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| CNU > SEC Filings for CNU > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
On January 1, 2006, the Medicare Prescription Drug Plan created by the
Medicare Modernization Act became effective. As a result, our HMO affiliates
have established or expanded prescription drug benefit plans for their Medicare
Advantage members. Under the terms of our risk arrangements, we are financially
responsible for a substantial portion of the cost of the prescription drugs our
patients receive, and, in exchange, our HMO affiliates have agreed to provide us
with an additional per member capitated fee related to prescription drug
coverage. However, there can be no assurance that the additional fee that we
receive will be sufficient to reimburse us for the additional costs that we may
incur under the Medicare Prescription Drug Plan.
In addition, the premiums our HMO affiliates receive from CMS for their
Medicare Prescription Drug Plans is subject to periodic adjustment, positive or
negative, based upon the application of risk corridors that compare their plans'
revenues targeted in their bids to actual prescription drug costs. Variances
exceeding certain thresholds may result in CMS making additional payments to the
HMOs or require the HMOs to refund to CMS a portion of the payments they
received. Our contracted HMO affiliates estimate and periodically adjust premium
revenues related to the risk corridor payment adjustment, and a portion of the
HMO's estimated premium revenue adjustment is allocated to us. As a result, the
revenues recognized under our risk arrangements with our HMO affiliates are net
of the portion of the estimated risk corridor adjustment allocated to us. The
portion of any such risk corridor adjustment that the HMOs allocate to us may
not directly correlate to the historical utilization patterns of our patients or
the costs that we may incur in future periods. Our HMO affiliates allocated to
us adjustments related to their risk corridor payments which had the effect of
reducing our operating income by approximately $0.5 million and $1.1 million,
respectively, during the three-month periods ended March 31, 2009 and 2008, and
$1.5 million and $2.8 million, respectively, during the nine-month periods ended
March 31, 2009 and 2008.
The Medicare Prescription Drug Plan has also been subject to significant
public criticism and controversy, and members of Congress have discussed
possible changes to the program as well as ways to reduce the program's cost to
the federal government. We cannot predict what impact, if any, these
developments may have on the Medicare Prescription Drug Plan or on our future
financial results.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to the
consolidated financial statements included in our Annual Report on Form 10-K for
Fiscal 2008. Included within these policies are certain policies which contain
critical accounting estimates and, therefore, have been deemed to be "critical
accounting policies." Critical accounting estimates are those which require
management to make assumptions about matters that were uncertain at the time the
estimate was made and for which the use of different estimates, which reasonably
could have been used, or changes in the accounting estimates that are reasonably
likely to occur from period to period, could have a material impact on the
presentation of our financial condition, changes in financial condition or
results of operations.
We base our estimates and assumptions on historical experience, knowledge of
current events and anticipated future events, and we continuously evaluate and
update our estimates and assumptions. However, our estimates and assumptions may
ultimately prove to be incorrect or incomplete and our actual results may differ
materially. We believe the following critical accounting policies involve the
most significant judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition
Under our risk contracts with HMOs, we receive a percentage of premium or
other capitated fee for each patient that chooses one of our physicians as their
primary care physician. Revenue under these agreements is generally recorded in
the period we assume responsibility to provide services at the rates then in
effect as determined by the respective contract. As part of the Medicare
Advantage program, CMS periodically recomputes the premiums to be paid to the
HMOs based on updated health status of participants and updated demographic
factors. We record any adjustments to this revenue at the time that the
information necessary to make the determination of the adjustment is received
from the HMO.
Under our risk agreements, we assume responsibility for the cost of all
medical services provided to the patient, even those we do not provide directly,
in exchange for a percentage of premium or other capitated fee. To the extent
that patients require more frequent or expensive care, our revenue under a
contract may be insufficient to cover the costs of care provided. When it is
probable that expected future health care costs and maintenance costs under a
contract or group of existing contracts will exceed anticipated capitated
revenue on those contracts, we recognize losses on our prepaid health care
services with HMOs. No contracts were considered loss contracts at March 31,
2009 because we have the right to terminate unprofitable physicians and close
unprofitable centers under our managed care contracts.
Under our limited risk and non-risk contracts with HMOs, we receive a
capitation fee based on the number of patients for which we are providing
services on a monthly basis. The capitation fee is recorded as revenue in the
period in which services are provided as determined by the respective contract.
Payments under both our risk contracts and our non-risk contracts (for both
the Medicare Advantage program as well as Medicaid) are also subject to
reconciliation based upon historical patient enrollment data. We record any
adjustments to this revenue at the time that the information necessary to make
the determination of the adjustment is received from the HMO or the applicable
governmental body.
