| CENTENE CORP Item 1A Risk Factors FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK You should carefully consider the risks described below before making an investment decision |
| The trading price of our common stock could decline due to any of these risks, in which case you could lose all or part of your investment |
| You should also refer to the other information in this filing, including our consolidated financial statements and related notes |
| The risks and uncertainties described below are those that we currently believe may materially affect our Company |
| Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become important factors that affect our Company |
| Most of our revenues come from Medicaid, SCHIP and SSI premiums |
| The base premium rate paid by each state differs, depending on a combination of factors such as defined upper payment limits, a member’s health status, age, gender, county or region, benefit mix and member eligibility categories |
| Future levels of Medicaid, 18 ______________________________________________________________________ [41]Table of Contents SCHIP and SSI funding and premium rates may be affected by continued government efforts to contain medical costs and may further be affected by state and federal budgetary constraints |
| For example, in August 2004, the Centers for Medicare & Medicaid Services, or CMS, proposed a rule that would have required states to estimate improper payments made under their Medicaid and SCHIP programs, report such overpayments to Congress, and, if necessary, take actions to reduce erroneous payments |
| In October 2005, CMS announced an interim rule under which a CMS contractor will randomly select states for review once every three years to estimate each state’s rate of erroneous payments, the federal share of which the states will be required to return to CMS In February 2005, the Bush administration called for changes in Medicaid that would cut payments for prescription drugs and give states new power to reduce or reconfigure benefits |
| The Bush administration has also proposed to reduce total federal funding for the Medicaid program, by dlra10 billion over the next five years and both the House of Representatives and the Senate have approved budget bills containing Medicaid reductions |
| Some states, including Texas, have been authorized to implement special measures to accommodate the arrival of large numbers of beneficiaries from Gulf Coast areas evacuated as a result of hurricanes Katrina and Rita, but it is unknown whether these measures will be sufficient to cover the additional Medicaid costs incurred by these states |
| The newly effective Medicare prescription drug benefit is interrupting prescription drug coverage for many Medicaid beneficiaries, prompting several states to pay for prescription drugs on an emergency basis without any assurance of receiving reimbursement from Medicaid |
| Changes to Medicaid, SCHIP and SSI programs could reduce the number of persons enrolled or eligible, reduce the amount of reimbursement or payment levels, or increase our administrative or healthcare costs under those programs |
| States periodically consider reducing or reallocating the amount of money they spend for Medicaid, SCHIP and SSI In recent years, the majority of states have implemented measures to restrict Medicaid, SCHIP and SSI costs and eligibility |
| We believe that reductions in Medicaid, SCHIP and SSI payments could substantially reduce our profitability |
| Further, our contracts with the states are subject to cancellation by the state after a short notice period in the event of unavailability of state funds |
| If Our Medicaid and SCHIP Contracts are Terminated or are Not Renewed, Our Business Will Suffer |
| We provide managed care programs and selected services to individuals receiving benefits under federal assistance programs, including Medicaid, SSI and SCHIP We provide those healthcare services under contracts with regulatory entities in the areas in which we operate |
| The contracts expire on various dates between June 30, 2006 and August 31, 2008 |
| Our contracts may be terminated if we fail to perform up to the standards set by state regulatory agencies |
| In addition, the Indiana contract under which we operate can be terminated by the State without cause |
| Our contracts are generally intended to run for one or two years and may be extended for one or two additional years if the state or its contractor elects to do so |
| When our contracts expire, they may be opened for bidding by competing healthcare providers |
| There is no guarantee that our contracts will be renewed or extended |
| If any of our contracts are terminated, not renewed, or renewed on less favorable terms, our business will suffer, and our operating results may be materially affected |
| Changes in Government Regulations Designed to Protect the Financial Interests of Providers and Members Rather than Our Stockholders Could Force Us to Change How We Operate and Could Harm Our Business |
| Our business is extensively regulated by the states in which we operate and by the federal government |
| The applicable laws and regulations are subject to frequent change and generally are intended to benefit and protect the financial interests of health plan providers and members rather than stockholders |
