated costs of processing such claims. Health benefits expense has 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 expense incurred by applying observed medical cost trend factors to the average 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, new flu strains, 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 that may impact medical cost trends include factors such as government-mandated benefits or other regulatory changes; catastrophes and epidemics, such as the H1N1 pandemic; or increases in membership that contribute to an increase in outpatient costs. 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 are potentially 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 mature incurred 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, 2009:
Medical cost PMPM trend factors are generally the most significant factors we use in estimating our medical claims payable for 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 the most recent three months as of December 31, 2009:
Reflects estimated potential changes in health benefits expense and medical claims payable caused by changes in medical costs PMPM trend data used in developing medical claims payable estimates for the most recent three months.
We continually monitor and adjust the medical claims payable and health benefits expense based on subsequent paid claims activity. If it is determined that our assumptions regarding medical cost trends and utilization are significantly different than actual results, our results of operations, financial position and liquidity could be impacted in future periods. Adjustments of prior year estimates may result in additional health benefits expense or a reduction of health benefits expense in the period an adjustment is made. Further, due to the considerable variability of healthcare costs, adjustments to medical claims payable occur each quarter and are sometimes significant as compared to the net income recorded in that quarter. Prior period development is
Health benefits expense incurred during the year, was reduced by approximately $85.3 million, $60.8 million and $68.2 million in the years ended December 31, 2009, 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 any of these periods. Therefore included in the amounts related to prior years are approximately $34.4 million, $37.3 million and $30.4 million for the years ended December 31, 2009, 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.
In addition to incurred but not paid claims, the liability for medical claims payable includes reserves for premium deficiencies, if appropriate. We review each state Medicaid and Federal Medicare contract under which we operate on a quarterly basis for any apparent premium deficiency. In doing so, we evaluate current medical cost trends, expected premium rate changes and termination clauses to determine our exposure to future losses, if any. Premium deficiencies are recognized when it is probable that expected claims and administrative expenses will exceed future premiums and investment income on existing medical insurance contracts. For purposes of premium deficiencies, contracts are grouped in a manner consistent with our method of acquiring, servicing and measuring the profitability of such contracts. We did not have any premium deficiency reserves at December 31, 2009.
After tax returns for the applicable year are filed, the estimated tax liability is adjusted to the actual liability per the filed state and Federal tax returns. Historically, we have not experienced significant differences between our estimates of tax liability and our actual tax liability.
As of December 31, 2009, we had investments with a carrying value of $1.5 billion, primarily held in marketable debt securities. Our investments are principally classified as available-for-sale and are recorded at fair value. We exclude gross unrealized gains and losses on available-for-sale investments from earnings and report net unrealized gains or losses, net of income tax effects, as a separate component in shareholders’ equity. We continually monitor the difference between the cost and fair value of our investments. As of December 31, 2009, our investments had gross unrealized gains of $6.6 million and gross unrealized losses of $4.4 million. We evaluate investments for impairment considering the length of time and extent to which market value has been less than cost, the financial condition and near-term prospects of the issuer as well as specific events or circumstances that may
influence the operations of the issuer and our intent to sell the security or the likelihood that we will be required to sell the security before recovery of the entire amortized cost. For debt securities, if we intend to either sell or determine that we will more likely than not be required to sell a debt security before recovery of the entire amortized cost basis or maturity of the debt security, we recognize the entire impairment in earnings. If we do not intend to sell the debt security and we determine that we will not more likely than not be required to sell the debt security but we do not expect to recover the entire amortized cost basis, the impairment is bifurcated into the amount attributed to the credit loss, which is recognized in earnings, and all other causes, which are recognized in other comprehensive income. New information and the passage of time can change these judgments. We manage our investment portfolio to limit our exposure to any one issuer or market sector, and largely limit our investments to U.S. government and agency securities; state and municipal securities; and corporate debt obligations, substantially all of investment grade quality.
Summarized comparative financial information for the years ending December 31, 2009, 2008 and 2007 are as follows (dollars in millions, except per share data); (totals in the table below may not equal the sum of individual line items as all line items have been rounded to the nearest decimal):
Premium revenue for the year ended December 31, 2009 increased $792.6 million, or 18.2%. The increase was primarily due to two factors: (1) entry into new markets including the New Mexico market under the CoLTS
Premium revenue for the year ended December 31, 2008 increased $530.9 million, or 13.8%. The increase was primarily due to the full year impact of operations in Tennessee which commenced in April 2007 as well as premium rate and yield increases in that market and 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 increases and yield increases resulting from changes in membership mix across many of our markets. Lastly, in 2008 both the Tennessee and Georgia markets benefited from retroactive premium rate adjustments related to operations in 2007 of approximately $35.5 million and $10.4 million, respectively.
