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WCG > SEC Filings for WCG > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for WELLCARE HEALTH PLANS, INC.



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Statements contained in this Form 10-Q for the quarterly period ended March 31, 2013 ("2013 Form 10-Q") that are not historical fact may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend such statements to be covered by the safe harbor provisions for forward-looking statements contained therein. Such statements, which may address, among other things, market acceptance of our products and services, product development, our ability to finance growth opportunities, our ability to respond to changes in laws and government regulations, implementation of our sales and marketing strategies, projected capital expenditures, liquidity and the availability of additional funding sources may be found in this section of this 2013 Form 10-Q and generally elsewhere in this report. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "targets," "predicts," "potential," "continues" or the negative of such terms or other comparable terminology. You are cautioned that forward-looking statements involve risks and uncertainties, including economic, regulatory, competitive and other factors that may affect our business. Please refer to Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012 ("2012 Form 10-K") and in Part II, Item 1A of this 2013 Form 10-Q, for a discussion of certain risk factors which could materially affect our business, financial condition, cash flows, and results of operations. 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 estimates of future earnings depend, in large part, on accurately predicting and effectively managing health benefits and other operating expenses. A variety of factors, including potential reductions in Medicaid and Medicare revenue, including due to sequestration, competition, changes in health care practices, changes in federal or state laws and regulations or their interpretations, inflation, provider contract changes, changes or suspensions or terminations of our contracts with government agencies, new technologies, government-imposed surcharges, taxes or assessments, reductions in provider payments by governmental payors, major epidemics, disasters and numerous other factors affecting the delivery and cost of health care, such as major health care providers' inability to maintain their operations, may affect our ability to control our medical costs and other operating expenses. Governmental action or inaction could result in premium revenues not increasing to offset any increase in medical costs or other operating expenses. Once set, premiums are generally fixed for one-year periods and, accordingly, unanticipated costs during such periods generally cannot be recovered through higher premiums. Furthermore, if we are unable to estimate accurately incurred but not reported 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 or regulatory action, including benefit mandates or reform of the Medicaid and Medicare programs, could have the effect of reducing the premiums paid to us by governmental programs, increasing our medical and 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.



We are a leading provider of managed care services to government-sponsored health care programs, focusing on Medicaid and Medicare. Headquartered in Tampa, Florida, we offer a variety of health plans for families, children, and the aged, blind and disabled, as well as prescription drug plans. As of March 31, 2013, we served approximately 2.7 million members nationwide. We believe that our broad range of experience and exclusive government focus allows us to effectively serve our members, partner with our providers and government clients, and efficiently manage our ongoing operations.

Summary of Consolidated Financial Results

Summarized below are the key highlights for the three months ended March 31, 2013. For a detailed discussion, refer to the "Results of Operations" section which discusses our consolidated and segment results for the quarter ended March 31, 2013.

Membership increased 7% compared to March 31, 2012 due to growth in our Medicaid segment, particularly in Kentucky and from our acquisition in South Carolina that was effective January 31, 2013, and growth in our Medicare Advantage ("MA") segment due to product design, marketing activities service area expansion and our Easy Choice acquisition in California that was effective November 1, 2012. These increases were partially offset by lower prescription drug plan ("PDP") membership based on our 2013 bid results.

Premiums increased 26%, reflecting the membership growth in our Medicaid and MA segments, as well as rate increases in certain of our Medicaid markets, mainly Kentucky, partially offset by the impact of lower PDP membership.

Net Income decreased, due mainly to a lower amount of net favorable development of prior years' medical benefits payable, increased medical expense associated with the flu, lower results in our PDP segment and increased selling, general and administrative ("SG&A") expense related to growth initiatives and investments in technology and infrastructure required by regulatory changes. Improved results in our Medicaid segment resulting from membership growth and rate increases in certain markets, as well as an additional tax benefit recognized in the current quarter, partially offset these decreases.

Key Developments

Presented below are key developments and accomplishments relating to progress on our strategic business priorities that occurred or impacted our financial condition and results of operations during 2013.

Effective March 31, 2013, we acquired Aetna Inc.'s Medicaid business in Missouri. Missouri Care, Incorporated ("Missouri Care") serves MO HealthNet Medicaid program members across the state. Missouri Care's provider network includes more than 50 hospitals and 9,500 physicians.

Effective January 31, 2013, we acquired UnitedHealth Group Incorporated's ("UnitedHealth") Medicaid business in South Carolina. WellCare of South Carolina, Inc. ("WCSC"), formerly UnitedHealthcare of South Carolina, Inc., participates in South Carolina's Healthy Connections Choices program across the majority of the state's 46 counties.

