We own both of our corporate office headquarters buildings located in St. Louis, Missouri. During 2008, 2009 and 2010, our capital expenditures included costs for the construction of a new real estate development on the property adjoining our corporate office, which we believe is necessary to accommodate our growing business.
Premium and service revenues from continuing operations of $4.3 billion, representing 10.5% growth year over year.
Health Benefits Ratio from continuing operations of 83.8%, compared to 83.5% in 2009.
Total operating cash flows of $168.9 million, or 1.7 times net earnings.
The following items contributed to our revenue and membership growth over the last two years:
Florida. In February 2009, we began converting non-risk managed care membership from Access Health Solutions LLC, or Access, to our subsidiary, Sunshine State Health Plan on an at-risk basis. During 2010, we completed the conversion of approximately 26,000 members from Access. Additionally, in December 2010, we completed the acquisition of Citrus Health Care, Inc., a Medicaid and long-term care health plan.
Massachusetts. In July 2009, we began managing healthcare services for members under the state’s Commonwealth Care program and in October 2009 under the Commonwealth Care Bridge program. In April 2010, we began offering an individual insurance product, under the names of Commonwealth Choice and CeltiCare Direct, for residents of the Boston area who do not qualify for other state funded insurance programs. At December 31, 2010, we served 36,200 members operating as CeltiCare Health Plan of Massachusetts.
In September 2010, our new subsidiary, IlliniCare Health Plan, was selected as one of two vendors to provide managed care services to older adults and adults with disabilities under the Integrated Care Program in six counties of Illinois. We expect operations to commence in the first half of 2011.
In January 2011, we began operating under a new contract in Mississippi to provide managed care services to Medicaid recipients through the Mississippi Coordinated Access Network (MississippiCan) program.
In January 2011, we began operating under a new statewide managed care contract serving Healthy Indiana Plan members.
In April 2010, we were notified by the Wisconsin Department of Health Services that our Wisconsin subsidiary, Managed Health Services (MHS), was not awarded a Southeast Wisconsin BadgerCare Plus Managed Care contract. The change was effective November 1, 2010; after a two-month transition period (September through October), MHS no longer serves BadgerCare Plus Standard and Benchmark members in Milwaukee, Washington, Ozaukee, Waukesha and Kenosha counties. MHS continues to serve Wisconsin Core Plan and ABD members in this region as well as members in other regions of the state. In 2010, we filed a legal challenge to the State of Wisconsin's decision on the southeast region reprocurement. The lawsuit is currently pending before the Wisconsin court of appeals. The timing and outcome of any decision from the appellate court is unknown at this time.
In March 2010, the Patient Protection and Affordable Care Act and the accompanying Health Care and Education Affordability Reconciliation Act, or the Acts, were enacted in the United States. The Acts contain provisions we expect will have a significant effect on our business in coming years including expanding Medicaid eligibility beginning in 2014 to recipients with incomes below 133% of the federal poverty level, retaining the CHIP program in its current form, and requiring state-based exchanges similar to our experience in Massachusetts in the future. The Acts allow states to receive the same level of rebates from pharmaceutical companies for their Medicaid programs, whether or not the states participate in managed care. The Acts also impose an excise tax on health insurers beginning in 2014 based upon relative market share. Effective in 2011, minimum health benefit cost ratios will be mandated for commercial, fully-insured major medical health plans in the individual market, like our Celtic subsidiary. The minimum health benefit cost ratio for these commercial plans will be set at 80% of premium revenue, adjusted for certain taxes, fees, assessments, risk premium and a credibility factor based upon both the number of covered life years and an average plan cost sharing adjustment calculated for each state. If the actual health benefit cost ratios do not meet the minimum calculated for any state, rebates will be paid to those policyholders. Due to its complexity and lack of comprehensive interpretive guidance and implementing regulations, the full impact of the Acts on Celtic is not yet fully known. The health benefit cost ratio minimum does not apply to other Centene subsidiaries.
From December 31, 2008 to December 31, 2010, we increased our at-risk managed care membership by 28.0%. The following table sets forth our membership by state for our managed care organizations:
From December 31, 2009 to December 31, 2010 our membership changed as a result of:
continued conversion of non-risk membership from Access to at-risk under Sunshine State Health Plan in Florida; and
From December 31, 2008 to December 31, 2009 our membership increased in all of our states as a result of:
the conversion of non-risk membership from Access to at-risk under Sunshine State Health Plan in Florida; and
Summarized comparative financial data for 2010, 2009 and 2008 are as follows ($ in millions):
Our development of the IBNR estimate is a continuous process which we monitor and refine on a monthly basis as claims receipts and payment information becomes available. As more complete information becomes available, we adjust the amount of the estimate, and include the changes in estimates in medical expense in the period in which the changes are identified.
