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UAM > SEC Filings for UAM > Form 10-K on 13-Mar-2014All Recent SEC Filings

Show all filings for UNIVERSAL AMERICAN CORP.



Annual Report



The following discussion and analysis presents a review of our financial condition as of December 31, 2013 and our results of operations for the years ended December 31, 2013, 2012 and 2011. As used in this report, except as otherwise indicated, references to the "Company," "Universal American," "we," "our," and "us" are to Universal American Corp., a Delaware corporation and its subsidiaries.

You should read the following analysis of our consolidated results of operations and financial condition in conjunction with the consolidated financial statements and related consolidated footnotes included in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from management's expectations. Factors that could cause such differences include those set forth under Part I, Item 1A-Risk Factors.


Universal American, through our health insurance and managed care subsidiaries, primarily serves the growing Medicare population by providing Medicare Advantage products. Approximately 30% of the Medicare population in the United States is currently enrolled in Medicare Advantage plans, a type of Medicare health plan offered by private companies that contract with the federal government to provide enrollees with health insurance. Our current focus is to grow our Medicare Advantage business in our core markets, which largely consists of our health plans offered in the Southwest and Upstate New York markets. In addition, we believe there is an opportunity to address the high cost of health care for the remaining 70% of the Medicare population enrolled in traditional fee-for-service Medicare and have joined primarily with primary-care and multi-specialty provider groups to form thirty-four Accountable Care Organizations, or ACOs, pursuant to the Medicare Shared Saving Program, or Shared Savings Program. We also provide Medicaid services to Medicaid agencies through APS Healthcare and recently acquired the Total Care Medicaid health plan serving approximately 35,000 members in Upstate New York.

Our Strategy

The principal components of our business strategy are to:

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º Continue to build our Medicare Advantage business and expand our Healthy Collaboration® model in our core markets.

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º Expand our relationships with health care providers both within and outside our Medicare Advantage footprint to further develop existing and additional ACOs.

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º Employ our medical management capabilities to improve the health and well-being of those we serve and reduce healthcare costs.

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º Work in collaboration with healthcare providers to help them assume and manage risk, in order to achieve measurably better quality and lower cost.

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º Engage the people we serve to help them make smart and economic choices about their healthcare.

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º Develop additional capabilities to participate in the growing dual eligible and long-term care sectors.

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Emerging Opportunities in Healthcare

Senior Market Opportunity-Medicare

We believe that attractive growth opportunities exist in providing products, particularly health insurance, to the growing senior market. At present, approximately 51 million Americans are eligible for Medicare, the Federal program that offers basic hospital and medical insurance to people over 65 years old and some disabled people under the age of 65. According to the U.S. Census Bureau, more than 2 million Americans turn 65 in the United States each year, and this number is expected to grow as the so-called baby boomers continue to turn 65. In addition, many large employers that traditionally provided medical and prescription drug coverage to their retirees have begun to curtail these benefits. Medicare Advantage continues to grow its share of the overall Medicare market and we believe is likely to continue to gain positive acceptance with consumers.

Medicare Shared Savings-Accountable Care Organizations

In March 2010, President Obama signed into law The Patient Protection and Affordable Care Act and The Healthcare and Education Reconciliation Act of 2010, which we collectively refer to as the Affordable Care Act. The Affordable Care Act established ACOs as a tool to improve quality and lower costs through increased care coordination in the Medicare Fee-for-Service, or FFS, program, which covers approximately 70% of the Medicare recipients, approximately 36 million eligible Medicare beneficiaries. CMS established the Shared Savings Program to facilitate coordination and cooperation among providers to improve the quality of care for FFS beneficiaries and reduce unnecessary costs. Eligible providers, hospitals, and suppliers may participate in the Shared Savings Program by creating or participating in an ACO.