Easy Choice Health Plan, Inc. of California ("Easy Choice") increased its 2013 service area to 11 California counties, including the San Diego area and five counties in northern California. Easy Choice began offering MA chronic condition special needs plans in five of the 11 counties in its service area in January 2013.

As of January 1, 2013, we began serving Medicaid beneficiaries in Medicaid Managed Care Region 3 of the Commonwealth of Kentucky.

Effective January 1, 2013, we received an approximate 7.0% premium rate increase for the Kentucky Medicaid program. The Commonwealth of Kentucky also has accelerated to July 1, 2013, our 3.0% rate increase previously scheduled for October 1, 2013. These rate increases apply to all Medicaid geographic regions of the Commonwealth, other than Region 3. We believe that these activities will make the Medicaid program more stable from a financial standpoint.

Effective March 1, 2013, we expanded our Medicaid managed long-term care health plan into four new counties in the State of New York: Nassau, Richmond, Suffolk and Westchester counties.

Services began in March 2013 in Hawaii on a statewide basis under the Community Care Services Program, in which we case manage, authorize and facilitate the delivery of behavioral health services to Medicaid-eligible adults who have serious mental illnesses and who are participants in the state's QUEST Expanded Access (QExA) health program.

For the 2013 plan year, we have expanded the geographic footprint of our MA plans and we now offer plans in a total of 204 counties, including D-SNPs for those who are dually-eligible for Medicare and Medicaid in most of the MA markets we serve. This expansion is consistent with our focus on the lower-income demographic of the market and our ability over time to serve both the Medicaid- and Medicare-related coverage of these members.

In January 2013, our Florida Medicaid and Medicare health plans were awarded by the National Committee for Quality Assurance ("NCQA") Commendable accreditation. We continue to target accreditation for all of our health plans, and anticipate further progress in 2013.

Business and Financial Outlook

Political Environment Impacting our Business

Pursuant to the sequestration provisions of the Budget Control Act of 2011, approximately $1.2 trillion in domestic and defense spending reductions began in March 2013. A 2% rate reduction to the Medicare program began on April 1, 2013. We may be able to partially offset this reduction. However, there will be negative financial impact for the last nine months of 2013. In absence of further action by Congress, sequestration will continue annually for a 10-year period.

The President, the U.S. House of Representatives and U.S. Senate have each presented budget proposals for the fiscal year beginning October 2013, but no budget has yet been passed by Congress. Each of the three budget proposals would include reforms to both the Medicare and Medicaid programs. It is uncertain whether any or all of these proposals will pass, when they will pass or how they would impact our operations.

As of March 7, 2013, 18 states had been conditionally approved to operate state-based exchanges under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "2010 Acts") and seven states had been conditionally approved to operate a state partnership exchange. Exchanges are expected to begin enrolling individuals and small groups in October 2013 for plans going into effect on January 1, 2014. At this time, the exchanges' impact on our operations is uncertain.


A number of states are evaluating new strategies for their Medicaid programs. Given ongoing fiscal challenges, economic conditions, and the success of Medicaid managed care programs over the long run, states continue to recognize the value of collaborating with managed care plans to deliver quality, cost-effective health care solutions.

Current legislative sessions are winding down in most states. In those states requiring statutory or budget authority to administer Medicaid, states are debating the now-optional expansion of Medicaid under the 2010 Acts. Of the states in which we currently operate coordinated care plans:

Arizona, California, Connecticut, Hawaii, Illinois, New Jersey, New York and Ohio have stated their intention to expand Medicaid eligibility;

Georgia, Louisiana, South Carolina and Texas have stated their intention not to move forward with an expansion; and

Florida, Kentucky and Missouri continue to debate the expansion.

We offer Medicaid products in Florida, Georgia, Hawaii, Illinois, Kentucky, Missouri, New York, Ohio and South Carolina. Except in the case of Ohio, where we expect to discontinue offering Medicaid products in June 2013, if those states implement the Medicaid expansion, and depending on the mechanism by which they choose to implement the expansion, our membership could be reduced or increased. At this time, we are unable to predict the ultimate impact to our Medicaid membership. In California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Missouri, New York, Ohio, and Texas, we offer duals special needs plans ("D-SNPs"). The expansion of Medicaid in any of those states could impact the number of those eligible for both Medicare and Medicaid in the state.

