In California and Guam, we own 2 buildings encompassing approximately 225,000 aggregate square feet of space primarily used for administrative operations. All of our facilities are in good working condition, are well maintained and are adequate for our present and currently anticipated needs. We believe that we can rent additional space at competitive rates when current leases expire, or if we need additional space.
Commercial and Medicare Premiums. We receive per-member per-month payments on behalf of each member enrolled in our commercial HMOs and our behavioral health services, life and health insurance and dental and vision services plans. Generally, our Medicare+Choice contracts entitle us to per-member per-month payments from the Centers for Medicare and Medicaid Services, or CMS, on behalf of each enrolled Medicare beneficiary. We report prepaid health care premiums received from our commercial plans’ enrolled groups, CMS, and our Medicare plans’ members as revenue in the month that members are entitled to receive health care. We record premiums received in advance as unearned premium revenue.
Generally, since the Balanced Budget Act of 1997 went into effect, annual premium increases for Medicare+Choice members have not kept pace with increases in the costs of health care. CMS announced that federal payments to Medicare+Choice managed care organizations are projected to increase only 2%, the guaranteed minimum required by law, in calendar year 2003. These shortfalls in Medicare+Choice premiums compared to our health care service expenses in some of our operating areas contributed to our decision to cease offering, close enrollment, or obtain capacity limits in our Medicare+Choice plans in various counties in 2003, 2002 and 2001. These premium trends also contributed to changes in our benefits, copayments and deductibles. The following table provides information on the number of counties where we did offer or currently offer our Medicare+Choice plans for new member enrollment as of the dates indicated. Additionally, it provides information on the number of counties for which we contracted with CMS to offer our Medicare+Choice plans, as of the beginning of each calendar year indicated. The change in the number of counties from 2002 to 2003 for which we contracted with CMS to offer our
Medicare+Choice health plans was due to service area exits in California as well as our exit from the Houston, Texas market.
Other Income. Other income consists of revenue we receive from administrative services we offer through our specialty products companies, primarily from our pharmacy benefit management company. Our pharmacy benefit management company generates mail-service revenue where we, rather than network retail pharmacies, collect the member copayments, for both affiliated and unaffiliated members. Additionally, we record revenues for prescription ingredient costs on prescriptions dispensed by our mail-service pharmacy. For prescription drugs dispensed through retail pharmacies, we record administrative services fees when a prescription claim is reviewed and approved, and the prescription is shipped or filled. For prescription drugs dispensed through retail pharmacies, we do not record revenues for drugs dispensed or the network pharmacies’ dispensing fees; nor do we record revenues for copayments our members make to the retail pharmacies.
Net Investment Income. Net investment income consists of interest income, gross realized gains and losses experienced based on the level of cash invested over each period. As we have increased the number of our contracts that are risk-based rather than capitated contracts, our net investment income has become, and will continue to be an important component to results of operations. Under risk-based contracts, cash disbursements to health care providers for services provided to members are made after the related claim has been submitted and adjudicated. Under capitated contracts, health care providers are prepaid on a fixed-fee per-member per-month basis for the agreed-upon schedule of services, without regard to the volume of services provided to a given member.
Commercial and Senior Health Care Services. Health care services expenses for our commercial plans and our senior plans primarily comprise payments to physicians, hospitals and other health care providers under capitated or risk-based contracts for services provided to our members. Health care services expenses also include expenses for health care provided and administrative services performed under our specialty products and services companies.
health care costs while providing quality health care. Expenses related to these programs, which are based in part on estimates, are recorded in the period in which the related services are provided. Historically, we have primarily arranged health care services for our members by contracting with health care providers on a capitated basis, regardless of the services provided to each member. Under our risk-based contracts, we generally bear or partially share the risk of excess health care expenses with health care providers, meaning that if member utilization of health care services exceeds agreed-on amounts, we bear or partially share the excess expenses with the applicable health care provider.