The Shared Savings Program is designed to improve beneficiary outcomes and increase value of care by (1) promoting accountability for the care of Medicare FFS beneficiaries; (2) requiring coordinated care for all services provided under Medicare FFS; and (3) encouraging investment in infrastructure and redesigned care processes. The Shared Savings Program will reward ACOs that lower their health care costs while meeting performance standards on quality of care and putting patients first. Under the final Shared Savings Program rules, Medicare will continue to pay individual providers and suppliers for specific items and services as it currently does under the FFS payment methodologies. The Shared Savings Program rules require CMS to develop a benchmark for savings to be achieved by each ACO if the ACO is to receive shared savings. An ACO that meets the program's quality performance standards will be eligible to receive a share of the savings to the extent its assigned beneficiary medical expenditures are below the medical expenditure benchmark provided by CMS. A minimum savings rate must be achieved before the ACO can receive a share of the savings. Once the minimum savings rate is surpassed, all the savings below the benchmark provided by CMS will be shared 50% with the ACOs. The minimum savings rate varies depending on the number of patients assigned to the ACO, starting at 3.9% for ACOs with patients totaling 5,000 and grading to 2% for ACOs with patients totaling 10,000 or more.

CMS assigns a beneficiary to the preliminary roster of an ACO if the ACO physicians billed for a "plurality" of services during the calendar year preceding the performance period. A plurality means the ACO physicians provided a greater proportion of primary care services, measured in terms of allowed charges, than the physicians in any other ACO or Medicare-enrolled tax- identification number. CMS sets the benchmark for each ACO using the historical medical costs of the beneficiaries assigned to an ACO. At the end of the ACO performance period, CMS applies the same plurality definition but to a different time period, the actual performance period. CMS does not fully update the benchmark to reflect the new mix of beneficiaries assigned during the performance period. As a result, many beneficiaries originally assigned to an ACO at the beginning of a performance year (i.e. January 1) may

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no longer be on the ACOs roster at the end of a performance year (i.e. December 31) if they did not see a physician in the ACO during the performance year. As a result, many ACOs may experience a significant attrition of healthier patients in their ACO rosters that were included in the original benchmark set by CMS but had not received care during the performance period itself. This can have a significant adverse impact on an ACOs ability to achieve shared savings. Accordingly, it will be important for ACOs to ensure that all the assigned beneficiaries to an ACO continue to receive wellness and other services during the year to ensure they are assigned to the ACO at the end of the performance period.

As of December 31, 2013, we have partnered with primary-care provider groups and a variety of other health care providers to form thirty-four ACOs which have been approved by CMS for participation in the Shared Savings Program. Based on data provided by CMS at December 31, 2013, these thirty-four ACOs included approximately 3,200 participating providers with approximately 358,000 assigned Medicare fee-for-service beneficiaries covering portions of thirteen states both within and outside our current Medicare Advantage footprint, including Southeast Texas and upstate New York. CHS provides these ACOs with care coordination, analytics and reporting, technology and other administrative capabilities to enable participating providers to deliver better care, improved health and lower healthcare costs for their Medicare fee-for-service beneficiaries. During 2014, we may reduce the number of our ACOs based on a variety of factors, including the level of commitment by the physicians in the ACO and the likelihood of the ACO achieving shared savings.

The Medicare Shared Savings Program is relatively new and therefore has limited historical experience. This impacts our ability to accurately accumulate and interpret the data available for calculating the ACOs' shared savings. Therefore, we were not able to recognize revenue for the year ended December 31, 2013. We expect that any revenue for the initial program periods ending December 31, 2013 will be reported in 2014. Based on the ACO operating agreements, we bear nearly all of the costs of the ACO operations until revenue is recognized. At that point, we share in 100% of the revenue up to our costs incurred. Any remaining profit is generally shared equally with our ACO provider partners.

Medicaid Program, Dual Eligibles and Health Benefits Exchanges

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. 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. Our APS Healthcare segment provides a variety of healthcare services to Medicaid beneficiaries in numerous states.

Due to the Medicaid expansion provisions under the Affordable Care Act, CMS projects that Medicaid expenditures will increase from approximately $420 billion in 2012 to approximately $740 billion by 2020. In addition, as part of the Affordable Care Act, approximately 15 million additional people are expected to qualify for Medicaid in 2015.

A portion of Medicaid beneficiaries are dual eligibles, low-income seniors and people with disabilities who are enrolled in both Medicaid and Medicare. Based on CMS and Kaiser Family Foundation data, we estimate there are approximately 10 million dual eligible enrollees with annual spending of approximately $400 billion. Only a small portion of the total spending on dual eligibles is

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administered by managed care organizations. Dual eligibles tend to consume more healthcare services due to their tendency to have more chronic health issues.

