AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 25,
2007
Registration
Statement No. 333-142854 SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Pre-Effective
Amendment No. 1 to
FORM
S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________________________
CENTENE
CORPORATION
(Exact
name of each registrant as specified in its respective charter)
|
Delaware
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6324
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42-1406317
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
standard industrial
classification
code number)
7711
Carondelet Avenue
St.
Louis, Missouri 63105
(314)
725-4477
|
(I.R.S.
employer
identification
number)
|
(Address,
including zip code, and telephone number, including area code, of principal
executive offices of each registrant)
_______________________________
|
Keith
H. Williamson
Centene
Corporation
7711
Carondelet Avenue
St.
Louis, Missouri 63105
(314)
725-4477
(Address,
including zip code, and telephone number, including area code, of
principal executive offices of each registrant)
|
|
Copies
to:
J.
Mark Klamer, Esq.
Bryan
Cave LLP
211
N.
Broadway
One
Metropolitan Square, Suite 3600
St.
Louis, Missouri 63102
Tel:
(314) 259-2000
Fax:
(314) 259-2020
|
Approximate
date of commencement of proposed sale to the public:
As soon
as practicable after this Registration Statement becomes effective.
If
the
only securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: o
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
The
registrant hereby
amends this Registration Statement on such date or dates as may be necessary
to
delay its effective date until the registrant shall file a further amendment
which specifically states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until this Registration Statement shall become effective on such date as
the
Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be changed. We may
not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to
sell
these securities and it is not soliciting an offer to buy these securities
in
any state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED MAY 25, 2007
Centene
Corporation
Offer
to Exchange
$175,000,000
7¼% Senior Notes due 2014
for
$175,000,000 7¼% Senior Notes due 2014
that
have been registered under the Securities Act of 1933
_______________________________
We
are
offering to exchange an aggregate principal amount of up to $175,000,000 of
our
new 7¼% Senior Notes due 2014, which we refer to as the exchange notes, for a
like amount of our outstanding 7¼% Senior Notes dues 2014, which we refer to as
the outstanding notes, in a transaction registered under the Securities Act
of
1933, as amended. The term “notes” refers to, collectively, the outstanding
notes and the exchange notes.
Terms
of
the exchange offer:
| · |
We
will exchange all outstanding notes that are validly tendered and
not
withdrawn prior to the expiration of the exchange
offer.
|
| · |
You
may withdraw tenders of outstanding notes at any time prior to the
expiration of the exchange offer.
|
| · |
We
believe that the exchange of outstanding notes for exchange notes
will not
be a taxable event for U.S. federal income tax
purposes.
|
| · |
The
form and terms of the exchange notes are identical in all material
respects to the form and terms of the outstanding notes, except that
(i)
the exchange notes are registered under the Securities Act, (ii)
the
transfer restrictions and registration rights applicable to the
outstanding notes do not apply to the exchange notes, and (iii) the
exchange notes will not contain provisions relating to liquidated
damages
relating to our registration
obligations.
|
The
exchange offer will expire at ,
New York City time, on
,
2007,
unless
we extend the offer. We will announce any extension by press release or other
permitted means no later than 9:00 a.m. on the business day after the expiration
of the exchange offer. You may withdraw any outstanding notes tendered until
the
expiration of the exchange offer.
The
exchange notes will not be listed on the New York Stock Exchange or any other
securities exchange.
For
a discussion of factors you should consider in determining whether to tender
your outstanding notes, see the information under “Risk Factors” beginning on
page 12 of this prospectus.
_______________________________
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities, or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
_______________________________
The
date of this prospectus is ,
2007.
We
have
not authorized anyone to give any information or to make any representations
concerning this exchange offer except that which is in this prospectus, or
which
is referred to under “Where You Can Find More Information.” If anyone gives or
makes any other information or representation, you should not rely on it. This
prospectus is not an offer to sell or a solicitation of an offer to buy
securities in any circumstances in which the offer or solicitation is unlawful.
You should not interpret the delivery of this prospectus, or any sale of
securities, as an indication that there has been no change in our affairs since
the date of this prospectus. You should also be aware that information in this
prospectus may change after this date.
This
prospectus incorporates by reference business and financial information about
us
that is not included in or delivered with this prospectus. This information
is
available without charge upon written or oral request directed to:
Centene
Corporation
7711
Carondelet Avenue
St.
Louis, Missouri 63105
(314)
725-4477
Attention:
J. Per Brodin
If
you
would like to request copies of these documents, please do so by , 2007 in
order to receive them before the expiration of the exchange offer.
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MARKET
AND INDUSTRY DATA
Throughout
this prospectus, we rely on and refer to information and statistics regarding
the healthcare industry. We obtained this information and these statistics
from
various third-party sources, discussions with state regulators and our own
internal estimates. We believe that these sources and estimates are reliable,
but we have not independently verified them and cannot guarantee their accuracy
or completeness.
This
prospectus and the documents incorporated in this prospectus contain
forward-looking statements. These forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act
of
1995 and include estimates and assumptions related to economic, competitive
and
legislative developments. Forward-looking statements address our beliefs and
expectations of the outcome of future events that are forward looking in nature,
including, without limitation, the statements under “Prospectus Summary” and
“Risk Factors.” All statements other than statements of current or historical
fact contained in this prospectus are forward-looking statements. The words
“anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “plan,”
“may,” “projects,” “will,” and similar expressions, as they relate to us, are
intended to identify these forward-looking statements. These statements are
based on our current plans and not actual future activities, and our results
of
operations may be materially different from those set forth in the
forward-looking statements due to a number of factors. In particular, these
factors include, among other things:
| · |
our
ability to accurately predict and effectively manage health benefits
and
other operating expenses;
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| · |
competition;
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| · |
changes
in healthcare practices;
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| · |
changes
in federal or state laws or
regulations;
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| · |
inflation;
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| · |
provider
contract changes;
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| · |
new
technologies;
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| · |
reduction
in provider payments by governmental
payors;
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major
epidemics;
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| · |
disasters
and numerous other factors affecting the delivery and cost of
healthcare;
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| · |
the
expiration, cancellation or suspension of our Medicaid managed care
contracts by state governments;
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| · |
availability
of debt and equity financing, on terms that are favorable to us;
and
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| · |
general
economic and market conditions.
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You
should read and interpret any forward-looking statement together with the risk
factors contained in this prospectus under the caption “Risk
Factors.”
All
forward-looking statements included in this prospectus are based on information
available to us on the date of this prospectus. Except as required by law,
we
undertake no obligation to update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained throughout this prospectus.
The
following summary contains basic information about us and this offering.
It is
likely that this summary does not contain all of the information that is
important to you. You should read the entire prospectus, including the
risk
factors and the financial statements and related notes included elsewhere
herein, before making an investment decision. Unless otherwise indicated,
the
terms “Company,” “us,” “we” and “our” refers solely to Centene Corporation and
its subsidiaries.
Our
Company
We
are a
multi-line healthcare enterprise operating primarily in two segments: Medicaid
Managed Care and Specialty Services. Our Medicaid Managed Care segment
provides
Medicaid and Medicaid-related health plan coverage to individuals through
government subsidized programs, including Medicaid, the State Children’s Health
Insurance Program, or SCHIP, and Supplemental Security Income, or SSI.
Medicaid
currently accounts for 76% of our membership, while SCHIP and SSI account
for
19% and 5%, respectively. Our Specialty Services segment provides specialty
services, including behavioral health, disease management, long-term care
programs, managed vision, nurse triage, pharmacy benefits management and
treatment compliance, to state programs, healthcare organizations and other
commercial organizations, as well as to our own subsidiaries on market-based
terms. Our FirstGuard health plans exited the Kansas and Missouri markets
effective January 1 and February 1, 2007, respectively. We were established
in
1984, and our stock is publicly traded on the New York Stock Exchange under
the
ticker symbol “CNC.” As of March 6, 2007, we had a market capitalization of
approximately $1.04 billion. For the year ended December 31, 2006, our
revenues,
cash flow from operations and net loss were $2.3 billion, $195.0 million
and
$43.6 million, respectively. The net loss figure includes $94.5 million
in
pre-tax charges for intangible asset impairment and costs to exit Kansas
and
Missouri. For
the
quarter ended March 31, 2007, our revenues, cash flow from operations and
net
income were $670.8 million, $36.0 million and $38.2 million,
respectively.
We
receive a fixed monthly fee per member from states in which we operate
in return
for managing the benefits of our health plan members. Our revenues increase
to
the extent we can increase our membership or receive higher monthly premiums
per
member. Premium levels are established by the states with input from us.
The
premiums are required by Federal law to be actuarially sound. Our medical
costs
are determined by the healthcare services our members use. The keys to
our
profitability are to increase our membership, contract at appropriate rates
with
providers, and effectively control costs through medical management programs,
such as disease management, preventative care and appropriate emergency
room
use.
Our
Medicaid Managed Care membership totaled approximately 1.1
million
as of March
31,
2007,
an
increase of 26%
from
March 31, 2006. We
currently have six health plan subsidiaries offering healthcare services
in
Georgia, Indiana, New Jersey, Ohio, Texas and Wisconsin. Additionally,
effective in April 2007, we acquired a Medicaid Medical Home Network in
South
Carolina and we expect to participate in the state rollout of Medicaid
Managed
Care in South Carolina. Our
membership growth has come from expansion in both our existing markets
and new
markets. The following table sets forth information about each of our current
health plans as of December
31, 2006:
|
State
|
Local
Health Plan Name
|
First
Year of Operations Under Centene
|
Counties
Served at December 31, 2006
|
Market
Share(1)
|
Membership
at December 31, 2006
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|||||
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Georgia
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Peach
State Health Plan
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2006
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90
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30.6%
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308,800
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|||||
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Indiana
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Managed
Health Services
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1995
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92
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33.4%
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183,100
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|||||
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New
Jersey
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University
Health Plans
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2002
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20
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8.1%
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58,900
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|||||
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Ohio
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Buckeye
Community Health Plan
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2004
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27
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11.3%
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109,200
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|||||
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Texas
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Superior
Health Plan
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1999
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217
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21.0%
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298,500
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|||||
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Wisconsin
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Managed
Health Services
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1984
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29
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32.9%
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164,800
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(1) Represents
Medicaid and SCHIP membership as of December 31, 2006 as a percentage
of total
eligible Medicaid and SCHIP members in each state. SSI programs are
excluded.
Our
health
plans facilitate access to healthcare services for members primarily through
our
contracts with providers. For each of our service areas, we establish a provider
network consisting of primary and specialty care physicians, hospitals and
ancillary providers. Our contracts with these physicians and providers are
usually for one to two-year periods and renew automatically for successive
one-year terms. As of December 31, 2006, our provider network included over
13,000 primary care physicians, such as family and general practitioners,
pediatricians, internal medicine physicians and obstetrician/gynecologists,
over
31,000 specialty care physicians, such as orthopedic surgeons, cardiologists
and
otolaryngologists, and over 600 hospitals. We also provide education and
outreach programs to inform and assist members in accessing quality, appropriate
healthcare services.
Our
Specialty Services segment is a key component of our healthcare enterprise.
These services diversify our products and revenue stream and help control
our
medical costs through improved disease management techniques. We provide
member-focused services through locally-based staff by assisting in accessing
care, coordinating referrals to related health and social services and
addressing member concerns and questions. The following table sets forth
information about each of our specialty services businesses:
|
Centene
Commenced
Operations
|
Description
|
||
 |
2005
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Respiratory-focused
disease management
|
|
 |
2006
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Long-term
care
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|
 |
2006
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Cardiac-focused
disease management
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|
 |
2003
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Behavioral
health plans
|
 |
1998
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Nurse
phone line providing health education and triage advice
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|
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2006
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Managed
vision
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|
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2003
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Prescription
drug treatment compliance programs
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|
 |
2006
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Pharmacy
benefits management
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Our
Industry
We
provide our services to organizations and individuals primarily through
Medicaid, SCHIP and SSI programs. The Congressional Budget Office, or CBO,
estimates the total Medicaid market was approximately $330 billion in 2005,
and
the federal Centers for Medicare and Medicaid Services, or CMS, estimate
the
market will grow to over $450 billion by 2010. According to the most recent
information provided by the Kaiser Commission on Medicaid and the Uninsured,
Medicaid spending increased by 2.8% in fiscal 2006 and states appropriated
an
increase of 5.0% for Medicaid in fiscal 2007 budgets.
Established
in 1965, Medicaid is the largest publicly funded program in the United States
and provides health insurance to low-income families and individuals with
disabilities. Authorized by Title XIX of the Social Security Act, Medicaid
is an
entitlement program funded jointly by the federal and state governments and
administered by the states. The majority of funding is provided at the federal
level. Each state establishes its own eligibility standards, benefit packages,
payment rates and program administration within federal standards. As a result,
there are 56 Medicaid programs—one for each U.S. state, each U.S. territory and
the District of Columbia. An increasing number of states have mandated that
their Medicaid recipients enroll in managed care plans as a means of delivering
quality healthcare and controlling costs. Currently, 37 of the 56 programs,
including each of the six states in which we operate health plans, have mandated
managed care for some or all of their Medicaid recipients. Eligibility is
based
on a combination of household income and assets, often determined by an income
level relative to the federal poverty level. Historically, children have
represented the largest eligibility group.
Established
in 1972 and authorized by Title XVI of the Social Security Act, SSI covers
low-income persons with chronic physical disabilities or behavioral health
impairments. SSI beneficiaries represent a growing portion of all Medicaid
recipients. In addition, SSI recipients typically utilize more services because
of their critical health issues.
The
Balanced Budget Act of 1997 created SCHIP to help states expand coverage
primarily to children whose families earn too much to qualify for Medicaid,
yet
not enough to afford private health insurance. Some states include the parents
of these children in their SCHIP programs. SCHIP is the single largest expansion
of health insurance coverage for children since the enactment of Medicaid.
Costs
related to the largest eligibility group, children, are primarily composed
of
pediatrics and family care. These costs tend to be more predictable than
other
healthcare issues which predominantly affect the adult population.
A
portion
of Medicaid beneficiaries are dual eligibles, low-income seniors and people
with
disabilities who are enrolled in both Medicaid and Medicare. According to
information provided by the Kaiser Commission on Medicaid and the Uninsured,
dual eligibles account for 14% of Medicaid enrollees. These dual eligibles
may
receive assistance from Medicaid for Medicaid benefits, such as nursing home
care, and/or assistance with Medicare premiums and cost sharing. Dual eligibles
also use more services due to their tendency to have more chronic health
issues.
Spending
for Medicaid, SSI and SCHIP has increased steadily since 1988, with a compound
annual growth rate, or CAGR, of 11% from 1988 through 2004, despite periods
of
recession.
Our
Competitive Strengths
We
believe a significant market opportunity exists for managed care organizations
with operations and programs focused on the distinct socio-economic, cultural
and healthcare needs of the Medicaid, SCHIP and SSI populations. We believe
our
approach and strategy enable us to be a growing participant in this market.
Our
multi-line managed care approach is based on the following key
attributes:
Strong
Historic Operating Performance.We
have
increased revenues as we have grown in existing markets, expanded into
new
markets and broadened our product menu. We entered the Wisconsin market
in 1984,
the Indiana market in 1995, the Texas market in 1999, the New Jersey market
in
2002, the Ohio market in 2004 and the Georgia market in 2006. We have also
increased membership by acquiring Medicaid businesses, contracts and other
related assets from competitors in existing markets, most recently in Ohio
in
2005 and 2006. We have increased our membership from 409,600 in 2002 to
1,103,300
as of
March
31,
2007. For the year ended December 31, 2006, we had revenue of $2.3 billion,
representing a 49% CAGR since the year ended December 31, 2002. We generated
cash flow from operations of $195.0 million and a net loss of $43.6 million
for
the year ended December 31, 2006. The figures above include Kansas and
Missouri,
which we exited in January and February 2007, respectively, and which accounted
for 138,900 members at December 31, 2006 and $317.0 million in revenue
for the
year ended December 31, 2006. For the quarter ended March 31, 2007, our
revenues, cash flow from operations and net income were $670.8 million,
$36.0
million and $38.2 million, respectively.
Medicaid
Expertise. Over
the
last 20 years, we have strived to develop a specialized Medicaid expertise
that
has helped us establish and maintain relationships with members, providers
and
state governments. We have implemented programs developed to achieve savings
for
state governments and improve medical outcomes for members by reducing
inappropriate emergency room use, inpatient days and high cost interventions,
as
well as by managing care of chronic illnesses. Our experience in working
with
state regulators helps us implement and deliver programs and services
efficiently and affords us opportunities to provide input regarding Medicaid
industry practices and policies in the states in which we operate. We work
with
state agencies on redefining benefits, eligibility requirements and provider
fee
schedules in order to maximize the number of uninsured individuals covered
through Medicaid, SCHIP and SSI and expand the types of benefits offered.
Our
approach is to accomplish this while maintaining adequate levels of provider
compensation and protecting our profitability.
Diversified
Business Lines. We
continue to broaden our service offerings to address areas that we believe
have
been traditionally underserved by Medicaid managed care organizations.
In
addition to our Medicaid and Medicaid-related managed care services, our
service
offerings include behavioral health plans, disease management, long-term
care
programs, managed vision, nurse triage, pharmacy benefits management and
treatment compliance. Through the utilization of a multi-business line
approach,
we are able to diversify our revenue and help control our medical
costs.
Localized
Approach with Centralized Support Infrastructure. We
take a
localized approach to managing our subsidiaries, including provider and member
services. This approach enables us to facilitate access by our members to
high
quality, culturally sensitive healthcare services. Our systems and procedures
have been designed to address community-specific challenges through outreach,
education, transportation and other member support activities. For example,
our
community outreach programs work with our members and their communities to
promote health and self-improvement through employment and education on how
best
to access care. We complement this localized approach with a centralized
infrastructure of support functions such as finance, information systems
and
claims processing, which allows us to minimize general and administrative
expenses and integrate and realize synergies from acquisitions. We believe
this
combined approach allows us to efficiently integrate new business opportunities
in both Medicaid and specialty services while maintaining local accountability
and improved access.