The following table illustrates our shift from capitated contracts to risk-based contracts since 2000. We expect this shift to continue in 2004. The percentages of HMO membership by contract type at December 31, 2002, 2001 and 2000 were as follows:
Membership. Total HMO and other membership decreased 10% to approximately 3.1 million members at December 31, 2002 from approximately 3.5 million members at December 31, 2001.
Senior HMO membership decreased approximately 20% at December 31, 2002 compared to the prior year due to a decrease of 150,100 members in California and Texas. This decrease primarily resulted from county exits and member disenrollments attributable to reduced benefits and increased premiums effective January 1, 2002. As previously announced, we exited five counties in California and Texas resulting in the loss of approximately 37,000 senior HMO members effective January 1, 2003.
Pharmacy benefit management unaffiliated membership at December 31, 2002 increased approximately 45% compared to the prior year due to increased marketing efforts. Pharmacy benefit management HMO membership at December 31, 2002 decreased approximately 11% compared to the prior year as a result of county exits and member disenrollments attributable to reduced benefits and increased premiums effective January 1, 2002.
PacifiCare dental HMO membership at December 31, 2002 decreased approximately 36% compared to the prior year primarily due to senior membership losses in California, attributable to dental benefit changes effective January 1, 2002. Dental unaffiliated membership at December 31, 2002 increased approximately 7% compared to the prior year due to membership from new PPO product offerings.
Commercial Premiums. Commercial premiums increased 4% or $214 million for the year ended December 31, 2002 compared to the prior year as follows:
Senior Premiums. Senior premiums decreased 13% or $880 million for the year ended December 31, 2002 compared to the prior year as follows:
Net Investment Income. Net investment income decreased 42% or $47 million to $64 million for the year ended December 31, 2002, from $111 million for the year ended December 31, 2001.
Consolidated Medical Loss Ratio. The consolidated medical loss ratio (health care services as a percentage of premium revenue) decreased for the year ended December 31, 2002 compared to the prior year as follows:
year ended December 31, 2002 compared to 88.8% in the prior year. This decrease was driven by significant premium rate increases, partially offset by the membership losses described above, that outpaced an increase in commercial health care costs on an absolute dollar and per-member per-month basis.
Senior Medical Loss Ratio. The senior medical loss ratio for 2002 includes results from our indemnity insurance operations for the Medicare Supplement and Senior Supplement products. We have not adjusted the prior-year period to include senior indemnity insurance operations because these results, which were previously included in our commercial medical loss ratio, were not material to senior premiums or senior health care costs in total. Our senior medical loss ratio decreased to 86.8% for the year ended December 31, 2002 compared to 90.3% for the same period in 2001. This decrease was driven by premium rate increases from both CMS and member premiums, benefit reductions, primarily of prescription drugs, effective January 1, 2002 and decreased utilization attributable to our medical management programs, net of membership losses described above, that outpaced an increase in senior health care costs on a per-member per-month basis. Additionally, in 2002 we had one full year of premium rate increases attributable to the Benefits Improvements Act of 2000, or BIPA. Because BIPA became effective March 1, 2001, the same period in 2001 included only ten months of BIPA increases.
Selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income) increased compared to the prior year primarily due to declines in operating revenue (excluding net investment income) totaling $641 million for the year ended December 31, 2002.
Interest Expense. Interest expense increased 7% or $5 million to $75 million for the year ended December 31, 2002, from $70 million compared to the prior year due to our sale of $500 million in aggregate principal amount of 10 3/4% senior notes in May 2002, which carried a higher annual interest rate than the debt we repaid using the proceeds of that offering. The increase was partially offset by cash redemptions of a portion of our outstanding 7% FHP senior notes and our sale of $135 million in aggregate
Behavioral health and dental PacifiCare HMO membership represents members that are in our commercial HMO that are also enrolled in our behavioral health or dental plan.
