through 2013. We also own a building in Richmond, Virginia with 45,000 square feet, which is used for
Operating revenues $ 4,535,143 $ 3,576,905 $ 3,147,245 $ 2,604,910 $ 2,162,372
health care company with approximately 2.4 million members, excluding network rental members, as of
December 31, 2003. We operate a diversified portfolio of local market health plans, insurance companies
and provider networks serving 14 markets. Our operations are based in Bethesda, Maryland with our local
markets primarily covering the Mid-Atlantic, Midwest and Southeast regions of the United States. Our
focus but with the management expertise, resources and economies of scale of a large, well-capitalized
company. We believe the delivery of health care benefits and services is best managed on a market-by-market
enables us to quickly adapt our products and services to the needs of individual markets and maintain
strong relationships with our employer customers, members and health care providers. We will continue
Medical loss ratio of 81.2% improved 210 basis points over the prior year.
Operating margin of 8.1% improved 250 basis points over the prior year.
Total cash and investments increased to $1.4 billion, a 26% increase over the prior year.
risk products, for which we assume full underwriting risk, can vary. For example, premiums for our preferred
provider organization (“PPO”) and point of service (“POS”) products are typically lower than our health
maintenance organization (“HMO”) premiums due to medical underwriting and higher deductibles and co-payments
and state-sponsored managed Medicaid, are established by governmental regulatory agencies. These government
products are offered in selected markets where we believe we can achieve profitable growth based upon
(“non-risk”) is generally a fixed administrative fee for access to our provider networks and management
include network management, claims processing, utilization review and quality assurance. In addition,
2003, we experienced substantial growth in operating revenues due to membership increases
able to operate at target margins for the long term. Acquisitions must have a manageable regulatory
was achieved organically through marketing efforts, geographic expansion and increased product offerings.
a large variety of lower cost products, which has proven especially attractive to customers. In some
expediting the regulatory approval processes. Although the approval processes are unique to each state,
paid under contractual relationships with a wide variety of providers and capitation arrangements. Medical
physicians are compensated under a discounted fee-for-service arrangement. The majority of our contracts
with hospitals provide for inpatient per diem or per case hospital rates. Outpatient services are contracted
on a discounted fee-for-service, a per case basis or in some instances a discount from charges basis.
We pay ancillary providers on a fixed fee schedule or a capitation basis. Prescription drug benefits
of the provider organization. In addition to global capitation arrangements, we have capitation arrangements
our members pursuant to the customer agreements. To the extent that the respective provider organization
faces financial difficulties or otherwise is unable to perform its obligations under the capitation
arrangements, we will be required to perform such obligations. Consequently, we may have to incur costs
in doing so in excess of the amounts we would otherwise have to pay under the original global or ancillary
data in each of our markets that we use to analyze over-utilization or under-utilization of services
and assist our health plans in providing appropriate care for their members and improving patient outcomes
in a cost efficient manner. Medical directors also monitor the utilization of diagnostic services and
encourage the use of outpatient surgery and testing where appropriate. Each health plan collects data
collects and presents such data to the health plan’s physicians. The medical directors monitor these
results in an effort to ensure the use of cost-effective, medically appropriate services.
for our plans. Our regional service centers enable us to take advantage of economies of scale, implement
health plans, which allows us to utilize our underwriting expertise and a disciplined pricing strategy
we did issue senior notes in 2002 (as described in Note H to our consolidated financial statements of
this Form 10-K), the entire proceeds were used to repurchase a portion of our common stock and were
policies are ones that require difficult, subjective, or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently uncertain. The judgments and
in the month in which members are entitled to service. Premiums are based on both a per subscriber contract
adjusted to reflect changes in membership as a result of retroactive terminations, additions, or other
changes. Due to early timing of the premium billing, we are able to identify the retroactive adjustments
for two subsequent months billings. Current period revenues are adjusted to reflect these retroactive
accounts, we estimate, on a monthly basis, the amount of bad debt and future membership retroactivity
for retroactive billing adjustments of approximately $7.2 million compared with approximately $12.0
is based on a percentage of the gross accounts receivable with the reserve percentage increasing for
the older receivables. The reserves have declined as a result of an improvement in the aging of our
Centers for Medicare and Medicaid Services (“CMS”) on a monthly basis for our Medicare+Choice membership.
Membership and category eligibility are periodically reconciled with CMS and could result in adjustments
to revenue. Premiums collected in advance are recorded as deferred revenue.
Program (“FEHBP”). These contracts with the OPM and applicable government regulations establish premium
on-hold time, etc. Under these performance guarantees, we could be at risk and may incur penalties for
not maintaining the standards established in the contracts. The risk level varies by agreement with
penalties based on a variety of calculations including per member per month, percentage of premium,
or percentage of administration fees. Risk levels are evaluated at least quarterly. We estimate our
claims reported but not paid and estimates of health care services incurred but not reported (“IBNR”).
