Forward Looking Statements

Statements contained in this Quarterly Report on Form 10-Q which are not historical fact may be forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 as amended ("Exchange Act"). We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Such statements, which may address, among other things, market acceptance of our products and services, expansion into new targeted markets, product development, our ability to finance growth opportunities, our ability to respond to changes in government regulations, sales and marketing strategies, projected capital expenditures, liquidity and the availability of additional funding sources may be found in the sections of this Quarterly Report on Form 10-Q entitled "Business," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q generally. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues" or the negative of such terms or other comparable terminology. You are cautioned that matters subject to forward-looking statements involve risks and uncertainties, including economic, regulatory, competitive and other factors that may affect our business. These forward-looking statements are inherently susceptible to uncertainty and changes in circumstances, as they are based on management's current expectations and beliefs about future events and circumstances. We undertake no obligation beyond that required by law to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Our actual results may differ materially from those indicated by forward-looking statements as a result of various important factors including the expiration, cancellation or suspension of our state and federal contracts. In addition, our results of operations and projections of future earnings depend, in large part, on accurately predicting and effectively managing health benefits and other operating and non-operating expenses. A variety of factors may in the future affect our ability to control our medical costs and other operating and non-operating expenses. These factors include:
competition; changes in health care practices; changes in federal or state laws and regulations or their interpretations; inflation; provider contract changes; changes in or terminations of our contracts with government agencies; new technologies; government-imposed surcharges; taxes or assessments; reduction in provider payments by governmental payors; major epidemics; pandemics; disasters; general economic conditions; the cost and availability of financing; and numerous other factors affecting the delivery and cost of health care, such as major health care providers' inability to maintain their operations. Governmental action or business conditions could result in premium revenues not increasing to offset any increase in medical costs and other operating expenses. Once set, premiums are generally fixed for one-year periods and, accordingly, unanticipated costs during such periods cannot be recovered through higher premiums. Furthermore, if we are unable to accurately estimate incurred but not reported ("IBNR") medical costs in the current period, our future profitability may be affected. Due to these factors and risks, we cannot provide any assurance regarding our future premium levels or our ability to control our future medical costs.

From time to time, at the federal and state government levels, legislative and regulatory proposals have been made related to, or potentially affecting, the health care industry, including but not limited to limitations on managed care organizations, including benefit mandates, and reform of the Medicaid and Medicare programs. Any such legislative and regulatory action, including benefit mandates and reform of the Medicaid and Medicare programs, could have the effect of reducing the premiums paid to us by governmental programs, increasing our medical or administrative costs or requiring us to materially alter the manner in which we operate. We are unable to predict the specific content of any future legislation, action or regulation that may be enacted or when any such future legislation or regulation will be adopted. Therefore, we cannot predict accurately the effect or ramifications of such future legislation, action or regulation on our business.

Overview

We refer collectively to the cash and investment balances available in our non-regulated subsidiaries as "unregulated cash" and "unregulated investments," respectively; and to cash and investment balances available in our regulated subsidiaries as "regulated cash" and "regulated investments," respectively. On September 30, 2009, our total cash and investment balance was $1,171.2 million as compared to a total cash and investment balance of $1,181.9 million as of December 31, 2008. Of these amounts, $92.7 million and $152.6 million were unregulated cash and investments as of September 30, 2009 and December 31, 2008, respectively, with the balance being comprised of regulated cash and investments. The primary reasons for the changes in our unregulated cash and investment position from December 31, 2008 to September 30, 2009 was the repayment in full of amounts outstanding under our credit facility, as well as the payment of resolution amounts to the United States Attorney's Office for the Middle District of Florida (the "USAO") and the U.S. Securities and Exchange Commission (the "SEC"), partially offset by dividends received from three of our regulated subsidiaries.