Specialized
and Scalable Systems and Technology. Through
our specialized information systems, we work to strengthen relationships
with
providers and states which help us grow our membership base. Our specialized
information systems allow us to support our core processing functions under
a
set of integrated databases which are designed to be both replicable and
scalable. Physicians can use claims, utilization and membership data to manage
their practices more efficiently, and they also benefit from our timely
payments. State agencies can use data from our information systems to
demonstrate that their Medicaid populations receive quality healthcare in
an
efficient manner. These systems also help identify needs for new healthcare
and
specialty programs. We have the ability to leverage our platform for one
state
configuration into new states or for health plan acquisitions. Our ability
to
access data and translate it into meaningful information is essential to
operating across a multi-state service area in a cost-effective
manner.
Experienced
Management Team.We
have a
management team who possess significant industry experience. Michael Neidorff,
our Chairman and CEO, has been with us since 1996 and has over 20 years of
experience in all aspects of managed care. Per Brodin, our Senior Vice President
and Chief Financial Officer, has extensive experience as a financial and
accounting officer both at Centene and other organizations. The other members
of
our senior management team are well-seasoned professionals with a broad range
of
capabilities including industry experience and functional expertise. This
team
has successfully managed the growth of our health plans and specialty
businesses, while maintaining operational discipline.
Our
Business Strategy
Our
objective is to become the leading multi-line healthcare enterprise focusing
on
Medicaid and Medicaid-related services. We intend to achieve this objective
by
implementing the following key components of our strategy:
Increase
Penetration of Existing State Markets. We
seek
to continue to increase our Medicaid membership in states in which we currently
operate through alliances with key providers, outreach efforts, development
and
implementation of community-specific products and acquisitions. In 2006,
we were
awarded two regions in connection with Ohio’s statewide restructuring of its
Medicaid managed care program, expanding the number of counties we serve
from
three to 27. We also were awarded a Medicaid Aged, Blind or Disabled, or
ABD,
contract in four regions in Ohio. In Texas, we expanded our operations to
the
Corpus Christi market in 2006 and began managing care for SSI recipients
in
February 2007. We may also increase membership by acquiring Medicaid businesses,
contracts and other related assets from our competitors in our existing markets
or by enlisting additional providers. For example, in 2005 and 2006, we acquired
certain Medicaid-related assets in Ohio.
Diversify
Business Lines. We
seek
to broaden our business lines into areas that complement our existing business
to enable us to grow and diversify our revenue. We are constantly evaluating
new
opportunities for expansion both domestically and abroad. For instance, in
October 2006, we commenced operations under our managed care program contracts
to provide long-term care services in Arizona, and in January 2006, we completed
the acquisition of US Script, a pharmacy benefits manager. We are also
considering other premium based or fee-for-service lines of business that
would
provide additional diversity. We employ a disciplined acquisition strategy
that
is based on defined criteria including internal rate of return, accretion
to
earnings per share, market leadership and compatibility with our information
systems. We engage our executives in the relevant operating units or functional
areas to ensure consistency between the diligence and integration
processes.
Address
Emerging State Needs. We
work
to assist the states in which we operate in addressing the operating challenges
they face. We seek to assist the states in balancing premium rates, benefit
levels, member eligibility, policies and practices and provider compensation.
For example, in 2005, we began performing under our contract with the State
of
Arizona to facilitate the delivery of mental health and substance abuse services
to behavioral health recipients in Arizona. By helping states structure an
appropriate level and range of Medicaid, SCHIP and specialty services, we
seek
to ensure that we are able to continue to provide those services on
terms that achieve targeted gross margins, provide an acceptable return and
grow
our business.
Develop
and
Acquire Additional State Markets where Enrollment is Mandated. We
continue to leverage our experience to identify and develop new markets
by
seeking both to acquire existing businesses and to build our own operations.
We
expect to focus expansion on states where Medicaid recipients are mandated
to
enroll in managed care organizations because we believe member enrollment
levels
are more predictable in these states. For example, effective June 1,
2006 we
began managing care for Medicaid and SCHIP members in Georgia.
Leverage
Established Infrastructure to Enhance Operating Efficiencies. We
intend
to continue to invest in infrastructure to further drive efficiencies
in
operations and to add functionality to improve the service provided to
members
and other organizations at a low cost. Our centralized functions enable
us to
add members and markets quickly and economically. For example, during
2005, we
opened an additional claims processing facility to accommodate our planned
growth initiatives for this centralized function.
Maintain
Operational Discipline. We
monitor our cost trends, operating performance, regulatory relationships
and the
Medicaid political environment in our existing markets. We seek to operate
in
markets that allow us to meet our internal metrics including membership
growth,
plan size, market leadership and operating efficiency. We may divest
contracts
or health plans in markets where the state’s Medicaid environment, over a
long-term basis, does not allow us to meet our targeted performance levels.
We
use multiple techniques to monitor and reduce our medical costs, including
on-site hospital review by staff nurses and involvement of medical management
and finance personnel in significant cases. Our health economics unit
and health
plan controllers evaluate the financial impact of proposed changes in
provider
relationships. We also conduct monthly reviews of member demographics
for each
health plan.
Additional
Information
We
are
incorporated in Delaware and headquartered in St. Louis, Missouri. Our
executive
offices are located at 7711 Carondelet Avenue, St. Louis, Missouri 63105,
and
our telephone number is (314) 725-4477. Our website address is www.centene.com.
Information contained on our website does not constitute a part of this
prospectus.
THE
EXCHANGE OFFER
On
March
22, 2007, we issued $175,000,000 aggregate principal amount of 7¼% Senior Notes
due 2014, the outstanding notes to which the exchange offer applies,
to a group
of initial purchasers in reliance on exemptions from, or in transactions
not
subject to, the registration requirements of the Securities Act and applicable
securities laws. In connection with the sale of the outstanding notes
to the
initial purchasers, we entered into a registration rights agreement pursuant
to
which we agreed, among other things, to deliver this prospectus to you,
to
commence this exchange offer and to use our commercially reasonable efforts
to
complete the exchange offer within 180 days of the issuance of the outstanding
notes. The summary below describes the principal terms and conditions
of the
exchange offer. Some of the terms and conditions described below are
subject to
important limitations and exceptions. See “The Exchange Offer” for a more
detailed description of the terms and conditions of the exchange offer
and
“Description of the Exchange Notes” for a more detailed description of the terms
of the exchange notes.
|
The
Exchange Offer
|
We
are offering to exchange up to $175,000,000 aggregate principal
amount of
our new 7¼% Senior Notes due 2014, which have been registered under
the
Securities Act, in exchange for your outstanding notes. The
form and terms
of these exchange notes are identical in all material respects
to the
outstanding notes. The exchange notes, however, will not
contain transfer
restrictions and registration rights applicable to the outstanding
notes.
To
exchange your outstanding notes, you must properly tender
them, and we
must accept them. We will accept and exchange all outstanding
notes that
you validly tender and do not validly withdraw. We will issue
registered
exchange notes promptly after the expiration of the exchange
offer.
|
|
Resale
of Exchange Notes
|
Based
on interpretations by the staff of the SEC as detailed in
a series of
no-action letters issued to third parties, we believe that,
as long as you
are not a broker-dealer, the exchange notes offered in the
exchange offer
may be offered for resale, resold or otherwise transferred
by you without
compliance with the registration and prospectus delivery
requirements of
the Securities Act as long as:
· you
are acquiring the exchange notes in the ordinary course of
your
business;
· you
are not participating, do not intend to participate in and
have no
arrangement or understanding with any person to participate
in a
“distribution” of the exchange notes; and
· you
are not an “affiliate” of ours within the meaning of Rule 405 of the
Securities Act.
If
any of these conditions is not satisfied and you transfer
any exchange
notes issued to you in the exchange offer without delivering
a proper
prospectus or without qualifying for a registration exemption,
you may
incur liability under the Securities Act. Moreover, our belief
that
transfers of exchange notes would be permitted without registration
or
prospectus delivery under the conditions described above
is based on SEC
interpretations given to other, unrelated issuers in similar
exchange
offers. We cannot assure you that the SEC would make a similar
interpretation with respect to our exchange offer. We will
not be
responsible for or indemnify you against any liability you
may incur under
the Securities Act.
Any
broker-dealer that acquires exchange notes for its own account
in exchange
for outstanding notes must represent that the outstanding
notes to be
exchanged for the exchange notes were acquired by it as a
result of
market-making activities or other trading activities and
acknowledge that
it will deliver a prospectus meeting the requirements of
the Securities
Act in connection with any offer to resell, resale or other
retransfer of
the exchange notes. However, by so acknowledging and by delivering
a
prospectus, such participating broker-dealer will not be
deemed to admit
that it is an “underwriter” within the meaning of the Securities Act.
During the period ending 180 days after the consummation
of the exchange
offer, subject to extension in limited circumstances, a participating
broker-dealer may use this prospectus for an offer to sell,
a resale or
other retransfer of exchange notes received in exchange for
outstanding
notes which it acquired through market-making activities
or other trading
activities.
|
|
Expiration
Date
|
The
exchange offer will expire at , New
York City
time, on
,
2007, unless we extend the expiration date.
|
|
Accrued
Interest on the Exchange Notes and the Outstanding Notes
|
The
exchange notes will bear interest from the most recent date to which
interest has been paid on the outstanding notes. If your outstanding
notes
are accepted for exchange, then you will receive interest on the
exchange
notes and not on the outstanding notes. Any outstanding notes not
tendered
will remain outstanding and continue to accrue interest according
to their
terms.
|
|
Conditions
|
The
exchange offer is subject to customary conditions. We may assert
or waive
these conditions in our sole discretion. If we materially change
the terms
of the exchange offer, we will resolicit tenders of the outstanding
notes.
See “The Exchange Offer—Conditions to the Exchange Offer” for more
information regarding conditions to the exchange offer.
|
|
Procedures
for Tendering Outstanding Notes
|
Each
holder of outstanding notes that wishes to tender their outstanding
notes
must either:
· complete,
sign and date the accompanying letter of transmittal or a facsimile
copy
of the letter of transmittal, have the signatures on the letter of
transmittal guaranteed, if required, and deliver the letter of
transmittal, together with any other required documents (including
the
outstanding notes), to the exchange agent; or
· if
outstanding notes are tendered pursuant to book-entry procedures,
the
tendering holder must deliver a completed and duly executed letter
of
transmittal or arrange with Depository Trust Company, or DTC, to
cause an
agent’s message to be transmitted with the required information (including
a book-entry confirmation) to the exchange agent; or
· comply
with the procedures set forth below under “—Guaranteed Delivery
Procedures.”
Holders
of outstanding notes that tender outstanding notes in the exchange
offer
must represent that the following are true:
· the
holder is acquiring the exchange notes in the ordinary course of
its
business;
· the
holder is not participating in, does not intend to participate in,
and has
no arrangement or understanding with any person to participate in
a
“distribution” of the exchange notes; and
· the
holder is not an “affiliate” of us within the meaning of Rule 405 of the
Securities Act.
Do
not send letters of transmittal, certificates representing outstanding
notes or other documents to us or DTC. Send these documents only
to the
exchange agent at the appropriate address given in this prospectus
and in
the letter of transmittal. We could reject your tender of outstanding
notes if you tender them in a manner that does not comply with the
instructions provided in this prospectus and the accompanying letter
of
transmittal. See “Risk Factors—There are significant consequences if you
fail to exchange your outstanding notes” for further
information.
|
|
Special
Procedures for Tenders by Beneficial Owners of Outstanding
Notes
|
If:
· you
beneficially own outstanding notes;
· those
notes are registered in the name of a broker, dealer, commercial
bank,
trust company or other nominee; and
· you
wish to tender your outstanding notes in the exchange offer,
please
contact the registered holder as soon as possible and instruct it
to
tender on your behalf and comply with the instructions set forth
in this
prospectus and the letter of transmittal.
|
|
Guaranteed
Delivery Procedures
|
If
you hold outstanding notes in certificated form or if you own outstanding
notes in the form of a book-entry interest in a global note deposited
with
the trustee, as custodian for DTC, and you wish to tender those
outstanding notes but:
· your
outstanding notes are not immediately available;
· time
will not permit you to deliver the required documents to the exchange
agent by the expiration date; or
· you
cannot complete the procedure for book-entry transfer on
time,
you
may tender your outstanding notes pursuant to the procedures described
in
“The Exchange Offer—Procedures for Tendering Outstanding notes—Guaranteed
Delivery.”
|
|
Withdrawal
Rights
|
You
may withdraw your tender of outstanding notes under the exchange
offer at
any time before the exchange offer expires. Any withdrawal must be
in
accordance with the procedures described in “The Exchange Offer—Withdrawal
Rights.”
|
|
Effect
on Holders of Outstanding Notes
|
As
a result of making this exchange offer, and upon acceptance for exchange
of all validly tendered outstanding notes, we will have fulfilled
our
obligations under the registration rights agreement. Accordingly,
there
will be no liquidated or other damages payable under the registration
rights agreement if outstanding notes were eligible for exchange,
but not
exchanged, in the exchange offer.
If
you do not tender your outstanding notes or we reject your tender,
your
outstanding notes will remain outstanding and will be entitled to
the
benefits of the indenture governing the notes. Under such circumstances,
you would not be entitled to any further registration rights under
the
registration rights agreement, except under limited circumstances.
Existing transfer restrictions would continue to apply to the outstanding
notes.
Any
trading market for the outstanding notes could be adversely affected
if
some but not all of the outstanding notes are tendered and accepted
in the
exchange offer.
|
|
Material
U.S. Federal Income and Estate Tax Consequences
|
Your
exchange of outstanding notes for exchange notes should not be treated
as
a taxable event for U.S. federal income tax purposes. See “Material U.S.
Federal Income and Estate Tax
Consequences.”
|
|
Use
of Proceeds
|
We
will not receive any proceeds from the exchange offer or the issuance
of
the exchange notes. $150.0 million of the net proceeds from the issuance
of the outstanding notes were used to refinance our outstanding
indebtedness under our revolving credit agreement and the remaining
proceeds are available for general corporate purposes.
|
SUMMARY
OF TERMS OF EXCHANGE NOTES
The
form
and terms of the exchange notes will be identical in all material respects
to
the form and terms of the outstanding notes, except that the exchange notes:
•
will
have been registered under the Securities Act;
•
will
not bear restrictive legends restricting their transfer under the Securities
Act;
•
will
not be entitled to the registration rights that apply to the outstanding
notes;
and
•
will
not contain provisions relating to an increase in the interest rate borne
by the
outstanding notes under circumstances related to the timing of the exchange
offer.
The
exchange notes represent the same debt as the outstanding notes and are
governed
by the same indenture, which is governed by New York law. A brief description
of
the material terms of the exchange notes follows:
|
Issuer
|
Centene
Corporation
|
|
|
Notes
Offered
|
$175,000,000
aggregate principal amount of 7 ¼ % Senior Notes due 2014.
|
|
|
Maturity
Date
|
April
1, 2014.
|
|
|
Interest
Payment Dates
|
April
1 and October 1, beginning October 1, 2007.
|
|
|
Ranking
|
The
notes will be unsecured and rank equally with our senior debt and
senior
to our subordinated indebtedness. The notes will effectively rank
junior
to our subsidiaries’ liabilities. The notes will also be subordinated to
our secured indebtedness to the extent of the assets securing such
indebtedness. As of December 31, 2006, after giving pro forma effect
to
this offering and our use of the net proceeds,
· we
would have had outstanding $175.0 million of senior indebtedness;
and
· our
subsidiaries would have had outstanding $415.5 million of indebtedness
and
other liabilities, including trade payables and medical liabilities
(excluding intercompany liabilities).
|
|
|
Option
Redemption
|
Prior
to April 1, 2011, we may from time to time redeem all or a portion
of the
notes by paying a special “make-whole” premium specified in this
prospectus under “Description of the Exchange Notes — Optional
Redemption.” We may redeem some or all of the notes, at any time on or
after April 1, 2011 at the redemption prices described in this prospectus.
See “Description of the Exchange Notes — Optional
Redemption.”
|
|
|
Equity
Offering Optional Redemption
|
Before
April 1, 2010, we may redeem up to 35% of the original aggregate
principal
amount of the notes with the net proceeds from certain equity offerings,
at 107.250% of the principal amount of the notes, plus accrued and
unpaid
interest and additional interest, if any, to the redemption date,
if at
least 65% of the aggregate principal amount of the notes originally
issued
remains outstanding after such redemption.
|
|
|
Change
of Control
|
When
certain specified change of control events occur, each holder of
notes may
require us to repurchase all or a portion of its notes at a purchase
price
of 101% of the principal amount of such notes, plus accrued and unpaid
interest and additional interest, if any, to the date of purchase.
See
“Description of the Exchange Notes — Repurchase at the Option of Holders —
Change of Control.”
|
|
|
Mandatory
Offer to Repurchase Following Certain Asset Sales
|
If
we sell certain assets and do not reinvest the net proceeds or repay
senior debt in compliance with the indenture, we must offer to repurchase
the notes at 100% of their principal amount, plus accrued and unpaid
interest, with such proceeds. See “Description of the Exchange Notes —
Repurchase at the Option of Holders — Asset Sales.”
|
|
|
Certain
Covenants
|
The
indenture governing the notes will contain covenants that, among
other
things, will limit our ability and the ability of our restricted
subsidiaries to:
· incur
additional indebtedness and issue preferred stock,
· pay
dividends or make other distributions,
· make
other restricted payments and investments,
· sell
assets, including capital stock of restricted subsidiaries,
· create
certain liens,
· enter
into sale and leaseback transactions,
· incur
restrictions on the ability of restricted subsidiaries to pay dividends
or
make other payments,
· in
the case of our subsidiaries, guarantee indebtedness,
· engage
in transactions with affiliates,
· create
unrestricted subsidiaries, and
· merge
or consolidate with other entities.
These
covenants are subject to important exceptions and qualifications,
that are
described under the heading “Description of the Exchange Notes — Certain
Covenants” in this prospectus.
In
addition, following the first day the notes have an investment
grade
rating from both Standard & Poor’s Ratings Group, Inc. and Moody’s
Investors Service, Inc., subject to certain conditions, we and
our
restricted subsidiaries will not be subject to certain of these
covenants.