IBNR estimates are developed using actuarial principles and assumptions that consider, among other things,
inflation, product mix, seasonality, membership and other relevant factors. We also establish reserves,
costs under the group of existing contracts will exceed anticipated future premiums and reinsurance
for medical costs caused by changes in actual experience could cause these estimates to change in the
near term. Certain situations require judgment in setting reserves, such as system conversions, processing
developed, refined and used the same set of reserve models over the past several years. For inpatient
for inpatient and non-inpatient services, there are certain assumptions that are used. For inpatient
into per diem amounts. The per diem estimates reflect anticipated effects of changes in reimbursement
structure and severity mix. For non-inpatient services, a composite trend assumption is applied which
require the actuarial developed medical claims estimates to cover obligations under an assumption of
last several years, a reduction in medical costs in the period an adjustment was made. Our reserve models
development is a result of good communications between our health plans and our actuarial staff regarding
of the change in medical liabilities (Medical claims liabilities and Other medical liabilities) for the years ended December 31, 2003, 2002 and 2001, respectively
Medical liabilities, End of Period $ 597,190 $ 558,599 $ 522,854
The negative amounts noted as “prior year” medical costs are favorable adjustments for claim estimates being settled for amounts less than originally anticipated. As noted above, these favorable restatements from original estimates occur due to changes in medical utilization, mix of provider rates and other components of medical cost trends.
We believe that the amount of medical liabilities is adequate to cover our ultimate liability for unpaid claims as of December 31, 2003; however,
actual claim payments and other items may differ from established estimates. Assuming a hypothetical
net earnings for the year ended December 31, 2003, would increase or decrease by approximately $3.8
million and diluted earnings per share would increase or decrease by approximately $0.04 per share.
with Statement of Financial Accounting Standards (“SFAS”) No. 115 - “Accounting for Certain Investments
in Debt and Equity Securities.” We invest primarily in fixed income securities and classify all our
investments as available-for-sale. Investments are evaluated at least quarterly to determine if declines
in value are other-than-temporary. In making that determination, we consider all available evidence
not meet the criteria for an other-than-temporarily impaired investment. These securities have an investment
changes in the credit ratings associated with these securities. These investments are not in high risk
consist of corporate bonds, U.S. treasury notes and commercial paper. Long-term investments have original
have indefinite lives are subject to a periodic assessment for impairment by applying a fair-value-based
test. We use three approaches to identifying the fair value of our goodwill and other intangible assets:
a market approach, a market capitalization approach and an income approach. The market approach estimates
approach is based on the market value of our total shares outstanding. The income approach is based
on the present value of expected future cash flows. All three approaches are reviewed together for consistency
and commonality. Any impairment charges that may result will be recorded in the period in which the
Standards Board (“FASB”) issued SFAS No. 148 - “Accounting for Stock-Based Compensation - Transition
This statement provides alternative methods of transition to the fair value method of accounting for
stock-based compensation and requires prominent disclosure in our footnotes to the financial statements
transition to the fair value method of accounting for stock-based compensation, and, accordingly, this
- “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses the financial
Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits
EITF Issue No. 88-10, “Cost Associated with Lease Modification or Termination.” SFAS No. 146 requires
and prohibits the pooling-of-interest method of accounting. SFAS No. 141 also states that acquired intangible
in the period in which the impairment took place. As required, we adopted SFAS No. 142 for the fiscal
- “Accounting for Derivative Instruments and Hedging Activities.” Effective January 1, 2001, we adopted
quarter of 2001 related to one financial investment classified as derivative in nature. The adjustment
was shown separately as a cumulative effect of a change in accounting principle.
are all accounted for using the purchase method of accounting, and, accordingly, the operating results
of each acquisition have been included in our consolidated financial statements since their effective
purchase price over the net identifiable assets acquired was allocated to goodwill. Prior to December
January 1, 2002, we no longer amortize goodwill. The purchase price of our membership purchases is allocated
price of the acquisition. In addition, most of our acquisition agreements contain a provision for a
final retroactive balance sheet settlement which may result in adjustments to the purchase price. The
is attributable to the acquisitions of Altius in the third quarter of 2003 and PersonalCare in the first
quarter of 2003, as well as continued organic growth. Medicare membership decreased as a result of the
termination of the Mid-America Medicare Risk contract as of January 1, 2003. Medicaid membership increased
withdrawal of a competitor in that market. Non-risk membership increased as a result of the
Altius acquisition and from additional organic membership obtained in our Missouri market. Overall organic
membership growth, which excludes initial acquisitions and all changes to acquired entities during the
first twelve months of operations, was approximately 7.7% and 2.8% for the years ended December 31,
percentages and membership data) is provided to facilitate a more meaningful discussion regarding the
a result of rate increases on renewals that occurred throughout all markets, acquisitions and organic
membership growth. Rate increases on commercial risk renewals averaged 13.5% for the year 2003. Commercial
yields increased by an average of 12.1% on a per member per month (“PMPM”) basis. Excluding the Altius
acquisition, the commercial yield increased 12.8%. Medicare yields increased 6.1% on a PMPM basis as
approximately $325 million. Organic membership growth resulted in an increase to managed care premiums