We continue to consider additional dividends from certain of our regulated subsidiaries to increase our unregulated cash balance. However, we cannot provide any assurances that if we decide to request approval from the applicable state regulatory authorities, to the extent such approvals are required, that the state regulatory authorities will approve the payment of dividends to our non-regulated subsidiaries by our regulated subsidiaries. We currently believe that we will be able to meet our known near-term monetary obligations and maintain sufficient liquidity to operate our business. However, we cannot provide any assurances that adverse developments will not impede our ability to do so.

In May 2009, we repaid in full the outstanding balance of approximately $152.4 million under our senior secured credit facility.

Financial Impact of the DPA and SEC Settlement

As previously disclosed, on May 5, 2009, we entered into a Deferred Prosecution Agreement (the "DPA") with USAO and the Florida Attorney General's Office. The DPA has resolved previously disclosed investigations by the USAO and the Florida Attorney General's Office. Pursuant to the terms of the DPA, we agreed to pay to the USAO a total of $80.0 million, comprised of (a) $35.2 million that we paid in August 2008, (b) a payment of $25.0 million that we paid in May 2009 and (c) a payment of $19.8 million to be made no later than December 31, 2009. These amounts were previously accrued in our financial statements for the year ended December 31, 2007; accordingly, there was no incremental expense recorded in association with these matters during the three or nine months ended September 30, 2009. Therefore, $19.8 million remains accrued within the Current portion of amounts accrued related to investigation resolution line item in our Condensed Consolidated Balance Sheet as of September 30, 2009 for amounts payable under the DPA.

As part of the DPA, we also retained, at our expense, an outside independent monitor (the "Monitor") for a period of 18 months from his retention in August 2009. The Monitor was selected by the USAO after consultation with us. At this time we cannot estimate the costs that we will incur in connection with the implementation of any remedial measures recommended by the Monitor; such costs, if any, could be significant. The DPA provides that the Monitor will undertake to avoid the disruption of our ordinary business operations or the imposition of unnecessary costs or expenses.

On May 18, 2009, we resolved the previously disclosed investigation by the SEC. Under the terms of the Consent and Final Judgment, without admitting or denying the allegations in the complaint filed by the SEC, we consented to the entry of a permanent injunction against any future violations of certain specified provisions of the federal securities laws. In addition, we agreed to pay, in four quarterly installments, a civil penalty in the aggregate amount of $10.0 million and disgorgement in the amount of one dollar plus post-judgment interest, of which the first two installments have been made. If we fail to pay timely, in full, any amount due under the Consent and Final Judgment, all outstanding amounts (including post-judgment interest), minus any payments already made, will immediately become due and payable. These amounts were previously included in the range of probable losses determined by management's best estimate and recorded in our March 31, 2009 financial statements. Accordingly, there was no incremental expense recorded in our Condensed Consolidated Statement of Operation for the three months ended September 30, 2009. As of September 30, 2009, $5.0 million remains accrued within the Current portion of amounts accrued related to investigation resolution line item in our Condensed Consolidated Balance Sheet related to the Consent and Final Judgment.

Remaining Civil Division and OIG Investigations

As previously disclosed, we remain engaged in resolution discussions as to matters under review with the Civil Division of the United States Department of Justice ("the "Civil Division") and the Office of Inspector General of the U.S. Department of Health and Human Services (the "OIG"). Management currently estimates that the remaining liability associated with these matters is approximately $60.0 million, plus interest. We anticipate these amounts will be payable in installments over a 54-month period. In accordance with fair value accounting guidance, we discounted the liability and recorded it at its fair value of approximately $55.4 million. This amount remains accrued in our Condensed Consolidated Balance Sheet as of September 30, 2009 within the short and long term portions of Amounts accrued related to investigation resolution line items.

The final timing, terms and conditions of a civil resolution may differ from those currently anticipated, which may result in an adjustment to our recorded amounts. These adjustments may be material.

Investigation Related Costs

As previously disclosed, we have expended significant financial resources in connection with the investigations and related matters. Since the inception of these investigations through September 30, 2009, we have spent a total of approximately $157.0 million for administrative expenses associated with, or consequential to, these governmental and Company investigations for legal fees, accounting fees, consulting fees, employee recruitment and retention costs and other similar expenses. Approximately $9.0 million and $32.9 million were incurred in the three months and nine months ended September 30, 2009, respectively.