See “Description of Exchange Notes — Certain Covenants — Covenant
Termination.”
|
|
Absence
of an Established Public Market for the Exchange Notes
|
The
outstanding notes are presently eligible for trading through the
PORTAL®
Market of the Nasdaq Stock Market, Inc., but the exchange notes
will be
new securities for which there is currently no market. We do not
intend to
apply for a listing of the exchange notes on any securities exchange.
Accordingly, we cannot assure you that a liquid market for the
exchange
notes will develop or be maintained.
|
|
Risk
Factors
|
See
“Risk Factors” and the other information in this prospectus for a
discussion of factors you should carefully consider before deciding
to
participate in the exchange offer.
|
SUMMARY
FINANCIAL DATA
The
following summary consolidated financial data should be read in connection
with
our Annual Report on Form 10-K for the year ended December 31, 2006 and
our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, including
the related notes to financial statements and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” contained therein,
which are incorporated by reference elsewhere in this prospectus.
The
data for the years ended December 31, 2004, 2005 and 2006 and as
of December 31, 2004, 2005 and 2006 are derived from our audited consolidated
financial statements, which are incorporated by reference elsewhere in
this
prospectus. The selected consolidated financial data as of and for the
three
months ended March 31, 2006 and March 31, 2007 are derived from our unaudited
financial statements, which are incorporated by reference elsewhere in
this
prospectus. Historical results are not necessarily indicative of the results
to
be expected in the future.
|
|
Year
Ended December
31,
|
Three
Months Ended March 31,
|
||||||||||||||
|
2004
|
2005
|
2006
|
2006
|
2007
|
||||||||||||
|
(dollars
in thousands, except member data)
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Premium
(1)
|
$
|
991,673
|
$
|
1,491,899
|
$
|
2,199,439
|
$
|
435,562
|
$
|
649,243
|
||||||
|
Service
|
9,267
|
13,965
|
79,581
|
19,516
|
21,592
|
|||||||||||
|
Total
revenues
|
1,000,940
|
1,505,864
|
2,279,020
|
455,078
|
670,835
|
|||||||||||
|
Expenses:
|
||||||||||||||||
|
Medical
costs
|
800,476
|
1,226,909
|
1,819,811
|
361,672
|
535,406
|
|||||||||||
|
Cost
of services
|
8,065
|
5,851
|
60,735
|
15,588
|
15,630
|
|||||||||||
|
General
and administrative expenses (1)
|
127,863
|
193,913
|
346,284
|
65,222
|
106,866
|
|||||||||||
|
Gain
on sale of FirstGuard Missouri
|
—
|
—
|
—
|
—
|
(4,218
|
)
|
||||||||||
|
Impairment
loss
|
—
|
—
|
81,098
|
—
|
—
|
|||||||||||
|
Total
operating expenses
|
936,404
|
1,426,673
|
2,307,928
|
442,482
|
653,684
|
|||||||||||
|
Earnings
(loss) from operations
|
64,536
|
79,191
|
(28,908
|
)
|
12,596
|
17,151
|
||||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Investment
and other income
|
6,431
|
10,655
|
17,892
|
3,540
|
4,501
|
|||||||||||
|
Interest
expense
|
(680
|
)
|
(3,990
|
)
|
(10,636
|
)
|
(1,998
|
)
|
(3,132
|
)
|
||||||
|
Earnings
(loss) before income taxes
|
70,287
|
85,856
|
(21,652
|
)
|
14,138
|
18,520
|
||||||||||
|
Income
tax (benefit) expense
|
25,975
|
30,224
|
21,977
|
5,372
|
(19,691
|
)
|
||||||||||
|
Net
earnings (loss)
|
$
|
44,312
|
$
|
55,632
|
$
|
(43,629
|
)
|
$
|
8,766
|
$
|
38,211
|
|||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Cash
and cash equivalents (2)
|
$
|
84,105
|
$
|
147,358
|
$
|
271,047
|
$
|
118,512
|
$
|
311,905
|
||||||
|
Investments
and restricted deposits (2)
|
233,257
|
202,916
|
237,603
|
221,249
|
250,883
|
|||||||||||
|
Total
assets
|
527,934
|
668,030
|
894,980
|
737,807
|
971,377
|
|||||||||||
|
Medical
claim liabilities
|
165,980
|
170,514
|
280,441
|
172,792
|
275,965
|
|||||||||||
|
Long-term
debt.
|
46,973
|
92,448
|
174,646
|
130,940
|
200,404
|
|||||||||||
|
Stockholders’
equity
|
271,312
|
352,048
|
326,423
|
364,249
|
369,464
|
|||||||||||
|
Other
Operating Data:
|
||||||||||||||||
|
Membership:
|
||||||||||||||||
|
Medicaid
|
484,700
|
573,100
|
887,300
|
574,300
|
839,600
|
|||||||||||
|
SCHIP
|
142,200
|
134,600
|
216,200
|
132,000
|
211,200
|
|||||||||||
|
SSI
|
10,400
|
14,900
|
19,800
|
15,800
|
52,500
|
|||||||||||
|
Subtotal
|
637,300
|
722,600
|
1,123,300
|
722,100
|
1,103,300
|
|||||||||||
|
Kansas
and Missouri Medicaid/SCHIP members
|
135,400
|
149,300
|
138,900
|
152,700
|
—
|
|||||||||||
|
Total
|
772,700
|
871,900
|
1,262,200
|
874,800
|
1,103,300
|
|||||||||||
|
Revenue
per Member (3)
|
$
|
142.97
|
$
|
146.14
|
$
|
165.83
|
$
|
157.17
|
$
|
185.90
|
||||||
|
Health
Benefits Ratio (4):
|
||||||||||||||||
|
Medicaid
and SCHIP
|
80.4
|
%
|
81.8
|
%
|
82.6
|
%
|
82.8
|
%
|
82.3
|
%
|
||||||
|
SSI
|
93.8
|
%
|
97.5
|
%
|
87.6
|
%
|
87.6
|
%
|
86.3
|
%
|
||||||
|
Specialty
Services
|
—
|
85.0
|
%
|
82.5
|
%
|
84.1
|
%
|
79.3
|
%
|
|||||||
|
G&A
Expense Ratio:
|
||||||||||||||||
|
Medicaid
Managed Care
|
10.7
|
%
|
10.5
|
%
|
12.6
|
%
|
11.9
|
%
|
13.0
|
%
|
||||||
|
Specialty
Services
|
52.3
|
%
|
35.4
|
%
|
16.9
|
%
|
22.3
|
%
|
15.8
|
%
|
||||||
|
Days
in Claims Payable (5)
|
66.5
|
45.4
|
46.4
|
43.0
|
46.4
|
|||||||||||
|
Year
Ended December
31,
|
|
Three
Months Ended March 31,
|
|
|||||||||||||
|
|
|
2004
|
|
2005
|
|
2006
|
|
2006
|
|
2007
|
||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Other
Financial Data:
|
||||||||||||||||
|
Net
cash provided by operating activities
|
$
|
99,405
|
$
|
74,048
|
$
|
195,032
|
$
|
9,343
|
$
|
35,980
|
||||||
|
Total
debt to total capitalization
|
35.3
|
%
|
||||||||||||||
___________
|
(1)
|
Premium
revenues and general and administrative expenses reflect the
enactments of
premium taxes in certain states. Premium taxes were $5,503, $9,802
and
$42,453 for the years ended December 31, 2004, 2005 and 2006,
respectively. Premium taxes were $4,305 and $18,216, respectively
for the
quarters ended March 31, 2006 and 2007. Premium revenues for
the
FirstGuard health plans, which we acquired on December 1, 2004
and exited
in 2007, were $20,247, $273,662 and $317,027 for the years ended
December
31, 2004, 2005 and 2006, respectively. Premium revenues for the
FirstGuard
health plans were $76,288 and $6,601, respectively for the quarters
ended
March 31, 2006 and 2007.
|
|
(2)
|
Unregulated
cash, cash equivalents and investments for the years ended December
31,
2004, 2005 and 2006 were $45,988, $27,680 and $28,852, respectively.
Unregulated cash, cash equivalents and investments for the quarters
ended
March 31, 2006 and 2007 were $25,813 and $71,843,
respectively.
|
|
(3)
|
Revenue
per member information is presented for the Medicaid Managed
Care
Segment.
|
|
(4)
|
The
health benefits ratio represents medical costs as a percentage
of premium
revenues. Our medical costs include payments to physicians, hospitals
and
other providers for healthcare and specialty services claims.
Medical
costs also include estimates of medical expenses incurred but
not yet
reported, or IBNR, and estimates of the cost to process unpaid
claims.
|
|
(5)
|
Days
in claims payable is a calculation of medical claims liabilities
at the
end of the period divided by average expense per calendar day
for the
applicable quarter of each period. Days in claims payable decreased
in
2005 due to the settlement of a lawsuit with Aurora Health Care,
Inc.,
information systems improvements to reduce our claims processing
cycle
time and the effect of our behavioral health contract in Arizona.
Acquisitions in the last quarter of 2004 contributed to an increase
in our
2004 days in claims payable.
|
You
should carefully consider the risk factors set forth below, as well as the
other
information contained in this prospectus, before participating in this exchange
offer. The risks described below are not the only risks facing us. Additional
risks and uncertainties not currently known to us or that we currently deem
to
be immaterial may also materially and adversely affect our business operations.
Any of the following risks could materially adversely affect our business,
financial condition or results of operations.
Risks
Relating to the Exchange Offer
There
are significant consequences if you fail to
exchange your outstanding notes.
We
did
not register the outstanding notes under the Securities Act or any state
securities laws, nor do we intend to do so after the exchange offer. As a
result, the outstanding notes may only be transferred in limited circumstances
under the securities laws. If you do not exchange your outstanding notes in
the
exchange offer, you will lose your right to have the outstanding notes
registered under the Securities Act, subject to certain limitations. If you
continue to hold outstanding notes after the exchange offer, you may be unable
to sell the outstanding notes. Outstanding notes that are not tendered or are
tendered but not accepted will, following the exchange offer, continue to be
subject to existing restrictions.
You
cannot be sure that an active trading market for the
exchange notes will develop.
While
the
outstanding notes are presently eligible for trading in the PORTAL® Market,
there is no existing market for the exchange notes. We do not intend to apply
for a listing of the exchange notes on any securities exchange. We do not know
if an active public market for the exchange notes will develop or, if developed,
will continue. If an active public market does not develop or is not maintained,
the market price and liquidity of the exchange notes may be adversely affected.
We cannot make any assurances regarding the liquidity of the market for the
exchange notes, the ability of holders to sell their exchange notes or the
price
at which holders may sell their exchange notes. In addition, the liquidity
and
the market price of the exchange notes may be adversely affected by changes
in
the overall market for securities similar to the exchange notes, by changes
in
our financial performance or prospects and by changes in conditions in our
industry.
You
must follow the appropriate procedures to tender your outstanding
notes or they will not be exchanged.
The
exchange notes will be issued in exchange for the outstanding notes only after
timely receipt by the exchange agent of the outstanding notes or a book-entry
confirmation related thereto, a properly completed and executed letter of
transmittal or an agent’s message and all other required documentation. If you
want to tender your outstanding notes in exchange for exchange notes, you should
allow sufficient time to ensure timely delivery. Neither we nor the exchange
agent are under any duty to give you notification of defects or irregularities
with respect to tenders of outstanding notes for exchange. Outstanding notes
that are not tendered or are tendered but not accepted will, following the
exchange offer, continue to be subject to the existing transfer restrictions.
In
addition, if you tender the outstanding notes in the exchange offer to
participate in a distribution of the exchange notes, you will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. For additional
information, please refer to the sections entitled “The Exchange Offer” and
“Plan of Distribution” later in this prospectus.
Risks
Related to Being a Regulated Entity
Reduction
in Medicaid, SCHIP and SSI funding could substantially reduce our
profitability.
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, SCHIP and SSI funding and premium rates may be affected by continuing
government efforts to contain healthcare costs and may further be affected
by
state and federal budgetary constraints. Additionally, state and federal
entities may make changes to the design of their Medicaid programs resulting
in
the cancellation or modification of these programs.
For
example, in August 2006, the Centers for Medicare & Medicaid Services, or
CMS, published an interim final rule regarding the estimation and recovery
of
improper payments made under Medicaid and SCHIP. This rule requires a CMS
contractor to sample selected states each year to estimate improper payments
in
Medicaid and SCHIP and create national and state specific error rates. States
must provide information to measure improper payments in Medicaid managed care,
as well as in fee-for-service Medicaid. Each state will be selected for review
once every three years for each program. States are required to repay CMS the
federal share of any overpayments identified.
On
February 8, 2006, President Bush signed the Deficit Reduction Act of 2005 to
reduce the size of the federal deficit. The Act reduces federal spending by
nearly $40 billion over 5 years, including a $5 billion reduction in Medicaid.
The Act reduces spending by cutting Medicaid payments for prescription drugs
and
gives states new power to reduce or reconfigure benefits. This law may also
lead
to lower Medicaid reimbursements in some states. The Bush administration’s
budget proposal for fiscal year 2008 proposes cutting Medicaid funding by $1.9
billion in legislative changes and by $1.5 billion in administrative changes,
which would lead to $25.7 billion in funding reductions over five years when
compared to the fiscal year 2007 levels. Additionally, the Bush administration’s
2008 budget for SCHIP provides for yearly allotments at the fiscal year 2007
levels, plus an additional $5 billion over the five-year period, which some
believe will result in a funding shortfall. States also 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.
Changes
to Medicaid, SCHIP and SSI programs could reduce the number of persons enrolled
in or eligible for these programs, reduce the amount of reimbursement or payment
levels, or increase our administrative or healthcare costs under those programs.
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
SCHIP is not reauthorized, our business could suffer.
The
authorization for SCHIP expires at the end of federal fiscal year 2007. We
cannot guarantee that federal funding of SCHIP will be reauthorized and if
it
is, what changes might be made to the program following reauthorization. If
SCHIP is not reauthorized by September 30, 2007, we anticipate that Congress
will pass legislation that will freeze federal funding at the current 2007
levels. Congress began the reauthorization process in early February, 2007.
At
this time, it is not clear whether the relevant congressional committees of
jurisdiction over this program will be able to reach agreement on an SCHIP
reauthorization package that could cost $50 billion in additional federal
spending.
Several states face a shortfall in federal SCHIP funding,
which
could have an impact on our business.
States
receive matching funds from the federal government to pay for their SCHIP
programs, which matching funds have a per state annual cap. It is predicted
that
two states in which we have SCHIP contracts, Georgia and New Jersey, will spend
all of their federal allocation for fiscal year 2007 prior to the end of the
year. In December 2006, Congress passed legislation that will redistribute
funds
that were not spent in prior years to the states that are facing these
shortfalls. The Congressional Research Service estimates that this legislation
will delay the shortfall to the first part of May 2007. We cannot predict
whether the U.S. Congress will appropriate additional funds or take other
legislative action to cover the shortfalls. Further, we cannot predict if states
will provide additional funding to cover the federal shortfall. Certain of
our
contracts are subject to renewal this year and we cannot guarantee that they
will be renewed and if renewed, whether the terms will be modified. If any
of
the contracts are not renewed or if any state delays paying us or fails to
pay
the full amount owed due to the shortfall, our business could
suffer.
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, SCHIP and SSI.
We provide those healthcare services under contracts with regulatory entities
in
the areas in which we operate. Our contracts with various states 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 agent elects to do so. Our current
contracts are set to expire between June 30, 2007 and September 30, 2011. 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.
For example, on August 25, 2006, we received notification from the Kansas Health
Policy Authority that FirstGuard Health Plan Kansas, Inc.’s contract with the
state would not be renewed or extended, and as a result, our contract ended
on
December 31, 2006. 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. Our contracts could also be terminated if we
fail
to perform in accordance with the standards set by state regulatory agencies.
For example, the Indiana contract under which we operate can be terminated
by
the State without cause. 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 investors 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 investors. The enactment of
new
laws and rules or changes to existing laws and rules or the interpretation
of
such 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;
|
| · |
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 previously considered various forms of patient protection
legislation commonly known as the Patients’ Bill of Rights and such legislation
may be proposed again. We cannot predict the impact of any such legislation,
if
adopted, on our business.
Regulations
may decrease the profitability of our health plans.
Certain
states have enacted regulations which require us to maintain a minimum health
benefits ratio, or establish limits on our profitability. Other states require
us to meet certain performance and quality metrics in order to receive our
full
contractual revenue. In certain circumstances, our plans may be required to
pay
a rebate to the state in the event profits exceed established levels. 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. Certain states, including
but
not limited to Georgia, 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. Certain
states also impose marketing restrictions on us which may constrain our
membership growth and our ability to increase our revenues.
We
face periodic reviews, audits and investigations under our contracts with state
government agencies, and these audits could have adverse findings, which may
negatively impact our business.
We
contract with various state governmental agencies to provide managed healthcare
services. Pursuant to these contracts, we are subject to various reviews, audits
and investigations to verify our compliance with the contracts and applicable
laws and regulations. Any adverse review, audit or investigation could result
in:
| · |
refunding
of amounts we have been paid pursuant to our
contracts;
|
| · |
imposition
of fines, penalties and other sanctions on
us;
|
| · |
loss
of our right to participate in various
markets;
|
| · |
increased
difficulty in selling our products and services;
and
|
| · |
loss
of one or more of our licenses.
|
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. In some states, we may be
subject to regulation by more than one governmental authority, which may impose
overlapping or inconsistent regulations. 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, SCHIP and SSI 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.
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, including 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.
We
may incur significant costs as a result of compliance with government
regulations, and our management will be required to devote time to
compliance.
Many
aspects of our business are affected by government laws and regulations. The
issuance of new regulations, or judicial or regulatory guidance regarding
existing regulations, could require 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 costs of any such future compliance efforts could have a
material adverse effect on our business. We have already expended significant
time, effort and financial resources to comply with the privacy and security
requirements of HIPAA. We cannot predict whether states will enact stricter
laws
governing the privacy and security of electronic health information. If any
new
requirements are enacted at the state or federal level, compliance would likely
require additional expenditures and management time.