The following table sets forth the approximate number of members we served in each state as of December 31, 2009, 2008 and 2007. Because we receive two premiums for members that are in both the Medicare Advantage and Medicaid products, these members have been counted twice in the states where we operate Medicare Advantage plans.
Membership includes approximately 170,000 members under an ASO contract in 2007. This contract terminated October 31, 2008.
Our investment portfolio generated approximately $22.4 million in pre-tax income for the year ended December 31, 2009 compared to $50.9 million in 2008. The decrease is primarily a result of decreased rates of return on fixed income securities due to current market interest rates. We anticipate that our effective yield will remain at or below the current rate as of December 31, 2009 for the foreseeable future, which will result in similar or reduced returns on our investment portfolio in future periods. The performance of our investment portfolio is interest rate driven and, consequently, changes in interest rates affect our returns on, and the fair value of, our portfolio which could materially adversely affect our results of operations or liquidity in future periods.
Other revenue for the year ended December 31, 2009, decreased $13.8 million to $6.7 million compared to $20.5 million for the year ended December 31, 2008. Included in other revenue for the year ended December 31, 2009 is the approximate $5.8 million gain on the sale of the South Carolina contract rights. Included in other revenue for the year ended December 31, 2008 is the ASO revenue from the West Tennessee contract which concluded on October 31, 2008. Revenues from this contract totaled approximately $19.3 million for the year ended December 31, 2008.
SG&A decreased $41.8 million, or 9.6%, to $394.1 million for the year ended December 31, 2009 compared to $435.9 million for the year ended December 31, 2008. Our SG&A as a percentage of total revenues for the year
ended December 31, 2009 was 7.6% compared to 9.8% in 2008. The decrease in the SG&A ratio is primarily a result of reductions in salary and benefits expenses. In 2009, variable compensation was lower due to decreases in our variable compensation accruals related to our operating results. The decrease in the SG&A ratio was also the result of leverage gained through an increase in premium revenue through new market expansion and existing market growth and the termination of our ASO contract in West Tennessee October 1, 2008.
Premium taxes were $134.3 million, $93.8 million and $85.2 million for the years ended December 31, 2009, 2008 and 2007, respectively. The increase in premium tax expense in 2009 compared to 2008 is a result of the commencement of the CoLTS program in New Mexico in August 2008, entry into Nevada in February 2009, adoption of premium tax in the State of New York effective January 2009, a premium tax rate increase in Tennessee effective July 2009 and growth in premium revenues across all markets where premium tax is levied. These increases were partially offset by the termination of premium tax in the State of Georgia in October 2009. 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.
On August 13, 2008, we settled a 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 wrong-doing by us or our 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, or $199.6 million net of the related tax effects, in the year ended December 31, 2008 and reported a net loss. In June 2009, we recorded a $22.4 million tax benefit regarding the tax treatment of the 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 settlement in future periods.
The effective tax rate for the year ended December 31, 2008 was significantly impacted by the non-deductible portion of the qui tam litigation settlement payment.
Income tax expense for 2007 was $67.7 million with an effective tax rate of 37.6%.
Our primary sources of liquidity are cash and cash equivalents, short- and long-term investments, and cash flows from operations. As of December 31, 2009, we had cash and cash equivalents of $505.9 million, short- and long-term investments of $848.7 million and restricted investments on deposit for licensure of $102.8 million. Cash, cash equivalents, and investments which are unregulated totaled $232.0 million at December 31, 2009.
2.0% Convertible Senior Notes mature on May 15, 2012, unless earlier repurchased or converted in accordance with the Indenture.
Also concurrent with the issuance of the 2.0% Convertible Senior Notes, we sold warrants to acquire, subject to customary anti-dilution adjustments, 6,112,964 shares of our common stock at an exercise price of $53.77 per share. If the average price of our common stock during a defined period ending on or about the settlement date exceeds the exercise price of the warrants, the warrants will be settled, at our option, in cash or shares of our common stock.