Additionally, we contract with independent actuaries to review our estimates on a quarterly basis. The independent actuaries provide us with a review letter that includes the results of their analysis of our medical claims liability. We do not solely rely on their report to adjust our claims liability. We utilize their calculation of our claims liability only as additional information, together with management’s judgment to determine the assumptions to be used in the calculation of our liability for medical costs.
General and administrative expenses, or G&A, primarily reflect wages and benefits, including stock compensation expense, and other administrative costs associated with our health plans, specialty companies and centralized functions that support all of our business units. Our major centralized functions are finance, information systems and claims processing. G&A expenses also include business expansion costs, such as wages and benefits for administrative personnel, contracting costs, and information technology buildouts, incurred prior to the commencement of a new contract or health plan.
The consolidated G&A expense ratio for the years ended December 31, 2010 and 2009 was 12.8% and 13.3%, respectively. The decrease in the ratio in 2010 primarily reflects the leveraging of our expenses over higher revenues, partially offset by an increase in contributions to our charitable foundation as well as increased business expansion costs.
The following table summarizes the components of investment and other income, net ($ in millions):
As a result of tightening our investment criteria for municipal securities, we sold municipal securities resulting in net gains of $2.5 million during 2010. Also in 2010, we received distributions from the Reserve Primary Fund of $5.7 million resulting in a gain of $3.3 recorded for the distributions received in excess of our adjusted basis.
Interest expense increased reflecting the borrowings on the loans associated with the construction of our corporate headquarters. The real estate development was placed in service in the third quarter 2010 and accordingly we ceased capitalizing interest on the project. The increase was partially offset by the reduction in debt outstanding under our revolving credit agreement as a result of the equity offering completed during the first quarter of 2010.
Pre-tax earnings related to discontinued operations (consisting solely of the New Jersey health plan operations) were $8.3 million in 2010 compared to a pre-tax loss of $3.6 million in 2009. As a result of the sale of certain assets of the New Jersey operations in March 2010, we recognized a pre-tax gain of $8.2 million, which was $3.9 million after tax, or $0.08 per diluted share. Additionally, we recognized $1.2 million of restructuring costs associated with the exit primarily due to lease termination costs and employee retention programs. The total revenue associated with UHP included in results from discontinued operations was $21.8 million and $145.1 million for 2010 and 2009, respectively. UHP had remaining statutory capital of approximately $2.5 million at December 31, 2010, which will be transferred to unregulated cash as operations wind-down, subject to regulatory approval.
Premium and service revenues increased 6.0% in 2010 primarily due to growth of our operations in Massachusetts, as well as membership growth in our Medicaid segment and the associated specialty services provided to this increased membership. Earnings from operations increased 2.9% in 2010 reflecting the growth in service revenue for lower margin services, higher HBR in 2010, and the effect of pharmacy carve outs in two states.
Contract amendments related to rate increases for the Georgia health plan effective July 1, 2009 and July 1, 2010 were not fully executed until the respective fourth quarters and accordingly, the premium revenue from July 1 to September 30 was recorded in the fourth quarter in each respective year.
The consolidated HBR for the year ended December 31, 2009 was 83.5%, an increase of 1.0% over 2008. The increase in the total HBR in 2009 as compared to 2008 is due to the effect of the following items:
recording the Georgia premium rate increase for the period from July 1, 2007 to December 31, 2007 during the first quarter of 2008 had the effect of decreasing the HBR in 2008 by 0.6%;
The pre-tax loss from discontinued operations was $3.6 million in 2009 and $1.0 million in 2008. Legal expenses of $1.8 million and employee retention expenses of $3.6 million related to the pending sale of UHP were included in the results from discontinued operations during 2009. The 2008 results include a one-time charge of $3.7 million primarily for asset impairments and employee severance related to the sale.
Premium and service revenues increased 15.8% in 2009 due to membership growth in our states, especially Florida, Indiana, South Carolina and Texas. Earnings from operations decreased in 2009 from 2008 levels due to the aforementioned effect of the Georgia rate increase. Excluding the effects of recording this rate increase in 2008, earnings from operations increased 13.4% in 2009 over 2008 levels reflecting the overall growth in our membership and revenue base and improvements in our ABD product, especially in Ohio and South Carolina. This increase was partially offset by a rate decrease in Texas, higher medical costs related to the flu, and a higher HBR in Florida.