The State of Florida is in the process of procuring Medicaid services. Florida's new Statewide Medicaid Managed Care ("SMMC") program will consist of a Long Term Care program and a Managed Medical Assistance Program (the "MMA program"). To date, Florida has received final approval from the Centers for Medicare & Medicaid Services ("CMS") to operate the Long Term Care program and tentative approval for the MMA program. Current contracts between the Florida Agency for Health Care Administration ("AHCA") and managed care organizations ("MCOs") to offer Medicaid managed care services, such as our Florida Medicaid contracts that expire in August 2015, are expected to be terminated early, possibly as early as the end of 2013 in connection with the implementation of the new MMA program.

The SMMC program represents a substantial redesign of the Florida Medicaid program. Most significantly, the substantial majority of eligible beneficiaries for Florida Medicaid will be mandated to enroll in a managed care plan under the SMMC program. Currently, managed care enrollment is optional for most Medicaid beneficiaries. Florida's fee-for-service primary care case management program, MediPass, will be discontinued. Most Medicaid recipients who are not eligible for long-term care services will receive their services through the MMA component of the SMMC program while those eligible for long-term care will receive services through the Long Term Care component. SMMC will include an "achieved savings rebate" in which MCOs will be required to rebate to AHCA half of their income (as determined in accordance with the plan contracts) between 5% and 10% of revenue and all of their income above 10% of revenue. In addition, capitated MCOs offering plans under MMA will be required to maintain a medical loss ratio of not less than 85% for at least the first full year of MMA program operation. MMA will also require MCOs to cover certain benefits they do not currently cover and will allow MCOs to offer expanded benefits. The number of MCOs offering Medicaid managed care plans will be limited to a small number of plans in each of 11 regions, while currently the number of plans is not limited. We recently responded to requests for proposals issued by AHCA to offer plans under the MMA component of the SMMC program for all 11 regions. We will not be participating in the Long Term Care component of SMMC. Bid results are anticipated to be announced in mid-September 2013, with an anticipated contract execution date of December 31, 2013. However, we cannot assure you that we will be awarded a contract to participate in the MMA program.

Additionally in Florida, AHCA plans to implement a new payment structure based on a diagnosis related group ("DRG") schedule to set reimbursement rates for certain providers whose contracts are tied to Medicaid effective July 1, 2013.

As discussed above, we began serving Medicaid beneficiaries in Region 3 of the Commonwealth of Kentucky on January 1, 2013. As of March 31, 2013, our membership for this region was approximately 14,000. Region 3 members that were auto- assigned to us had the opportunity to change their health plan through the end of March.


In February 2013, CMS announced proposed 2014 rates that were a 7.0% to 9.0% rate reduction from 2013 rates. On April 1, 2013, CMS revised their proposed 2014 rates, which resulted in a rate decrease of approximately 2.0% to 4.0% from 2013 rates.

In April 2013, CMS announced changes to the MA and PDP Medicare risk adjustment system which will be phased in over the 2014 and 2015 plan years. In addition, CMS will implement an MA coding pattern difference reduction of 4.91% for payment year 2014, which will offset a meaningful part of the rate improvement. This new risk adjustment model appears to most severely affect our rates for those individuals with complex medical conditions, including many of our dual-eligible and lower income members.

In 2014, CMS will continue to tier payments based on the quality ratings of MA plans, paying less to plans scoring less than 5 stars on the CMS star quality rating scale, as we do. On average, our MA plans in 2012 scored below 3 stars, with some plans scored at or above 3 stars. Our MA plans that operate at 3 stars will earn a 3% quality bonus demonstration percentage, compared to the 5% available to 4, 4.5 and 5 star plans.


In April 2013, CMS also announced changes for PDPs relating to applicable beneficiary and plan dispensing/vaccine administration fees for drug claims that straddle the coverage gap for the 2014 plan year. In addition, CMS decreased the Part D deductible, the initial coverage limit, and the out-of-pocket threshold for the catastrophic benefit. We are still evaluating the effect these changes will have on our 2014 PDP operations.

Based on the outcome of our 2013 stand-alone PDP bids, our plans are below the benchmarks in 14 of the 34 CMS regions and within the de minimis range of the benchmark in five other CMS regions. Comparatively, in 2012, our plans were below the benchmark in five regions and within the de minimis range in 17 other regions. In 2013, we are being auto-assigned newly-eligible members into our plans for the 14 regions that are below the benchmark. We have retained our auto-assigned members in the five regions in which we bid within the de minimis range; however, we are not being auto assigned new members in those regions during 2013. Members previously auto-assigned to our PDP plans in regions for which our 2013 bids were not within the de minimis range were reassigned to other plans in January 2013. Membership has declined to approximately 757,000 as of March 31, 2013, a decrease from 869,000 as of December 31, 2012, due to the reassignment to other plans of members who were previously auto-assigned to us, primarily in California, offset in part by additional auto-assignments to us in other regions and an increase in the members who actively chose our PDP plans. We expect membership for the remainder of 2013 to be relatively stable.