Health Insurance Exchanges are a key component of the Affordable Care Act. The Exchanges offer individuals and small businesses the opportunity to obtain health insurance through private companies. Each State has the option of operating its own Exchange, partnering with the federal government or defaulting to a federally-run Exchange. Insurers are required to offer a minimum level of benefits with three levels of coverage that vary based on premiums and out-of-pocket costs. On January 1, 2014, we launched an Exchange product in Upstate New York. As of March 1, 2014, we have less than 300 members in our Exchange product.

Healthy Collaboration® Strategy

Our Healthy Collaboration® strategy sets out a model of improving the quality of care to our members on a cost-efficient basis through an active partnership with our providers. We believe we can improve medical outcomes through a series of collaborative initiatives with our health care providers including clinically sound benefit design (where applicable), medical management, care coordination, population health management, long term supportive services and integrated care management systems. Our goal is to create mutually beneficial and interdependent collaborative arrangements with our providers. We believe provider compensation arrangements should not only help providers to be paid for complex care coordination, but also help align their interests with our objective of improving clinical outcomes and controlling unnecessary cost.

We provide medical management services, information and analysis, and other support services to enable our health care partners to serve their patients better. We rely heavily on the strong physician leadership of each network to help us achieve the clinical goals that support the mission of the organization.

Healthcare Reform

In March 2010, President Obama signed into law the Affordable Care Act, legislating broad-based changes to the U.S. health care system. Certain provisions of the health reform legislation have already taken effect, and others become effective at various dates over the next several years. Due to the complexity of the health reform legislation, including yet to be promulgated implementing regulations, lack of interpretive guidance, and gradual implementation, the impact of the health reform legislation remains difficult to predict and quantify. In addition, we believe that any impact from the health reform legislation could potentially be mitigated by certain actions we may take in the future including modifying future Medicare Advantage bids to compensate for such changes. For example, the anticipation of additional revenues from STAR bonuses or reduced CMS reimbursement rates are factored into the anticipated level of benefits included in our Medicare Advantage bids for the upcoming year.

The provisions of these new laws include the following key points, which are discussed further below:

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º reduced Medicare Advantage reimbursement rates, beginning in 2012;

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º implementation of a quality bonus for STAR ratings, beginning in 2012;

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º stipulated minimum medical loss ratios, beginning in 2014;

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º non-deductible health insurance industry fee, beginning in 2014;

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º coding intensity adjustments, with mandatory minimums, beginning in 2015;

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º •
º limitation on the federal tax deductibility of compensation earned by individuals, beginning in 2013; and

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º accountable care organizations, beginning in 2012.

Reduced Medicare Advantage reimbursement rates-Beginning in 2012, the Medicare Advantage "benchmark" rates began the transition to target Medicare fee-for-service cost benchmarks of 95%, 100%, 107.5% or 115% of the calculated Medicare fee-for-service costs. The transition period is 2, 4 or 6 years depending upon the applicable county. The counties are divided into quartiles based on each county's fee-for-service Medicare costs. We estimate that approximately 58% of our current membership resides in counties where the Medicare Advantage benchmark rate will equal 95% of the calculated Medicare fee-for-service costs, with approximately 95% of these members having a 6 year transition period. Under the law, the premiums for such members commenced the transition to 95% of Medicare fee-for-service costs beginning in 2012. This followed the freezing of Medicare Advantage reimbursement rates in 2011 based on our 2010 levels.