| Changes in existing laws and rules, the enactment of new laws and rules or changing interpretations of these laws and rules could, among other things: • force us to restructure our relationships with providers within our network; • require us to implement additional or different programs and systems; 19 ______________________________________________________________________ [42]Table of Contents • mandate minimum medical expense levels as a percentage of premium revenues; • restrict revenue and enrollment growth; • require us to develop plans to guard against the financial insolvency of our providers; • increase our healthcare and administrative costs; • impose additional capital and reserve requirements; and • increase or change our liability to members in the event of malpractice by our providers |
| For example, Congress has considered various forms of patient protection legislation commonly known as the Patients’ Bill of Rights and such legislation is frequently proposed in Congress |
| We cannot predict the impact of this legislation, if adopted, on our business |
| Our Texas plan is required to pay a rebate to the State in the event profits exceed established levels |
| Similarly, our New Jersey plan is required to pay a rebate to the State in the event its health benefits ratio is less than 80prca |
| These regulatory requirements, changes in these requirements or the adoption of similar requirements by our other regulators may limit our ability to increase our overall profits as a percentage of revenues |
| The states of Indiana, New Jersey and Texas have implemented prompt-payment laws and are enforcing penalty provisions for failure to pay claims in a timely manner |
| Failure to meet these requirements can result in financial fines and penalties |
| In addition, states may attempt to reduce their contract premium rates if regulators perceive our health benefits ratio as too low |
| Any of these regulatory actions could harm our operating results |
| In recent years, CMS has reduced the rates at which states are permitted to reimburse non-state government-owned or operated hospitals for inpatient and outpatient hospital services, with the upper payment limit decreasing to 100prca of Medicare payments for comparable services |
| Any further reductions in this limit could decrease the profitability of our health plans |
| Failure to Comply With Government Regulations Could Subject Us to Civil and Criminal Penalties |
| Federal and state governments have enacted fraud and abuse laws and other laws to protect patients’ privacy and access to healthcare |
| Violation of these and other laws or regulations governing our operations or the operations of our providers could result in the imposition of civil or criminal penalties, the cancellation of our contracts to provide services, the suspension or revocation of our licenses or our exclusion from participating in the Medicaid, SSI and SCHIP programs |
| If we were to become subject to these penalties or exclusions as the result of our actions or omissions or our inability to monitor the compliance of our providers, it would negatively affect our ability to operate our business |
| For example, failure to pay our providers promptly could result in the imposition of fines and other penalties |
| In some states, we may be subject to regulation by more than one governmental authority, which may impose overlapping or inconsistent regulations |
| The Health Insurance Portability and Accountability Act of 1996, or HIPAA, broadened the scope of fraud and abuse laws applicable to healthcare companies |
| HIPAA created civil penalties for, among other things, billing for medically unnecessary goods or services |
| HIPAA established new enforcement mechanisms to combat fraud and abuse |
| Further, HIPAA imposes civil and, in some instances, criminal penalties for failure to comply with specific standards relating to the privacy, security and electronic transmission of most individually identifiable health information |
| It is possible that Congress may enact additional legislation in the future to increase penalties and to create a private right of action under HIPAA, which could entitle patients to seek monetary damages for violations of the privacy rules |
| The issuance of future judicial or regulatory guidance regarding the interpretation of regulations, the states’ ability to promulgate stricter rules and continuing uncertainty regarding many aspects of the regulations’ implementation may make compliance with this regulatory landscape difficult |
| For example, our existing programs and systems may not enable us to comply in all respects with recent security regulations |
| In order to comply with new regulatory requirements, we were required to employ additional or different programs and systems |
| Further, compliance with new regulations could require additional changes to many of the procedures we currently use to conduct our business, which may lead to additional costs that we have not yet identified |
| We do not know whether, or the extent to which, we will be able to recover from the states our costs of complying with these new regulations |
| The new regulations and the related compliance costs could have a material adverse effect on our business |
| In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, or the NYSE, have imposed various requirements on public companies, including requiring changes in corporate governance practices |
| Our management and other personnel will continue to devote time to these new compliance initiatives |
| Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly |
| The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting |
| In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over our financial reporting as required by Section 404 of the Sarbanes-Oxley Act |
| Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses |
| Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management efforts |
| Moreover, if we are not able to comply with the requirements of Section 404, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NYSE, SEC or other regulatory authorities, which would require additional financial and management resources |