care premiums) for all products improved 2.1%. This favorable change was attributable mostly to our
10% for each of the last two years. Our Medicare business medical loss ratio improved as a result of
an increase in premium yields discussed above and exiting three counties in the Kansas City market on
medical loss ratio, but is lower in risk to our Company. Our days in total medical claims liabilities
have decreased 10.1 days from prior year due to faster claim receipts and processing cycle times as
increased primarily due to increased costs associated with acquisitions, an increase in broker commissions
and an increase in salary expenses. Broker commissions, excluding acquisitions, have increased due to
the growth in both organic membership and in premium yields. Salary expenses, excluding acquisitions,
shares of common stock granted in 2003, additional management and sales incentive accruals and incremental
portfolio in 2003 offset by a decrease in interest income as a result of lower interest rates. Additionally,
primarily due to an increase in earnings before taxes. The effective tax rate increased to 36.4% in
2002 over 2001 primarily from commercial rate increases that occurred throughout both years and from
membership growth, both organically and through the previously discussed acquisitions. Commercial premium
rates increased by an average of $20.75 over 2001 on a per member per month (“PMPM”) basis, to $183.80
increased in 2002 primarily due to acquisitions, an increase in fees paid to brokers and incremental
salary expense related to the expansion of our customer service organization. During 2002, we opened
a new regional service center in Bismarck, North Dakota to perform customer service functions related
compared to the prior year primarily due to the adoption of SFAS No. 142 in January 2002. In accordance
In 2001, we amortized $7.5 million in goodwill. We did not incur any impairment charges during 2002.
of discounts on investments, offset by an increase in interest income due to cash placed in long-term
in 2002 due to an increase in operating earnings, offset by a decrease in our effective tax rate from
38.0% in 2001 to 35.5% in 2002. This decrease in the tax rate is the result of strategic tax planning
of cash and cash equivalents and short-term and long-term investments, but excluding deposits of $23.2
Net cash from operating activities for the year ended December 31, 2003 increased over the prior year due to an increase in net earnings, a decrease in other receivables and an increase in deferred revenue. These are offset by an increase in the long-term deferred tax asset. Other receivables have decreased due to accelerated collections of our pharmacy rebate receivables as a result of improved procedures implemented in 2003. Deferred revenue has increased due to accelerated collections of premium billings as a result of operational efficiencies experienced at our regional service centers.
year ended December 31, 2003 improved over the prior year primarily as a result of investment activity,
2004 of approximately $16 million consist primarily of computer hardware, software and related equipment
our common stock and a warrant exercisable, at that time, for 3.1 million shares of our
the proceeds from the sale of $175.0 million of our 8.125% senior notes due February 15, 2012. Interest
on the notes is payable on February 15 and August 15 each year. As required under the terms of the senior
and restricting transactions with affiliates, sales of assets and consolidations or mergers. We have
year ended December 31, 2002 increased over 2001 due to an increase in net earnings and an increase
selling, general and administrative liabilities related to our acquisitions and business growth throughout
only 12 months of premium payments were received during 2002 which led to the decrease in our deferred
minimize the risk of principal. The fixed income portfolio includes government and corporate securities
31, 2003. We will continue to fund our working capital requirements from our cash flow from operations.
available-for-sale less current liabilities increased to $730.5 million at December 31, 2003 from $498.0
limiting the dividends the parent may receive from its regulated entities. During 2003, we collected
(“NAIC”) has proposed that states adopt risk-based capital (“RBC”) standards that, if adopted, generally
The Company’s health plans are required to submit an RBC report to the NAIC and their domiciled state’s
the health plan’s statutory net worth is adequate to support the amount of its calculated risk profile.
Regulators also use the RBC results to determine if any regulatory actions are required. Regulatory
plan will increase its statutory net worth to the approved levels, to the health plan being placed under
at or above the ‘Company Action Level’ which is currently equal to 200% of their RBC. We have adopted an
with the respective states’ departments of insurance. The table below summarizes our statutory reserve
The increase in statutory deposits is mainly a result of the acquisitions of PersonalCare and Altius.
to regulation, we had cash and investments of approximately $209.5 million and $86.7 million at December
31, 2003 and December 31, 2002, respectively. The increase in non-regulated cash and investments is
offset by payments for acquisitions. During the year ended December 31, 2003, we made capital contributions
of approximately $14.1 million to our HMO subsidiaries. This contribution was almost exclusively made
Human Services has issued rules, as mandated by the Health Insurance Portability and Accountability
identifiers. We have spent approximately $4.2 million, $4.1 million and $0.9 million on compliance matters
for the years ended December 31, 2003, 2002 and 2001, respectively. We anticipate spending approximately
cash receipts from premium revenues are typically received up to two months prior to the expected cash
fluctuations, risks and uncertainties that could materially affect the way we do business. Please refer
to the section entitled “Risk Factors” in this Form 10-K for more information. Management believes
that the combination of our ability to generate cash flows from operations, cash and investments on hand and the excess funds held
to repurchase up to 10% of our outstanding common stock. Stock repurchases may be made from time to
of this program, we purchased 5.6 million shares of our common stock from 1999 to 2002, which includes 3.3 million purchased in 2002 at an aggregate cost of $65.5
million. We did not purchase any shares of our common stock in 2003 under this program.