Medicare Advantage payment benchmarks have been cut over the last several years, with additional funding reductions to be phased in as noted above. In April 2013, CMS released its "Final Notice for Methodological Changes for Calendar Year (CY) 2014 for Medicare Advantage (MA) Capitation Rates, and Part C and Part D Payment Policies and 2014 Call Letter" (the "Final Notice") regarding 2014 Medicare Advantage benchmark rates and payment policies. The Final Notice included significant reductions to 2014 Medicare Advantage payments, including the benchmark reductions described above. These reductions and the Health Reform legislation insurance industry fee described below result in revenue reductions and incremental assessments totaling approximately 4.7% for 2014, against a typical industry forward medical cost trend outlook of 3% and limit the ability of plans to reduce benefits. As a result of these factors, we elected not to rebid our Medicare Advantage rural private fee-for-service contract covering approximately 10,700 beneficiaries in 2014. In addition, these factors will likely affect our plan benefit designs, market participation, growth prospects and earnings potential for our Medicare Advantage plans in the future. In February 2014, CMS released its proposal for 2015 Medicare rates (the "45 Day Call Letter") which is expected to reduce Medicare rates between 3%- 6%. These expected rate reductions do not include the increase in the non-deductible health insurance industry fee, known as the ACA fee. In addition, CMS has proposed excluding the diagnosis codes obtained from in-home health risk assessments for risk adjustment purposes, unless such codes are subsequently validated by a subsequent clinical encounter with a qualified provider. CMS will release its final action on 2015 rates in April 2014.

Implementation of quality bonus for STAR ratings-Beginning in 2012, Medicare Advantage plans with an overall "STAR rating" of three or more stars (out of five) based on 2011 performance are eligible for a "quality bonus" in their basic premium rates. Plans receiving STAR bonus payments are required to use the additional dollars to provide "extra benefits" for the plans' enrollees, to comply with required minimum loss ratios, resulting in a competitive advantage for those plans rather than a direct financial impact. The Affordable Care Act limits these quality bonuses to the plans that achieve 4 or more stars as their overall rating, but CMS is using demonstration authority to expand the quality bonus to 3 STAR plans for a three year period that will end December 31, 2014. In addition, beginning in 2012, Medicare Advantage STAR ratings affect the rebate percentage available for plans to provide additional member benefits (plans with quality ratings of 3.5 stars or above will have their rebate percentage increased from a base rate of 50% to 65% or 70%). In all cases, this rebate percentage is lower than the pre-Affordable Care Act rebate percentage of 75%. Our Medicare Advantage plans for 2014 are rated from 3.0 to 4.0 stars out of 5.0, with approximately 75% of our core membership now in

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plans rated 4 stars, which ratings are considered when preparing our bids to be submitted for 2015. A summary of these ratings is presented below:

                                                                     2014      Change from
                                                      Members        STAR       2013 STAR
 Contract        Plan Name           Location        (000's)(1)     Rating       Rating
 H4506      Texan Plus HMO        Southeast Texas           49.9        4.0             0.5
            Today's Options
 H2816      Network PFFS          Northeast                 25.0        4.0             1.0
 H2775      Today's Options PPO   Northeast                 13.2        3.5             0.5
            Today's Options       Northeast
 H3333      PFFS                  (rural)                    2.0        3.5               -
 H3706      Healthcare HMO        Oklahoma City              5.9        3.0               -
                                  North Texas
 H5656      Texan Plus HMO        (Dallas)                   4.6        3.0               -
            Today's Options       Midwest,
 H6169      Network PFFS          Southeast                 16.2        3.0             0.5
 H5378      Today's Options PPO   Southeast                  2.8        3.0             0.5


º (1)
º Membership as of December 31, 2013. Excludes 13,200 members in areas subject to 2014 Service Area Reductions. This includes 10,700 rural members whose plans were not renewed for 2014.

Notwithstanding continued efforts to improve or maintain our STAR ratings and other quality measures, there can be no assurances that we will be successful in doing so. Accordingly, our plans may not be eligible for full level quality bonuses or increased rebates, which could adversely affect the benefits such plans can offer, reduce membership, and reduce profit margins.

In addition, CMS has indicated that plans with a STAR rating of less than 3.0 for three consecutive years may be subject to termination. While we do not currently have any plans with a rating below 3.0, our inability to maintain STAR ratings of 3.0 or better for a sustained period of time could ultimately result in plan termination by CMS which could have a material adverse impact on our business, cash flows and results of operations. Also, the CMS STAR ratings/quality scores may be used by CMS to pay bonuses to Medicare Advantage plans that enable those plans to offer improved benefits and/or better pricing. Furthermore, lower quality scores compared to our competitors may result in us losing potential new business in new markets or dissuading potential members from choosing our plan in markets in which we compete. Lower quality scores compared to our competitors could have a material adverse effect on our rate of growth.