We expect to continue incurring additional costs in connection with the governmental and Company investigations, compliance with the DPA and related matters during the remainder of 2009 and into 2010. Although investigation related costs overall have gradually declined, we can provide no assurance that such costs will not be significant or increase in the future. These include, among others, anticipated costs associated with the retention of the Monitor and implementation of any recommendations, as discussed above, as well as anticipated costs related to the class action lawsuit and efforts of the Special Litigation Committee in connection with the ongoing shareholder derivative actions.

In April 2009, the federal Centers for Medicare & Medicaid Services ("CMS") announced final 2010 Medicare Advantage ("MA") payment rates which are approximately 4.5% below 2009 rates. Although these rates reflect approximately a 21% physician rate cut based upon the sustainable growth rate formula as enacted in the Balanced Budget Act of 1997, historically, Congress has postponed the physician rate cuts implicit in MA rates. Our 2010 product offerings assume the physician rate cut is postponed. We continue to closely monitor potential CMS and congressional actions that may impact the physician rate cut and our MA rates.

For 2010 and thereafter, CMS has changed the process, known as the Medicare Secondary Payer process, used by MA organizations for members with secondary health care coverage and coordination of benefits. Overall, these changes may result in a reduction in Medicare revenues to MA health plans that are not entirely offset by reductions in medical expense. Incremental administrative costs will be incurred as MA health plans will need to enhance the third-party liability processes, data collection upon initial enrollment, enrollment reconciliation, customer service, claims payment, provider relations, and other activities to preserve revenue and not pay claims out of turn where another carrier has a primary liability. We are continuing to evaluate the impact of this new process on our operations.

In February 2009, CMS notified us that, effective March 7, 2009, we were sanctioned through a suspension of marketing of, and enrollment into, all lines of our Medicare business. CMS's determination was based on findings of deficiencies in our compliance with Medicare regulations related to marketing activities, enrollment and disenrollment operations, appeals and grievances, timely and proper responses to beneficiary complaints and requests for assistance and marketing and agent/broker oversight activities. In response to the CMS suspension, we made certain changes to our Medicare marketing sales force and launched a company-wide initiative to analyze the processes and procedures for each of the issues identified by CMS in an effort to comply fully with CMS requirements going forward. In late June 2009, we submitted to CMS a report on our remediation efforts and the results of third-party validations of our remediation efforts. During September and October, 2009, we responded to a further request from CMS for additional information and continued to work with CMS to provide all requested information.

On November 3, 2009, we received written notification from CMS that it had determined that we had satisfactorily addressed the deficiencies that formed the basis for the CMS sanction, and that CMS released us from its marketing and enrollment sanction. Effective November 3, 2009, we may begin marketing our Medicare plans for the 2010 contract year and we may begin enrolling beneficiaries on November 15, 2009 for the 2010 contract year. CMS also notified us that it will subject us to targeted monitoring and heightened surveillance and oversight of all of our operational areas during the upcoming enrollment periods. Even though CMS lifted the sanction against us, we currently expect that our inability to perform marketing activities to Medicare beneficiaries or enroll new Medicare beneficiaries during the sanction will have a material adverse impact on our Medicare premium revenue for the remainder of 2009, 2010 and potentially beyond. See "Risk Factors - CMS will subject us to targeted monitoring and heightened surveillance and oversight of all of our operational areas during the upcoming open enrollment periods" in this Form 10-Q for additional information regarding the risks associated with CMS' targeted monitoring and heightened surveillance of us.