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.
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.
Changes
in healthcare law and benefits may reduce our
profitability.
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
to enroll in Medicaid, reduce the reimbursement or payment levels for medical
services or reduce benefits included in Medicaid coverage. We are also
unable
to
predict whether new laws or proposals will favor or hinder the growth of managed
healthcare in general. 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
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.
Changes
in federal funding mechanisms may reduce our
profitability.
The
Bush
administration previously 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.
14
In
April
2004, the Bush administration adopted a 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, this policy,
if
continued, may restrict some states’ funding for Medicaid, which 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. The Bush administration has also proposed to
further reduce total federal funding for the Medicaid program by $25.7 billion
over the next five years. These changes may reduce the availability of funding
for some states’ Medicaid programs, which could adversely affect our growth,
operations and financial performance. In addition, 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 which could adversely affect our growth,
operations and financial performance.
If
state regulatory agencies require a statutory capital level higher than the
state regulations, we may be required to make additional capital
contributions.
Our
operations are conducted through our wholly owned subsidiaries, which include
health maintenance organizations, or 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.
If
we are unable to participate in SCHIP programs, our growth rate may be
limited.
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.
If
state regulators do not approve payments of dividends and distributions by
our
subsidiaries to us, we may not have sufficient funds to implement our business
strategy.
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 us 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.
Failure
to accurately predict our medical expenses could negatively affect our reported
results.
Our
medical expenses include estimates of medical expenses incurred but not yet
reported, or IBNR. 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. For example, in the three months ended June 30, 2006 we adjusted
our
IBNR by $9.7 million for adverse medical cost development from the first quarter
of 2006. In addition, when we commence operations in a new state or region,
we
have limited information with which to estimate our medical claims liabilities.
For example, we commenced operations in the Atlanta and Central regions of
Georgia on June 1, 2006 and the Southwest region of Georgia on September 1,
2006
and have based our estimates on state provided historical actuarial data and
limited 2006 actual incurred and received data. 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 or significantly delayed premiums would negatively affect our
revenues and profitability.
Our
premium revenues consist of fixed monthly payments per member and supplemental
payments for other services such as maternity deliveries. 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
service 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. In
addition, if there is a significant delay in our receipt of premiums to offset
previously incurred health benefits costs, our earnings could be negatively
impacted.
Failure
to effectively manage our medical costs or related administrative costs would
reduce our profitability.
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.
Difficulties
in executing our acquisition strategy could adversely affect our
business.
Historically,
the acquisition of Medicaid and specialty services 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 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.
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.
Execution
of our growth strategy may increase costs or liabilities, or create disruptions
in our business.
We
pursue
acquisitions of other companies or businesses from time to time. Although we
review the records of companies or businesses we plan to acquire, even an
in-depth review of records may not reveal existing or potential problems or
permit us to become familiar enough with a business to assess fully its
capabilities and deficiencies. As a result, we may assume unanticipated
liabilities or adverse operating conditions, or an acquisition may not perform
as well as expected. We face the risk that the returns on acquisitions will
not
support the expenditures or indebtedness incurred to acquire such businesses,
or
the capital expenditures needed to develop such businesses. We also face the
risk that we will not be able to integrate acquisitions into our existing
operations effectively without substantial expense, delay or other operational
or financial problems. Integration may be hindered by, among other things,
differing procedures, including internal controls, business practices and
technology systems. We may need to divert more management resources to
integration than we planned, which may adversely affect our ability to pursue
other profitable activities.
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.
|
Additionally,
our growth strategy includes start-up operations in new markets or new products
in existing markets. We may incur significant expenses prior to commencement
of
operations and the receipt of revenue. As a result, these start-up operations
may decrease our profitability. In the event we pursue any opportunity to
diversify our business internationally, we would become subject to additional
risks, including, but not limited to, political risk, an unfamiliar regulatory
regime, currency exchange risk and exchange controls, cultural and language
differences, foreign tax issues, and different labor laws and
practices.
Accordingly,
we may be unable to identify, consummate and integrate future acquisitions
or
start-up operations successfully or operate acquired or new businesses
profitably.
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 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.
Failure
to achieve timely profitability in any business would negatively affect our
results of operations.
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 Georgia, Indiana, Kansas, Texas and Wisconsin have accounted for most of
our
premium revenues to date. For example, our Medicaid contract with Kansas, which
terminated December 31, 2006, together with our Medicaid contract with Missouri
accounted for $317.0 million in revenue for the year ended December 31, 2006.
If
we were unable to continue to operate in each of these other 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 or other governmental or
regulatory actions and decisions, economic conditions and similar factors in
those states. Our inability to continue to operate in any of the states in
which
we operate would harm our business.
Competition
may limit our ability to increase penetration of the markets that we
serve.
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.
If
we are unable to maintain relationships with our provider networks, our
profitability may be harmed.
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.
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 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.
Negative
publicity regarding the managed care industry may harm our business and
operating results.
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.
Claims relating to medical malpractice could cause us to
incur
significant expenses.
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. Claims
of
this nature, if successful, could result in substantial damage awards against
us
and our providers that could exceed the limits of any applicable insurance
coverage. 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.
Loss
of providers due to increased insurance costs could adversely affect our
business.
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 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.
Growth
in the number of Medicaid-eligible persons may be countercyclical, which could
cause our operating results to suffer when general economic conditions are
improving.
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.
If
we are unable to integrate and manage our information systems effectively,
our
operations could be disrupted.
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. These claims could be substantial. 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.
From
time to time, we may become involved in costly and time-consuming litigation
and
other regulatory proceedings, which require significant attention from our
management.
We
are a
defendant from time to time in lawsuits and regulatory actions relating to
our
business. Due to the inherent uncertainties of litigation and regulatory
proceedings, we cannot accurately predict the ultimate outcome of any such
proceedings. An unfavorable outcome could have a material adverse impact on
our
business and operating results. In addition, regardless of the outcome of any
litigation or regulatory proceedings, such proceedings are costly and require
significant attention from our management. For example, we have been named
in
two recently-filed securities class action lawsuits that are now consolidated.
In addition, we may in the future be the target of similar litigation. As with
other litigation, securities litigation could be costly and time consuming,
require significant attention from our management and could harm our business
and operating results.
To
service our indebtedness, we will require a significant amount of cash.
Our
ability to generate cash depends on many factors beyond our
control.
Our
ability to make payments on and to refinance our indebtedness, including
the
notes, and to fund planned capital expenditures will depend on our ability
and
the ability of our subsidiaries to generate cash in the future. This, to
a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control.
We
cannot
assure you that our business will generate sufficient cash flow from operations,
or that future borrowings will be available to us under our revolving credit
facility in an amount sufficient to enable us to pay our indebtedness, including
these notes, or to fund our other liquidity needs. We may need to refinance
all
or a portion of our indebtedness, including the notes, on or before maturity.
We
cannot assure you that we will be able to refinance any of our indebtedness,
including any current or future credit facility and the notes, on commercially
reasonable terms or at all.
The
restrictive covenants in our debt instruments may limit our operating
flexibility. Our failure to comply with these covenants could result in defaults
under our indenture and future debt instruments even though we may be able
to
meet our debt service obligations.
The
instruments governing our indebtedness, including the indenture governing the
notes and the revolving credit facility, impose significant operating and
financial restrictions on us. These restrictions significantly limit, among
other things, our ability to incur additional indebtedness, pay dividends,
repay
junior indebtedness, sell assets, make investments, engage in transactions
with
affiliates, create liens and engage in certain types of mergers or acquisitions.
Our future debt instruments may have similar or more restrictive covenants.
These restrictions could limit our ability to obtain future financings, make
capital expenditures, withstand a future downturn in our business or the economy
in general, or otherwise take advantage of business opportunities that may
arise. If we fail to comply with these restrictions, the note holders or lenders
under any debt instrument could declare a default under the terms of the
relevant indebtedness even though we are able to meet debt service obligations
and, because our indebtedness has cross-default and cross-acceleration
provisions, could cause all of our debt to become immediately due and
payable.
We
cannot
assure you that we would have sufficient funds available, or that we would
have
access to sufficient capital from other sources, to repay any accelerated debt.
Even if we could obtain additional financing, we cannot assure you that the
terms would be favorable to us. If we default on any future secured debt, the
secured creditors could foreclose on their liens. As a result, any event of
default could have a material adverse effect on our business and financial
condition, and could prevent us from paying amounts due under the
notes.
Despite
current indebtedness levels, we may still be able to incur substantially more
debt, including secured debt.
We
and
our subsidiaries may be able to incur substantial additional indebtedness in
the
future, including secured indebtedness. The terms of the indenture governing
the
notes do not fully prohibit us or our subsidiaries from doing so. Our revolving
credit facility would permit borrowing up to $300 million after completion
of
this offering and the application of proceeds to repay amounts outstanding
thereunder. If new debt is added to our current debt levels, the related risks
we now face could intensify.
In
addition, a substantial amount of debt we incur in the future could be secured.
To the extent we were to secure debt we incur in the future under any credit
facility or other issuance of debt, your ability to receive payments under
the
notes will be effectively subordinated to the secured debt, which will have
a
prior claim on any assets securing the debt, to the extent of the value of
those
assets.
Because
we are a holding company and depend entirely on cash flow from our subsidiaries
to meet our obligations, your right to receive payment on the notes will be
effectively subordinated to our subsidiaries’
obligations.
The
notes
will be obligations exclusively of Centene. Our cash flow and our ability to
service our debt, including the notes, depends on the earnings of our
subsidiaries and on the distribution of earnings, loans or other payments to
us
by our subsidiaries.
Our
subsidiaries are separate and distinct legal entities with no obligations to
pay
any amounts due on the notes or to provide us with funds for our payment
obligations, whether by dividend, distribution, loan or other payments. In
addition, the ability of our subsidiaries to make any dividend, distribution,
loan or other payment to us is subject to statutory restrictions, regulatory
capital requirements and contractual restrictions, including under the revolving
credit facility. Payments to us by our subsidiaries will also be contingent
upon
our subsidiaries’ earnings and their business considerations.
Our
right
to receive any assets of our subsidiaries upon their bankruptcy, liquidation,
dissolution, reorganization or similar proceeding, and therefore your right
to
participate in those assets, will be effectively subordinated to the claims
of
those subsidiaries’ creditors, including trace creditors. In addition, even if
Centene were a creditor of one or more of our subsidiaries, our rights as a
creditor would be subordinated to any security interest in the assets of those
subsidiaries and any debt of our subsidiaries senior to that held by us. As
a
result, the notes will be effectively subordinated to all liabilities, including
trade payables, of our current or future subsidiaries. Because we depend on
the
cash flow of our subsidiaries to meet our own obligations, including with
respect to the notes, these types of restrictions could impair our ability
to
make scheduled interest payments on the notes and to pay the principal at
maturity. As of December 31, 2006, the notes would have been effectively
subordinated, on a pro forma basis as adjusted for the offering and the use
of
proceeds therefrom, to $415.5 million of liabilities outstanding of our
subsidiaries, including trade payables and medical claims liabilities (excluding
intercompany liabilities).
In
addition, our regulated subsidiaries have historically generated substantially
all of our revenues. If one or more of our regulated subsidiaries becomes
insolvent, the regulators may seize its assets to cover its obligations under
healthcare policies, which could result in our remaining assets generating
insufficient revenue to pay the notes in full or at all.
We
may not have the ability to raise the funds necessary to finance the change
of
control offer required by the indenture.
Upon
a
change of control, we will be required to offer to repurchase all outstanding
notes at 101% of the principal amount thereof plus accrued and unpaid interest
and additional interest, if any, to the date of repurchase. However, it is
possible that we will not have sufficient funds at the time of the change of
control to make the required repurchase of notes or that restrictions in our
revolving credit facility or any other future indebtedness will not allow such
repurchases. In addition, certain important corporate events, such as leveraged
recapitalizations that would increase the level of our indebtedness, would
not
constitute a “change of control” under the indenture. See “Description of the
Exchange Notes —Repurchase at Option of Holders.”
We
will
not receive any proceeds from the exchange offer. Because the exchange notes
have substantially identical terms as the outstanding notes, the issuance of
the
exchange notes will not result in any increase in our indebtedness. The exchange
offer is intended to satisfy our obligations under the registration rights
agreement. Gross proceeds from the offering of the outstanding notes were
approximately $169.8 million, after deducting the discounts and estimated
offering expenses. We used the proceeds from the sale of the outstanding notes
to refinance approximately $150.0 million of our existing indebtedness under
our
revolving credit facility and any additional proceeds are available for general
corporate purposes.
The
following table sets forth our consolidated cash and cash equivalents,
investments and restricted deposits, and capitalization as of March 31,
2007.
|
March
31, 2007
|
||||
|
(dollars
in thousands)
|
||||
| Unregulated cash and investments | $ | 71,843 | ||
| Regulated cash, investments and restricted deposits | 490,945 | |||
|
Total
cash, investments and restricted deposits
|
$
|
562,788
|
||
|
Revolving
credit facility
|
$
|
—
|
||
|
7¼%
Senior Notes due 2014
|
175,000
|
|||
|
Debt
secured by real estate
|
20,725
|
|||
|
Capital
leases
|
5,644
|
|||
|
Total
debt
|
201,369
|
|||
|
Stockholders’
equity
|
369,464
|
|||
|
Total
capitalization
|
$
|
570,833
|
||
The
following summary consolidated financial data should be read in connection
with
our Annual Report on Form 10-K for the year ended December 31, 2006 and our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, including
the related notes to financial statements and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” contained therein,
which are incorporated by reference elsewhere in this prospectus.
The
data
for and as of the end of each of the last five fiscal years are derived from
our
audited consolidated financial statements. Historical results are not
necessarily indicative of the results to be expected in the future.
|
Year
Ended December 31,
|
Three
Months Ended March 31,
|
|||||||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
2006
|
2007
|
||||||||||||||||
|
(dollars
in thousands, except per share data)
|
||||||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||
|
Statement
of Earnings Data:
|
||||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||
|
Premium
(1)
|
$
|
461,030
|
$
|
759,763
|
$
|
991,673
|
$
|
1,491,899
|
$
|
2,199,439
|
$
|
435,562
|
$
|
649,243
|
||||||||
|
Service
|
457
|
9,967
|
9,267
|
13,965
|
79,581
|
19,516
|
21,592
|
|||||||||||||||
|
Total
Revenues
|
461,487
|
769,730
|
1,000,940
|
1,505,864
|
2,279,020
|
455,078
|
670,835
|
|||||||||||||||
|
Expenses:
|
||||||||||||||||||||||
|
Medical
costs
|
379,468
|
626,192
|
800,476
|
1,226,909
|
1,819,811
|
361,672
|
535,406
|
|||||||||||||||
|
Cost
of services
|
341
|
8,323
|
8,065
|
5,851
|
60,735
|
15,588
|
15,630
|
|||||||||||||||
|
General
and administrative expenses (1)
|
50,072
|
88,288
|
127,863
|
193,913
|
346,284
|
65,222
|
106,866
|
|||||||||||||||
|
Gain
on sale of FirstGuard Missouri
|
—
|
—
|
—
|
—
|
—
|
—
|
(4,218
|
)
|
||||||||||||||
|
Impairment
loss
|
—
|
—
|
—
|
—
|
81,098
|
—
|
—
|
|||||||||||||||
|
Total
operating expenses
|
429,881
|
722,803
|
936,404
|
1,426,673
|
2,307,928
|
442,482
|
653,684
|
|||||||||||||||
|
Earnings
(loss) from operations
|
31,606
|
46,927
|
64,536
|
79,191
|
(28,908
|
)
|
12,596
|
17,151
|
||||||||||||||
|
Other
income (expense):
|
||||||||||||||||||||||
|
Investment
and other income
|
9,575
|
5,160
|
6,431
|
10,655
|
17,892
|
3,540
|
4,501
|
|||||||||||||||
|
Interest
expense
|
(45
|
)
|
(194
|
)
|
(680
|
)
|
(3,990
|
)
|
(10,636
|
)
|
(1,998
|
)
|
(3,132
|
)
|
||||||||
|
Earnings
(loss) before income taxes
|
41,136
|
51,893
|
70,287
|
85,856
|
(21,652
|
)
|
14,138
|
18,520
|
||||||||||||||
|
Income
tax (benefit) expense
|
15,631
|
19,504
|
25,975
|
30,224
|
21,977
|
5,372
|
(19,691
|
)
|
||||||||||||||
|
Minority
interest
|
116
|
881
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Net
earnings (loss)
|
$
|
25,621
|
$
|
33,270
|
$
|
44,312
|
$
|
55,632
|
$
|
(43,629
|
)
|
$
|
8,766
|
$
|
38,211
|
|||||||
|
Net
earnings (loss) per common share:
|
||||||||||||||||||||||
|
Basic
|
$
|
0.82
|
$
|
0.93
|
$
|
1.09
|
$
|
1.31
|
$
|
(1.01
|
)
|
$
|
0.20
|
$
|
0.88
|
|||||||
|
Diluted
|
$
|
0.73
|
$
|
0.87
|
$
|
1.02
|
$
|
1.24
|
$
|
(1.01
|
)
|
$
|
0.20
|
$
|
0.85
|
|||||||
|
Weighted
average number of common shares outstanding:
|
||||||||||||||||||||||
|
Basic
|
31,432,080
|
35,704,426
|
40,820,909
|
42,312,522
|
43,160,860
|
42,987,892
|
43,433,319
|
|||||||||||||||
|
Diluted
|
34,932,232
|
38,422,152
|
43,616,445
|
45,027,633
|
43,160,860
|
44,750,271
|
44,923,340
|
|||||||||||||||
|
Ratio
of earnings to fixed charges (2)
|
45.96
|
43.12
|
29.24
|
14.20
|
—
|
5.90
|
5.39
|
|||||||||||||||
|
December
31,
|
March
31,
|
|||||||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
2006
|
2007
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||||
|
Cash
and cash equivalents (3)
|
$
|
59,656
|
$
|
64,346
|
$
|
84,105
|
$
|
147,358
|
$
|
271,047
|
$
|
118,512
|
$
|
311,905
|
||||||||
|
Investments
and restricted deposits (3)
|
104,999
|
220,335
|
233,257
|
202,916
|
237,603
|
221,249
|
250,883
|
|||||||||||||||
|
Total
assets
|
210,327
|
362,692
|
527,934
|
668,030
|
894,980
|
737,807
|
971,377
|
|||||||||||||||
|
Medical
claims liabilities
|
91,181
|
106,569
|
165,980
|
170,514
|
280,441
|
172,792
|
275,965
|
|||||||||||||||
|
Long-term
debt
|
—
|
7,616
|
46,973
|
92,448
|
174,646
|
130,940
|
200,404
|
|||||||||||||||
|
Total
stockholders’ equity
|
102,183
|
220,115
|
271,312
|
352,048
|
326,423
|
364,249
|
369,464
|
|||||||||||||||
__________
|
(1)
|
Premium
revenues and general and administrative expenses reflect the enactments
of
premium taxes in certain states. Premium taxes were $0, $1,425, $5,503,
$9,802 and $42,453 for the years ended December 31, 2002, 2003, 2004,
2005
and 2006, respectively. Premium taxes were $4,305 and $18,216,
respectively for the quarters ended March 31, 2006 and 2007. Premium
revenues for the FirstGuard health plans, which we acquired on December
1,
2004 and exited in 2007, were $20,247, $273,662 and $317,027 for
the years
ended December 31, 2004, 2005 and 2006, respectively. Premium revenues
for
the FirstGuard health plans were $76,288 and $6,601, respectively
for the
quarters ended March 31, 2006 and
2007.