We spent $31.7 million, $23.2 million and $44.1 million in 2010, 2009 and 2008, respectively, on capital expenditures for system enhancements and market expansions. We also spent $31.6 million, $0.5 million, and $21.1 million in 2010, 2009 and 2008, respectively, for costs associated with our headquarters development including land, tenant improvements and furniture. We anticipate spending approximately $55 million on capital expenditures in 2011 primarily associated with system enhancements and market expansions.
During the second quarter of 2009, we executed an agreement as a joint venture partner in an entity, Centene Center LLC, for the construction of a real estate development that includes the Company’s corporate headquarters. For the years ended December 31, 2010 and 2009, Centene Center LLC had capital expenditures of $55.3 million and $59.4 million, respectively, for costs associated with the real estate development. The development was placed into service in the third quarter of 2010. We anticipate spending approximately $10 million on capital expenditures in 2011 associated with the real estate development.
During the first quarter of 2010, we completed the sale of 5.75 million shares of common stock for $19.25 per share. Net proceeds from the sale of the shares were approximately $104.5 million. A portion of the net proceeds was used to repay the outstanding indebtedness under our $300 million revolving credit loan facility ($84.0 million as of December 31, 2009). The remaining net proceeds have been used to fund our acquisition in South Carolina as well as capital expenditures.
During the year ended December 31, 2010, we received dividends of $67.9 million from our regulated subsidiaries. During the year ended December 31, 2009, we received dividends of $19.1 million from our regulated subsidiaries. On July 1, 2008 we completed the acquisition of Celtic for a purchase price of approximately $82.0 million, net of unregulated cash acquired. During the year ended December 31, 2008, the Company received a dividend from Celtic of $31.4 million concurrent with the acquisition, and received an additional dividend of $17.0 million from a regulated subsidiary.
Our subsidiaries are required to maintain minimum capital requirements prescribed by various regulatory authorities in each of the states in which we operate. As of December 31, 2010, our subsidiaries had aggregate statutory capital and surplus of $516.1 million, compared with the required minimum aggregate statutory capital and surplus requirements of $308.0 million and we estimate our Risk Based Capital, or RBC, percentage to be in excess of 350% of the Authorized Control Level.
The paid and received completion factors, claims per member per month and per diem cost trend factors are the most significant factors affecting the IBNR estimate. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by changes in these factors based on December 31, 2010 data:
Medical claims are usually paid within a few months of the member receiving service from the physician or other healthcare provider. As a result, the liability generally is described as having a “short-tail,” which causes less than 5% of our medical claims liability as of the end of any given year to be outstanding the following year. We believe that substantially all the development of the estimate of medical claims liability as of December 31, 2010 will be known by the end of 2011.
We have made several acquisitions that have resulted in our recording of intangible assets. These intangible assets primarily consist of customer relationships, purchased contract rights, provider contracts, trade names and goodwill. At December 31, 2010, we had $278.1 million of goodwill and $29.1 million of other intangible assets.
We have audited the accompanying consolidated balance sheets of Centene Corporation and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
The accompanying notes to the consolidated financial statements are an integral part of these statements
The Company recognizes an impairment charge for any amount by which the carrying amount of goodwill exceeds its implied fair value.
The Company uses discounted cash flows to establish the fair value as of the testing date. The discounted cash flow approach includes many assumptions related to future growth rates, discount factors, future tax rates, etc. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairment in future periods. When available and as appropriate, the Company uses comparative market multiples to corroborate discounted cash flow results.
The Company accrues for loss contingencies associated with outstanding litigation, claims and assessments for which it has determined it is probable that a loss contingency exists and the amount of loss can be reasonably estimated. The Company expenses professional fees associated with litigation claims and assessments as incurred.
The Company has determined that all recently issued accounting guidance will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.
In November 2008, the Company announced its intention to sell certain assets of its New Jersey health plan, University Health Plans, Inc., or UHP. Accordingly, the results of operations of UHP are presented as discontinued operations for all periods presented. The assets, liabilities and results of operations of UHP were classified as discontinued operations for all periods presented beginning in December 2008. UHP was previously reported in the Medicaid Managed Care segment.