On June 1, 2009, we notified CMS that we do not intend to renew our contracts to participate in the MA private fee-for-service ("PFFS") program in 2010 or beyond. Our PFFS business represents approximately 31% of our Medicare segment revenue for the nine months ended September 30, 2009; accordingly our exit of this line of business will cause our Medicare revenue to decline in 2010. We anticipate that the withdrawal from the PFFS business may provide approximately $40.0 million to $60.0 million in unregulated cash from the dividend of surplus capital that we currently believe we will benefit from no sooner than 2011. The dividend of surplus capital by the applicable insurance entities, including the timing and amount, is subject to a variety of factors. Those factors include the ultimate financial performance of the PFFS business as well as the financial performance of other lines of business that operate in those insurance entities, approval from regulatory agencies and potential changes in regulatory capital requirements. For example, our current estimate of $40.0 million to $60.0 million has declined from previous estimates because the financial performance of the insurance entities that underwrite the PFFS business has worsened during the year.

In 2010, we will continue to serve our current members in our PDP program in 49 states and the District of Columbia, and our MA Coordinated Care Plans ("CCP") in 12 states. For 2010, we will be below the CMS benchmarks in 19 regions, including the following eight new regions: Arizona, Central New England (Connecticut, Massachusetts, Rhode Island and Vermont), Louisiana, Mississippi, Missouri, New York, Oklahoma and Virginia. As mentioned previously, the CMS sanctions precluded us from marketing our plans and enrolling new members, including low income subsidy auto-assignments, into our stand-alone PDP. Accordingly, our revenues generated from our stand-alone PDP may decrease significantly in 2010. With respect to our PDP plans, as a result of the sanction we are not eligible to be auto-assigned low income subsidy dual eligible beneficiaries for January 2010 membership. With the sanctions resolved, we are eligible for new voluntary enrollment for January 1, 2010 and we are eligible for low income subsidy auto-assigned membership beginning in February 2010. Unrelated to the CMS sanctions, we have decided to exit the Medicare PDP program in Wisconsin for 2010, and auto-assigned PDP membership in Wisconsin will be re-assigned to other plans.

Currently, the Obama Administration and the U.S. Congress are debating various alternatives for reforming the American health care system, including the reduction of payments under MA. As part of this debate they are reviewing alternative structures for MA payments. While the legislative and regulatory process is continuing to progress and new as well as modified proposals are being presented in Congress, we expect revisions to the current system to put pressure on operating results, decrease benefits and/or increase member premiums.

Additionally, health reforms proposed by the Obama Administration and being considered by the U.S. Congress could contain several challenges as well as opportunities for our Medicaid business. We anticipate the reforms, if ultimately adopted by the U.S. Congress, could significantly increase the number of citizens who are eligible to enroll in our Medicaid products. However, state budgets are strained due to economic conditions and existing federal financing for current populations. As a result, the effects of any potential future expansions are uncertain, making it difficult to determine whether these reform efforts will have a positive or negative impact on our Medicaid profitability.

Stimulus funds for Medicaid in the American Recovery and Reinvestment Act of 2009 are anticipated to end in 2010 leaving certain states with sizable projected budget gaps in their Medicaid programs. Absent additional federal assistance, these states may be under pressure to raise revenue, reduce provider payments, reduce benefits or a combination of the above. We continue to evaluate the impact proposed alternatives could have on our business and will take action as appropriate. For example, one state that might be affected is Florida. According to the State of Florida's Long Range Financial Outlook Fiscal Year 2010-2011 through 2012-2013 report, the state anticipates a number of budget challenges in the coming years. This report notes that, "Overall, the General Revenue Fund is solvent for Fiscal Year 2009-10, but has projected shortfalls in each of the three planning years despite the significant revenue growth projected for those years."

As previously disclosed, government funding continues to be a significant challenge to our business, particularly in light of the current economic conditions. Many of our products received a rate increase less than the medical cost trend for 2009 and we expect this may continue in 2010.