Under the authorization of our Board of Directors, we maintain an on-going share repurchase program that allows us to repurchase up to $200.0 million of shares of our common stock from and after August 5, 2009. Pursuant to this on-going share repurchase program, we repurchased 2,713,567 shares of our common stock at an average per share cost of approximately $25.70 and an aggregate cost of $69.8 million and placed them into treasury during the
This increase was offset in part by a decrease in cash flows generated by working capital changes of $120.4 million. Cash used in operating activities for working capital changes was $55.7 million for the year ended December 31, 2009 compared to cash provided by operating activities for working capital changes of $64.7 million for the year ended December 31, 2008. The decrease in cash provided by working capital changes primarily resulted from a net decrease in cash provided through changes in accounts payable, accrued expenses and other current liabilities of $49.3 million primarily due to payments in 2009 of prior year variable compensation accruals at amounts exceeding that accrued for the year ended December 31, 2009 and changes in the experience rebate accrual under our contract with the State of Texas. Additionally, working capital changes attributable to changes in prepaid expenses, provider and other receivables and other current assets decreased $43.5 million primarily as a result of the timing of tax payments year-over-year and the accrual of pharmacy rebates.
As of December 31, 2009, $56.8 million of our investments were comprised of auction rate securities issued by student loan corporations which are public, non-profit entities established by various state governments. Liquidity for these auction rate securities historically was 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. Since early 2008, auctions for these auction rate securities have failed and there is no assurance that auctions for these securities will succeed in the future. An auction failure means that the parties wishing to sell their securities could not 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. The securities for which auctions have failed will continue to accrue interest at the contractual rate and be auctioned every 28 or 35 days until the auction succeeds, the issuer calls the securities, or they mature. As a result, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited or not exist. As we cannot predict the timing of future successful auctions, if any, our auction rate securities are classified as long-term investments. The weighted-average life of our auction rate securities portfolio, based on the final maturity, is approximately 23 years. We currently have the intent to hold our auction rate securities to maturity, if required, or if and when market stability is restored with respect to these investments.
During the fourth quarter of 2008, we entered into a forward contract with a registered broker-dealer, at no cost to us, for auction rate securities with a fair value of $10.8 million as of December 31, 2009. This forward contract provides us with the ability to sell these auction rate securities to the registered broker-dealer at par within a defined timeframe, beginning June 2010. These securities are classified as trading securities because we do not intend to hold these securities until final maturity. Trading securities are carried at fair value with changes in fair value recorded in earnings. A realized gain of $1.1 million was recorded to earnings for the year ended December 31, 2009, related to these trading securities. The value of the forward contract of $1.2 million was estimated using a discounted cash flow analysis taking into consideration the creditworthiness of the counterparty to the agreement.
Cash used in financing activities was $107.7 million for the year ended December 31, 2009 compared to $105.8 million for the year ended December 31, 2008. The increase in cash used in financing activities for the year ended December 31, 2009 primarily related to an increase of $39.1 million in funds used to repurchase our common stock under our share repurchase program partially offset by a $39.7 million decrease in repayments of borrowings under our credit agreement, which was terminated effective August 21, 2009.
We believe that existing cash and investment balances and cash flow from operations will be sufficient to support continuing operations, capital expenditures and our growth strategy for at least 12 months. Our debt-to-total capital ratio at December 31, 2009 was 19.3%. The financial markets have experienced periods of volatility and disruption since 2008. Future volatility and disruption is possible and unpredictable. 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 depending on the market condition and our financial position at the time we pursue additional financing.
The principal of our 2.0% Convertible Senior Notes may be repaid with proceeds from debt or equity financing, existing cash and investments, or a combination thereof. If we determine that debt or equity financing is appropriate, our operations at the time we enter the credit or equity markets cannot be predicted and may cause our access to these markets to be limited. Additionally, any disruptions in the credit markets similar to that of the recent recession could further limit our flexibility in planning for, or reacting to, changes in our business and industry and addressing our future capital requirements.
Our operations are conducted through our wholly-owned subsidiaries, which include HMOs, one HIC and one PHSP. HMOs, HICs and PHSPs are subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment and amount of dividends and other distributions that may be paid to their stockholders. Additionally, certain state regulatory agencies may require individual regulated entities to maintain statutory capital levels higher than the state regulations. As of December 31, 2009, we believe our subsidiaries are in compliance with all minimum statutory capital requirements. The parent company may be required to fund minimum net worth shortfalls during 2010 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 2010.