|
(2) For
the
purpose of calculating the ratios of earning to fixed charges, earnings consist
of loss from continuing operations before income taxes and fixed charges. Fixed
charges consist of interest expense and the portion of rental expense
(approximately one-third) that management believes represents the interest
component of rent expense. For the year ended December 31, 2006, earnings were
insufficient to cover fixed charges by $21,652. The deficiency of earnings
to
fixed charges for this period includes the effect of $94,470 in pre-tax charges
for intangible asset impairment and costs to exit Kansas and
Missouri.
|
(3)
|
Unregulated
cash, cash equivalents and investments for the years ended December
31,
2002, 2003, 2004, 2005 and 2006 were $51,970, $126,675, $45,988,
$27,680
and $28,852, respectively. Unregulated cash, cash equivalents and
investments for the quarters ended March 31, 2006 and 2007 were $25,813
and $71,843, respectively.
|
Overview
We
are a
multi-line healthcare enterprise operating primarily in two segments: Medicaid
Managed Care and Specialty Services. Our Medicaid Managed Care segment provides
Medicaid and Medicaid-related health plan coverage to individuals through
government subsidized programs, including Medicaid, the State Children’s Health
Insurance Program, or SCHIP, and Supplemental Security Income, or SSI. Medicaid
currently accounts for 76% of our membership, while SCHIP and SSI account for
19% and 5%, respectively. Our Specialty Services segment provides specialty
services, including behavioral health, disease management, long-term care
programs, managed vision, nurse triage, pharmacy benefits management and
treatment compliance, to state programs, healthcare organizations and other
commercial organizations, as well as to our own subsidiaries on market-based
terms. Our FirstGuard health plans exited the Kansas and Missouri markets
effective January 1 and February 1, 2007, respectively. As of March 6, 2007
we
had a market capitalization of approximately $1.04 billion. For the year ended
December 31, 2006, our revenues, cash flow from operations, and net loss were
$2.3 billion, $195.0 million and $43.6 million, respectively. The net loss
figure includes $94.5 million in pre-tax charges for intangible asset impairment
and costs to exit Kansas and Missouri. For
the
quarter ended March 31, 2007, our revenues, cash flow from operations and net
income were $670.8 million, $36.0 million and $38.2 million,
respectively.
Our
Medicaid Managed Care membership totaled approximately 1.1 million as of March
31, 2007, an increase of 26%
from
March 31, 2006. We
currently have six health plan subsidiaries offering healthcare services in
Georgia, Indiana, New Jersey, Ohio, Texas and Wisconsin. Additionally,
effective in April 2007, we acquired a Medicaid Medical Home Network in South
Carolina and we expect to participate in the state rollout of Medicaid Managed
Care in South Carolina. We
provide member-focused services through locally based staff by assisting in
accessing care, coordinating referrals to related health and social services
and
addressing member concerns and questions. We also provide education and outreach
programs to inform and assist members in accessing quality, appropriate
healthcare services.
We
believe our local approach to managing our subsidiaries, including provider
and
member services, enables us to provide accessible, quality, culturally-sensitive
healthcare coverage to our communities. Our disease management, educational
and
other initiatives are designed to help members best utilize the healthcare
system to ensure they receive appropriate, medically necessary services and
effective management of routine, severe and chronic health problems, resulting
in better health outcomes. We combine our decentralized local approach for
care
with a centralized infrastructure of support functions such as finance,
information systems and claims processing.
Our
initial health plan commenced operations in Wisconsin in 1984. We were organized
in Wisconsin in 1993 as a holding company for our initial health plan and
reincorporated in Delaware in 2001. We are headquartered in St. Louis, Missouri
and our stock is publicly traded on the New York Stock Exchange under the ticker
symbol “CNC.”
Industry
We
provide our services to organizations and individuals primarily through
Medicaid, SCHIP and SSI programs. The Congressional Budget Office, or CBO,
estimated the total Medicaid market was approximately $330 billion in 2005,
and
the federal Centers for Medicare and Medicaid Services, or CMS, estimate the
market will grow to over $450 billion by 2010. According to the most recent
information provided by the Kaiser Commission on Medicaid and the Uninsured,
Medicaid spending increased by 2.8% in fiscal 2006 and states appropriated
an
increase of 5.0% for Medicaid in fiscal 2007 budgets.
Established
in 1965, Medicaid is the largest publicly funded program in the United States,
and provides health insurance to low-income families and individuals with
disabilities. Authorized by Title XIX of the Social Security Act, Medicaid
is an
entitlement program funded jointly by the federal and state governments and
administered by the states. The majority of funding is provided at the federal
level. Each state establishes its own eligibility standards, benefit packages,
payment rates and program administration within federal standards. As a result,
there are 56 Medicaid programs— one for each U.S. state, each U.S. territory and
the District of Columbia. An increasing number of states have mandated that
their Medicaid recipients enroll in managed care plans as a means of delivering
quality healthcare and controlling costs. Currently, 37 of the 56 programs,
including each of the six states in which we operate health plans, have mandated
managed care for some or all of their Medicaid recipients. Eligibility is based
on a combination of household income and assets, often determined by an income
level relative to the federal poverty level. Historically, children have
represented the largest eligibility group.
Established
in 1972, and authorized by Title XVI of the Social Security Act, SSI covers
low-income persons with chronic physical disabilities or behavioral health
impairments. SSI beneficiaries represent a growing portion of all Medicaid
recipients. In addition, SSI recipients typically utilize more services because
of their critical health issues.
The
Balanced Budget Act of 1997 created SCHIP to help states expand coverage
primarily to children whose families earned too much to qualify for Medicaid,
yet not enough to afford private health insurance. Some states include the
parents of these children in their SCHIP programs. SCHIP is the single largest
expansion of health insurance coverage for children since the enactment of
Medicaid. Costs related to the largest eligibility group, children, are
primarily composed of pediatrics and family care. These costs tend to be more
predictable than other healthcare issues which predominantly affect the adult
population.
A
portion
of Medicaid beneficiaries are dual eligibles, low-income seniors and people
with
disabilities who are enrolled in both Medicaid and Medicare. According to
information provided by the Kaiser Commission on Medicaid and the Uninsured,
dual eligibles account for 14% of Medicaid enrollees. These dual eligibles
may
receive assistance from Medicaid for Medicaid benefits, such as nursing home
care and/or assistance with Medicare premiums and cost sharing. Dual eligibles
also use more services due to their tendency to have more chronic health issues.
We serve dual eligibles through our SSI and long-term care
programs.
While
Medicaid programs have directed funds to many individuals who cannot afford
or
otherwise maintain health insurance coverage, they did not initially address
the
inefficient and costly manner in which the Medicaid population tends to access
healthcare. Medicaid recipients in non-managed care programs typically have
not
sought preventive care or routine treatment for chronic conditions, such as
asthma and diabetes. Rather, they have sought healthcare in hospital emergency
rooms, which tends to be more expensive. As a result, many states have found
that the costs of providing Medicaid benefits have increased while the medical
outcomes for the recipients remained unsatisfactory.
Since
the
early 1980s, increasing healthcare costs, combined with significant growth
in
the number of Medicaid recipients, have led many states to establish Medicaid
managed care initiatives. Continued pressure on states’ Medicaid budgets should
cause public policy to recognize the value of managed care as a means of
delivering quality healthcare and effectively controlling costs. A growing
number of states, including each of the six states in which we operate health
plans, have mandated that their Medicaid recipients enroll in managed care
plans. Other states are considering moving to a mandated
managed care approach. As a result, a significant market opportunity exists
for
managed care organizations with operations and programs focused on the distinct
socio-economic, cultural and healthcare needs of the Medicaid, SCHIP and SSI
populations. We believe our approach and strategy enable us to be a growing
participant in this market.
Our
Competitive Strengths
Our
multi-line managed care approach is based on the following key
attributes:
Strong
Historic Operating Performance. We
have
increased revenues as we have grown in existing markets, expanded into new
markets and broadened our product menu. We entered the Wisconsin market in
1984,
the Indiana market in 1995, the Texas market in 1999, the New Jersey market
in
2002, the Ohio market in 2004 and the Georgia market in 2006. We have also
increased membership by acquiring Medicaid businesses, contracts and other
related assets from competitors in existing markets, most recently in Ohio
in
2005 and 2006. Our
Medicaid Managed Care membership totaled approximately 1.1 million as of March
31, 2007, an increase of 26%
from
March 31, 2006. For
the
year ended December 31, 2006, we had revenue of $2.3 billion, representing
a 49%
CAGR since the year ended December 31, 2002. We generated cash flow from
operations of $195.0 million and a net loss of $43.6 million for the year ended
December 31, 2006. The figures above include Kansas and Missouri, which we
exited in January and February 2007, respectively, and which accounted for
138,900 members at December 31, 2006 and $317.0 million in revenue for the
year
ended December 31, 2006.
For the
quarter ended March 31, 2007, our revenues, cash flow from operations and net
income were $670.8 million, $36.0 million and $38.2 million,
respectively.
Medicaid
Expertise. Over
the
last 20 years, we have strived to develop a specialized Medicaid expertise
that
has helped us establish and maintain relationships with members, providers
and
state governments. We have implemented programs developed to achieve savings
for
state governments and improve medical outcomes for members by reducing
inappropriate emergency room use, inpatient days and high cost interventions,
as
well as by managing care of chronic illnesses. Our experience in working with
state regulators helps us implement and deliver programs and services
efficiently and affords us opportunities to provide input regarding Medicaid
industry practices and policies in the states in which we operate. We work
with
state agencies on redefining benefits, eligibility requirements and provider
fee
schedules in order to maximize the number of uninsured individuals covered
through Medicaid, SCHIP and SSI and expand these types of benefits offered.
Our
approach is to accomplish this while maintaining adequate levels of provider
compensation and protecting our profitability.
Diversified
Business Lines. We
continue to broaden our service offerings to address areas that we believe
have
been traditionally underserved by Medicaid managed care organizations. In
addition to our Medicaid and Medicaid-related managed care services, our service
offerings include behavioral health, disease management, long-term care
programs, managed vision, nurse triage, pharmacy benefits management and
treatment compliance. Through the utilization of a multi-business line approach,
we are able to diversify our revenue and help control our medical
costs.
Localized
Approach with Centralized Support Infrastructure. We
take a
localized approach to managing our subsidiaries, including provider and member
services. This approach enables us to facilitate access by our members to high
quality, culturally sensitive healthcare services. Our systems and procedures
have been designed to address these community-specific challenges through
outreach, education, transportation and other member support activities. For
example, our community outreach programs work with our members and their
communities to promote health and self-improvement through employment and
education on how best to access care. We complement this localized approach
with
a centralized infrastructure of support functions such as finance, information
systems and claims processing, which allows us to minimize general and
administrative expenses and to integrate and realize synergies from
acquisitions. We believe this combined approach allows us to efficiently
integrate new business opportunities in both Medicaid and specialty services
while maintaining our local accountability and improved access.
Specialized
and Scalable Systems and Technology. Through
our specialized information systems, we work to strengthen relationships with
providers and states which help us grow our membership base. Our specialized
information systems allow us to support our core processing functions under
a
set of integrated databases which are designed to be both replicable and
scalable. Physicians can use claims, utilization and membership data to manage
their practices more efficiently, and they also benefit from our timely
payments. State agencies can use data from our information systems to
demonstrate that their Medicaid populations receive quality healthcare in an
efficient manner. These systems also help identify needs for new healthcare
and
specialty programs. We have the ability to leverage our platform for one state
configuration into new states or for health plan acquisitions. Our ability
to
access data and translate it into meaningful information is essential to
operating across a multi-state service area in a cost-effective
manner.
Experienced
Management Team. We
have a
management team who possess significant industry experience. Michael Neidorff,
our Chairman and CEO, has been with us since 1996 and has over 20 years of
experience in all aspects of managed care. Per Brodin, our Senior Vice President
and Chief Financial Officer, has extensive experience as a financial and
accounting officer both at Centene and other organizations. The other members
of
our senior management team are well-seasoned professionals with a broad range
of
capabilities including industry experience and functional expertise. This team
has successfully managed the growth of our health plans and specialty
businesses, while maintaining operational discipline.
Our
Business Strategy
Our
objective is to become the leading multi-line healthcare enterprise focusing
on
Medicaid and Medicaid-related services. We intend to achieve this objective
by
implementing the following key components of our strategy:
Increase
Penetration of Existing State Markets. We
seek
to continue to increase our Medicaid membership in states in which we currently
operate through alliances with key providers, outreach efforts, development
and
implementation of community-specific products and acquisitions. In 2006, we
were
awarded two regions in connection with Ohio’s statewide restructuring of its
Medicaid managed care program, expanding the number of counties we serve from
three to 27. We also were awarded a Medicaid Aged, Blind or Disabled, or ABD,
contract in four regions in Ohio. In Texas, we expanded our operations to the
Corpus Christi market in 2006 and began managing care for SSI recipients in
February 2007. We may also increase membership by acquiring Medicaid businesses,
contracts and other related assets from our competitors in our existing markets
or by enlisting additional providers. For example, in 2005 and 2006, we acquired
certain Medicaid-related assets in Ohio.
Diversify
Business Lines. We
seek
to broaden our business lines into areas that complement our existing business
to enable us to grow and diversify our revenue. We are constantly evaluating
new
opportunities for expansion both domestically and abroad. For instance, in
October 2006, we commenced operations under our managed care program contracts
to provide long-term care services in Arizona, and in January 2006, we completed
the acquisition of US Script, a pharmacy benefits manager. We are also
considering other premium based or fee-for-service lines of business that would
provide additional diversity. We employ a disciplined acquisition strategy
that
is based on defined criteria including internal rate of return, accretion to
earnings per share, market leadership and compatibility with our information
systems. We engage our executives in the relevant operational units or
functional areas to ensure consistency between the diligence and integration
process.
Address
Emerging State Needs. We
work
to assist the states in which we operate in addressing the operating challenges
they face. We seek to assist the states in balancing premium rates, benefit
levels, member eligibility, policies and practices, and provider compensation.
For example, in 2005 we began performing under our contracts with the State
of
Arizona to facilitate the delivery of mental health and substance abuse services
to behavioral health recipients in Arizona. Effective January 1, 2005, we were
awarded a behavioral health contract to serve SCHIP members in Kansas. By
helping states structure an appropriate level and range of Medicaid, SCHIP
and
specialty services, we seek to ensure that we are able to continue to provide
those services on terms that achieve targeted gross margins, provide an
acceptable return and grow our business.
Develop
and Acquire Additional State Markets where Enrollment is Mandated.
We
continue to leverage our experience to identify and develop new markets by
seeking both to acquire existing business and to build our own operations.
We
expect to focus expansion on states where Medicaid recipients are mandated
to
enroll in managed care organizations because we believe member enrollment levels
are more predictable in these states. For example, effective June 1, 2006,
we
began managing care for Medicaid and SCHIP members in Georgia.
Leverage
Established Infrastructure to Enhance Operating Efficiencies. We
intend
to continue to invest in infrastructure to further drive efficiencies in
operations and to add functionality to improve the service provided to members
and other organizations at a low cost. Our centralized functions enable us
to
add members and markets quickly and economically. For example, during 2005,
we
opened an additional claims processing facility to accommodate our planned
growth initiatives for this centralized function.
Maintain
Operational Discipline. We
monitor our cost trends, operating performance, regulatory relationships and
the
Medicaid political environment in our existing markets. We seek to operate
in
markets that allow us to meet our internal metrics including membership growth,
plan size, market leadership and operating efficiency. We may divest contracts
or health plans in markets where the state’s Medicaid environment, over a
long-term basis, does not allow us to meet our targeted performance levels.
We
use multiple techniques to monitor and reduce our medical costs, including
on-site hospital review by staff nurses and involvement of medical management
and finance personnel in significant cases. Our health economics unit and health
plan controllers evaluate the financial impact of proposed changes in provider
relationships. We also conduct monthly reviews of member demographics for each
health plan.
Medicaid
Managed Care
Health
Plans
We
have
regulated subsidiaries offering healthcare services in each state we serve.