| Numerous proposals relating to changes in healthcare law have been introduced, some of which have been passed by Congress and the states in which we operate or may operate in the future |
| Changes in applicable laws and regulations are continually being considered, and interpretations of existing laws and rules may also change from time to time |
| We are unable to predict what regulatory changes may occur or what effect any particular change may have on our business |
| For example, these changes could reduce the number of persons enrolled or eligible for Medicaid, reduce the reimbursement or payment levels for medical services or reduce benefits included in Medicaid coverage |
| More generally, we are unable to predict whether new laws or proposals will favor or hinder the growth of managed healthcare |
| Legislation or regulations that require us to change our current manner of operation, benefits provided or our contract arrangements may seriously harm our operations and financial results |
| If a State Fails to Renew a Required Federal Waiver for Mandated Medicaid Enrollment into Managed Care or Such Application is Denied, Our Membership in That State Will Likely Decrease |
| States may administer Medicaid managed care programs pursuant to demonstration programs or required waivers of federal Medicaid standards |
| Waivers and demonstration programs are generally approved for two-year periods and can be renewed on an ongoing basis if the state applies |
| We have no control over this renewal 21 ______________________________________________________________________ [44]Table of Contents process |
| If a state does not renew such a waiver or demonstration program or the Federal government denies a state’s application for renewal, membership in our health plan in the state could decrease and our business could suffer |
| The Bush Administration has proposed a major long-term change in the way Medicaid and SCHIP are funded |
| The proposal, if adopted, would allow states to elect to receive, instead of federal matching funds, combined Medicaid-SCHIP “allotments” for acute and long-term healthcare for low-income, uninsured persons |
| Participating states would be given flexibility in designing their own health insurance programs, subject to federally-mandated minimum coverage requirements |
| It is uncertain whether this proposal will be enacted |
| Accordingly, it is unknown whether or how many states might elect to participate or how their participation may affect the net amount of funding available for Medicaid and SCHIP programs |
| If such a proposal is adopted and decreases the number of persons enrolled in Medicaid or SCHIP in the states in which we operate or reduces the volume of healthcare services provided, our growth, operations and financial performance could be adversely affected |
| In April 2004, the Bush Administration adopted a new policy that seeks to reduce states’ use of intergovernmental transfers for the states’ share of Medicaid program funding |
| By restricting the use of intergovernmental transfers as part of states’ Medicaid contributions, this policy, if continued, may restrict some states’ funding for Medicaid, which could adversely affect our growth, operations and financial performance |
| In February 2005, the Bush Administration called for changes in Medicaid that would cut payments for prescription drugs and give states new power to reduce or reconfigure benefits |
| The Administration has also proposed to reduce total federal funding for the Medicaid program by dlra10 billion over the next five years, and both the House and the Senate have approved budget bills containing Medicaid reductions |
| Some states, including Texas, have been authorized to implement special measures to accommodate the arrival of large numbers of beneficiaries from Gulf Coast areas evacuated as a result of hurricanes Katrina and Rita, but it is unknown whether these measures will be sufficient to cover the additional Medicaid costs incurred by these states |
| Any reduction or reconfiguration of state funding could adversely affect our growth, operations and financial performance |
| Recent legislative changes in the Medicare program may also affect our business |
| For example, the Medicare Prescription Drug, Improvement and Modernization Act of 2003, revised cost-sharing requirements for some beneficiaries and requires states to reimburse the federal Medicare program for costs of prescription drug coverage provided to beneficiaries who are enrolled simultaneously in both the Medicaid and Medicare programs |
| These changes may reduce the availability of funding for some states’ Medicaid programs, which could adversely affect our growth, operations and financial performance |
| The new Medicare prescription drug benefit is interrupting the distribution of prescription drugs to many beneficiaries simultaneously enrolled in both Medicaid and Medicare, prompting several states to pay for prescription drugs on an unbudgeted, emergency basis without any assurance of receiving reimbursement from the federal Medicaid program |
| These expenses may cause some states to divert funds originally intended for other Medicaid services |
| Our operations are conducted through our wholly owned subsidiaries, which include HMOs and managed care organizations, or MCOs |
| HMOs and MCOs are subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state |
| Additionally, state regulatory agencies may require, at their discretion, individual HMOs to maintain statutory capital levels higher than the state regulations |
| If this were to occur to one of our subsidiaries, we may be required to make additional capital contributions to the affected subsidiary |