The National Association of Insurance Commissioners (“NAIC”) has defined risk-based capital (“RBC”) standards for HMOs and other entities bearing risk for healthcare coverage that are designed to measure capitalization levels by comparing each company’s adjusted surplus to its required surplus (“RBC ratio”). The RBC ratio is designed to reflect the risk profile of HMOs. Within certain ratio ranges, regulators have increasing authority to take action as the RBC ratio decreases. There are four levels of regulatory action, ranging from (a) requiring insurers to submit a comprehensive plan to the state insurance commissioner to (b) requiring the state insurance commissioner to place the insurer under regulatory control. Eight of our eleven states have adopted RBC as the measure of required surplus. At December 31, 2009, our consolidated RBC ratio for these states is estimated to be over 375% which compares to the required level of 200%, the level at which regulatory action would be
initiated. In the remaining states, we have approximately 3 times the state required surplus level. Although not all states had adopted these rules at December 31, 2009, at that date, each of our active health plans had a surplus that exceeded either the applicable state net worth requirements or, where adopted, the levels that would require regulatory action under the NAIC’s RBC rules.
The following table summarizes our material contractual obligations, including both on- and off-balance sheet arrangements, and our commitments at December 31, 2009 (in thousands):
AMERIGROUP Corporation was incorporated in 1994 and began operations of its wholly owned subsidiaries to develop, own and operate as managed healthcare companies. The Company operates in one business segment with a single line of business.
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. As discussed in Note 2 (m), these estimates and assumptions are particularly sensitive when recording claims payable and health benefits.
To improve presentation and comparability, the Company has made certain reclassifications to its Consolidated Statements of Operations format and certain reclassifications to prior year amounts to conform to the current year presentation.
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company had cash equivalents of $481,171 and $711,826 at December 31, 2009 and 2008, respectively. Cash equivalents at December 31, 2009 consisted of money market funds, certificates of deposit, debt securities of government sponsored entities, commercial paper, municipal bonds and corporate bonds. Cash equivalents at December 31, 2008 consisted of commercial paper and money market funds.
Short and long-term investments and investments on deposit for licensure at December 31, 2009 and 2008 consisted of 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 Company considers all investments with original maturities greater than three months but less than or equal to twelve months to be short-term investments. Debt securities are classified as either trading or available-for-sale. Trading securities are bought and held principally for the purpose of selling them in the near term. Trading securities are carried at fair value and changes in fair value are recorded in earnings. All other securities not included in trading are classified as available-for-sale. Available-for-sale securities are carried at fair value with changes in fair value reported in other comprehensive income until realized through the sale or maturity of the security or at the time at which an other-than-temporary-impairment is determined. The states in which the Company operates prescribe the types of instruments in which the Company’s subsidiaries may invest their funds.
Short-term investments, long-term investments, investments on deposit for licensure, cash surrender value of life insurance policies (included in other long-term assets) and forward contracts related to certain auction rate securities (included in other long-term assets): Fair values for these items are determined based on quoted market prices or discounted cash flow analyses.
Convertible Senior Notes: The estimated fair value of the Company’s 2.0% Convertible Senior Notes is determined based upon quoted market prices.
Software is stated at cost less accumulated amortization. Software is amortized over its estimated useful life of three to ten years, using the straight-line method. Amortization expense on software was $16,392, $14,255 and $9,543 for the years ended December 31, 2009, 2008 and 2007, respectively.
Other assets include cash on deposit for payment of claims under administrative services only (“ASO”) arrangements, deposits, debt issuance costs, cash surrender value of life insurance policies, forward contract rights related to certain auction rate securities and other amortizable intangible assets acquired in a business combination. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Income taxes are accounted for in accordance with U.S. generally accepted accounting principles. On a quarterly basis, the tax liability is estimated 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.
In addition, the Company is periodically audited by state and Federal taxing authorities and these audits can result in proposed assessments. The Company believes that its tax positions comply with applicable tax law and, as
The qui tam litigation settlement payment in 2008 (See Note 8) had a significant impact on tax expense and the effective tax rates for 2009 and 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 $34,566. In June 2009, the Company recorded an additional $22,449 tax benefit under an agreement in principle with the Internal Revenue Service (“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. The Company does not anticipate that there will be any further material changes to the tax benefit associated with this litigation settlement in future periods.
Premium revenue is recorded based on membership and premium information from each government agency with whom the Company contracts to provide services. Premiums are due monthly and are recognized as revenue during the period in which the Company is obligated to provide services to members. Premium payments from contracted government agencies are based on eligibility lists produced by the government agencies. Adjustments to eligibility lists produced by the government agencies result from retroactive application of enrollment or disenrollment of members or classification changes between rate categories. The Company estimates the amount of retroactive premium owed to or from the government agencies each period and adjusts premium revenue accordingly. In all of the states in which the Company operates, except Florida, New Mexico, Tennessee and Virginia, the Company is 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 the contract. Revenue is recognized in the period that the delivery occurs and the related services are provided to the Company’s member. Additionally, in some states, supplemental payments are received 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 the balance sheet as premium receivables.