The
table below provides summary data for the state markets we currently
serve:
|
State
|
Local
Health Plan Name
|
First
Year of Operations Under Centene
|
Counties
Served at December 31, 2006
|
Market
Share(1)
|
Membership
at December 31, 2006
|
|||||
|
Georgia
|
Peach
State Health Plan
|
2006
|
90
|
30.6%
|
308,800
|
|||||
|
Indiana
|
Managed
Health Services
|
1995
|
92
|
33.4%
|
183,100
|
|||||
|
New
Jersey
|
University
Health Plans
|
2002
|
20
|
8.1%
|
58,900
|
|||||
|
Ohio
|
Buckeye
Community Health Plan
|
2004
|
27
|
11.3%
|
109,200
|
|||||
|
Texas
|
Superior
Health Plan
|
1999
|
217
|
21.0%
|
298,500
|
|||||
|
Wisconsin
|
Managed
Health Services
|
1984
|
29
|
32.9%
|
164,800
|
|
(1)
|
Represents
Medicaid and SCHIP membership as of December 31, 2006 as a percentage
of
total eligible Medicaid and SCHIP members in each state. SSI programs
are
excluded.
|
All
of
our revenue is derived from operations within the United States and its
territories. Our managed care subsidiaries in Georgia, Indiana, Kansas, Texas
and Wisconsin had revenues from their respective state governments that each
exceeded 10% of our consolidated total revenues in 2006. Other financial
information about our segments is found in Note 18 of our Notes to Consolidated
Financial Statements and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our Form 10-K for the fiscal year ended
December 31, 2006, which is incorporated herein by reference.
Benefits
to States
Our
ability to establish and maintain a leadership position in the markets we serve
results primarily from our demonstrated success in providing quality care while
reducing and managing costs, and from our specialized programs in working with
state governments. Among the benefits we are able to provide to the states
with
which we contract are:
| · |
Significant
cost savings compared to state paid reimbursement for services.
We
bring bottom-line management experience to our health plans. On the
administrative and management side, we bring experience including
quality
of care improvement methods, utilization management procedures, an
efficient claims payment system, and provider performance reporting,
as
well as managers and staff experienced in using these key elements
to
improve the quality of and access to
care.
|
| · |
Data-driven
approaches to balance cost and verify eligibility. Our
Medicaid health plans have conducted enrollment processing and activities
for state programs since 1984. We ensure effective enrollment procedures
that move members into the plan, then educate them and ensure that
they
receive needed services as quickly as possible. Our IT department
has
created mapping/translation programs for loading membership and linking
membership eligibility status to all of Centene’s
subsystems.
|
| · |
Establishment
of realistic and meaningful expectations for quality deliverables.
We
have collaborated with state agencies in redefining benefits, eligibility
requirements and provider fee schedules with the goal of maximizing
the
number of uninsured individuals covered through Medicaid and SSI
programs.
|
| · |
Managed
care expertise in government subsidized programs. Our
expertise in Medicaid has helped us establish and maintain strong
relationships with our constituent communities of members, providers
and
state governments. We provide access to services through local providers
and staff that focus on the cultural norms of their individual
communities. To that end, systems and procedures have been designed
to
address community-specific challenges through outreach, education,
transportation and other member support
activities.
|
| · |
Improved
medical outcomes. We
have implemented programs developed to achieve savings for state
governments and improve medical outcomes for members by reducing
inappropriate emergency room use, inpatient days and high cost
interventions, as well as by managing care of chronic
illness.
|
| · |
Timely
payment of provider claims. We
are committed to ensuring that our information systems and claims
payment
systems meet or exceed state requirements. We continuously endeavor
to
update our systems and processes to improve the timeliness of our
provider
payments.
|
| · |
Cost
saving outreach and specialty programs. Our
health plans have adopted a physician-driven approach where network
providers are actively engaged in developing and implementing healthcare
delivery policies and strategies. This approach is designed to eliminate
unnecessary costs, improve services to members and simplify the
administrative burdens placed on providers. The combination of a
decentralized local approach to health plan operations and a centralized
approach to administrative functions such as finance, information
systems
and claims processing allows us to quickly and economically integrate
new
business opportunities in both the Medicaid Managed Care and Specialty
Services segments.
|
| · |
Responsible
collection and dissemination of utilization data. We
gather utilization data from multiple sources, allowing for an integrated
view of our members’ utilization of services. These sources include
medical and behavioral health claims and encounter data, pharmacy
data,
vision and dental vendor claims and authorization data from Care
Enhanced
Case Management Systems, or CCMS, the authorization and case management
system utilized by us to coordinate care.
|
| · |
Timely
and accurate reporting. Our
information systems have robust reporting capabilities which have
been
instrumental in identifying the need for new and/or improved healthcare
and specialty programs. For state agencies, our reporting capability
is
instrumental in demonstrating an auditable
program.
|
Member
Programs and Services
We
recognize the importance of member-focused delivery of quality managed care
services. Our locally based staff assist members in accessing care, coordinating
referrals to related health and social services and addressing member concerns
and questions. While covered healthcare benefits vary from state to state,
our
health plans generally provide the following services:
| · |
primary
and specialty physician care
|
| · |
inpatient
and outpatient hospital care
|
| · |
emergency
and urgent care
|
| · |
prenatal
care
|
| · |
laboratory
and x-ray services
|
| · |
home
health and durable medical
equipment
|
| · |
behavioral
health and substance abuse services
|
| · |
24-hour
nurse advice line
|
| · |
transportation
assistance
|
| · |
vision
care
|
| · |
dental
care
|
| · |
immunizations
|
| · |
prescriptions
and limited over-the-counter drugs
|
|
We
also provide the following education and outreach programs to inform
and
assist members in accessing quality, appropriate healthcare services
in an
efficient manner:
|
| · |
CONNECTIONS
is
a community face-to-face outreach and education program designed
to create
a link between the member and the provider and help identify potential
challenges or risk elements to a member’s health, such as nutritional
challenges and health education shortcomings. CONNECTIONS representatives
also contact new members by phone or mail to discuss managed care,
the
Medicaid program and our services. Our CONNECTIONS representatives
make
home visits, conduct educational programs and represent our health
plans
at community events such as health
fairs.
|
| · |
Start
Smart For Your Baby is
a prenatal and infant health program designed to increase the percentage
of pregnant women receiving early prenatal care, reduce the incidence
of
low birth weight babies, identify high risk pregnancies, increase
participation in the federal Women, Infant and Children program,
and
increase well-child visits. The program includes risk assessments,
education through face-to-face meetings and materials, behavior
modification plans, assistance in selecting a provider for the infant
and
scheduling newborn follow-up
visits.
|
| · |
EPSDT
Case Management is
a preventive care program designed to educate our members on the
benefits
of Early and Periodic Screening, Diagnosis and Treatment, or EPSDT,
services. We have a systematic program of communicating, tracking,
outreach, reporting and follow-through that promotes state EPSDT
programs.
|
| · |
Disease
Management Programs are
designed to help members understand their disease and treatment plan
and
improve their health outcomes in a cost effective manner. These programs
address medical conditions that are common within the Medicaid population
such as asthma, diabetes and prenatal care. Our Specialty Services
segment
manages many of our disease management programs. Our SSI program
uses a
proprietary assessment tool that effectively identifies barriers
to care,
unmet functional needs, available social supports and the existence
of
behavioral health conditions that impede a member’s ability to maintain a
proper health status. Care coordinators develop individual care plans
with
the member and healthcare providers ensuring the full integration
of
behavioral, social and acute care services. These care plans, while
specific to an SSI member, incorporate “Condition Specific” practices in
collaboration with physician partners and community
resources.
|
Providers
For
each
of our service areas, we establish a provider network consisting of primary
and
specialty care physicians, hospitals and ancillary providers. As of December
31,
2006, the health plans we currently serve contracted with the following number
of physicians and hospitals:
|
Primary
Care Physicians
|
Specialty
Care Physicians
|
Hospitals
|
||||||||
| Georgia | 2,379 | 7,112 | 128 | |||||||
|
Indiana
|
738
|
1,422
|
42
|
|||||||
|
New
Jersey
|
1,732
|
5,283
|
73
|
|||||||
|
Ohio
|
1,026
|
2,387
|
35
|
|||||||
|
Texas
|
5,646
|
10,487
|
335
|
|||||||
|
Wisconsin
|
2,118
|
4,793
|
65
|
|||||||
Our
network of primary care physicians is a critical component in care delivery,
management of costs and the attraction and retention of new members. Primary
care physicians include family and general practitioners, pediatricians,
internal medicine physicians and obstetricians and gynecologists. Specialty
care
physicians provide medical care to members generally upon referral by the
primary care physicians. Specialty care physicians include orthopedic surgeons,
cardiologists and otolaryngologists. We also provide education and outreach
programs to inform and assist members in accessing quality, appropriate
healthcare services.
Our
health plans facilitate access to healthcare services for our members primarily
through contracts with our providers. Our contracts with primary and specialty
care physicians and hospitals usually are for one to two-year periods and renew
automatically for successive one-year terms, but generally are subject to
termination by either party upon 90 to 120 days prior written notice. In the
absence of a contract, we typically pay providers at state Medicaid
reimbursement levels. We pay physicians under a fee-for-service or capitation
arrangement.
| · |
Under
our fee-for-service contracts with physicians, particularly specialty
care
physicians, we pay a negotiated fee for covered services. This model
is
characterized as having no financial risk for the physician. In addition,
this model requires management oversight because our total cost may
increase as the units of services increase or as more expensive services
are replaced for less expensive services. We have prior authorization
procedures in place that are intended to make sure that certain high
cost
diagnostic and other services are medically
appropriate.
|
| · |
Under
our capitated contracts, primary care physicians are paid a monthly
fee
for each of our members assigned to his or her practice and are at
risk
for all costs related to primary and specialty physician and emergency
room services. In return for this payment, these physicians provide
all
primary care and preventive services, including primary care office
visits
and EPSDT services. If these physicians also provide non-capitated
services to their assigned members, they may receive payment under
fee-for-service arrangements at Medicaid
rates.
|
We
work
with physicians to help them operate efficiently by providing financial and
utilization information, physician and patient educational programs and disease
and medical management programs. Our programs are also designed to help the
physicians coordinate care outside of their offices. In addition, we are
governed by state prompt payment policies.
We
believe our collaborative approach with physicians gives us a competitive
advantage in entering new markets. Our physicians serve on local committees
that
assist us in implementing preventive care programs, managing costs and improving
the overall quality of care delivered to our members. This approach is designed
to eliminate unnecessary costs, improve services to our members and simplify
the
administrative burdens on our providers. It has enabled us to strengthen our
provider networks through improved physician recruitment and retention that,
in
turn, have helped to increase our membership base. The following are among
the
services we provide to support physicians:
| · |
Customized
Utilization Reports provide
certain of our contracted physicians with information that enables
them to
run their practices more efficiently and focuses them on specific
patient
needs. For example, quarterly detail reports update physicians on
their
status within their risk pools. Equivalency reports provide physicians
with financial comparisons of capitated versus fee-for-service
arrangements.
|
| · |
Case
Management Support helps
the physician coordinate specialty care and ancillary services for
patients with complex conditions and direct members to appropriate
community resources to address both their health and socio-economic
needs.
|
| · |
Web-based
Claims and Eligibility Resources have
been implemented in selected markets to provide physicians with on-line
access to perform claims and eligibility
inquiries.
|
| · |
Our
contracted physicians also benefit from several of the services offered
to
our members, including the CONNECTIONS, EPSDT case management and
disease
management programs. For example, the CONNECTIONS staff facilitates
doctor/patient relationships by connecting members with physicians,
the
EPSDT programs encourage routine checkups for children with their
physicians and the disease management programs assist physicians
in
managing their patients with chronic
disease.
|
Where
appropriate, our health plans contract with our specialty services organizations
to provide services and programs such as behavioral health, disease management,
managed vision, nurse triage, pharmacy benefit management, and treatment
compliance. When necessary, we also contract with third-party providers on
a
negotiated fee arrangement for physical therapy, home healthcare, vision care,
diagnostic laboratory tests, x-ray examinations, ambulance services and durable
medical equipment. Additionally, we contract with dental vendors in markets
where routine dental care is a covered benefit.
Quality
Management
Our
medical management programs focus on improving quality of care in areas that
have the greatest impact on our members. We employ strategies, including disease
management and complex case management, that are adjusted for implementation
in
our individual markets by a system of physician committees chaired by local
physician leaders. This process promotes physician participation and support,
both critical factors in the success of any clinical quality improvement
program.
We
have
implemented specialized information systems to support our medical quality
management activities. Information is drawn from our data warehouse, clinical
databases and our membership and claims processing system, to identify
opportunities to improve care and to track the outcomes of the interventions
implemented to achieve those improvements. Some examples of these intervention
programs include:
| · |
a
prenatal case management program aimed at helping women with high-risk
pregnancies deliver full-term, healthy
infants;
|
| · |
a
program to reduce the number of inappropriate emergency room visits;
and
|
| · |
a
disease management program to improve the ability of those with asthma
and
their families to control their disease and thereby reduce the need
for
emergency room visits and
hospitalizations.
|
We
provide reporting on a regular basis using our data warehouse. State and Health
Employer Data and Information Set, or HEDIS, reporting constitutes the core
of
the information base that drives our clinical quality performance efforts.
This
reporting is monitored by Plan Quality Improvement Committees and our corporate
medical management team.
In
an
effort to ensure the quality of our provider networks, we undertake to verify
the credentials and background of our providers using standards that are
supported by the National Committee for Quality Assurance.
Information
Technology
The
ability to access data and translate it into meaningful information is essential
to operating across a multi-state service area in a cost-effective manner.
Our
centralized information systems which are located in St. Louis, Missouri,
support our core processing functions under a set of integrated databases and
are designed to be both replicable and scalable to accommodate organic growth
and growth from acquisitions. We believe we have the ability to leverage the
platform we have developed for our existing states for configuration into new
states or health plan acquisitions.
Our
integrated approach helps to assure that consistent sources of claim and member
information are provided across all of our health plans. Our membership and
claims processing system is capable of expanding to support additional members
in an efficient manner as needed. We have a disaster recovery and business
resumption plan developed and implemented in conjunction with a third party.
This plan allows us complete access to the business resumption centers and
hot-site facilities provided by the plan.
Specialty
Services
Our
Specialty Services segment is a key component of our healthcare enterprise
and
complements our core Medicaid Managed Care business. The specialty services
diversify our revenue stream, provide higher quality health outcomes to our
membership and others, and assist in controlling costs. Our specialty services
are provided primarily through the following interrelated
businesses:
| · |
Behavioral
Health. Cenpatico
Behavioral Health manages behavioral healthcare for members via a
contracted network of providers. Cenpatico works with providers to
determine the best course of treatment for a given diagnosis and
helps
ensure members and their providers are aware of the full array of
services
available. Our networks feature a range of services so that patients
can
be treated at an appropriate level of care. We also run school-based
programs in Arizona that focus on students with special needs. We
acquired
Cenpatico in 2003.
|
| · |
Disease
Management. Our
disease management providers, AirLogix and Cardium Health, specialize
in
chronic respiratory disease management and cardiac disease management.
Through their specialization in respiratory management, AirLogix
uses
self-care therapies, in-home interaction and informatics processes
to
deliver highly effective clinical results, enhanced patient-provider
satisfaction and greater cost reductions in respiratory management.
We
acquired AirLogix in July 2005. Through a people centered,
multi-disciplinary and integrated approach, Cardium Health uses primary
health coaches, customized care plans, and disease-specific education
to
assist patients in achieving their health goals and deliver enhanced
patient-provider satisfaction and greater cost reductions in chronic
disease management. We acquired Cardium Health in May
2006.
|
| · |
Long-term
Care. Bridgeway
Health Solutions provides long-term care services to the elderly
and
people with disabilities on SSI that meet income and resources
requirements who are at risk of being or are institutionalized. Bridgeway
has members in the Maricopa, Yuma and La Paz counties of Arizona.
Bridgeway attempts to distinguish itself from other Medicaid and
Medicare
health plans through ongoing participation with community groups
to
address situations that might be barriers to quality care and independent
living. Bridgeway commenced operations in October
2006.
|
| · |
Managed
Vision. OptiCare
manages vision benefits for members via a contracted network of providers.
OptiCare works with providers to provide a variety of vision plan
designs
and helps ensure members and their providers are aware of the full
array
of products and services available. Our networks feature a range
of
products and services so that patients can be treated at an appropriate
level of care. We acquired the managed vision business of OptiCare
Health
Systems, Inc. in July 2006.
|
| · |
Nurse
Triage. NurseWise
provides a toll-free nurse triage line 24 hours per day, 7 days per
week,
52 weeks per year. Our members call one number and reach customer
service
representatives and bilingual nursing staff who provide health education,
triage advice and offer continuous access to health plan functions.
Additionally, our representatives verify eligibility, confirm primary
care
provider assignments and provide benefit and network referral coordination
for members and providers after business hours. Our staff can arrange
for
urgent pharmacy refills,
transportation and qualified behavioral health professionals for
crisis
stabilization assessments. Call volume is based on membership levels
and
seasonal variation. NurseWise commenced operations in
1998.
|
| · |
Pharmacy
Benefits Management. US
Script is a pharmacy benefits manager that administers pharmacy benefits
and processes pharmacy claims via its proprietary claims processing
software. US Script has developed and administers a contracted national
network of retail pharmacies. We acquired US Script in January
2006.
|
| · |
Treatment
Compliance. ScriptAssist
is a treatment compliance program that uses psychological-based tools
to
predict which patients are likely to be non-compliant regarding taking
their medications, and then to motivate those at-risk patients to
adhere
to their doctors’ advice. ScriptAssist
uses registered nurses to educate patients about the reasons for
the
medications they were prescribed, to provide accurate information
about
side effects and risks of such medications, and to keep the doctors
informed of the patients’ progress between visits. We acquired
ScriptAssist
in 2003.
|
Corporate
Compliance
Our
Corporate Ethics and Compliance Program was first established in 1998 and
provides methods by which we further enhance operations, safeguard against
fraud
and abuse, improve access to quality care and helps assure that our values
are
reflected in everything we do.
The
two
primary standards by which corporate compliance programs in the healthcare
industry are measured are the 1991 Federal Organizational Sentencing Guidelines
and the “Compliance Program Guidance” series issued by the Office of the
Inspector General, or OIG, of the Department of Health and Human Services.