| Any additional capital contribution made to one of the affected subsidiaries could have a material adverse effect on our liquidity and our ability to grow |
| SCHIP is a federal initiative designed to provide coverage for low-income children not otherwise covered by Medicaid or other insurance programs |
| The programs vary significantly from state to state |
| Participation in SCHIP programs is an important part of our growth strategy |
| If states do not allow us to participate or if we fail to win bids to participate, our growth strategy may be materially and adversely affected |
| We principally operate through our health plan subsidiaries |
| If funds normally available to us become limited in the future, we may need to rely on dividends and distributions from our subsidiaries to fund our operations |
| These subsidiaries are subject to regulations that limit the amount of dividends and distributions that can be paid to us without prior approval of, or notification to, state regulators |
| If these regulators were to deny our subsidiaries’ request to pay dividends to us, the funds available to our Company as a whole would be limited, which could harm our ability to implement our business strategy |
| Risks Related to Our Business Ineffectiveness of State-operated Systems and Subcontractors Could Adversely Affect Our Business Our health plans rely on other state-operated systems or sub-contractors to qualify, solicit, educate and assign eligible clients into the health plans |
| The effectiveness of these state operations and sub-contractors can have a material effect on a health plan’s enrollment in a particular month or over an extended period |
| When a state implements new programs to determine eligibility, new processes to assign or enroll eligible clients into health plans, or chooses new contractors, there is an increased potential for an unanticipated impact on the overall number of members assigned into the health plans |
| Our medical expenses include estimates of incurred but not reported (IBNR) medical expenses |
| We estimate our IBNR medical expenses monthly based on a number of factors |
| Adjustments, if necessary, are made to medical expenses in the period during which the actual claim costs are ultimately determined or when criteria used to estimate IBNR change |
| We cannot be sure that our IBNR estimates are adequate or that adjustments to those estimates will not harm our results of operations |
| From time to time in the past, our actual results have varied from our estimates, particularly in times of significant changes in the number of our members |
| Our failure to estimate IBNR accurately may also affect our ability to take timely corrective actions, further harming our results |
| Receipt of Inadequate Premiums Would Negatively Affect Our Revenues and Profitability |
| Nearly all of our revenues are generated by premiums consisting of fixed monthly payments per member |
| These premiums are fixed by contract, and we are obligated during the contract periods to provide healthcare services as established by the state governments |
| We use a large portion of our revenues to pay the costs of healthcare services delivered to our members |
| If premiums do not increase when expenses related to medical services rise, our earnings will be affected negatively |
| In addition, our actual medical services costs may exceed our estimates, which would cause our health benefits ratio, or our expenses related to medical services as a percentage of premium revenue, to increase and our profits to decline |
| In addition, it is possible for a state to increase the rates payable to the hospitals without granting a corresponding increase in premiums to us |
| If this were to occur in one or more of the states in which we operate, our profitability would be harmed |
| Our profitability depends, to a significant degree, on our ability to predict and effectively manage expenses related to health benefits |
| We have less control over the costs related to medical services than we do over our general and administrative expenses |
| Because of the narrow margins of our health plan business, relatively small changes in our health benefits ratio can create significant changes in our financial results |
| Changes in healthcare regulations and practices, the level of use of healthcare services, hospital costs, pharmaceutical costs, major epidemics, new medical technologies and other external factors, including general economic conditions such as inflation levels, are beyond our control and could reduce our ability to predict and effectively control the costs of providing health benefits |
| We may not be able to manage costs effectively in the future |
| If our costs related to health benefits increase, our profits could be reduced or we may not remain profitable |
| Historically, the acquisition of Medicaid businesses, contract rights and related assets of other health plans both in our existing service areas and in new markets has accounted for a significant amount of our growth |
| Many of the other potential purchasers of Medicaid assets have greater financial resources than we have |
| In addition, many of the sellers are interested either in (a) selling, along with their Medicaid assets, other assets in which we do not have an interest or (b) selling their companies, including their liabilities, as opposed to the assets of their ongoing businesses |
| We generally are required to obtain regulatory approval from one or more state agencies when making acquisitions |
| In the case of an acquisition of a business located in a state in which we do not currently operate, we would be required to obtain the necessary licenses to operate in that state |