Between January 1, 2004, and the date of this filing, under the share repurchase program previously approved by the Board of Directors, the Company purchased 2.0 million shares of its common stock at an aggregate purchase price of $84.6 million. The remaining common shares the Company is authorized to repurchase under the program is approximately 1.8 million.
We maintain general liability, professional liability and employment practices liability insurances
in amounts that we believe are appropriate, with varying deductibles for which we maintain reserves.
The professional liability and employment practices liability insurances are carried through our captive
per year. The captive is also co-insured with a commercial carrier for an additional $10 million for
Humana, Inc., et al. This action was filed by a group of physicians as a class action against us
have alleged violations of RICO, conspiracy to violate RICO and aiding and abetting a scheme to violate
RICO. In addition to these RICO claims, the complaint includes counts for breach of contract, violations
of various state prompt payment laws and equitable claims for unjust enrichment and quantum meruit.
our physician contracts. In response to the motion to dismiss, the trial court dismissed several of
who have arbitration provisions voluntarily dismissed all of their arbitratable claims. The trial court
subclasses of physicians; however, we are not subject to the class certification order because the motion
to certify was filed before we were joined as a defendant. The plaintiffs have now filed a motion to
certify a class as to the Company, and we have filed our opposition to that motion. The trial court
has not yet issued a ruling on the motion. The defendants who were subject to the certification order
decision. Subsequent to this appeal, two companies have entered into settlement agreements with the
adverse effect on our financial position or our results of operations. Management also believes that
that they deliver quality health care. Although we may be the target of other similar lawsuits, we believe
change. Existing or future laws could have a significant effect on our operations.
for the benefit of the members of the health plans. Managed care laws and regulations vary significantly
from jurisdiction to jurisdiction and changes are frequently considered and implemented.
adopted at the state or federal level can not be accurately predicted at this time, management believes
that the ultimate outcome of currently proposed legislation would not have a material adverse effect
our patient care management and provider contracting. We can not be certain that we will be able to
but believe that the pricing environment is rational in our existing markets, thus creating the opportunity
for reasonable price increases. We will continue to obtain adequate premium increases and expect premium
rates to continue to rise at a rate equal to or greater than medical trend in 2004. Management believes
as a result of the Medicare Modernization Act passed in December 2003. The rate increases will not improve
our profitability as the increases are for enhanced member benefits and/or network access.
ones that we face. Additional risks not presently known to us or that we currently deem immaterial may
affected if we are unable to accurately estimate and control future health care costs.
we charge, at least in part, on our estimate of expected health care costs over the applicable premium
period. Factors that may cause health care costs to exceed our estimates include:
an increase in the cost of health care services and supplies, including pharmaceuticals;
financial statements include our estimated reserves for incurred but not reported and unpaid claims,
you of this. Any adjustments to our IBNR reserves could adversely affect our results of operations.
ability to increase premiums to offset increases in our health care costs. Although we attempt to base
the premiums we charge on our estimate of future health care costs, we may not be able to control the
of operations could be adversely affected if we are unable to set premium rates at appropriate levels
in our health plans could adversely affect our results of operations.
our exit from a market or the termination of a health plan; and
is to grow through the acquisition of additional health plans. During the last several years, we have
significantly increased our membership through a number of acquisitions. We can not assure you that
independent agents and brokers to market our products to employers, and we can not assure you that they
are not dedicated exclusively to us and frequently market the health care products of our competitors.
We face intense competition for the services and allegiance of independent agents and brokers, and we
can not assure you that agents and brokers will continue to market our products in a fair and consistent
agreements with a sufficient number of providers may result in higher medical costs and a decrease in
The terms of those provider contracts will have a material effect on our medical costs and our ability
to control these costs. In addition, our ability to contract successfully with a sufficiently large
number of providers in a particular geographic market will impact the relative attractiveness of our
own health plans in the past or may choose to do so in the future. These provider systems could adversely
affect our product offerings and results of operations if they refuse to contract with us, place us
at a competitive disadvantage or use their market position to negotiate contracts that are less favorable
to us. Provider agreements are subject to periodic renewal and renegotiations. We can not assure you
that these large provider systems will continue to contract with us or that they will contract with
health care industry has been subject to negative publicity. Negative publicity regarding the managed
health care industry generally or our company in particular may result in increased regulation and legislative
review of industry practices, such as the Patients’ Bill of Rights legislation in 2001, which may further
disruptions in our information systems could cause disruptions in our business operations, loss of existing
customers, difficulty in attracting new customers, disputes with customers and providers, regulatory
certain sections of this Act. The law is far-reaching and complex and proper interpretation and practice
practices to comply with the law are ongoing. Because these regulations and other similar federal, state
and local laws and regulations continue to evolve, we can not guarantee that the costs of compliance
business and results of operations. Legislative or regulatory changes that could significantly harm
maintain various regulatory approvals to market many of our products. Delays in obtaining or failure
and local authorities frequently consider changes to laws and regulations that could adversely affect
or assure you that those changes will not have an adverse effect on our business or results of operations.