Our
program contains each of the seven elements suggested by the Sentencing
Guidelines and the OIG guidance. These key components are:
| · |
written
standards of conduct;
|
| · |
designation
of a corporate compliance officer and compliance
committee;
|
| · |
effective
training and education;
|
| · |
effective
lines for reporting and
communication;
|
| · |
enforcement
of standards through disciplinary guidelines and
actions;
|
| · |
internal
monitoring and auditing; and
|
| · |
prompt
response to detected offenses and development of corrective action
plans.
|
Our
internal Corporate Compliance website, accessible by all employees, contains
our
Business Ethics and Conduct Policy, our Mission, Values and Philosophies and
Compliance Programs, a company-wide policy and procedure database and our
toll-free hotline to allow employees or other persons to report suspected
incidents of fraud, abuse or other violations. The audit committee and the
board
of directors review a full compliance report, including an incident log, on
a
quarterly basis.
Competition
We
continue to face varying and increasing levels of competition as we expand
in
our existing service areas or enter new markets as federal regulations require
at least two competitors in each service area. Healthcare reform proposals
may
cause a number of commercial managed care organizations to decide to enter
or
exit the Medicaid market.
In
our
business, our principal competitors for state contracts, members and providers
consist of the following types of organizations:
| · |
Medicaid
Managed Care Organizations focus
solely on providing healthcare services to Medicaid recipients. Many
of
these operate in one city or state and are owned by providers, primarily
hospitals.
|
| · |
National
and Regional Commercial Managed Care Organizations have
Medicaid members in addition to members in private commercial plans.
Some
of these organizations offer a range of specialty services including
pharmacy benefits management, behavioral health management, disease
management, and nurse triage call support
centers.
|
| · |
Primary
Care Case Management Programs are
programs established by the states through contracts with primary
care
providers. Under these programs, physicians provide primary care
services
to Medicaid recipients, as well as limited medical management oversight.
|
We
compete with other managed care organizations and specialty companies for state
contracts. In order to grant a contract, state governments consider many
factors. These factors include quality of care, financial requirements, an
ability to deliver services and establish provider networks and infrastructure.
In addition, our specialty companies also compete with other providers, such
as
disease management companies and pharmacy benefits managers for non-governmental
contracts.
We
also
compete to enroll new members and retain existing members. People who wish
to
enroll in a managed healthcare plan or to change healthcare plans typically
choose a plan based on the quality of care and services offered, ease of access
to services, a specific provider being part of the network and the availability
of supplemental benefits. In certain markets, where recipients select a
physician instead of a health plan, we are able to grow our membership by adding
new physicians to our provider base.
We
also
compete with other managed care organizations to enter into contracts with
physicians, physician groups and other providers. We believe the factors that
providers consider in deciding whether to contract with us include existing
and
potential member volume, reimbursement rates, medical management programs,
speed
of reimbursement and administrative service capabilities. See “Risk Factors —
Competition may limit our ability to increase penetration of the markets that
we
serve.”
Regulation
Our
healthcare and specialty operations are regulated at both state and federal
levels. Government regulation of the provision of healthcare products and
services is a changing area of law that varies from jurisdiction to
jurisdiction. Regulatory agencies generally have discretion to issue regulations
and interpret and enforce laws and rules. Changes in applicable laws and rules
also may occur periodically.
Our
regulated subsidiaries are licensed to operate as health maintenance
organizations and/or insurance companies in their respective states. In each
of
the jurisdictions in which we operate, we are regulated by the relevant health,
insurance and/or human services departments that oversee the activities of
managed care organizations providing or arranging to provide services to
Medicaid enrollees.
The
process for obtaining authorization to operate as a managed care organization
is
complex and requires demonstration to the regulators of the adequacy of the
health plan’s organizational structure, financial resources, utilization review,
quality assurance programs, complaint procedures, provider network adequacy
and
procedures for covering emergency medical conditions. Under both state managed
care organization statutes and state insurance laws, our health plan
subsidiaries must comply with minimum statutory capital requirements and other
financial requirements, such as deposit and reserve requirements. Insurance
regulations may also require prior state approval of acquisitions of other
managed care organizations’ businesses and the payment of dividends, as well as
notice for loans or the transfer of funds. Our subsidiaries are also subject
to
periodic reporting requirements. In addition, each health plan must meet
criteria to secure the approval of state regulatory authorities before
implementing operational changes, including the development of new product
offerings and, in some states, the expansion of service areas.
States
have adopted a number of regulations that may affect our business and results
of
operations. These regulations in certain states include:
| · |
premium
and maintenance taxes;
|
| · |
stringent
prompt-pay laws;
|
| · |
requirements
of National Provider Identifier numbers on claim
submittals;
|
| · |
disclosure
requirements regarding provider fee schedules and coding procedures;
and
|
| · |
programs
to monitor and supervise the activities and financial solvency of
provider
groups.
|
State
Contracts
In
order
to be a Medicaid Managed Care organization in each of the states in which we
operate, we must operate under a contract with the state’s Medicaid agency.
States generally use either a formal proposal process, reviewing a number of
bidders, or award individual contracts to qualified applicants that apply for
entry to the program. We receive monthly payments based on specified capitation
rates determined on an actuarial basis. These rates differ by membership
category and by state depending on the specific benefits and policies adopted
by
each state.
Our
contracts with the states and regulatory provisions applicable to us generally
set forth the requirements for operating in the Medicaid sector, including
provisions relating to:
| · |
eligibility,
enrollment and disenrollment
processes;
|
| · |
covered
services;
|
| · |
eligible
providers;
|
| · |
subcontractors;
|
| · |
record-keeping
and record retention;
|
| · |
periodic
financial and informational
reporting;
|
| · |
quality
assurance;
|
| · |
health
education and wellness and prevention
programs;
|
| · |
timeliness
of claims payment;
|
| · |
financial
standards;
|
| · |
safeguarding
of member information;
|
| · |
fraud
and abuse detection and reporting;
|
| · |
grievance
procedures; and
|
| · |
organization
and administrative systems.
|
A
health
plan’s compliance with these requirements is subject to monitoring by state
regulators and by CMS. A health plan is also subject to periodic comprehensive
quality assurance evaluations by a third-party reviewing organization and
generally by the insurance department of the jurisdiction that licenses the
health plan. A health plan must also submit reports to various regulatory
agencies, including quarterly and annual statutory financial statements and
utilization reports.
The
table
below sets forth the term of our state contracts and provides details regarding
related renewal or extension and termination provisions as of December 31,
2006.
|
State
Contract
|
Expiration
Date
|
Renewal
or Extension by the
State
|
Termination
by the State
|
|
Arizona
— Behavioral Health
|
June
30, 2008
|
May
be extended for up to two additional years.
|
May
be terminated for convenience or an event of default.
|
|
Arizona
— Long-term Care
|
September
30, 2009
|
May
be extended for up to two additional years.
|
May
be terminated for convenience or an event of default.
|
|
Georgia
|
June
30, 2007
|
Renewable
for five additional one-year terms.
|
May
be terminated for an event of default or significant changes in
circumstances.
|
|
Indiana
|
December
31, 2010
|
May
be extended for up to two additional years.
|
May
be terminated for convenience or an event of default.
|
|
Kansas
—Behavioral Health
|
June
30, 2008
|
May
be extended with four one-year renewal options.
|
May
be terminated for cause, or without cause for lack of
funding.
|
|
Missouri
|
June
30, 2007
|
Contract
rights sold effective February 1, 2007.
|
|
|
New
Jersey
|
June
30, 2007
|
Renewable
annually for successive
12-month
periods.
|
May
be terminated for convenience or an event of default.
|
|
Ohio
|
June
30, 2007
|
Renewable
annually for successive
12-month
periods.
|
May
be terminated for an event of default.
|
|
Ohio
— ABD
|
June
30, 2007
|
Renewable
annually for successive
12-month
periods.
|
May
be terminated for an event of default.
|
|
Texas
|
August
31, 2008
|
May
be extended for up to six additional years.
|
May
be terminated for convenience, an event of default or lack of federal
funding.
|
|
Texas
—Exclusive Provider Organization
|
August
31, 2007
|
May
be extended for up to three additional years.
|
May
be terminated upon any event of default or in the event of lack of
state
or federal funding.
|
|
Wisconsin
|
December
31, 2007
|
Renewable
through the states’ periodic recertification process.
|
May
be terminated if a change in state or federal laws, rules or regulations
materially affects either party’s right or responsibilities or for an
event of default or lack of funding
|
|
Wisconsin
— Network Health Plan Subcontract
|
December
31, 2011
|
Renews
automatically for successive five-year terms.
|
May
be terminated upon two-years notice prior to the end of the then
current
term or if a change in state or federal laws, rules or regulations
materially affects either party’s rights or responsibilities under the
contract, or if Network Health Plan’s contract with the State is
terminated.
|
|
Wisconsin
SSI
|
December
31, 2007
|
Renewable
through the states’ periodic recertification process.
|
May
be terminated for convenience, if a change in state or federal laws,
rules
or regulations materially affects either party’s rights or
responsibilities, or an event of default or lack of funding.
|
HIPAA. In
1996,
Congress enacted the Health Insurance Portability and Accountability Act of
1996, or HIPAA. The Act is designed to improve the portability and continuity
of
health insurance coverage and simplify the administration of health insurance
claims. Among the main requirements of HIPAA are standards for the processing
of
health insurance claims and related transactions.
The
regulation’s requirements apply to transactions conducted using “electronic
media.” Since “electronic media” is defined broadly to include “transmissions
that are physically moved from one location to another using magnetic tape,
disk
or compact disk media,” many communications are considered to be electronically
transmitted. Under the HIPAA regulations, health plans are required to have
the
capacity to accept and send all covered transactions in a standardized
electronic format. Penalties can be imposed for failure to comply with these
requirements.
HIPAA
regulations also protect the privacy of medical records and other personal
health information maintained and used by healthcare providers, health plans
and
healthcare clearinghouses. We have implemented processes, policies and
procedures to comply with the HIPAA privacy regulations, including education
and
training for employees. In addition, the corporate privacy officer and health
plan privacy officials serve as resources to employees to address any questions
or concerns they may have. Among numerous other requirements, the privacy
regulations:
| · |
limit
certain uses and disclosures of private health information, and require
patient authorizations for such uses and disclosures of private health
information;
|
| · |
guarantee
patients rights to access their medical records and to know who else
has
accessed them;
|
| · |
limit
most disclosure of health information to the minimum needed for the
intended purpose;
|
| · |
establish
procedures to ensure the protection of private health
information;
|
| · |
authorize
access to records by researchers and others;
and
|
| · |
impose
criminal and civil sanctions for improper uses or disclosures of
health
information.
|
The
preemption provisions of HIPAA provide that the federal standards will not
preempt state laws that are more stringent than the related federal
requirements. In addition, the Secretary of HHS may grant exceptions allowing
state laws to prevail if one or more of a number of conditions are met,
including but not limited to the following:
| · |
the
state law is necessary to prevent fraud and abuse related to the
provision
of and payment for healthcare;
|
| · |
the
state law is necessary to ensure appropriate state regulation of
insurance
and health plans;
|
| · |
the
state law is necessary for state reporting on healthcare delivery
or
costs; or
|
| · |
the
state law addresses controlled
substances.
|
In
2003,
HHS published final regulations relating to the security of electronic
individually identifiable health information. Compliance was required by April
2005. These rules require healthcare providers, health plans and healthcare
clearinghouses to implement administrative, physical and technical safeguards
to
ensure the privacy and confidentiality of such information when it is
electronically stored, maintained or transmitted through such devices as user
authentication mechanisms and system activity audits. In addition, numerous
states have adopted personal data security laws that provide for, among other
things, private rights of action for breaches of data security and mandatory
notification to persons whose identifiable information is obtained without
authorization.
Patients’
Rights Legislation
The
United States Senate and House of Representatives passed different versions
of
patients’ rights legislation in June and August 2001, respectively. Both
versions included provisions that specifically apply protections to participants
in federal healthcare programs, including Medicaid beneficiaries. Although
no
such federal legislation has been enacted, patients’ rights legislation is
frequently proposed in Congress. If enacted, this type of legislation could
expand our potential exposure to lawsuits and increase our regulatory compliance
costs. Depending on the final form of any patients’ rights legislation, such
legislation could, among other things, expose us to liability for economic
and
punitive damages for making determinations that deny benefits or delay
beneficiaries’ receipt of benefits as a result of our medical necessity or other
coverage determinations. We cannot predict when or whether patients’ rights
legislation will be enacted into law or, if enacted, what final form such
legislation might take.
Other
Fraud and Abuse Laws
Investigating
and prosecuting healthcare fraud and abuse became a top priority for law
enforcement entities in the last decade. The focus of these efforts has been
directed at participants in public government healthcare programs such as
Medicaid. The laws and regulations relating to Medicaid fraud and abuse and
the
contractual requirements applicable to health plans participating in these
programs are complex and changing and may require substantial
resources.
Properties
Our
corporate office headquarters building is located in St. Louis, Missouri. The
real estate we own surrounding this building is adequate to accommodate office
expansion needs to support future company growth. Effective December 30, 2005,
we executed an agreement with the City of Clayton, Missouri, a suburb of St.
Louis, for the redevelopment of certain properties surrounding our corporate
offices. Our primary purpose for the agreement is to accommodate office
expansion needs for future company growth. The total scope of the project
includes building two new office towers and street-level retail space. We plan
to occupy a portion of those towers. The total expected cost of the project
is
approximately $210 million. It is not our intent to serve as developer of the
project or finance the project construction costs. We operate claims processing
facilities in Missouri and Montana. We lease space in the states where our
health plans and specialty companies operate. We are required by various
insurance and regulatory authorities to have offices in the service areas where
we provide benefits. We believe our current facilities are adequate to meet
our
operational needs for the foreseeable future.
Legal
Proceedings
Two
class
action lawsuits were filed against us and certain of our officers and directors
in the United States District Court for the Eastern District of Missouri, one
in
July 2006, or the July Class Action Lawsuit, and one in August 2006, or the
August Class Action Lawsuit. The July Class Action Lawsuit and the August Class
Action Lawsuit were consolidated on November 2, 2006 and an amended consolidated
complaint was filed in the United States District Court for the Eastern District
of Missouri on January 17, 2007, which we refer to as the Consolidated Class
Action Lawsuit. The Consolidated Class Action Lawsuit alleges, on behalf of
purchasers of our common stock from April 25, 2006 through July 17, 2006, that
we and certain of our officers and directors violated federal securities laws
by
issuing a series of materially false statements prior to the announcement of
our
fiscal 2006 second quarter results. According to the Consolidated Class Action
Lawsuit, these allegedly materially false statements had the effect of
artificially inflating the price of our common stock, which subsequently dropped
after the issuance of a press release announcing our preliminary fiscal 2006
second quarter earnings and revised guidance. We believe the case is without
merit and have filed a motion to dismiss the Consolidated Class Action
Lawsuit.
Additionally,
in August 2006, a separate derivative action was filed on behalf of Centene
Corporation against us and certain of our officers and directors in the United
States District Court for the Eastern District of Missouri. Plaintiff purports
to bring suit derivatively on behalf of the Company against the Company’s
directors for breach of fiduciary duties, gross mismanagement and waste of
corporate assets by reason of the directors’ alleged failure to correct the
misstatements alleged in the Consolidated
Class Action Lawsuits discussed above. The derivative complaint largely repeats
the allegations in the Consolidated Class Action Lawsuits. Based on discussions
that have been held with plaintiff ’s counsel, it is our understanding that
plaintiff does not intend to pursue this action until the Consolidated Class
Action Lawsuits proceed past the dismissal stage. Although this matter is in
its
early stages and no precise prediction of its outcome can be made, we believe
the case is without merit and plan to vigorously defend against this
lawsuit.
In
addition, we routinely are subjected to legal proceedings in the normal course
of business. While the ultimate resolution of such matters is uncertain, we
do
not expect the results of any of these matters discussed above individually,
or
in the aggregate, to have a material effect on our financial position or results
of operations.
Employees
As
of
December 31, 2006, we had approximately 2,600 employees. Our employees are
not
represented by a union. We believe our relationships with our employees are
good.
We
have a
revolving credit agreement with several lending institutions, for which LaSalle
Bank National Association serves as administrative agent and co-lead arranger,
Wachovia Capital Markets, LLC serves as co-lead arranger, and Wachovia Bank,
National Association serves as syndication agent. Our obligations under the
credit agreement are unsecured and are not guaranteed by any of our
subsidiaries. The total amount available under the credit agreement is $300.0
million, including a sub-facility for letters of credit in an aggregate amount
of up to $75.0 million. Borrowings under the credit agreement bear interest
based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. There is
a
commitment fee on the unused portion of the agreement that ranges from 0.15%
to
0.275% depending on the total debt to EBITDA ratio. The credit agreement
contains non-financial and financial covenants, including requirements of
minimum fixed charge coverage ratios, maximum debt to EBITDA ratios and minimum
net worth. The credit agreement will expire in September 2011. As of March
31,
2007, we had no borrowings outstanding under the credit agreement and $24.5
million in letters of credit outstanding, leaving availability of $275.5
million. As of March 31, 2007, we were in compliance with all
covenants.
In
May
2006, one of our subsidiaries executed a three-year $25.0 million Revolving
Loan
Agreement which is non-recourse to Centene. Borrowings under the agreement
bear
interest based upon LIBOR rates plus 1.50%. Subject to the terms and conditions
of the agreement, the proceeds of the Revolving Loan may only be used for the
acquisition of certain properties contiguous to our corporate headquarters
as
part of our redevelopment agreement with the city of Clayton, Missouri. As
of
March 31, 2007, our subsidiary had $8.4 million in borrowings outstanding,
which
bore interest at 6.8%. This subsidiary also had mortgage loans of $12.3 million
outstanding, which are non-recourse to Centene, but are secured by our current
headquarters building and one of the additional properties which would be part
of the redevelopment. These mortgage loans mature on January 1, 2010 and bear
interest at 7.5%.