| In addition, even if we already operate in a state in which we acquire a new business, we would be required to obtain additional regulatory approval if the acquisition would result in our operating in an area of the state in which we did not operate previously, and we could be required to renegotiate provider contracts of the acquired business |
| We cannot assure you that we would be able to comply with these regulatory requirements for an acquisition in a timely manner, or at all |
| In deciding whether to approve a proposed acquisition, state regulators may consider a number of factors outside our control, including giving preference to competing offers made by locally owned entities or by not-for-profit entities |
| In addition to the difficulties we may face in identifying and consummating acquisitions, we will also be required to integrate and consolidate any acquired business or assets with our existing operations |
| This may include the integration of: • additional personnel who are not familiar with our operations and corporate culture; • provider networks that may operate on different terms than our existing networks; • existing members, who may decide to switch to another healthcare plan; and • disparate administrative, accounting and finance, and information systems |
| Accordingly, we may be unable to identify, consummate and integrate future acquisitions successfully or operate acquired businesses profitably |
| We also may be unable to obtain sufficient additional capital resources for future acquisitions |
| If we are unable to effectively execute our acquisition strategy, our future growth will suffer and our results of operations could be harmed |
| If Competing Managed Care Programs are Unwilling to Purchase Specialty Services From Us, We May Not be Able to Successfully Implement Our Strategy of Diversifying Our Business Lines |
| We are seeking to diversify our business lines into areas that complement our Medicaid business in order to grow our revenue stream and balance our dependence on Medicaid risk reimbursement |
| In 2005, for example, we 24 ______________________________________________________________________ [47]Table of Contents acquired Airlogix, Inc, a disease management company |
| In order to diversify our business, we must succeed in selling the services of our specialty subsidiaries not only to our managed care plans, but to programs operated by third-parties |
| Some of these third-party programs may compete with us in some markets, and they therefore may be unwilling to purchase specialty services from us |
| In any event, the offering of these services will require marketing activities that differ significantly from the manner in which we seek to increase revenues from our Medicaid programs |
| Our inability to market specialty services to other programs may impair our ability to execute our business strategy |
| Start-up costs associated with a new business can be substantial |
| For example, in order to obtain a certificate of authority in most jurisdictions, we must first establish a provider network, have systems in place and demonstrate our ability to obtain a state contract and process claims |
| If we were unsuccessful in obtaining the necessary license, winning the bid to provide service or attracting members in numbers sufficient to cover our costs, any new business of ours would fail |
| We also could be obligated by the state to continue to provide services for some period of time without sufficient revenue to cover our ongoing costs or recover start-up costs |
| The expenses associated with starting up a new business could have a significant impact on our results of operations if we are unable to achieve profitable operations in a timely fashion |
| We Derive a Majority of Our Premium Revenues From Operations in a Small Number of States, and Our Operating Results Would be Materially Affected by a Decrease in Premium Revenues or Profitability in Any One of Those States |
| Operations in Arizona, Indiana, Kansas, Missouri, New Jersey, Ohio, Texas and Wisconsin have accounted for most of our premium revenues to date |
| If we were unable to continue to operate in each of those states or if our current operations in any portion of one of those states were significantly curtailed, our revenues could decrease materially |
| Our reliance on operations in a limited number of states could cause our revenue and profitability to change suddenly and unexpectedly depending on legislative actions, economic conditions and similar factors in those states |
| We compete for members principally on the basis of size and quality of provider network, benefits provided and quality of service |
| We compete with numerous types of competitors, including other health plans and traditional state Medicaid programs that reimburse providers as care is provided |
| Subject to limited exceptions by federally approved state applications, the federal government requires that there be choices for Medicaid recipients among managed care programs |
| Voluntary programs and mandated competition may limit our ability to increase our market share |
| Some of the health plans with which we compete have greater financial and other resources and offer a broader scope of products than we do |
| In addition, significant merger and acquisition activity has occurred in the managed care industry, as well as in industries that act as suppliers to us, such as the hospital, physician, pharmaceutical, medical device and health information systems businesses |
| To the extent that competition intensifies in any market that we serve, our ability to retain or increase members and providers, or maintain or increase our revenue growth, pricing flexibility and control over medical cost trends may be adversely affected |