investigations under our contracts with federal and state government agencies, and these audits could
and applicable laws and regulations. Any adverse review, audit or investigation could result in:
new types of purported legal claims against managed care companies. Recent court decisions and legislative
if it resulted in a significant damage award, could have a significant adverse effect on our financial
condition or results of operations. In the event that a significant damage award does occur it may make
liability and employment practices liability insurance is covered through our captive subsidiary. Potential
liabilities that we incur may not, however, be covered by insurance, our insurers may dispute coverage,
inadequate. We can not assure you that we will be able to obtain insurance coverage in the future, or
that insurance will continue to be available on a cost effective basis, if at all.
were issued on February 1, 2002, imposes restrictions on our business and operations. These restrictions
in the future, which may impose further restrictions on us. The restrictions in the indenture for our
senior notes and in any future debt instruments could limit, among other things, our ability to finance
our future operations or capital needs, make acquisitions or pursue available business opportunities.
senior notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest
thereon to the date of purchase. It is possible that we will not have sufficient funds at the time of
other debt instruments may not allow such repurchases. Our failure to purchase the senior notes would
notes in the event of a change of control, the use of our cash resources to complete the repurchase
rights plan would cause substantial dilution to a person or group that attempts to acquire us on terms
involving our company that our stockholders may consider favorable. These provisions could also discourage
proxy contests and make it more difficult for stockholders to elect directors and take other corporate
establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at a meeting.
plan, certificate of incorporation and bylaws and Delaware law may discourage transactions that otherwise
terrorism, the threat of future acts of terrorism or the related concerns of members or providers will
not adversely affect our health care costs and our ability to predict and control such costs. Future
acts of terrorism and bio-terrorism could adversely affect us through, among other things:
our business and results of operations. The state of the economy could affect our employer group renewal
the states’ budgets, which could result in the states attempting to reduce payments to Medicaid plans
all of such costs resulting from any budget cuts in states in which we operate. Although we have attempted
assurance that the effects of economic conditions will not cause our existing membership to seek health
balance sheets of Coventry Health Care, Inc. and subsidiaries as of December 31, 2003 and 2002, and
These financial statements and schedule are the responsibility of the Company’s management. Our responsibility
and schedule of Coventry Health Care, Inc. and subsidiaries for the year ended December 31, 2001 were
audited by other auditors who have ceased operations and whose report dated February 1, 2002 expressed
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
used and significant estimates made by management, as well as evaluating the overall financial statement
referred to above present fairly, in all material respects, the consolidated financial position of Coventry
when considered in relation to the basic financial statements taken as a whole, presents fairly, in
financial statements, effective January 1, 2002, Coventry Health Care, Inc., changed its method of accounting
2001 were audited by other auditors who have ceased operations. As described in Note C, these consolidated
Note C with respect to 2001 included (a) agreeing the previously reported net earnings to the previously
and (b) testing the mathematical accuracy of the reconciliation of adjusted net earnings to reported
net earnings, and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 in
2001 financial statements of the Company other than with respect to such disclosures and, accordingly,
we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements
to conform with new accounting pronouncements and SEC rules and regulations issued during the fiscal
balance sheets of Coventry Health Care, Inc. (a Delaware corporation) and subsidiaries as of December
flows for each of the three years in the period ended December 31, 2001. These financial statements
referred to above present fairly, in all material respects, the financial position of Coventry Health
their cash flows for each of the three years in the period ended December 31, 2001 in conformity with
Balance, December 31, 2000 $ 994 $ (10,810) $ 538,473 $ 3,276 $ 68,497 $ 600,430
Life, Group Health Plan, HealthAmerica, HealthAssurance, HealthCare USA, PersonalCare, SouthCare, Southern
Health and WellPath. The Company provides a full range of managed care products and services including
(“POS”) products. The Company also administers self-insured plans for large employer groups and rents
Insurance Company (“CH&L”), the Company has grown substantially through acquisitions. The table
financial statements include the accounts of the Company and its subsidiaries, all of which are 100%
Company’s Board of Directors approved a three-for-two stock split of the Company’s common stock. The
stock split, in the form of a stock dividend, was distributed January 30, 2004 for stockholders of record
on January 9, 2004. The stock split is reflected retroactively in the Company’s consolidated financial
10.8%, 12.3% and 11.4%, respectively, of its managed care premiums from the Federal Medicare+Choice
care premiums in 2003, 2002 and 2001, respectively, from its state-sponsored Medicaid programs throughout
its various markets. In 2003, the State of Missouri accounted for over half of the Company’s Medicaid
The Company considers all highly liquid securities purchased with an original maturity of three months
or less to be cash equivalents. The carrying amounts of cash and cash equivalents reported in the accompanying
Investments are evaluated at least quarterly to determine if declines in value are other-than-temporary.
