We announced on June 2, 2005, that the State of Illinois cut $70 million from its fiscal year 2006 Medicaid managed care budget. The State of Illinois’ decision to reduce spending on its Medicaid managed care program caused AMERIGROUP Illinois, Inc., to reduce its operations beginning with the third quarter of 2005. Effective July 1, 2005, AMERIGROUP Illinois, Inc. entered into a new contract with the State of Illinois that substantially reduced reimbursement for administrative, sales and marketing expenses and, accordingly, AMERIGROUP Illinois, Inc., reduced the size of its organization. The Illinois Legislature recently passed a bill proposed by the Governor that would expand coverage for all uninsured children in Illinois, using savings generated by imposing a statewide primary care case management program (PCCM). This will allow the creation of a new entitlement with very limited controls on the growing costs of Medicaid. According to the State of Illinois, the current HMO model would co-exist and provide a choice for members. This may limit growth opportunities for HMOs and require us to reconsider our business strategy with respect to this market in the future.
We utilize the services of independent actuarial consultants, who are contracted to review our estimates on a quarterly basis, as well as the assumptions used in forming these estimates. Judgments are made based on knowledge and experience about past and current events. There is a likelihood that actual results could be materially different than reported if different assumptions or conditions prevail.
The following table shows the components of the change in medical claims payable for the years ended December 31, 2005, 2004 and 2003 (in thousands):
On December 14, 2004, we announced a two-for-one split of our common stock. The stock split was in the form of a one hundred percent stock dividend of one share of common stock for every share of common stock issued and outstanding. The stock dividend was distributed on January 18, 2005, to shareholders of record on December 31, 2004. All share and per share data described herein give retroactive effect to the two-for-one stock split effective January 18, 2005.
Investment income increased $8.0 million to $18.3 million for the year ended December 31, 2005. The increase in investment income is primarily due to increases in market interest rates.
Net income for 2005 was $53.7 million, or $1.02 per diluted share, compared to $86.0 million, or $1.66 per diluted share in 2004. The decrease in net income is primarily a result of increased medical costs driven by higher incidence of illness, an increase in obstetric services and related costs such as neonatal intensive care unit and other services, higher utilization and unit costs for network changes and other new contract terms, as well as higher costs associated with entry into new markets.
Short and long-term investments and investments on deposit for licensure at December 31, 2005 and 2004 consist of certificates of deposit, commercial paper, money market funds, U.S. Treasury securities, corporate securities, debt securities of government sponsored entities, municipal bonds and auction rate securities. We consider all investments with original maturities greater than three months but less than or equal to twelve months to be short-term investments. We classify our debt and equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which we have the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. At December 31, 2005 and 2004, our auction rate securities are classified as available-for-sale. All other securities are classified as held-to-maturity.
The following table summarizes intangible assets resulting from the PHP transaction:
We apply APB Opinion No. 25 and related interpretations in accounting for our stock plans. Accordingly, compensation cost related to stock options issued to employees would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. During 2000, we recorded deferred charges of $1,833, representing the difference between the exercise price and the deemed fair value of our common stock for the options granted in 2000. The deferred compensation has been amortized to expense over the period the options vested, generally four to five years. We recognized $57 and $360 in non-cash compensation expense related to the amortization of deferred compensation during 2004 and 2003. At December 31, 2004 the deferred compensation was fully amortized.
Amortization of assets held under capital leases is included with depreciation and amortization expense.