Additionally, delays in annual premium rate changes require that the Company 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
Experience rebate payable, included in accrued expenses and other current liabilities, consists of estimates of amounts due under contracts with the State of Texas. These amounts are computed based on a percentage of the contract profits as defined in the contract with the State. The profitability computation includes premium revenue earned from the State less paid medical and administrative costs incurred and estimated unpaid claims payable for the applicable membership. The unpaid claims payable estimates are based on historical payment patterns using actuarial techniques. A final settlement is generally made 334 days after the contract period ends using paid claims data and is subject to audit by the State of Texas any time thereafter. Any adjustment made to the experience rebate payable as a result of final settlement is included in current operations.
Health benefits expense incurred during the year was reduced by approximately $85,300, $60,800 and $68,200 in the years ended December 31, 2009, 2008 and 2007, respectively, for amounts related to prior years. Actuarial
standards of practice generally require that the liabilities established for accrued medical expenses be sufficient to cover obligations under an assumption of moderately adverse conditions. Moderately adverse conditions were not experienced in any of these periods. Therefore included in the amounts related to prior years are approximately $34,400, $37,300 and $30,400 for the years ended December 31, 2009, 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 remaining reduction in health benefits expense incurred during the year, related to prior years, of approximately $50,900, $23,500 and $37,800 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. These amounts are referred to 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 the 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.
Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the fair value of a reporting unit is determined and compared to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation on a business acquisition. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. As a result of the Company’s exit from the West Tennessee and District of Columbia markets in 2008, impairment losses of $71 and $8,808 were recorded during the years ended December 31, 2009 and 2008, respectively, related to goodwill. No impairment of goodwill was recorded in 2007.
(loss) by the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares include all outstanding stock options, convertible debt securities and warrants after applying the treasury stock method to the extent the potential common shares are dilutive.
(“ASC”) became the single source of authoritative GAAP recognized by the FASB for nongovernmental entities. The FASB no longer issues new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. FASB accounting standard issuances are now issued as amendments to the ASC and referred to as Accounting Standards Updates. The adoption of the ASC had no impact on our financial position, results of operations or cash flows.
In April 2009, the FASB issued new guidance related to fair value measurements and disclosures which provides additional guidance for determining whether a market for a financial asset or liability that historically was active is no longer active and whether transactions or quoted prices may not be determinative of fair value. This new guidance also provides additional guidelines on the major categories for which equity and debt securities disclosures are to be presented and amends existing disclosure requirements to require disclosure in interim and annual financial statements of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. The adoption of this new guidance in 2009 did not impact the Company’s financial position, results of operations or cash flows.
In April 2009, the FASB issued new guidance related to the recognition and presentation of other-than-temporary-impairments (“OTTI”). This new guidance expands the disclosure requirements in interim and annual financial statements for both debt and equity securities to enable users of the financial statements to understand the types of securities held, including information about investments in an unrealized loss position, the reasons that a portion of an OTTI of a debt security was not recognized in earnings and the methodology and significant inputs used to calculate the portion of the total OTTI that was recognized in earnings. This new guidance requires that if an entity intends to sell, or more likely than not will be required to sell, a debt security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings. If neither of these factors applies, the portion of the OTTI representing the credit loss shall be recognized in earnings and the remaining portion of the OTTI shall be recognized in other comprehensive income. The adoption of this new guidance in 2009 did not impact the Company’s financial position, results of operations or cash flows.
In October 2008, the FASB issued new guidance permitting the deferral until fiscal years beginning after November 15, 2008 of applying previously issued fair value measurement guidance to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The application of the fair value measurement guidance to nonrecurring nonfinancial assets and nonrecurring nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis as of January 1, 2009 did not impact the Company’s financial position, results of operations or cash flows.
evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of this new guidance in 2009 did not impact the Company’s financial position, results of operations or cash flows.