In March 2010, the Company ceased operations and completed the sale of certain assets of UHP and recorded a pre-tax gain of $8,201. Goodwill and intangible assets associated with the New Jersey operations disposed of as a part of the sale were $3,720. UHP had remaining statutory capital of approximately $2,500 at December 31, 2010, which will be transferred to unregulated cash as operations wind-down, subject to regulatory approval.
NovaSys Health, LLC. In July 2010, the Company acquired certain assets and liabilities of NovaSys Health, LLC, a third party administrator in Arkansas and paid $4,330 in cash. The Company’s allocation of fair value resulted in goodwill of $1,444 and other identifiable intangible assets of $3,050 that were recorded in the Specialty Services segment. All of the goodwill is deductible for income tax purposes.
Casenet, LLC. In December 2010, the Company acquired an additional ownership interest in Casenet, LLC for total consideration of $6,619, bringing its ownership interest to 68%. Casenet, LLC is a provider of care management solutions that automate the clinical, administrative, and technical components of care management programs. The Company performed an initial allocation of total consideration to assets acquired and liabilities assumed based on its initial estimates of fair value using methodologies and assumptions that it believed were reasonable. The initial allocation resulted in goodwill of $1,752 and other identifiable intangible assets of $4,500 that were recorded in the Specialty Services segment. The fair value of the acquired intangible assets is preliminary pending the final valuation of those assets. The goodwill is not deductible for income tax purposes.
Access. In July 2007, the Company acquired a 49% ownership interest in Access, a Medicaid managed care entity in Florida. The Company accounted for its investment in Access using the equity method of accounting through December 31, 2008. During the quarter ended March 31, 2009, the Company began presenting its investment in Access as a consolidated subsidiary in its financial statements. The consolidation of Access resulted in goodwill of approximately $43,400, and other identified intangible assets of approximately $5,400. In 2009, the Company paid an additional $33,927 conversion fee for the transfer of membership from Access to the Company’s wholly-owned subsidiary, Sunshine State Health Plan, Inc.
Celtic Insurance Company. On July 1, 2008, the Company acquired Celtic Insurance Company, or Celtic, a health insurance carrier focused on the individual health insurance market. The Company paid approximately $82,100 in cash and related transaction costs, net of unregulated cash acquired. In conjunction with the closing of the acquisition, Celtic paid to the Company an extraordinary dividend of $31,411 in July 2008. The results of operations for Celtic are included in the Specialty Services segment of the consolidated financial statements since July 1, 2008.
During the first quarter of 2010, one of the Company’s employees became the owner of Syncare, LLC, or Syncare, a disease management company providing services to private and public insurers. Additionally, the Company is a guarantor on a $300 loan that was utilized to purchase the business and is a guarantor of Syncare’s $100 business loan. As a result, the Company determined that Syncare is a variable interest entity and the Company is the primary beneficiary. The Company has presented Syncare as a consolidated entity effective February 1, 2010. The Company’s non-controlling interest includes $119 associated with Syncare at December 31, 2010.
The Company’s investments are classified as available-for-sale with the exception of life insurance contracts and certain cost method and equity method investments. The Company’s investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets with the focus on high credit quality securities. The Company limits the size of investment in any single issuer other than U.S. treasury securities and obligations of U.S. government coporations and agencies. As of December 31, 2010, the Company had no single issue with a par value greater than $5,000. As of December 31, 2010, 37% of the Company’s fair value investments in securities that carry a rating by Moody’s or S&P were rated AAA or higher, 76% were rated AA- or higher, and 99% were rated A- or higher. At December 31, 2010, the Company held certificates of deposit, life insurance contracts and cost and equity method invesments which did not carry a credit rating.
For each security in an unrealized loss position, the Company assesses whether it intends to sell the security or it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If the security meets this criterion, the decline in fair value is other-than-temporary and is recorded in earnings. 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.
The contractual maturities of short-term and long-term investments and restricted deposits as of December 31, 2010, are as follows:
The following table summarizes fair value measurements by level at December 31, 2009, for assets and liabilities measured at fair value on a recurring basis:
Goodwill additions in 2010 and 2009 were related to the acquisitions discussed in Note 4, Acquisitions.
The consolidated income tax expense consists of the following for the years ended December 31:
The December 31, 2010 reserve balance of $1,667 would decrease income tax expense, if recognized.
The Company files in numerous state jurisdictions with varying statutes of limitation. The unrecognized state tax benefits are related to returns open from 2006 to 2010.
The Company had reinsurance recoverables related to medical claims liability of $6,180 and $4,700 at December 31, 2010 and 2009, respectively, included in premium and related receivables.