Stipulated minimum MLRs-Beginning in 2014, the new healthcare reform legislation will stipulate a minimum medical loss ratio, or MLR, of 85% for Medicare Advantage plans. This MLR takes into account benefit costs, quality initiative expenses, the ACA fee and taxes. Financial and other penalties may result from failing to achieve the minimum MLR ratio. Our reported Medicare Advantage MLR was 83.4% for the year ended December 31, 2013 and 80.6% for the year ended December 31, 2012. Although the methodology for defining medical costs and for calculating MLRs was recently defined by CMS, it remains subject to interpretation and we are continuing to evaluate its impact. Complying with such minimum ratio by increasing our medical expenditures or refunding any shortfalls to the federal government could have a material adverse effect on our operating margins, results of operations, and our statutory required capital.

Non-deductible health insurance industry fee ("ACA Fee")-Beginning in 2014, the new healthcare reform legislation will impose an annual aggregate health insurance industry fee of $8.0 billion (with increasing annual amounts thereafter) on health insurance premiums, including Medicare Advantage premiums, that is not deductible for income tax purposes. As a result, our effective income tax rate will increase in 2014 and future years. Our share of the new fee will be based on our pro rata percentage of premiums written during the preceding calendar year compared to the industry as a whole, calculated

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annually. This fee will first be expensed and paid in 2014 and will affect the profitability of our Medicare Advantage business and could have a material adverse effect on our results of operations. We have estimated that the fee to be paid in 2014, based on 2013 net written premiums, will be approximately $22 million. Pursuant to the guidance issued by the FASB in July 2011, for reporting in accordance with U.S generally accepted accounting principles (GAAP), the liability for the fee will be estimated and recorded in full once the entity provides qualifying health insurance in the corresponding period with a corresponding deferred cost that is to be amortized to expense on a straight-line basis over the applicable calendar year. For statutory reporting purposes, the fee will be expensed on January 1 in the year of payment, rather than amortized to expense over the year. The ACA fee will be included in other operating costs, however, will be factored in when calculating the stipulated minimum MLR.

Coding intensity adjustments-Under the new healthcare reform legislation, the coding intensity adjustment instituted in 2010 became permanent, resulting in mandated minimum reductions in risk scores of 4.91% in 2014 increasing each year to 5.91% in 2018. These coding adjustments may adversely affect the level of payments from CMS to our Medicare Advantage plans.

Limitation on the federal tax deductibility of compensation earned by individuals-Beginning in 2013, with respect to services performed during 2010 and afterward, for health insurance companies, the federal tax deductibility of compensation will be limited under Section 162(m)(6) of the Code to $500,000 per individual and will not contain an exception for "performance-based compensation." This limitation has increased our effective tax rate by approximately 60 basis points for the year ended December 31, 2013 and 200 basis points for the year ended December 31, 2012.

Accountable Care Organizations-The Affordable Care Act established Accountable Care Organizations, or ACOs, as a tool to improve quality and lower costs through increased care coordination in the Medicare fee-for-service program. CMS established the Medicare Shared Savings Program, or MSSP, to facilitate coordination and cooperation among providers to improve the quality of care for Medicare fee-for-service beneficiaries and reduce unnecessary costs. To date, we have partnered with numerous groups of healthcare providers to form thirty-four ACOs that have been approved to participate in the MSSP. ACOs are entities that contract with CMS to serve the Medicare fee-for-service population with the goal of better care for individuals, improved health for populations and lower costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. We provide a variety of services to the ACOs, including care coordination, analytics and reporting, technology and other administrative services to enable these physicians and their associated healthcare providers to deliver better quality care, improved health and lower healthcare costs for their Medicare fee-for-service patients. As of December 31, 2013, we have incurred inception-to-date expenses of approximately $63 million, pre-tax, related to our ACO business, including our equity in the losses of our unconsolidated ACOs and have recognized no revenues to date. We also expect to incur significant costs during 2014. Under the MSSP, CMS will not make any payments to ACO's for the . . .

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