| In addition, in order to increase our membership in the markets we currently serve, we believe that we must continue to develop and implement community-specific products, alliances with key providers and localized outreach and educational programs |
| If we are unable to develop and implement these initiatives, or if our competitors are more successful than we are in doing so, we may not be able to further penetrate our existing markets |
| Our profitability depends, in large part, upon our ability to contract favorably with hospitals, physicians and other healthcare providers |
| Our provider arrangements with our primary care physicians, specialists and hospitals generally may be cancelled by either party without cause upon 90 to 120 days prior written notice |
| We cannot assure you that we will be able to continue to renew our existing contracts or enter into new contracts enabling us to service our members profitably |
| From time to time providers assert or threaten to assert claims seeking to terminate noncancelable agreements due to alleged actions or inactions by us |
| Even if these allegations represent attempts to avoid or renegotiate contractual terms that have become economically disadvantageous to the providers, it is possible that in the future a provider may pursue such a claim successfully |
| In addition, we are aware that other managed care organizations have been subject to class action suits by physicians with respect to claim payment procedures, and we may be subject to similar claims |
| Regardless of whether any claims brought against us are successful or have merit, they will still be time-consuming and costly and could distract our management’s attention |
| As a result, we may incur significant expenses and may be unable to operate our business effectively |
| We will be required to establish acceptable provider networks prior to entering new markets |
| We may be unable to enter into agreements with providers in new markets on a timely basis or under favorable terms |
| If we are unable to retain our current provider contracts or enter into new provider contracts timely or on favorable terms, our profitability will be harmed |
| Changes in Stock Option Accounting Rules May Have a Significant Adverse Affect on Our Operating Results |
| We have a history of using broad based employee stock option programs to hire, incentivize and retain our workforce in a competitive marketplace |
| Statement of Financial Accounting Standards Nodtta 123, “Accounting for Stock-Based Compensation,” allows companies the choice of either using a fair value method of accounting for options that would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion Nodtta 25, “Accounting for Stock Issued to Employees,” or APB 25, with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method |
| We have previously elected to apply APB 25, and, accordingly, we generally have not recognized any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant |
| In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard Nodtta 123 (revised 2004) “Share Based Payment” (SFAS123R) which would require all companies to measure compensation cost for all share-based payments, including employee stock options, at fair value |
| In April 2005 the SEC delayed the implementation until the first annual period beginning after June 15, 2005 |
| The effect of expensing stock options in accordance with the original SFAS 123 is presented in Note 2 of our Notes to Consolidated Financial Statements included elsewhere in this Form 10-K We May be Unable to Attract and Retain Key Personnel |
| We are highly dependent on our ability to attract and retain qualified personnel to operate and expand our business |
| If we lose one or more members of our senior management team, including our chief executive officer, Michael F Neidorff, who has been instrumental in developing our business strategy and forging our business relationships, our business and operating results could be harmed |
| Our ability to replace any departed members of our senior management or other key employees may be difficult and may take an extended period of time because of the limited number of individuals in the Medicaid Managed Care and Specialty Services industry with the breadth of skills and experience required to operate and successfully expand a business such as ours |
| Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these personnel |
| The managed care industry has received negative publicity |
| This publicity has led to increased legislation, regulation, review of industry practices and private litigation in the commercial sector |
| These factors may adversely affect our ability to market our services, require us to change our services, and increase the regulatory burdens under which we operate |
| Any of these factors may increase the costs of doing business and adversely affect our operating results |
| Our providers and employees involved in medical care decisions may be subject to medical malpractice claims |
| In addition, some states, including Texas, have adopted legislation that permits managed care organizations to be held liable for negligent treatment decisions or benefits coverage determinations |
| Therefore, successful malpractice or tort claims asserted against us, our providers or our employees could adversely affect our financial condition and profitability |
| Even if any claims brought against us are unsuccessful or without merit, they would still be time-consuming and costly and could distract our management’s attention |
| As a result, we may incur significant expenses and may be unable to operate our business effectively |