In making that determination, the Company considers all available evidence relating to the realizable
value of a security. This evidence includes, but is not limited to, the following:
adverse financial conditions of a specific issuer, segment, industry, region or other variables;
the Company’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value;
Realized gains and losses on the sale of investments are determined on a specific identification basis.
consist of corporate bonds, U.S. Treasury notes and commercial paper. Long-term investments have original
maturities in excess of one year and primarily consist of fixed income securities.
of tax, was recorded in the first quarter of 2001 related to one financial investment classified as
principle. The derivative investment was sold during the second quarter of 2003 and a gain of $0.8 million
and leasehold improvements are recorded at cost. Depreciation is computed using the straight-line method
Long-term Assets - Long-term assets include primarily assets associated with the Supplemental Executive Retirement Plan (“SERP” )
The first statement, SFAS No. 141 - “Business Combinations,” requires all business combinations initiated
method of accounting. SFAS No. 141 also states that acquired intangible assets should be separately
recognized upon meeting certain criteria. Such intangible assets include, but are not limited to, trade
and Other Intangible Assets,” requires companies to cease amortization of goodwill. Rather, goodwill
future cash flows. As, impairment charges occur, write-downs charges will be recorded in the
period in which the impairment took place. As required, the Company adopted SFAS No. 142 for the fiscal
Note C to consolidated financial statements for disclosure related to intangible assets.
Medical claims liabilities consist of actual claims reported but not paid and estimates of health care
data, current enrollment, health service utilization statistics and other related information. In determining
of the change in medical liabilities (Medical claims liabilities and Other medical liabilities) for the years ended December 31, 2003, 2002 and 2001, respectively:
medical liabilities is adequate to cover its ultimate liability for unpaid claims as of December 31,
2003; however, actual claim payments and other items may differ from established estimates. Assuming
a hypothetical 1% variance between the December 31, 2003 estimates of medical liabilities and actual
costs payable, net earnings for the year ended December 31, 2003, would increase or decrease by approximately
$3.8 million and diluted earnings per share would increase or decrease by approximately $0.04 per share.
Liabilities consist primarily of liabilities associated with the SERP and the deferred tax liability
are recorded as revenue in the month in which members are entitled to service. Premiums are based on
category eligibility are periodically reconciled with CMS and could result in adjustments to revenue.
groups are subject to audit and review by the Office of Personnel Management (“OPM”) on a periodic basis.
Such audits are usually a number of years in arrears. Adjustments are recorded as additional information regarding
the audits and reviews becomes available. Any differences between actual results and estimates are recorded
guarantees with employer groups where the Company guarantees that it will meet certain
could be at risk for not maintaining the standards agreed upon in the contracts. The risk level varies
by agreement with penalties based on a variety of calculations including per member per month, percentage
The Company estimates its potential exposure and records the appropriate reserves. The penalties that
the Company have incurred have been immaterial and, although, the Company can not predict with precision
the future effect on its results of operations of these penalties, the Company expects them
for stock-based compensation to employees under Accounting Principles Board (“APB”) No. 25 - “Accounting
for Stock-Based Compensation” and SFAS No. 148 - “Accounting for Stock-Based Compensation - Transition
and Disclosure.” Unless the accounting rules change, the Company does not expect to transition to the
fair value method of accounting for stock-based compensation. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company’s net earnings and earnings per share (“EPS”)
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects 6,169 3,655
Basic earnings per share as reported $ 2.84 $ 1.64 $ 0.87
in the pro-forma amounts shown above was estimated as of the grant date using the Black-Scholes option-pricing
federal tax return for the Company and its subsidiaries. The Company accounts for income taxes in accordance
by multiplying the differences between the financial reporting and tax reporting bases for assets and
liabilities by the enacted tax rates expected to be in effect when such differences are recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. See Note F to consolidated financial statements for disclosures related
2003, the Company completed several business combinations and membership purchases. The Company’s business
combinations are all accounted for using the purchase method of accounting, and, accordingly, the operating
results of each acquisition have been included in the Company’s consolidated financial statements since
goodwill. Through December 31, 2001, goodwill was amortized over a useful life of 35 years. In accordance
with SFAS No. 142, effective January 1, 2002, the Company no longer amortizes goodwill. The purchase
combinations and membership purchases for the three years ended December 31, 2003. The purchase price,
in thousands, of each business combination includes the payment for net worth and transition costs.
a final retroactive balance sheet settlement after the effective date of the acquisition which may result
in adjustments to the purchase price. The purchase price, in thousands, is inclusive of all retroactive
of costs in excess of the fair value of the net tangible assets of subsidiaries or operations acquired
The Company has completed its impairment test of goodwill and has determined that there was no impairment
of goodwill as of October 1, 2003, the Company’s annual revaluation date. The changes in the carrying
Total amortized other intangible assets $ 35,468 $ 8,121 $ 27,347
Total amortized other intangible assets $ 36,174 $ 10,587 $ 25,587
December 31, 2003, 2002 and 2001 was $15.6 million, $15.8 million and $15.8 million, respectively.