Medical Claims Expense Recognition
The cost of health care services provided or contracted for is accrued in the
period in which the services are provided. This cost includes our estimate of
the related liability for medical claims incurred in the period but not yet
reported, or IBNR. IBNR represents a material portion of our medical claims
liability which is presented in the balance sheet net of amounts due from HMOs.
Changes in this estimate can materially affect, either favorably or unfavorably,
our results of operations and overall financial position.
We develop our estimate of IBNR primarily based on historical claims incurred
per member per month. We adjust our estimate if we have unusually high or low
utilization or if benefit changes provided under the HMO plans are expected to
significantly increase or reduce our claims exposure. We also adjust our
estimate for differences between the estimated claims expense recorded in prior
months to actual claims expense as claims are paid by the HMO and reported to
us. We use an actuarial analysis as an additional tool to further corroborate
our estimate of IBNR.
Based on our analysis, as of March 31, 2009, we recorded a liability of
approximately $22.5 million for IBNR. The liability for IBNR decreased by
$1.4 million or 5.7% to $22.5 million as of March 31, 2009 from $23.9 million as
of June 30, 2008 primarily due to the timing of claims paid by our HMO
affiliates and a decrease in patients under risk arrangements. The liability for
IBNR as of March 31, 2008 of $23.4 million was relatively unchanged from the
liability for IBNR of $23.6 million recorded as of June 30, 2007.
Consideration of Impairment Related to Goodwill and Other Intangible Assets
Our balance sheet includes intangible assets, including goodwill and other
separately identifiable intangible assets, of approximately $78.8 million, which
represented approximately 66% of our total assets at March 31, 2009. The most
significant component of the intangible assets consists of the intangible assets
recorded in connection with the acquisition (the "Acquisition") of Miami Dade
Health Centers, Inc. and its affiliated companies (collectively, the "MDHC
Companies"). The purchase price, including acquisition costs, of approximately
$66.2 million was allocated to the estimated fair value of acquired tangible
assets of $13.9 million, identifiable intangible assets of $8.7 million and
assumed liabilities of $15.3 million, resulting in goodwill totaling
$58.9 million.
Under Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," goodwill and intangible assets with indefinite useful
lives are no longer amortized, but are reviewed for impairment on an annual
basis or more frequently if certain indicators of impairment arise. Intangible
assets with definite useful lives are amortized over their respective useful
lives to their estimated residual values and also reviewed for impairment
annually or more frequently if certain indicators of impairment arise.
Indicators of an impairment include, among other things, a significant adverse
change in legal factors or the business climate, the loss of a key
HMO contract, an adverse action by a regulator, unanticipated competition, and
the loss of key personnel or allocation of goodwill to a portion of business
that is to be sold.
Because we operate in a single segment of business, we have determined that
we have a single reporting unit and we perform our impairment test for goodwill
on an enterprise level. In performing the impairment test, we compare the total
current market value of all of our outstanding common stock, to the current
carrying value of our total net assets, including goodwill and intangible
assets. Depending on the market value of our common stock at the time that an
impairment test is required, we may also perform other valuation techniques to
measure market value before reaching a conclusion that impairment exists.
Depending on the outcome of our analyses, there is a risk that a portion of our
intangible assets would be considered impaired and must be written-off during
that period. We completed our annual impairment test as of May 1, 2008 and
determined that no impairment existed. In addition, no indicators of impairment
were noted and accordingly, no impairment charges were required for the three
and nine-month periods ended March 31, 2009. Should we later determine that an
indicator of impairment exists, we would be required to perform an additional
impairment test.
Realization of Deferred Income Tax Assets
We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes" ("SFAS 109") which requires that deferred income tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets and liabilities.
SFAS No. 109 also requires that deferred income tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred income tax asset will not be realized.
As part of the process of preparing our consolidated financial statements, we
estimate our income taxes based on our actual current tax exposure together with
assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. We also recognize as deferred income tax assets the
future tax benefits from net operating loss carryforwards. We evaluate the
realizability of these deferred income tax assets by assessing their valuation
allowances and by adjusting the amount of such allowances, if necessary. Among
the factors used to assess the likelihood of realization are our projections of
future taxable income streams, the expected timing of the reversals of existing
temporary differences, and the impact of tax planning strategies that could be
implemented to avoid the potential loss of future tax benefits. However, changes
in tax codes, statutory tax rates or future taxable income levels could
materially impact our valuation of tax accruals and assets and could cause our
provision for income taxes to vary significantly from period to period. At
March 31, 2009, we had deferred income tax liabilities in excess of deferred
income tax assets of approximately $3.1 million.