Decrease of 1,800 members in Texas due to member disenrollments in anticipation of reduced benefits that were effective January 1, 2002; partially offset by an
PacifiCare dental HMO membership at December 31, 2001 decreased approximately 29% compared to the prior year primarily due to membership losses in Arizona, California and Washington, mainly due to Secure Horizon member disenrollments, attributable to benefit changes effective January 1, 2001. Dental unaffiliated membership at December 31, 2001 decreased approximately 31% compared to the prior year due to commercial member disenrollments in California.
Senior Premiums. Senior premiums increased 5% or $348 million for the year ended December 31, 2001 compared to the prior year as follows:
In the fourth quarter of 2001, our commercial health care costs were partially offset by the impact of favorable claims experience for our new indemnity products, including PPO, Medicare Supplement, and in our behavioral health business.
Senior Medical Loss Ratio. Our senior medical loss ratio increased to 90.3% for the year ended December 31, 2001, compared to 89.4% for the year ended December 31, 2000. This increase was driven by an increase in senior health care costs that outpaced premium rate increases, including BIPA (effective March 1, 2001) and supplemental premiums. Senior health care costs increased $374 million for the year ended December 31, 2001 compared to the prior year. On a per-member per-month basis, these costs increased 9% to $501.65 per member per month for the year ended December 31, 2001 compared to $466.18 in 2000. This increase was due to a 20% increase in hospital costs, offset by a 1% decrease in physician costs, and a 2% decrease in pharmacy costs. At our Texas HMO more members accessed more services, at a higher cost, from providers with whom we have shared-risk, rather than capitation contracts. Additionally, our Texas HMO experienced increased health care costs because we paid hospitals and doctors for expenses that were otherwise the obligations of our contracted providers and for which we previously paid capitation. See Note 11 of the Notes to Consolidated Financial Statements. Substantial premium rate increases at our Colorado HMO and Washington HMO partially offset increased health care costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $1.2 billion for the year ended December 31, 2001 were comparable to the prior year. For the year ended December 31, 2001, selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income) decreased compared to the same period in the prior year primarily due to higher operating revenue in 2001.
Selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income)
Provision for Income Taxes. The effective income tax rate was 67.9% for the year ended December 31, 2001, compared with 44.1% in 2000. Because of lower 2001 earnings, the non-deductible goodwill amortization expense is a higher percentage of pretax income, increasing our 2001 effective tax rate.
Investing Activities. For the year ended December 31, 2002, investing activities used $278 million of cash, compared to $261 million used during the year ended December 31, 2001. The increase was primarily related to increased purchases of marketable securities.
We received gross proceeds totaling $497 million from the 10 3/4% senior notes offering and $135 million from the 3% convertible subordinated debentures offering, and received no proceeds from debt offerings during 2001;
We repaid $554 million under our senior credit facility, including $499 million under the term loan facility and $55 million under the revolving credit facility. In 2001, we repaid $30 million under our senior credit facility;
We repurchased and permanently retired $42 million of FHP International Corporation, or FHP, senior notes with funds from a restricted cash collateral account maintained under our senior credit facility. In 2001, we did not repurchase FHP senior notes;
We repaid $2 million on our database financing agreement with no comparable activity in 2001; and
In the fourth quarter of 2002, we sold $135 million in aggregate principal amount of 3% convertible subordinated debentures due in 2032 through a private placement. We used a portion of the net proceeds from the debentures to repay $53 million in indebtedness under our term loan facility. The debentures are convertible into common stock under certain conditions, including satisfaction of a market price condition for our common stock, satisfaction of a trading price condition relating to the debentures, upon notice of redemption, or upon specified corporate transactions. Each $1,000 of the debentures is convertible into 23.8095 shares of our common stock. Beginning in October 2007, we may redeem for cash all or any portion of the debentures, at a purchase price of 100% of the principal amount plus accrued interest, upon not less than 30 nor more than 60 days’ written notice to the holders. Beginning in October 2007, and in successive 5-year increments, our holders may require us to repurchase the debentures for cash at a repurchase price of 100% of the principal amount plus accrued interest. Our payment obligations under the debentures are subordinated to our senior indebtedness, and effectively subordinated to all indebtedness and other liabilities of our subsidiaries. In connection with the debentures offering, we incurred approximately $5 million in fees that will be amortized over the term of the debentures.
the 10 3/4% senior notes by the terms of the FHP senior notes, but will fully and unconditionally guarantee the 10 3/4% senior notes once we permanently repay the FHP senior notes. See Note 13 of the Notes to Consolidated Financial Statements.