determined to be other-than-temporary impairments, as other comprehensive income in the stockholders’
or loss and estimated fair value of short-term and long-term investments by security type were as follows
State and municipal bonds $ 277,667 $ 9,191 $ (140) $ 286,718
gross investment losses of $1.5 million were realized on sales of investments for the year ended December 31,
2003. This compares to gross investment gains of $1.9 million and gross investment losses of $3.1 million
investments’ gross unrealized losses and fair value, at December 31, 2003, aggregated by investment
investment grade credit rating. The current unrealized loss is the result of interest rate increases
industries or sectors and the Company intends to hold these investments for a period of time sufficient
At December 31, 2003, the Company had approximately $63 million of federal and $151 million
of state tax net operating loss carryforwards. The net operating losses were primarily acquired through
one stock incentive plan, the Amended and Restated 1998 Stock Incentive Plan (the “Stock Incentive Plan”)
under which shares of the Company’s common stock were authorized for issuance to key employees, consultants
and directors in the form of stock options, restricted stock and other
Board of Directors. At the annual meeting of shareholders held on June 5, 2003, the Company’s shareholders
voted to increase the shares of common stock authorized for issuance under the Stock Incentive Plan
from an aggregate of 13.5 million shares to an aggregate of 16.5 million shares. Shares available for
options being equal to not less than 100% of the fair value of the underlying stock at the date of grant.
from the date of grant. At December 31, 2003, the Stock Incentive Plan had outstanding options representing
for options granted in 2003, 2002 and 2001 were $10.69, $10.44 and $6.78, respectively.
implemented in 1994, allows substantially all employees who meet length of service requirements to set
aside a portion of their salary for the purchase of the Company’s common stock. At the end of each plan
lower of the stock price at the end of the plan year or the average stock price, as defined. The Company
has reserved 1.4 million shares of stock for this plan and has issued 25,696, 16,495 and 13,912 shares
the Coventry Health Care, Inc. Retirement Savings Plan (the “Savings Plan”); Mid-America Health Partners
in the Savings Plan. The Savings Plan assets were held by (1) Principal Life Insurance Company, as funding
Care, Inc., (2) Delaware Charter Guarantee and Trust Company, as custodial trustee of the mutual funds
and (3) Bankers Trust Company, as custodial trustee of the Savings Plan’s participant loans and the
trustee of the mutual funds, Savings Plan, participant loans and the Coventry Health Care, Inc. common
equal to 100% of the participant’s contribution on the first 3% of the participant’s eligible compensation
date over a period of two years of service with the Company. All costs of the Savings
Plan’s are funded by the Company and participants as they are incurred.
since the adoption of the Savings Plan. Pursuant to specific terms of each acquisition’s respective
commenced participation in the Savings Plan following approval by the Company’s Board of Directors.
assets of the former qualified retirement plan were rolled over into the Savings Plan and employees
Mid-America Health Partners. All employees of the former Mid-America Health Partners were eligible to
participate in the Savings Plan effective December 2, 2002; however their balance in the MAH Plan remained
in the MAH Plan. The MAH Plan was terminated effective December 1, 2002 and the MAH Plan assets will
by Fidelity Management Trust Company, as funding agent of the assets held under the terms of the Plan
and Trust. All participants in the MAH Plan were 100% vested in employer matching contributions as of
The Altius Plan was frozen effective December 31, 2003 and the Plan assets will be merged with and into
matching contributions as of September 1, 2003. All costs of the Altius Plan are funded by the Company
the sponsor of a Supplemental Executive Retirement Plan (the “SERP”), currently known as the Coventry
to 15% of their base salary and up to 100% of any bonus awarded. The Company makes matching contributions
equal to 100% of the participant’s contribution on the first 3% of the participant’s compensation and
50% of the participant’s contribution on the second 3% of the participant’s compensation. Participants
placement. These senior notes were then registered with the Securities and Exchange Commission. The
million shares of Coventry common stock and a warrant exercisable, at that time, for 3.1 million shares
of Coventry common stock. The aggregate purchase price for the shares of common stock and the warrant
The Company recorded a loss on the repurchase in accordance with SFAS No. 145 which requires gains and
losses on extinguishments of debt to be classified as income or loss from continuing operations. The
loss of $0.5 million was included as additional senior notes interest expense. The carrying value of the senior notes is equal to the face value and the fair value is based on the quoted market prices. As of December 31, 2003, the carrying value was $170.5 million and the fair value was $189.7 million. As of December 31, 2002, the carrying value was $175.0 million and the fair value was $182.0 million.