The Company had a $300,000 revolving credit agreement dated September 14, 2004 with various financial institutions, expiring in September 2011. The agreement contained various non-financial and financial covenants. As of December 31, 2010, the Company had $60,000 in borrowings outstanding under the agreement and $41,576 in letters of credit outstanding, leaving availability of $198,424. The outstanding borrowings at December 31, 2010 bore interest at the prime rate of 3.25%.
The Company has 10,000,000 authorized shares of preferred stock at $.001 par value. At December 31, 2010, there were no preferred shares outstanding.
On October 26, 2009, the Company’s Board of Directors extended the Company’s stock repurchase program. The program authorizes the repurchase of up to 4,000,000 shares of the Company’s common stock from time to time on the open market or through privately negotiated transactions. No duration has been placed on the repurchase program, however, the terms of the Senior Notes require that all such redemptions are consummated on or before April 1, 2011. The Company reserves the right to discontinue the repurchase program at any time. During the year ended December 31, 2010, the Company did not repurchase any shares through this publicly announced program.
The Company’s stock incentive plans allow for the granting of restricted stock or restricted stock unit awards and options to purchase common stock. Both incentive stock options and nonqualified stock options can be awarded under the plans. No option will be exercisable for longer than ten years after the date of grant. The plans have 2,082,929 shares available for future awards. Compensation expense for stock options and restricted stock unit awards is recognized on a straight-line basis over the vesting period, generally three to five years for stock options and one to ten years for restricted stock or restricted stock unit awards. Certain restricted stock unit awards contain performance-based as well as service-based provisions. Certain awards provide for accelerated vesting if there is a change in control as defined in the plans. The total compensation cost that has been charged against income for the stock incentive plans was $13,874, $14,634 and $15,328 for the years ended December 31, 2010, 2009 and 2008, respectively. The total income tax benefit recognized in the income statement for stock-based compensation arrangements was $4,713, $3,945 and $4,771 for the years ended December 31, 2010, 2009 and 2008, respectively.
Option activity for the year ended December 31, 2010 is summarized below:
The total fair value of restricted stock and restricted stock units vested during the years ended December 31, 2010, 2009 and 2008, was $13,012, $17,213 and $1,822, respectively.
As of December 31, 2010, there was $37,970 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans; that cost is expected to be recognized over a weighted-average period of 1.8 years. The actual tax benefit realized for the tax deductions from stock option exercises totaled $883, $395 and $1,127 for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company maintains an employee stock purchase plan and has issued 37,048 shares, 34,306 shares, and 36,682 shares in 2010, 2009 and 2008, respectively.
Centene and its subsidiaries lease office facilities and various equipment under non-cancelable operating leases which may contain escalation provisions. The rental expense related to these leases is recorded on a straight-line basis over the lease term, including rent holidays. Tenant improvement allowances are recorded as a liability and amortized against rent expense over the term of the lease. Rent expense was $21,393, $20,211 and $19,561 for the years ended December 31, 2010, 2009 and 2008, respectively. Annual non-cancelable minimum lease payments over the next five years and thereafter are as follows:
In connection with an appeals conference in August 2010, the Company responded to the field agent's original write-up and provided additional documentation to the Appeals Officer to support the Company's view that sufficient technical tax authority existed at the time of the FirstGuard abandonment to support the Company's tax position. The Company is proceeding with the appeals process and believes that once the factual issues surrounding the abandonment are understood by the IRS, the position, more likely than not, will be upheld. Accordingly the Company has not made any adjustments to the reserve for this position.
The following table sets forth the calculation of basic and diluted net earnings per share for the years ended December 31:
The calculation of diluted earnings per common share for 2010, 2009 and 2008 excludes the impact of 2,010,183 shares, 2,351,679 shares and 2,004,778 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.
In Centene Corporation’s parent company only financial statements, Centene Corporation’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries. Centene Corporation’s share of net income of its unconsolidated subsidiaries is included in income using the equity method of accounting.Centene Corporation has unrestricted subsidiaries that receive monthly management fees from our restricted subsidiaries. The management and service fees received by our unrestricted subsidiaries are associated with all of the functions required to manage the restricted subsidiaries including but not limited to salaries and wages for all personnel, rent, utilities, medical management, provider contracting, compliance, member services, claims processing, information technology, cash management, finance and accounting, and other services. The management fees are based on a percentage of the restricted subsidiaries revenue.