Legal settlement was $1,185,000 in 2014 and did not exist in 2013. The Company’s subsidiary, CompCare de Puerto Rico (“Puerto Rico”) entered into an agreement with MAPRE Life Insurance Company of Puerto Rico (“MAPFRE”) whereby the Company made available to MAPFRE’s Medicare Advantage beneficiaries its network of providers for behavioral, and mental health amongst other services effective December 1, 2008. From that time until August 13, 2012, the Company claimed that overpayments for medical costs were made and requested reimbursement. An arbitration case was filed, and the parties settled on June 12, 2014 for a settlement of $1,150,000, which was received by the Company. This settlement is recorded as part of Other Income on the face of the financial statements.
The services provided through our provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization services), inpatient programs and crisis intervention services. We do not directly provide treatment or own any treatment facility.
● At-risk arrangements under which our clients pay us a fixed fee per member in exchange for our assumption of the financial risk of providing services; and
● ASO arrangements where we manage behavioral healthcare programs or perform various managed care services, such as clinical care management, provider network development, and claims processing without assuming financial risk for member behavioral healthcare costs.
Under at-risk arrangements, the number of covered members as reported to us by our clients determines the amount of premiums we receive, which is independent of the cost of services rendered to members. The amount of premiums we receive for each member is fixed by our contract at the beginning of our contract term. Under certain circumstances these premiums may be subsequently adjusted up or down, or the contract terminated, generally at the commencement of each renewal period.
Throughout 2013 and 2014, we negotiated agreements with several creditors to modify the due dates of previously matured and unpaid promissory notes. Under the modified terms, the maturity dates for various notes were extended as follows and are now in default.
In June 2014, we settled an arbitration matter for $1,150,000. Of the proceeds we paid fees of $150,000 and used the remaining $1,000,000 for the repayment of a portion of our outstanding debt. See Note 12 Legal Settlement of the notes to the consolidated financial statements.
Revenue recognition. In 2013, the majority of our managed care activities were performed under at-risk arrangements pursuant to terms of agreements primarily with health plans to provide contracted behavioral healthcare and pharmacy management services to subscribing members. In December 2013, we sold CBC which held our at-risk agreements. For the year ended December 31, 2013 such agreements accounted for approximately 24% or $766,116 of our revenue. Revenue under these agreements is earned continuously over time regardless of services actually provided and, therefore, is recognized monthly based on the number of qualified members. The information regarding qualified members is supplied by our clients, and we review member eligibility records and other reported information to verify its accuracy and determine the amount of revenue to be recognized. The remaining balance of our revenues is earned and recognized as services are delivered on a non-risk basis. In 2014, all of our revenue was earned and recognized as services delivered on a non-risk basis.
The accrued claims payable liability represents the estimated ultimate net amounts owed for all behavioral healthcare services provided through the respective balance sheet dates, including estimated amounts for claims IBNR. We have used the same methodology and assumptions for estimating the IBNR portion of the accrued claims liability for the last three years ending in December 2013.
Our unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Any significant increase in member utilization that falls outside of our estimates would increase claims expense and could adversely affect our ability to achieve and sustain improvements in profitability and positive cash flow. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate.
Whenever we believe it is probable that a future loss will be incurred under our managed care contracts based on a perceived contractual premium deficiency, and we expect to be unable to cancel our obligation or renegotiate, and the amount of the loss can be reasonably estimated, we also provide for such expected losses. We perform this loss accrual analysis on a contract-by-contract basis by taking into consideration various factors such as future contractual revenue, estimated future healthcare and maintenance costs, and each contract’s specific terms related to future revenue increases as compared to expected increases in healthcare costs. The estimated future healthcare and maintenance costs are based on historical trends and expected future cost increases.
Accrued claims payable consists primarily of amounts established for reported claims and IBNR claims, which are unpaid through the respective balance sheet dates. Our policy is to record management’s best estimate of IBNR. The IBNR liability is estimated monthly using an actuarial paid completion factor methodology and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability as more information becomes available. In deriving an initial range of estimates, we use an industry accepted actuarial model that incorporates past claims payment experience, enrollment data and key assumptions such as trends in healthcare costs and seasonality. Authorization data, utilization statistics, calculated completion percentages and qualitative factors are then combined with the initial range to form the basis of management’s best estimate of the accrued claims payable balance. However, estimating IBNR claims involved a significant amount of judgment by our management.
No recent accounting pronouncements have been issued that are not yet effective and have not been early adopted that we believe will have a significant effect on our consolidated financial in future periods.
Our audited financial statements may be found beginning on Page 55, appearing elsewhere in this report.