In April 2002, we executed an amendment with our lenders to extend the maturity date of our senior credit facility to January 3, 2005. The extension of the maturity date to January 3, 2005 was conditioned on the reduction of the senior credit facility by $250 million on or prior to January 2, 2003. We satisfied this condition using a portion of the proceeds of the offering of the 10 3/4% senior notes. Since December 31, 2001, we have repaid indebtedness under the senior credit facility as follows:
The senior credit facility amortizes at a rate of $25 million per quarter. Each quarterly amortization payment includes a $20 million cash payment on the term loan facility and a $5 million reduction in borrowing capacity under the revolving credit facility. As of December 31, 2002, the total size of the committed revolving credit facility was $36 million, of which at least $35 million was available for borrowing.
The interest rates per annum applicable to amounts outstanding under the term loan facility and revolving credit facility were increased in connection with the amendment of our senior credit facility and are, at our option, either the administrative agent’s publicly announced “prime rate” (or, if greater, the Federal Funds Rate plus 0.5%) plus a margin of 4% per annum, or the rate of Eurodollar borrowings for the applicable interest period plus a margin of 5% per annum. Based on our outstanding balance under the credit facility as of December 31, 2002, our average overall interest rate, excluding the facility fee, was 6.4% per annum.
The terms of the senior credit facility contain various covenants usual for financings of this type, including a minimum net worth requirement, a minimum fixed-charge coverage requirement and a maximum debt to earnings before interest, taxes, depreciation and amortization, or EBITDA, requirement. At December 31, 2002, we were in compliance with all of these covenants. Our domestic, unregulated subsidiaries provide guarantees and have granted security interests to the lenders in substantially all of their personal property to secure our obligations under the senior credit facility. We have also pledged the equity of certain of our subsidiaries to the lenders under the senior credit facility.
Our ability to repay debt depends in part on dividends and cash transfers from our subsidiaries. Nearly all of the subsidiaries are subject to HMO regulations or insurance regulations and may be subject to substantial supervision by one or more HMO or insurance regulators. Subsidiaries subject to regulation must meet or exceed various capital standards imposed by HMO or insurance regulations, which may from time to time impact the amount of funds the subsidiaries can pay to us. Our subsidiaries are not obligated to make funds available to us. Additionally, from time to time, we advance funds in the form of a loan or capital contribution to our subsidiaries to assist them in satisfying state financial requirements. We may provide additional funding to a subsidiary if a state regulator imposes additional financial requirements due to concerns about the financial position of the subsidiary or if there is an adverse effect resulting from changes to the risk-based capital requirements. This may in turn affect the subsidiary’s ability to pay dividends or make other cash transfers.
We expect to fund our working capital requirements and capital expenditures during the next twelve months from our cash flow from operations. We have taken a number of steps to increase our internally generated cash flow, including increasing premiums, increasing our marketing of specialty product lines, introducing new products to generate new revenue sources and reducing our expenses by, among other things, exiting from unprofitable markets and cost savings initiatives. If our cash flow is less than we expect due to one or more of the risk factors described in “Forward-Looking Statements,” or our cash flow requirements increase for reasons we do not currently foresee, then we may need to draw down remaining available funds on our revolving credit facility which matures in January 2005, or our equity commitment arrangement which expires in June 2003. A failure to comply with any covenant in the senior credit facility could make funds under our revolving credit facility unavailable. We also may be required to take additional actions to reduce our cash flow requirements, including the deferral of planned investments aimed at reducing our selling, general and administrative expenses. The deferral or cancellation of any investments could have a material adverse impact on our ability to meet our short-term business
Receivables, Net. Receivables, net as of December 31, 2002, decreased $86 million from December 31, 2001 as follows:
$39 million decrease in provider receivables, primarily from collections of amounts owed by various providers in California and Texas;
that may occur. As of December 31, 2002, approximately 78% of medical claims and benefits payable was attributable to risk-based contracts.