Stock-Based Payment
We use the modified prospective transition method under SFAS 123(R). SFAS
123(R) requires us to recognize compensation costs in our financial statements
related to our share-based payment transactions with employees and directors.
SFAS 123(R) requires us to calculate this cost based on the grant date fair
value of the equity instrument. As a result of adopting SFAS No. 123(R), we
recognized share-based compensation expense of $0.3 million and $0.4 million,
respectively, for the three-month periods ended March 31, 2009 and 2008 and
$0.9 million and $1.0 million, respectively, for the nine-month periods ended
March 31, 2009 and 2008. For the three and nine-month periods ended March 31,
2009 and 2008, the Company had no excess tax benefits resulting from the
exercise of stock options.
Consistent with our practices prior to adopting SFAS 123(R), we have elected
to calculate the fair value of our employee stock options using the
Black-Scholes option pricing model. Using this model we calculated the fair
value for employee stock options granted during the three-month periods ended
March 31, 2009 and 2008 based on the following assumptions: risk-free interest
rate ranging from 0.66% to 2.28% and 1.61% to 2.71%, respectively; dividend
yield of 0%; weighted-average volatility factor of the expected market price of
our common stock of 60.7% and 59.6%, respectively, and weighted-average expected
life of the options ranging from 2 to 6 years, depending on the vesting
provisions of each option. The fair value for employee stock options granted
during the nine-month periods ended March 31, 2009 and 2008 based on the
following assumptions: risk-free interest rate ranging from 0.66% to 3.09% and
1.61% to 4.22%, respectively; dividend yield of 0%; weighted-average volatility
factor of the expected market price of our common stock of 58.6% and 59.5%,
respectively, and weighted-average
expected life of the options ranging from 2 to 6 years, depending on the vesting
provisions of each option. The expected life of the options is based on the
historical exercise behavior of our employees. The expected volatility factor is
based on the historical volatility of the market price of our common stock as
adjusted for certain events that management deemed to be non-recurring and
non-indicative of future events.
SFAS 123(R) does not require the use of any particular option valuation
model. Because our stock options have characteristics significantly different
from traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, it is
possible that existing models may not necessarily provide a reliable measure of
the fair value of our employee stock options. We selected the Black-Scholes
model based on our prior experience with it, its wide use by issuers comparable
to us, and our review of alternate option valuation models.
The effect of applying the fair value method of accounting for stock options
on reported net income for any period may not be representative of the effects
for future periods because our outstanding options typically vest over a period
of several years and additional awards may be made in future periods.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIOD ENDED MARCH 31, 2009 TO THE THREE- MONTH
PERIOD ENDED MARCH 31, 2008
Revenue
Revenue increased by $9.5 million, or 14.3%, to $75.4 million for the
three-month period ended March 31, 2009 from $65.9 million for the three-month
period ended March 31, 2008 due primarily to increases in our Medicare revenue.
The most significant component of our revenue is the revenue we generate from
Medicare patients under risk arrangements which increased by $10.2 million, or
17.4%, during the three-month period ended March 31, 2009. During the
three-month period ended March 31, 2009, revenue generated by our Medicare risk
arrangements increased approximately 19.9% on a per patient per month basis and
Medicare patient months decreased by approximately 2.1% over the comparable
period of Fiscal 2008. The increase in the per member per month Medicare revenue
was primarily due to a rate increase in the Medicare premiums and an increase in
premiums resulting from the Medicare risk adjustment program. The increase in
Medicare revenue was partially offset by a $1.0 million decrease in revenue
generated by our Medicaid patients due primarily to a decrease in Medicaid
patient months.
Under the Medicare risk adjustment program, the health status and demographic
factors of Medicare Advantage participants are taken into account in determining
premiums paid for each participant. CMS periodically recomputes the premiums to
be paid to the HMOs based on the updated health status and demographic factors
of the Medicare Advantage participants. In addition, the premiums paid to the
HMOs for their Medicare Prescription Drug Plan are subject to periodic
adjustment based upon CMS's risk corridor adjustment methodology. The net effect
of the premium adjustments included in revenue for the three-month period ended
March 31, 2008 was a favorable retroactive Medicare adjustment of approximately
$0.4 million. There were no retroactive premium adjustments included in revenue
for the three-month period ended March 31, 2009. Future Medicare risk
adjustments may result in reductions of revenue depending on the future health
status and demographic factors of our patients as well as the application of
CMS's risk corridor methodology to the HMOs Medicare Prescription Drug Programs.