In May 2008, the FASB 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 Company’s adoption of this new guidance on January 1, 2009, with retrospective application to prior periods, changed the accounting treatment for its 2.0% Convertible Senior Notes, which were issued effective March 28, 2007 (See Note 9). 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 $50,885. This amount was retrospectively applied to the financial statements from the issuance date of the 2.0% Convertible Senior Notes in 2007, and 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 following table provides additional information about the 2.0% Convertible Senior Notes as required by the provisions:
In December 2007, the FASB issued new guidance on business combinations which 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, the goodwill acquired and disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. In April 2009, the FASB issued additional guidance requiring an acquirer to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined during the measurement period, then the acquirer follows the recognition criteria in previously issued guidance on accounting for contingencies to determine whether the contingency should be recognized as of, or after, the acquisition date. The adoption of this new guidance in 2009 did not impact the Company’s financial position, results of operations or cash flows; however, future acquisitions will be accounted for under this guidance.
At December 31, 2009, the Company served members who received healthcare benefits through contracts with the regulatory entities in the jurisdictions in which it operates. 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. The Company’s 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. If these contracts were not renewed on favorable terms to the Company, the Company’s financial position, results of operations or cash flows could be materially adversely affected.
The Company has evaluated subsequent events for potential recognition and/or disclosure through February 22, 2010, the date the Consolidated Financial Statements included in this Annual Report on Form 10-K were filed with the SEC.
The following table presents the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), for the years ended December, 31 2009 and 2008:
At December 31, 2009 and 2008, the Company did not elect the fair value option available under current guidance for any financial assets and liabilities that were not required to be measured at fair value.
The Company has invested in auction rate securities that are classified as either available-for-sale or trading securities which are reflected at fair value and included in long-term investments in the accompanying Consolidated Balance Sheets. The auction rate securities held by the Company at December 31, 2009 and 2008, totaling $56,838 and $71,640, respectively, were securities issued by student loan corporations which are public, non-profit entities established by various 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. For the years ended December 31, 2009 and 2008, an unrealized gain of $2,225 and an unrealized loss of $6,372, respectively, was recorded to accumulated other comprehensive income and accumulated other comprehensive loss, respectively as a result of changes in fair value for auction rate securities classified as available-for-sale. These securities, with a net unrealized loss of $4,147 at December 31, 2009, continue to be held at fair values that are below the purchased value of the investments due primarily to the decreased liquidity of the investments and not as a result of decreases in creditworthiness of the issuers. As the Company does not intend to sell these securities prior to maturity and as it is not likely that the Company will be required to sell these securities, the net unrealized losses are deemed temporary. Any future fluctuation in the fair value related to these securities that the Company deems to be temporary, including any additional recoveries of previous write-downs, will be recorded to accumulated other comprehensive income. If it is determined that any future valuation adjustment is other than temporary and the Company continues to believe it will hold the security to maturity, the amount of other than temporary impairment related to credit losses will be recognized in earnings.
The auction events for these securities failed during early 2008 and have not resumed. Therefore, the estimated fair values of these securities have been determined utilizing a discounted cash flow analysis as of December 31, 2009 and 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. As the timing of future successful auctions, if any, cannot be predicted, available-for-sale auction rate securities are classified as long-term. During the fourth quarter of 2008, the Company entered into a forward contract with a registered broker dealer, at no cost, for auction rate securities with a fair value of $10,835 and $15,612 as of December 31, 2009 and 2008, respectively. This forward contract provides the Company with the ability to sell these auction rate securities to the registered broker-dealer at par within a defined timeframe, beginning June 2010. These securities are classified as trading securities because the Company does not intend to hold these securities until final maturity. Trading securities are carried at fair value with changes in fair value recorded in earnings. For the years ended December 31, 2009 and 2008, a realized gain of $1,073 and a realized loss of $2,238, respectively, was recorded to earnings related to these trading securities. The value of the forward contract at December 31, 2009 and 2008, of $1,165 and $2,014, respectively, was estimated
The estimated fair value of the Company’s 2.0% Convertible Senior Notes is determined based upon quoted market prices. As of December 31, 2009, the fair value of the borrowings under the 2.0% Convertible Notes was $246,025 compared to the face value of $260,000.
As a condition for licensure by various state governments to operate health maintenance organizations (“HMOs”), health insuring corporations (“HICs”) or prepaid health services plans (“PHSPs”), the Company is 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. The Company purchases interest-based
The temporary declines in value at December 31, 2009 and 2008, are primarily due to fluctuations in short-term market interest rates and the lack of liquidity of auction rate securities. Auction rate securities that have been in an unrealized loss position for greater than 12 months have experienced losses due to the lack of liquidity for these instruments, not as a result of impairment of the underlying debt securities. Additionally, the Company does not intend to sell these securities prior to maturity and it is not likely that the Company will be required to sell these securities prior to maturity; therefore, there is no indication of other than temporary impairment for these securities.