Stockholders’ Equity. The decreases in treasury stock and additional paid-in capital from December 31, 2001 were primarily due to the reissuance of approximately 1,071,000 shares of treasury stock, of which approximately 421,000 shares were reissued under the equity commitment arrangement, approximately 101,000 shares were reissued in connection with the retirement of FHP senior notes and approximately 549,000 shares were reissued in connection with our employee benefit plans during the year ended December 31, 2002.
Incurred But Not Reported or Paid Claims Reserves. We estimate the amount of our reserves for incurred but not reported, or IBNR, claims submitted under our risk-based provider contracts, primarily using standard actuarial methodologies based on historical data. These standard actuarial methodologies include, among other factors, the average interval between the date services are rendered and the date claims are received and/or paid, denied claims activity, disputed claims activity, expected health care cost inflation, utilization, seasonality patterns and changes in membership. The estimates for submitted claims and IBNR claims liabilities are made on an accrual basis and adjusted, based on actual claims data, in future periods as required. For new products, such as our PPO products, estimates are initially based on health care cost data provided by third parties. This data includes assumptions for member age, gender and geography. The models that we use to prepare estimates for each product are adjusted as we accumulate actual claims data. Such estimates could materially understate or overstate our actual liability for medical claims and benefits payable. These estimates are reviewed by outside parties and state regulatory authorities on a periodic basis. The estimates for submitted claims and IBNR claims liabilities are made on an accrual basis and adjusted in future periods as required. Adjustments to prior period estimates, if any, are included in the current period.
Provider Insolvency Reserves. We maintain insolvency reserves for our capitated contracts with providers that include estimates for potentially insolvent providers, where conditions indicate claims are not being paid or have slowed considerably. These insolvency reserves include write-offs of certain uncollectable receivables from providers and the estimated cost of unpaid health care claims that were previously the responsibility of the capitated provider. Depending on states’ laws, we may be held liable for unpaid health care claims that were previously the responsibility of the capitated provider and for which we have already paid capitation. These estimates could materially understate or overstate our actual liability for medical claims and benefits payable.
For further discussion of risk factors associated with these accounting estimates, read “Forward Looking Statements.”
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act, and are subject to the safe harbor created by the Securities Litigation Reform Act of 1995. These forward-looking statements relate to future events or our future financial and/or operating performance and can generally be identified as such because the context of the statement will include words such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,” “continue,” or “opportunity,” the negative of these words or words of similar import. Similarly, statements that describe our reserves and our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward-looking statements. These forward-looking statements are based largely on our expectations and projections about future events and future trends affecting our business, and so are subject to risks and uncertainties, including the risks and uncertainties set forth below, that could cause actual results to differ materially from those anticipated as of the date of this report. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. In evaluating these statements, you should specifically consider the risks described below and in other parts of this report. Except as required by law, we undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this report.
Our premiums for our commercial products and Medicare+Choice products are generally fixed in advance of the periods covered and our profitability may suffer to the extent that those premiums do not adequately allow for increases in the costs of health care services over those periods.