and restricting transactions with affiliates, sales of assets and consolidations or mergers. The Company
has been named as a defendant in various legal actions such as actions seeking payments for claims denied
million per year. The captive is also co-insured with a commercial carrier for an additional $10 million
$10 million. Each year the Company will re-evaluate the most cost effective method for insuring these
in the provider track in the Managed Care Litigation filed in the United States District Court for the
Southern District of Florida, Miami Division, MDL No. 1334, styled in re: Humana, Inc., Charles B. Shane,
MD, et al. vs. Humana, Inc., et al. This action was filed by a group of physicians as a class action
In addition to these RICO claims, the complaint includes counts for breach of contract, violations of
of the claims and ordered that all physicians who have an arbitration provision in their provider contracts
must submit all of their claims to arbitration. As a consequence of this ruling, all the plaintiffs
to violate RICO and aiding and abetting violations of RICO. The defendants, including Coventry, have
appealed the trial court’s decision to the 11th Circuit Court of Appeals. The appeal has been fully
a motion to certify a class as to Coventry, and Coventry has filed their opposition to that motion.
the plaintiffs. Both settlement agreements have been filed with the Court and have received final approval. Although the Company can not predict the outcome, management believes that this lawsuit will not have a material
adverse effect on its financial position or our results of operations. Management also believes that
the claims asserted in this lawsuit are without merit, and the Company intends to defend its position.
lawsuits involving RICO and the Employee Retirement Income Security Act, generally claiming that managed
and the laws and rules governing the industry and interpretations of those laws and rules are subject
to frequent change. Existing or future laws could have a significant effect on the Company’s operations.
fixed percentage of premium to cover all the medical costs provided to the globally capitated members.
Under some capitated arrangements, physicians may also receive additional compensation from risk sharing
and other incentive arrangements. Global capitation arrangements limit the Company’s exposure to the
risk of increasing medical costs, but expose the Company to risk as to the adequacy of the financial
and medical care resources of the provider organization. In addition to global capitation arrangements,
is responsible for the coverage of its members pursuant to its customer agreements. To the extent that
Consequently, the Company may have to incur costs in excess of the amounts it would otherwise have to pay under
December 31, 2003, 2002 and 2001, respectively. Membership associated with global capitation arrangements
Benefits Program (“FEHBP”). These contracts with the OPM and applicable government regulations establish
premium rating arrangements for this program. The OPM conducts periodic audits of its contractors to,
the community rating and other requirements under FEHBP. The OPM may seek premium refunds or institute
1993 - 1999. In the fourth quarter of 2003, HealthAmerica, settled this dispute with the OPM and the
are exposed to credit risk consist primarily of cash equivalents, investments in fixed income securities
and accounts receivable. The Company invests its excess cash in state and municipal bonds, U.S. Treasury
securities. Investments in marketable securities are managed within guidelines established by the Board
of Directors, which require investment-grade fixed income securities and limit the amount that may be
carrying value and, although there is some credit risk associated with these instruments, the Company
to receivables is limited due to the large number of customers comprising the Company’s customer base
and their breakdown among geographical locations. The Company believes the allowance for doubtful accounts
limiting the dividends the parent may receive from its regulated entities. During 2003, the Company
(“NAIC”) has proposed that states adopt risk-based capital (“RBC”) standards that, if adopted, would
generally require higher minimum capitalization requirements for HMOs and other risk-bearing health
profile. This calculation, approved by the NAIC, incorporates asset risk, underwriting risk, credit
the NAIC and their domiciled state’s department of insurance with their annual filing.
Regulators will also use the RBC results to determine if any regulatory actions are required. Regulatory
actions that could take place, if any, range from filing a financial action plan explaining how the
operates health plans have adopted an RBC policy that recommends the health plans maintain statutory
The Company has adopted an internal policy to maintain all of its regulated subsidiaries’
parent company. The increase in statutory deposits is mainly a result of the acquisitions of PersonalCare
at December 31, 2003 and December 31, 2002, respectively. The increase in non-regulated cash and investments
capital contributions of approximately $14.1 million to the Company’s HMO subsidiaries. This contribution
was almost exclusively made to the Company’s recently acquired Altius Health Plan in order to increase
31, 2003, 2002 and 2001 includes investment income, net of fees, of approximately $40.2 million, $40.9
weighted average number of common shares outstanding during the year. Diluted earnings per share assume
the exercise of all options and warrants and the vesting of all restricted stock using the treasury
a program to repurchase up to 10% of its outstanding common stock. Stock repurchases may be made from
As a part of this program, the Company purchased 5.6 million shares of its common stock from 1999 to 2002, which includes 3.3 million purchased in 2002 at an
under this program. The total remaining common shares the Company are authorized to repurchase under
physician. PPO and POS products permit members to participate in managed care but allow them the flexibility
to utilize out-of-network providers in exchange for increased out-of-pocket costs. The Company provides
comprehensive health benefits to members participating in Medicare and Medicaid programs and receives
products and, accordingly, can not be reported by segment. The following tables summarize the Company’s
quarterly results of operations (in thousands, except per share data) for the years ended December 31,
benefits to approximately 14,000 fully insured commercial members and 6,000 full-service self insured
members. Under the terms of the agreement, Rockford Health Systems providers will become participating
providers in PersonalCare’s network. The agreement expected to commence upon final regulatory approvals.