Revenue generated by our managed care entities under contracts with Humana,
Vista and Wellcare accounted for approximately 72%, 19% and 7%, respectively, of
our total revenue for the three-month period ended March 31, 2009. Revenue
generated by our managed care entities under contracts with Humana, Vista and
Wellcare accounted for approximately 73%, 17% and 9%, respectively, of our total
revenue for the three-month period ended March 31, 2008.
Operating Expenses
Medical services expenses are comprised of medical claims expense and other
direct costs related to the provision of medical services to our patients.
Because our risk contracts with HMOs provide that we are financially responsible
for the cost of substantially all medical services provided to our patients
under those contracts, our medical claims expense includes the costs of
prescription drugs our patients receive as well as medical services provided to
patients under our risk contracts by providers other than us. Other direct costs
consist primarily of salaries, taxes and benefits of our health professionals
providing primary care services including a portion of our stock-based
compensation expense, medical malpractice insurance costs, capitation payments
to our IPA physicians and fees paid to independent contractors providing medical
services to our patients.
Medical services expenses for the three-month period ended March 31, 2009
increased by $8.5 million, or 16.2%, to $60.5 million from $52.0 million for the
three-month period ended March 31, 2008. Medical claims expense, which is the
largest component of medical services expense, increased by $8.1 million, or
17.9%, to $53.2 million for the three-month period ended March 31, 2009 from
$45.1 million for the three-month period ended March 31, 2008 primarily due to
an increase in Medicare claims expense of $7.9 million, or 19.4%. The increase
in Medicare claims expense resulted from a 21.9% increase on a per patient per
month basis in medical claims expenses related to our Medicare patients and a
decrease of 2.1% in Medicare patient months. The increase in Medicare per
patient per month medical claims expense is primarily attributable to enhanced
benefits offered by our HMO affiliates, inflationary trends in the health care
industry and higher than usual favorable adjustments relating to prior period
medical claims expenses during the three-month period ended March 31, 2008.
As a percentage of revenue, medical services expenses increased to 80.2% of
revenue for the three-month period ended March 31, 2009 as compared to 78.9% for
the three-month period ended March 31, 2008. Our claims loss ratio (medical
claims expense as a percentage of revenue) increased to 70.6% for the
three-month ended March 31, 2009 from 68.4% for the three-month period ended
March 31, 2008. These increases were primarily due to an increase in Medicare
revenue at a lower rate than the increase in Medicare claims expense on a per
patient per month basis. HMOs are under continuous competitive pressure to offer
enhanced and possibly more expensive, benefits to their Medicare Advantage
members. The premiums CMS pays to HMOs for Medicare Advantage members are
generally not increased as a result of those benefit enhancements. This could
increase our claims loss ratio in future periods, which could reduce our
profitability and cash flows.
Other direct costs increased by $0.3 million, or 4.8%, to $7.2 million for
the three-month period ended March 31, 2009 from $6.9 million for the
three-month period ended March 31, 2008. As a percentage of revenue, other
direct costs decreased to 9.6% for the three-month period ended March 31, 2009
from 10.5% for the three-month period ended March 31, 2008. The increase in the
amount of other direct costs was primarily due to an increase in payroll expense
and related benefits for physicians and medical support personnel at our medical
centers and patient transportation related expenses.
Administrative payroll and employee benefits expense remained relatively
unchanged at $3.5 million for the three-month periods ended March 31, 2009 and
2008. As a percentage of revenue, administrative payroll and employee benefits
expense decreased to 4.7% for the three-month period ended March 31, 2009 from
5.3% for the three-month period ended March 31, 2008.
General and administrative expenses remained relatively unchanged at
$4.4 million and $4.3 million for the three-month periods ended March 31, 2009
and 2008, respectively. As a percentage of revenue, general and administrative
expenses decreased to 5.8% for the three-month period ended March 31, 2009 from
6.6% for the three-month period ended March 31, 2008.
Income from Operations
Income from operations for the three-month period ended March 31, 2009
increased by $0.9 million, or 16.0%, to $7.0 million from $6.1 million for the
three-month period ended March 31, 2008.
Taxes
An income tax provision of $2.7 million and $2.5 million was recorded for the
three-month periods ended March 31, 2009 and 2008, respectively. The effective
income tax rates were 38.7% and 40.8% for the three-month periods ended
March 31, 2009 and 2008, respectively.
Net Income
. . .
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