We use our underwriting systems to establish and assess premium rates based on accumulated actuarial data, with adjustments for factors such as claims experience and hospital and physician contract changes. We may be less able to accurately price our new products than our other products because of our relative lack of experience and accumulated data for our new products. Our future profitability will depend in part on our ability to predict health care costs and control future health care costs through underwriting criteria, medical and disease management programs, product design and negotiation of favorable provider and hospital contracts, and we may be less able to do so for our new products than for our other products. These factors are of greater significance, to the extent that we have entered into and may continue to increasingly enter into fee-for-service contracts with hospitals and physicians due to the continuing industry trend away from capitation contracts. In addition, changes in demographic characteristics, the regulatory environment, health care practices, inflation, new technologies, continued consolidation of physician, hospital and other provider groups, contractual disputes with providers and numerous other factors may adversely affect our ability to predict and control health care costs as well as our financial condition, results of operations or cash flows.
We could become subject to material unpaid health care claims and health care costs that we would not otherwise incur because of insolvencies of providers with whom we have capitated contracts.
Providers with whom we have capitated contracts could become insolvent and could expose us to unanticipated expenses. We maintain insolvency reserves that include estimates for potentially insolvent providers, where conditions indicate claims are not being paid or have slowed considerably. Depending on states’ laws, we may be held liable for unpaid health care claims that were previously the responsibility of the capitated provider and for which we have already paid capitation. We may also incur additional health care costs in the event of provider instability where we are unable to agree upon a contract that is mutually beneficial. These costs may be incurred when we need to contract with other providers at less than cost-effective rates to continue providing health care services to our members. In addition to our insolvency exposure, our providers have deposited security reserves with us, and in third party institutions. Because our access to provider reserves has, and may continue to be subject to challenge by the provider group or other third parties at interest, we could incur additional charges for unpaid health care claims if we are ultimately denied access to these funds.
We estimate the amount of our reserves for incurred but not reported (IBNR) claims primarily using standard actuarial methodologies based upon historical data. These standard actuarial methodologies include, among other factors, the average interval between the date services are rendered and the date claims are received and/or paid, denied claims activity, disputed claims activity, expected health care cost inflation, utilization, seasonality patterns and changes in membership. The estimates for submitted claims and IBNR claims liabilities are made on an accrual basis and adjusted in future periods as required. These estimates could materially understate or overstate our actual liability for claims and benefits payable. Any increases to these prior estimates could adversely affect our results of operations in future periods.
Our profitability may be adversely affected if we are unable to adequately control our prescription drug costs.
In addition, our selling, general and administrative expenses as a percentage of our revenue could increase due to changes in our product mix between senior and commercial products and expected declines in our revenue, and could be adversely affected if we exit Medicare+Choice or commercial markets without replacing our revenue from those markets with revenue from other sources, such as our new Medicare Supplement product offerings. If we do not generate expected cash flow from operations, we could be forced to postpone or cancel some of these planned investments, which would adversely affect our ability to meet our short-term strategic plan.
Health care providers and members are currently attacking practices of the HMO industry through a number of lawsuits brought against us and other HMOs. The class action lawsuits brought by health care providers allege that HMOs’ claims processing systems automatically and impermissibly alter codes included on providers’ reimbursement/claims forms to reduce the amount of reimbursement, and that HMOs impose unfair contracting terms on health care providers, impermissibly delay making capitated payments under their capitated contracts, and negotiate capitation payments that are inadequate to cover the costs of health care services provided. The Jose Cruz lawsuit filed in November 1999 alleged that we engaged in a number of purportedly undisclosed practices designed to limit the amount and cost of health care services provided to members, such as:
providing health care providers with financial incentives to restrict hospitalizations, referrals to specialist physicians, and prescriptions for high cost drugs;
entering into capitated contracts with health care providers, since capitated providers have financial incentives to limit health care services; and
In addition, as part of our lawsuit with the State of Texas, the Texas Attorney General, or AG, alleges that we violated Texas laws relating to prompt payment in connection with the administration of our capitated contracts with three insolvent physician groups. On March 21, 2003, we entered into a binding memorandum of understanding, or MOU, with the State of Texas, the AG and the Texas Department of Insurance, or TDI, setting forth the principal terms of a settlement of all of the pending litigation between the parties and related civil investigations by the TDI. We cannot provide assurances that we will be able to meet the conditions required to cause the settlement to become effective.