Purpose
of the Exchange Offer
Simultaneously
with the sale of the outstanding notes, we entered into a registration rights
agreement with the initial purchasers of the outstanding notes — Banc of America
Securities LLC, Wachovia Capital Markets, LLC, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, ABN AMRO Incorporated, Allen & Company LLC, and
Goldman, Sachs & Co. Under the registration rights agreement, we agreed,
among other things, to:
| · |
file
a registration statement relating to a registered exchange offer
for the
outstanding notes with the SEC no later than 90 days after the date
of the
issuance of the outstanding notes;
|
| · |
use
our commercially reasonable efforts to cause the SEC to declare the
registration statement effective under the Securities Act no later
than
180 days after the date of the issuance of the outstanding notes;
and
|
| · |
commence
and use our commercially reasonable efforts to consummate the exchange
offer no later than the 45th business day after the registration
statement
was declared effective by the SEC.
|
We
are
conducting the exchange offer to satisfy our obligations under the registration
rights agreement. If
we
fail to meet certain specified deadlines under the registration rights
agreement, we will be obligated to pay liquidated damages to the holders of
the
outstanding notes. A copy of the registration rights agreement has been filed
with the SEC
as
Exhibit 10.1 to our Current Report on Form 8-K dated March 23, 2007,
and is
incorporated by reference as an exhibit to the registration statement of which
this prospectus is a part.
The
form
and terms of the exchange notes are the same as the form and terms of the
outstanding notes, except that the exchange notes:
| · |
will
be registered under the Securities Act;
|
| · |
will
not bear restrictive legends restricting their transfer under the
Securities Act;
|
| · |
will
not be entitled to the registration rights that apply to the outstanding
notes; and
|
| · |
will
not contain provisions relating to liquidated damages in connection
with
the outstanding notes under circumstances related to the timing of
the
exchange offer.
|
The
exchange offer is not extended to original note holders in any jurisdiction
where the exchange offer does not comply with the securities or blue sky laws
of
that jurisdiction.
Terms
of the Exchange Offer
We
are
offering to exchange up to $175,000,000 aggregate principal amount of exchange
notes for a like aggregate principal amount of outstanding notes. The
outstanding notes must be tendered properly in accordance with the conditions
set forth in this prospectus and the accompanying letter of transmittal on
or
prior to the expiration date and not withdrawn as permitted below. In exchange
for outstanding notes properly tendered and accepted, we will issue a like
total
principal amount of up to $175,000,000 in exchange notes. This prospectus,
together with the letter of transmittal, is first being sent on or
about 2007, to all holders
of outstanding notes known to us. Our obligation to accept outstanding notes
for
exchange in the exchange offer is subject to the conditions described below
under the heading “—Conditions to the Exchange Offer.” The exchange offer is not
conditioned upon holders tendering a minimum principal amount of outstanding
notes. As of the date of this prospectus, $175,000,000 aggregate principal
amount of outstanding notes are outstanding.
Outstanding
notes tendered in the exchange offer must be in denominations of the principal
amount of $1,000 and any integral multiple of $1,000 in excess
thereof.
Holders
of the outstanding notes do not have any appraisal or dissenters’ rights in
connection with the exchange offer. If you do not tender your outstanding notes
or if you tender outstanding notes that we do not accept, your outstanding
notes
will remain outstanding. Any outstanding notes will be entitled to the benefits
of the indenture but will not be entitled to any further registration rights
under the registration rights agreement, except under limited circumstances.
Existing transfer restrictions would continue to apply to such outstanding
notes. See “Risk Factors—There are significant consequences if you fail to
exchange your outstanding notes” for more information regarding outstanding
notes outstanding after the exchange offer.
After
the
expiration date, we will return to the holder any tendered outstanding notes
that we did not accept for exchange.
None
of us, our board of directors or our management recommends that you tender
or
not tender outstanding notes in the exchange offer or has authorized anyone
to
make any recommendation. You must decide whether to tender in the exchange
offer
and, if you decide to tender, the aggregate amount of outstanding notes to
tender.
The
expiration date is , New York City
time, on ,2007,
or
such later date and time to which we extend the exchange offer.
We
have
the right, in accordance with applicable law, at any time:
| · |
to
delay the acceptance of the outstanding
notes;
|
| · |
to
terminate the exchange offer and not accept any outstanding notes
for
exchange if we determine that any of the conditions to the exchange
offer
have not occurred or have not been
satisfied;
|
| · |
to
extend the expiration date of the exchange offer and retain all
outstanding notes tendered in the exchange offer other than those
notes
properly withdrawn; and
|
| · |
to
waive any condition or amend the terms of the exchange offer in any
manner.
|
If
we
materially amend the exchange offer, we will as promptly as practicable
distribute a prospectus supplement to the holders of the outstanding notes
disclosing the change and extend the exchange offer.
If
we
exercise any of the rights listed above, we will as promptly as practicable
give
oral or written notice of the action to the exchange agent and will make a
public announcement of such action. In the case of an extension, an announcement
will be made no later than 9:00 a.m., New York City time on the next business
day after the previously scheduled expiration date.
Acceptance
of Outstanding notes for Exchange and Issuance of Outstanding notes
As
promptly as practicable after the expiration date, we will accept all
outstanding notes validly tendered and not withdrawn, and we will issue exchange
notes registered under the Securities Act to the exchange agent. The exchange
agent might not deliver the exchange notes to all tendering holders at the
same
time. The timing of delivery depends upon when the exchange agent receives
and
processes the required documents.
We
will
be deemed to have exchanged outstanding notes validly tendered and not withdrawn
when we give oral or written notice to the exchange agent of our acceptance
of
the tendered outstanding notes, with written confirmation of any oral notice
to
be given promptly thereafter. The exchange agent is our agent for receiving
tenders of outstanding notes, letters of transmittal and related
documents.
In
tendering outstanding notes, you must warrant in the letter of transmittal
or in
an agent’s message (described below) that:
| · |
you
have full power and authority to tender, exchange, sell, assign and
transfer outstanding notes;
|
| · |
we
will acquire good, marketable and unencumbered title to the tendered
outstanding notes, free and clear of all liens, restrictions, charges
and
other encumbrances; and
|
| · |
the
outstanding notes tendered for exchange are not subject to any adverse
claims or proxies.
|
You
also
must warrant and agree that you will, upon request, execute and deliver any
additional documents requested by us or the exchange agent to complete the
exchange, sale, assignment and transfer of the outstanding notes.
Procedures
for Tendering Outstanding notes
Valid
Tender
When
the
holder of outstanding notes tenders, and we, accept outstanding notes for
exchange, a binding agreement between us, on the one hand, and the tendering
holder, on the other hand, is created, subject to the terms and conditions
set
forth in this prospectus and the accompanying letter of transmittal. Except
as
set forth below, a holder of outstanding notes who wishes to tender outstanding
notes for exchange must, on or prior to the expiration date:
| · |
transmit
a properly completed and duly executed letter of transmittal, including
all other documents required by such letter of transmittal (including
outstanding notes), to the exchange agent, The Bank of New York Trust
Company, N.A., at the address set forth below under the heading “—Exchange
Agent;”
|
| · |
if
outstanding notes are tendered pursuant to the book-entry procedures
set
forth below, the tendering holder must deliver a completed and duly
executed letter of transmittal or arrange with the Depository Trust
Company, or DTC, to cause an agent’s message to be transmitted with the
required information (including a book-entry confirmation), to the
exchange agent at the address set forth below under the heading “—Exchange
Agent,” or
|
| · |
comply
with the provisions set forth below under “—Guaranteed
Delivery.”
|
In
addition, on or prior to the expiration date:
| · |
the
exchange agent must receive the certificates for the outstanding
notes and
the letter of transmittal;
|
| · |
the
exchange agent must receive a timely confirmation of the book-entry
transfer of the outstanding notes being tendered into the exchange
agent’s
account at DTC, along with the letter of transmittal or an agent’s
message; or
|
| · |
the
holder must comply with the guaranteed delivery procedures described
below.
|
The
letter of transmittal or agent’s message may be delivered by mail, facsimile,
hand delivery or overnight carrier, to the exchange agent.
The
term
“agent’s message” means a message transmitted to the exchange agent by DTC which
states that DTC has received an express acknowledgment that the tendering holder
agrees to be bound by the letter of transmittal and that we may enforce the
letter of transmittal against such holder.
If
you
beneficially own outstanding notes and those notes are registered in the name
of
a broker, dealer, commercial bank, trust company or other nominee or custodian
and you wish to tender your outstanding notes in the exchange offer, you should
contact the registered holder as soon as possible and instruct it to tender
the
outstanding notes on your behalf and comply with the instructions set forth
in
this prospectus and the letter of transmittal.
If
you
tender fewer than all of your outstanding notes, you should fill in the amount
of notes tendered in the appropriate box on the letter of transmittal. If you
do
not indicate the amount tendered in the appropriate box, we will assume you
are
tendering all outstanding notes that you hold.
The
method of delivery of the certificates for the outstanding notes, the letter
of
transmittal and all other required documents is at the election and sole risk
of
the holders. If delivery is by mail, we recommend registered mail with return
receipt requested, properly insured, or overnight delivery service. In all
cases, you should allow sufficient time to assure timely delivery. No letters
of
transmittal or outstanding notes should be sent directly to us.
Delivery
is complete when the exchange agent actually
receives the items to be delivered. Delivery of documents to DTC in accordance
with DTC’s procedures does not constitute delivery to the exchange
agent.
Signature
Guarantees
Signatures
on a letter of transmittal or a notice of withdrawal, as the case may be, must
be guaranteed unless the outstanding notes surrendered for exchange are
tendered:
| · |
by
a registered holder of outstanding notes who has not completed the
box
entitled “Special Issuance Instructions” or “Special Delivery
Instructions” on the letter of transmittal; or
|
| · |
for
the account of an eligible
institution.
|
An
“eligible institution” is a firm or other entity which is identified as an
“Eligible Guarantor Institution” in Rule 17Ad-15 under the Exchange Act,
including:
| · |
a
bank;
|
| · |
a
broker, dealer, municipal securities broker or dealer or government
securities broker or dealer;
|
| · |
a
credit union;
|
| · |
a
national securities exchange, registered securities association or
clearing agency; or
|
| · |
a
savings association.
|
If
signatures on a letter of transmittal or notice of withdrawal are required
to be
guaranteed, the guarantor must be an eligible institution.
If
outstanding notes are registered in the name of a person other than the signer
of the letter of transmittal, the outstanding notes surrendered for exchange
must be endorsed or accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by us in our sole
discretion, duly executed by the registered holder with the holder’s signature
guaranteed by an eligible institution.
Book-Entry
Transfers
For
tenders by book-entry transfer of outstanding notes cleared through DTC, the
exchange agent will make a request to establish an account at DTC for purposes
of the exchange offer. Any financial institution that is a DTC participant
may
make book-entry delivery of outstanding notes by causing DTC to transfer the
outstanding notes into the exchange agent’s account at DTC in accordance with
DTC’s procedures for transfer. The exchange agent and DTC have confirmed that
any financial institution that is a participant in DTC may use the Automated
Tender Offer Program, or ATOP, procedures to tender outstanding notes.
Accordingly, any participant in DTC may make book-entry delivery of outstanding
notes by causing DTC to transfer those outstanding notes into the exchange
agent’s account in accordance with its ATOP procedures for
transfer.
Notwithstanding
the ability of holders of outstanding notes to effect delivery of outstanding
notes through book-entry transfer at DTC, either:
| · |
the
letter of transmittal or a facsimile thereof, or an agent’s message in
lieu of the letter of transmittal, with any required signature guarantees
and any other required documents must be transmitted to and received
by
the exchange agent prior to the expiration date at the address given
below
under “—Exchange Agent;” or
|
| · |
the
guaranteed delivery procedures described below must be complied
with.
|
Guaranteed
Delivery
If
a
holder wants to tender outstanding notes in the exchange offer and (1) the
certificates for the outstanding notes are not immediately available or all
required documents are unlikely to reach the exchange agent on or prior to
the
expiration date, or (2) a book-entry transfer cannot be completed on a timely
basis, the outstanding notes may be tendered if the holder complies with the
following guaranteed delivery procedures:
| · |
the
tender is made by or through an eligible
institution;
|
| · |
the
eligible institution delivers a properly completed and duly executed
notice of guaranteed delivery, substantially in the form provided,
to the
exchange agent on or prior to the expiration
date:
|
| ─ |
setting
forth the name and address of the holder of the outstanding notes
being
tendered and the amount of the outstanding notes being tendered;
|
| ─ |
stating
that the tender is being made; and
|
| ─ |
guaranteeing
that, within three (3) New York Stock Exchange trading days after
the date
of execution of the notice of guaranteed delivery, the certificates
for
all physically tendered outstanding notes, in proper form for transfer,
or
a book-entry confirmation, as the case may be, together with a properly
completed and duly executed letter of transmittal, or an agent’s message,
with any required signature guarantees and any other documents required
by
the letter of transmittal, will be deposited by the eligible institution
with the exchange agent; and
|
| · |
the
exchange agent receives the certificates for the outstanding notes,
or a
confirmation of book-entry transfer, and a properly completed and
duly
executed letter of transmittal, or an agent’s message in lieu thereof,
with any required signature guarantees and any other documents required
by
the letter of transmittal within three (3) New York Stock Exchange
trading
days after the notice of guaranteed delivery is executed for all
such
tendered outstanding notes.
|
You
may
deliver the notice of guaranteed delivery by hand, facsimile, mail or overnight
delivery to the exchange agent and you must include a guarantee by an eligible
institution in the form described above in such notice.
Our
acceptance of properly tendered outstanding notes is a binding agreement between
the tendering holder and us upon the terms and subject to the conditions of
the
exchange offer.
Determination
of Validity
We,
in
our sole discretion, will resolve all questions regarding the form of documents,
validity, eligibility, including time of receipt, and acceptance for exchange
of
any tendered outstanding notes. Our determination of these questions as well
as
our interpretation of the terms and conditions of the exchange offer, including
the letter of transmittal, will be final and binding on all parties. A tender
of
outstanding notes is invalid until all defects and irregularities have been
cured or waived. Holders must cure any defects and irregularities in connection
with tenders of outstanding notes for exchange within such reasonable period
of
time as we will determine, unless we waive the defects or irregularities.
Neither us, any of our affiliates or assigns, the exchange agent nor any other
person is under any obligation to give notice of any defects or irregularities
in tenders nor will they be liable for failing to give any such
notice.
We
reserve the absolute right, in our sole and absolute discretion:
| · |
to
reject any tenders determined to be in improper form or
unlawful;
|
| · |
to
waive any of the conditions of the exchange offer;
and
|
| · |
to
waive any condition or irregularity in the tender of outstanding
notes by
any holder, whether or not we waive similar conditions or irregularities
in the case of other holders.
|
If
any
letter of transmittal, endorsement, bond power, power of attorney, or any other
document required by the letter of transmittal is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, that person must
indicate such capacity when signing. In addition, unless waived by us, the
person must submit proper evidence satisfactory to us, in our sole discretion,
of his or her authority to so act.
Resales
of Exchange Notes
Based
on
interpretive letters issued by the SEC staff to third parties in transactions
similar to the exchange offer, we believe that a holder of exchange notes,
other
than a broker-dealer, may offer exchange notes for resale, resell and otherwise
transfer the exchange notes without delivering a prospectus to prospective
purchasers, if the holder acquired the exchange notes in the ordinary course
of
business, has no intention of engaging in a “distribution” (as defined under the
Securities Act) of the exchange notes and is not an “affiliate” (as defined
under the Securities Act) of Centene. We will not seek our own interpretive
letter. As a result, we cannot assure you that the staff will take the same
position on this exchange offer as it did in interpretive letters to other
parties in similar transactions.
By
tendering outstanding notes, the holder, other than participating
broker-dealers, as defined below, of those outstanding notes will represent
to
us that, among other things:
| · |
the
exchange notes acquired in the exchange offer are being obtained
in the
ordinary course of business of the person receiving the exchange
notes,
whether or not that person is the
holder;
|
| · |
neither
the holder nor any other person receiving the exchange notes is engaged
in, intends to engage in or has an arrangement or understanding with
any
person to participate in a “distribution” (as defined under the Securities
Act) of the exchange notes; and
|
| · |
neither
the holder nor any other person receiving the exchange notes is an
“affiliate” (as defined under the Securities Act) of
Centene.
|
If
any
holder or any such other person is an “affiliate” of Centene or is engaged in,
intends to engage in or has an arrangement or understanding with any person
to
participate in a “distribution” of the exchange notes, such holder or other
person:
| · |
may
not rely on the applicable interpretations of the staff of the SEC
referred to above; and
|
| · |
must
comply with the registration and prospectus delivery requirements
of the
Securities Act in connection with any resale
transaction.
|
Each
broker-dealer that receives exchange notes for its own account in exchange
for
outstanding notes must represent that the outstanding notes to be exchanged
for
the exchange notes were acquired by it as a result of market-making activities
or other trading activities and acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any offer
to
resell, resale or other retransfer of the exchange notes pursuant to the
exchange offer. Any such broker-dealer is referred to as a participating
broker-dealer. However, by so acknowledging and by delivering a prospectus,
the
participating broker-dealer will not be deemed to admit that it is an
“underwriter” (as defined under the Securities Act). If a broker-dealer acquired
outstanding notes as a result of market-making or other trading activities,
it
may use this prospectus, as amended or supplemented, in connection with offers
to resell, resales or retransfers of exchange notes received in exchange for
the
outstanding notes pursuant to the exchange offer. We have agreed that, during
the period ending 180 days after the consummation of the exchange offer, subject
to extension in limited circumstances, we will use all commercially reasonable
efforts to keep the exchange offer registration statement effective and make
this prospectus available to any broker-dealer for use in connection with any
such resale. See “Plan of Distribution” for a discussion of the exchange and
resale obligations of broker-dealers in connection with the exchange
offer.
Withdrawal
Rights
You
can
withdraw tenders of outstanding notes at any time prior to ,
New
York City time, on the expiration date.
For
a
withdrawal to be effective, you must deliver a written notice of withdrawal
to
the exchange agent. The notice of withdrawal must:
| · |
specify
the name of the person tendering the outstanding notes to be
withdrawn;
|
| · |
identify
the outstanding notes to be withdrawn, including the total principal
amount of outstanding notes to be
withdrawn;
|