Business Rationalization and Organizational Realignment

Our fundamental objective is to provide our members with efficient and effective access to health care to promote their long-term health and well-being, while maintaining a sustainable rate of return. We continue to evaluate various strategic alternatives to address the ongoing challenges to, and changes in, our business and regulatory environment, competitive position and financial resources, including, reducing enrollment levels, exiting existing lines of business, service areas, or markets and/or disposing of assets. For example, we have withdrawn from the Florida Medicaid reform programs effective July 1, 2009, after Florida notified us that it was reducing our reimbursement rates. In addition, in May 2009 we announced a realignment of our organization to respond to changing business conditions and to strengthen our position in government-sponsored health care programs. As part of this realignment, we announced workforce reductions related to the streamlining of reporting relationships, consolidation of an operating division, reorganization of some activities, and our withdrawal in 2010 from MA PFFS plans, as discussed above. These changes affected approximately 360 associates. These efforts reflect our focus on achieving administrative efficiencies and maintaining a competitive cost structure. Each associate affected by this action received severance pay and outplacement support.

Further, we have taken certain steps to reduce our administrative costs by implementing certain cost-cutting measures, including a freeze on merit-based salary increases, management bonus reductions and the suspension of the 401(k) retirement plan matching contributions. We continue to evaluate and rationalize our operations, management structure and staffing needs which may result in further consolidations in our operations, exits of business and reductions in our workforce.

Basis of Presentation

Segments

We have two reportable business segments: Medicaid and Medicare.

Medicaid was established to provide medical assistance to low-income and disabled persons. It is state operated and implemented, although it is funded and regulated by both the state and federal governments. Our Medicaid segment includes plans for beneficiaries of the Temporary Assistance for Needy Families ("TANF") programs, Supplemental Security Income ("SSI") programs, Aged Blind and Disabled ("ABD") programs, Children's Health Insurance Programs ("CHIP") and Family Health Plus ("FHP") programs. TANF generally provides assistance to low-income families with children and SSI generally provides assistance to low-income ABD individuals. Our Medicaid segment also includes other programs that are not part of the Medicaid program, such as CHIP and FHP, for qualifying families who are not eligible for Medicaid because they exceed the applicable income thresholds.

Medicare is a federal program that provides eligible persons age 65 and over and some disabled persons a variety of hospital, medical insurance and prescription drug benefits. Medicare is administered and funded by CMS. Our Medicare segment includes stand-alone PDP and MA plans, which includes coordinated care plans ("CCP") and PFFS. MA is Medicare's managed care alternative to original Medicare fee-for-service ("Original Medicare"), which provides individuals standard Medicare benefits directly through CMS. CCPs are administered through a health maintenance organization ("HMO") and generally require members to seek health care services from a network of health care providers. PFFS plans are offered by insurance companies and are open-access plans that allow members to be seen by any physician or facility that participates in the Original Medicare program and agrees to bill, and otherwise accepts the terms and conditions of, the sponsoring insurance company.

Membership

  The following table summarizes our membership by segment and line of business.

                                       As of September 30,
                                        2009        2008
                        Medicaid
                        TANF          1,072,000   1,031,000
                        CHIP            158,000     180,000
                        SSI and ABD      78,000      64,000
                        FHP              14,000      26,000
                                      1,322,000   1,301,000

                        Medicare
                        MA              240,000     240,000
                        PDP             768,000     989,000
                                      1,008,000   1,229,000
                        Total         2,330,000   2,530,000

We enter into contracts with government agencies that administer health benefits programs. These contracts generally are subject to renewal every one to four years. We receive premiums from state and federal agencies for the members that are assigned to or have selected us to provide health care services under each benefit program. The amount of premiums we receive for each member varies according to the government program, the member's health status, age, gender and geographic location. The premiums are subject to periodic adjustments and, in some cases, minimum health care spending requirements.

Medical Benefits Expense

Our largest expense is the cost of medical benefits that we provide, which is based primarily on our arrangements with health care providers and utilization of health care services by our members. As our profits are a small fraction of the revenue we receive, relatively small changes in our medical benefits ratio ("MBR"), the ratio of our medical benefits expense to the premiums we receive, can create significant changes in our financial results. Our profitability depends on our ability to predict and effectively manage medical benefits . . .