These lawsuits, including those filed to date against us, may take years to resolve and cause us to incur substantial litigation expenses. Depending upon the outcomes of these cases, these lawsuits may cause or force changes in practices of the HMO industry, including our ability to settle disputes with our providers by arbitration. These cases also may cause additional regulation of the industry through new federal or state laws. These actions and actions brought by state attorney generals ultimately could adversely affect the HMO industry and, whether due to damage awards, required changes to our operating procedures, increased regulatory requirements or otherwise, have a material adverse effect on our financial position, results of operations or cash flows and prospects.
From time to time, we are involved in legal proceedings that involve claims for coverage encountered in the ordinary course of business. We, like other HMOs and health insurers generally, exclude payment for some health care services from coverage under our HMO and other plans. We are, in the ordinary course of business, subject to the claims of our members arising out of decisions to deny or restrict reimbursement for services, including medical malpractice claims related to our taking a more active role in managing the cost of medical care. The loss of even one of these claims, if it results in a significant punitive damage award, could have a material adverse effect on our business. In addition, our exposure to potential liability under punitive damage theories may significantly decrease our ability to settle these claims on reasonable terms. We maintain general liability, property, managed care errors and omissions and medical malpractice insurance coverage. We are at risk for our self-insured retention on these claims, and are substantially self-insured for medical malpractice claims. Coverages typically include varying and increasing levels of self-insured retention or deductibles that increase our risk of loss.
Our adjusted community rate proposals for the contract year 2003 have been filed and approved. In the normal course of business, all information submitted as part of the adjusted community rate process is subject to audit and approval. We cannot be certain that any ongoing and future audits will be concluded satisfactorily. We may incur additional, possibly material, liability as a result of these audits. The incurrence of such liability could have a material adverse effect on our financial position, results of operations or cash flows.
draft compliance guidelines from the Office of Inspector General that propose voluntary guidelines for pharmaceutical manufacturers to establish internal controls, which, if implemented, may result in pharmaceutical companies restructuring the financial terms of their business arrangements with PBMs, HMOs or other health service plans;
new and proposed “patients’ bill of rights” legislation at the state level that would hold HMOs liable for medical malpractice, including legislation enacted in Arizona, California, Oklahoma, Texas and Washington, may increase the likelihood of lawsuits against HMOs for malpractice liability. The United States Supreme Court has ruled that state laws that establish independent review boards to which members can appeal when HMOs deny coverage for certain treatments or procedures are not pre-empted by The Employee Retirement Income Security Act of 1974, or ERISA;
existing or new state legislation and regulation that may require increases in minimum capital, reserves, and other financial liability requirements and proposed state legislation that may limit the admissibility of certain assets;
new and proposed state and federal legislation that would attempt to address increases in medical malpractice insurance premiums and tort reform;
new regulations that place additional restrictions and administrative requirements on the transmission, processing and receipt of electronic data as required by HIPAA; and
existing or new state and federal legislation and regulations governing the timely payment and administration of claims by HMOs and insurers, and imposing financial and other penalties for non-compliance.
Our significant indebtedness poses risks to our business, including the risks that:
our level of indebtedness may make us more vulnerable to economic or industry downturns; and
place restrictions on our subsidiaries’ ability to pay dividends, make distributions or transfer assets;
We could have to change our investment practices in the future to avoid being deemed to be an investment company under the Investment Company Act of 1940, as amended, which could adversely affect our rate of return on our investments and our results of operations.
be exempt from the provisions of the Investment Company Act. The granting of this type of order is a matter of SEC discretion and, therefore, we cannot assure you that it will be granted to our HMO operating subsidiaries. Even if we were to receive an SEC order, there can be no assurance that our business activities would not ultimately subject us to regulation under the Investment Company Act.