| Our providers routinely purchase insurance to help protect themselves against medical malpractice claims |
| In recent years, the costs of maintaining commercially reasonable levels of such insurance have increased dramatically, and these costs are expected to increase to even greater levels in the future |
| As a result of the level of these costs, providers may decide to leave the practice of medicine or to limit their practice to certain areas, which may not address the needs of Medicaid participants |
| We rely on retaining a sufficient number of providers in order to maintain a certain level of service |
| If a significant number of our providers exit our provider networks or the practice of medicine generally, we may be unable to replace them in a timely manner, if at all, and our business could be adversely affected |
| Growth in the Number of Medicaid-Eligible Persons During Economic Downturns Could Cause Our Operating Results and Stock Prices to Suffer if State and Federal Budgets Decrease or Do Not Increase |
| Less favorable economic conditions may cause our membership to increase as more people become eligible to receive Medicaid benefits |
| During such economic downturns, however, state and federal budgets could decrease, causing states to attempt to cut healthcare programs, benefits and rates |
| We cannot predict the impact of changes in the United States economic environment or other economic or political events, including acts of terrorism or related military action, on federal or state funding of healthcare programs or on the size of the population eligible for the programs we operate |
| If federal funding decreases or remains unchanged while our membership increases, our results of operations will suffer |
| Historically, the number of persons eligible to receive Medicaid benefits has increased more rapidly during periods of rising unemployment, corresponding to less favorable general economic conditions |
| Conversely, this number may grow more slowly or even decline if economic conditions improve |
| Therefore, improvements in general economic conditions may cause our membership levels to decrease, thereby causing our operating results to suffer, which could lead to decreases in our stock price during periods in which stock prices in general are increasing |
| 27 ______________________________________________________________________ [50]Table of Contents We Intend to Expand Our Medicaid Managed Care Business Primarily into Markets Where Medicaid Recipients are Required to Enroll in Managed Care Plans |
| We expect to continue to focus our business in states in which Medicaid enrollment in managed care is mandatory |
| Currently, the majority of states require health plan enrollment for Medicaid eligible participants in all or a portion of their counties |
| Because we concentrate on markets with mandatory enrollment, we expect the geographic expansion of our Medicaid Managed Care segment to be limited to those states |
| Our operations depend significantly on effective information systems |
| The information gathered and processed by our information systems assists us in, among other things, monitoring utilization and other cost factors, processing provider claims, and providing data to our regulators |
| Our providers also depend upon our information systems for membership verifications, claims status and other information |
| Our information systems and applications require continual maintenance, upgrading and enhancement to meet our operational needs and regulatory requirements |
| Moreover, our acquisition activity requires frequent transitions to or from, and the integration of, various information systems |
| We regularly upgrade and expand our information systems’ capabilities |
| If we experience difficulties with the transition to or from information systems or are unable to properly maintain or expand our information systems, we could suffer, among other things, from operational disruptions, loss of existing members and difficulty in attracting new members, regulatory problems and increases in administrative expenses |
| In addition, our ability to integrate and manage our information systems may be impaired as the result of events outside our control, including acts of nature, such as earthquakes or fires, or acts of terrorists |
| We Rely on the Accuracy of Eligibility Lists Provided by State Governments |
| Inaccuracies in Those Lists Would Negatively Affect Our Results of Operations |
| Premium payments to us are based upon eligibility lists produced by state governments |
| From time-to-time, states require us to reimburse them for premiums paid to us based on an eligibility list that a state later discovers contains individuals who are not in fact eligible for a government sponsored program or are eligible for a different premium category or a different program |
| Alternatively, a state could fail to pay us for members for whom we are entitled to payment |
| Our results of operations would be adversely affected as a result of such reimbursement to the state if we had made related payments to providers and were unable to recoup such payments from the providers |
| We May Not be Able to Obtain or Maintain Adequate Insurance |
| We maintain liability insurance, subject to limits and deductibles, for claims that could result from providing or failing to provide managed care and related services |
| We believe that our present insurance coverage and reserves are adequate to cover currently estimated exposures |
| We cannot assure you that we will be able to obtain adequate insurance coverage in the future at acceptable costs or that we will not incur significant liabilities in excess of policy limits |