We operate health plans, insurance companies, managed care services companies and workers’ compensation services companies and generate our operating revenues from premiums and fees for a broad range of managed care and management service products. Managed care premiums for our commercial 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 that are typically required of the PPO and POS members. Managed care premium rates for our government programs, Medicare and state-sponsored managed Medicaid, are largely established by governmental regulatory agencies. These government products are offered in select markets where we believe we can achieve profitable growth based upon favorable reimbursement levels, provider costs and regulatory approaches.
The following table presents our membership as of December 31, 2012 and 2011 (in thousands).
Our Board of Directors has approved a program to repurchase our outstanding common stock. Stock repurchases may be made from time to time at prevailing prices on the open market, by block purchase or in private transactions. As a part of this program, 9.9 million shares were purchased in 2012 at an aggregate cost of $328.0 million, 10.7 million shares were purchased in 2011 at an aggregate cost of $327.7 million and no shares were repurchased in 2010. As of December 31, 2012, the total remaining common shares we are authorized to repurchase under this program is 6.5 million. Excluded from these share repurchase program amounts are shares purchased in connection with the vesting of restricted stock awards to satisfy employees’ minimum statutory tax withholding obligations as these purchases are not part of the program. The terms of the Merger Agreement prohibit
Medicare Advantage - Driven by successful execution during the 2013 Medicare Annual Enrollment Period, Coventry's Medicare Advantage membership is expected to grow by approximately 48,000 members, or 18% in the first quarter of 2013.
In addition, PPACA ties a portion of each Medicare Advantage plan's reimbursement to the plan's “star rating” under a five-star quality rating system administered by CMS. Star ratings are based on a plan's performance on a variety of measures, including quality of preventative services, chronic illness management and overall member satisfaction. Since 2012, bonus payments have been paid to Medicare Advantage plans that qualify with a star rating of three or higher pursuant to a CMS demonstration project. Beginning in 2015, bonus payments will only be made to Medicare Advantage plans that qualify with a star rating of four or higher. Our future Medicare Advantage operating results are likely to continue to be significantly determined by our Medicare Advantage plans' star ratings. We have had success in improving our star ratings and other quality measures for 2013, but there can be no assurances that we will be successful in maintaining or improving our star ratings in future years. Although we are dedicating substantial resources to improving our quality scores and star ratings, if we are unable to significantly increase the level of membership in plans with a rating of 4 stars or higher for the 2015 payment year, our results of operations and cash flows could be adversely affected.
In October 2012, the FASB issued ASU No. 2012-04, “Technical Corrections and Improvements.” The amendments in this Update cover a wide range of topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. ASU 2012-04 will be effective for fiscal periods beginning after December 15, 2012. The Company will adopt these amendments beginning in fiscal year 2013. The adoption of ASU 2012-04 is not expected to materially affect the Company’s financial position or results of operations and comprehensive income.
During 2011, the Company entered into a new Credit Agreement (the “Credit Facility”). The Credit Facility provides for a five-year revolving credit facility in the principal amount of $750.0 million, with the Company having the ability to request an increase in the facility amount up to an aggregate principal amount not to exceed $1.0 billion. Advances under the Credit Facility bear interest at (1) a rate per annum equal to the Administrative Agent’s base rate (the “Base Rate”) or (2) the one-, two-, three-, six-, nine-, or twelve-month rate per annum for Eurodollar deposits (the “Eurodollar Rate”) plus an applicable margin, as selected by the Company. The applicable margin for Eurodollar Rate advances depends on the Company’s debt ratings and varies from 1.05% to 1.850%. The Company pays commitment fees on the Credit Facility ranging from 0.200% to 0.400%, per annum, regardless of usage and dependent on the Company’s debt ratings. The obligations under the Credit Facility are general unsecured obligations of the Company. As of December 31, 2012, there were no amounts outstanding under the Credit Facility.
The Company uses a risk-free interest rate consistent with the yield available on a U.S. Treasury note with a term equal to the expected term of the underlying grants. The expected volatility was estimated based upon a blend of the implied volatility of the Company’s tradeable options and the historical volatility of the Company’s share price. The expected life was estimated based upon exercise experience of option grants made in the past to Company employees.
The following table summarizes PSU activity for the year ended December 31, 2012:
In the normal course of business, the Company has been named as a defendant in various legal actions such as actions seeking payments for claims denied by the Company, medical malpractice actions, employment related claims and other various claims seeking monetary damages. The claims are in various stages of proceedings and some may ultimately be brought to trial. Incidents occurring through December 31, 2012 may result in the assertion of additional claims. The Company maintains general liability, professional liability and employment practices liability insurances in amounts that it believes are appropriate, with varying deductibles for which it maintains reserves. The professional errors and omissions liability and employment practices liability insurances are carried through its captive subsidiary. Although the results of pending litigation are always uncertain, the Company does not believe the results of such actions currently threatened or pending, including those described below, will individually or in the aggregate have a material adverse effect on its consolidated financial position or results of operations and comprehensive income.