On October 23, 2009, AMERIGROUP Corporation and AMERIGROUP New Jersey, Inc. settled litigation with Centene Corporation (“Centene”) and its wholly-owned subsidiary, University Health Plans, Inc. (“UHP”), regarding AMERIGROUP New Jersey, Inc.’s termination of an agreement to purchase certain assets of UHP. Pursuant to the terms of the confidential settlement, the parties dismissed the litigation with prejudice and an amended and modified asset purchase agreement was reinstated. The parties will move forward with the transaction contemplated by the asset purchase agreement, as modified in connection with the settlement, and expect the transaction, which is subject to regulatory approval and other closing conditions, to close in the early part of 2010. Costs associated with the transaction are not expected to be material to the Company’s results of operations, financial position or cash flows.
AMERIGROUP Tennessee, Inc.’s ASO contract for the West Tennessee region terminated on October 31, 2008 pursuant to its terms. The Company received a purchase price adjustment that reduced the purchase price by $1,500 for early termination of the ASO contract which was recorded as an adjustment to goodwill. The remaining goodwill of $6,544, was written off to selling, general and administrative expenses during the year ended December 31, 2008.
Other acquired intangible assets for the years ended December 31, 2009 and 2008 are as follows:
Amortization expense for the years ended December 31, 2009, 2008 and 2007 was $404, $2,496 and $2,279, respectively, and the estimated aggregate amortization expense for the five succeeding years is as follows:
Income tax expense (benefit) for the years ended December 31, 2009, 2008 and 2007 consists of the following:
Income tax expense differed from the amounts computed by applying the statutory U.S. Federal income tax rate to income before income taxes as a result of the following:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are presented below:
To assess the recoverability of deferred tax assets, the Company considers whether it is more likely than not that deferred tax assets will be realized. In making this determination, the scheduled reversal of deferred tax liabilities and whether projected future taxable income is sufficient to permit deduction of the deferred tax assets are taken into account. Based on the level of historical taxable income and projections for future taxable income, the Company believes it is more likely than not that it will fully realize the benefits of the gross deferred tax assets of $45,537. State net operating loss carryforwards that expire in 2027 through 2028 comprise $322 of the gross deferred tax assets.
The Company is subject to U.S. Federal income tax, as well as income taxes in multiple state jurisdictions. Substantially all U.S. Federal income tax matters have been concluded for years through 2005. Substantially all material state matters have been concluded for years through 2005.
Also concurrent with the issuance of the 2.0% Convertible Senior Notes, the Company sold warrants to acquire, subject to customary anti-dilution adjustments, 6,112,964 shares of its common stock at an exercise price of $53.77 per share. If the average price of the Company’s common stock during a defined period ending on or about the settlement date exceeds the exercise price of the warrants, the warrants will be settled, at the Company’s option, in cash or shares of its common stock.
The Company maintained a Credit and Guaranty Agreement (the “Credit Agreement”) that provided both a secured term loan and a senior secured revolving credit facility. On July 31, 2009, the Company paid the remaining balance of the secured term loan. Effective August 21, 2009, the Company terminated the Credit Agreement and related Pledge and Security Agreement. The Company had no outstanding borrowings under the Credit Agreement as of the effective date of termination.
Maturities of long-term debt for future years ending December 31 are as follows:
In May 2009, our shareholders adopted and approved our 2009 Equity Incentive Plan (“2009 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 3,635,000 shares of common stock under the 2009 Plan. In addition, shares remaining available for issuance under our previous plans will be available under the 2009 Plan. Under all plans, an option’s maximum term is ten years. As of December 31, 2009, we had a total 4,200,022 shares available for issuance under our 2009 Plan.
Stock option activity during the year ended December 31, 2009 was as follows:
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, 2009, 2008 and 2007:
expected volatility is based on historical volatility levels, which we believe is indicative of future levels; and
The weighted-average fair value per share of options granted during the years ended December 31, 2009, 2008 and 2007 was $13.80, $11.79 and $14.08, respectively. The total fair value of options vested during the years ended
December 31, 2009, 2008 and 2007 was $8,148, $6,324 and $8,526, respectively. The following table provides information related to options exercised during the years ended December 31, 2009, 2008, and 2007:
Non-vested restricted stock for the twelve months ended December 31, 2009 is summarized below:
On February 15, 2001, the Board of Directors approved and we adopted an Employee Stock Purchase Plan. All employees are eligible to participate except those employees who have been employed by us less than 90 days, whose customary employment is less than 20 hours per week or any employee who owns five percent or more of our common stock. Eligible employees may join the plan every six months. Purchases of common stock are priced at the lower of the stock price less 15% on the first day or the last day of the six-month period. We have reserved for issuance 1,200,000 shares of common stock. We issued 97,332, 104,238, and 88,277 shares under the Employee Stock Purchase Plan in 2009, 2008, and 2007, respectively. As of December 31, 2009 we had a total of 511,971 shares available for issuance under the Employee Stock Purchase Plan.
The fair value of the employees’ purchase rights granted in each of the six month offering periods during 2009, 2008 and 2007 was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
The Company’s warrants to purchase shares of its common stock, sold on March 28, 2007 and April 9, 2007 (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.
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, 2009.
We maintain professional liability coverage for certain claims which is provided by independent carriers and is subject to annual coverage limits. Professional liability policies are on a claims-made basis and must be renewed or replaced with equivalent insurance if claims incurred during its term, but asserted after its expiration, are to be insured.
The Company’s employees have the option to participate in a deferred compensation plan sponsored by the Company. All full-time and most part-time employees of the Company and its subsidiaries may elect to participate in this plan. This plan is a defined contribution profit sharing plan under Section (401)k of the Internal Revenue Code. Participants may contribute a certain percentage of their compensation subject to maximum Federal and plan limits. The Company may elect to match a certain percentage of each employee’s contributions up to specified limits. For the years ended December 31, 2009, 2008 and 2007, the matching contributions under the plan were $4,486, $3,649 and $3,748, respectively.
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 $3,192, $5,232 and $5,542 in 2009, 2008 and 2007, respectively. The related current portion of the liability of $5,722 and $4,868 at December 31, 2009 and 2008, respectively, is included in accrued payroll and related liabilities for the amounts due under the 2007 plan payable in 2010. The related long-term portion of the liability of $5,392 and $8,476 at December 31, 2009 and 2008, respectively, is included in other long-term liabilities.
Under the terms of the contract between AMERIGROUP Florida, Inc. and the Florida Agency for Healthcare Administration (“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.”
Beginning in July 2008, AMERIGROUP Florida, Inc. received a series of letters from the Florida Office of the Inspector General (“IG”) and AHCA stating that AMERIGROUP Florida, Inc. had failed to comply with the Unborn Activation Process and, as a result, AHCA had paid approximately $10,600 in Medicaid fee-for-service claims that should have been paid by AMERIGROUP Florida, Inc. The letters requested that AMERIGROUP Florida, Inc. provide documentation to evidence it’s compliance with the terms of the contract with AHCA with respect to the Unborn Activation Process.
Effective July 1, 2009, the Company has caused to be issued a collateralized irrevocable standby letter of credit in an aggregate principal amount of approximately $17,400 to meet certain obligations under its Medicaid contract in the State of Georgia through its Georgia subsidiary, AMGP Georgia Managed Care Company, Inc. The letter of credit is collateralized through investments held by AMGP Georgia Managed Care Company, Inc.
The Company believes that AMERIGROUP Texas has substantial defenses to the claims asserted by Memorial Hermann and we intend to vigorously contest their claims. Although it is possible that the ultimate outcome of this litigation may not be favorable to the Company, the amount of loss, if any, is uncertain. Accordingly, the Company has not recorded any amounts in the Consolidated Financial Statements for unfavorable outcomes, if any, as a result of this litigation. There can be no assurances that the ultimate outcome of this litigation will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
On August 13, 2008, the Company settled a qui tam litigation relating to certain marketing practices of its former Illinois health plan for a cash payment of $225,000 without any admission of wrong-doing by the Company or its subsidiaries or affiliates. The Company 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, a one-time expense in the amount of $234,205, or $199,638 net of the related tax effects, was recorded in the year ended December 31, 2008 resulting in a net loss for the year. In June 2009, the Company recorded a $22,449 tax benefit regarding the tax treatment of the 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. The Company does not anticipate that there will be any further material changes to the tax benefit associated with this settlement in future periods.
Additionally, the Company is involved in various other legal proceedings in the normal course of business. Based upon its evaluation of the information currently available, the Company believes that the ultimate resolution of any such proceedings will not have a material adverse effect, either individually or in the aggregate, on its financial position, results of operations or cash flows.