Dual Eligibles

As of April 19, 2013, California, Illinois, Massachusetts, Ohio and Washington states have each executed a Memorandum of Agreement with CMS to implement a Duals Financial Alignment Demonstration Program ("Duals Demonstration Program"), and 16 states are still negotiating with CMS on their demonstration parameters. We may participate in some of the Duals Demonstration Programs that are pending CMS approval, depending on the ultimate program design.

For 2013 and 2014, beneficiaries eligible for both Medicaid and Medicare, or dual-eligible beneficiaries, subject to a Duals Demonstration Program will be able to elect to remain in or join a WellCare plan only during the annual enrollment period or special election periods. Dual-eligible beneficiaries enrolled in WellCare products and subject to passive enrollment will have the opportunity to opt out of a Duals Demonstration Program and remain in a WellCare plan up until the last day of the month prior to the effective date of enrollment. Beneficiaries will also have the ability to opt out of the Duals Demonstration Program on a monthly basis which could impact PDP enrollment. For those states that have a Duals Demonstration Program in which we do not participate, the membership in our MA plans or PDP could be reduced, depending on the program design. However, the potential impact of the Duals Demonstration Program on our MA and PDP membership has decreased as a result of changes to the programs' eligible populations and state implementation time frames. For example, California and New York have recently delayed implementation of their programs to October 2013 and April 2014, respectively. In addition, the California Duals Demonstration Program limits the total number of individuals eligible to 456,000, with no more than 200,000 in Los Angeles County.


Consolidated Financial Results

The following table sets forth consolidated statements of operations data, as
well as other key data used in our results of operations discussion for the
three months ended March 31, 2013 compared to the three months ended March 31,
2012. These historical results are not necessarily indicative of results to be
expected for any future period.

                                         For the Three Months Ended
                                                 March 31,                          Change
                                           2013               2012          Dollars      Percentage
Revenues:                                          (Dollars in millions)
Premium                              $     2,252.3       $    1,788.5     $    463.8         25.9  %
Investment and other income                    4.3                2.8            1.5         53.6  %
Total revenues                             2,256.6            1,791.3          465.3         26.0  %

Medical benefits                           1,987.3            1,521.8          465.5         30.6  %
Selling, general and administrative          213.4              161.7           51.7         32.0  %
Medicaid premium taxes                        21.3               20.4            0.9          4.4  %
Depreciation and amortization                 10.1                7.0            3.1         44.3  %
Interest                                       1.6                1.1            0.5         43.5  %
Total expenses                             2,233.8            1,712.0          521.8         30.5  %
Income before income taxes                    22.9               79.3          (56.4 )      (71.1 )%
Income tax expense                             1.4               28.1          (26.7 )      (95.0 )%
Net income                           $        21.5       $       51.2     $    (29.7 )      (58.0 )%
Effective tax rate                             5.9 %             35.4 %                     (29.5 )%


                      March 31, 2013                 December 31, 2012                  March 31, 2012
                              Percentage of                    Percentage of                    Percentage of
Segment        Membership         Total         Membership         Total         Membership         Total
Medicaid       1,690,000            62.5 %      1,587,000            59.5 %      1,486,000            58.7 %
MA               256,000             9.5 %        213,000             8.0 %        150,000             5.9 %
PDP              757,000            28.0 %        869,000            32.5 %        897,000            35.4 %
Total          2,703,000           100.0 %      2,669,000           100.0 %      2,533,000           100.0 %

As of March 31, 2013, we served approximately 2,703,000 members, an increase of approximately 34,000 members at December 31, 2012 and an increase of approximately 170,000 members at March 31, 2012. We experienced membership growth in both our Medicaid and MA segments, which was partially offset by a decline in PDP membership. Medicaid segment membership increased by 103,000 compared to December 31, 2012 due to the acquisition of UnitedHealth's South Carolina Medicaid business effective January 31, 2013, which accounted for 53,000 members, growth in Florida and growth in our Kentucky Medicaid program, including approximately 17,000 beneficiaries from Region 3 which we began serving effective January 1, 2013. Members for Region 3 were able to switch plans through March 2013, and our membership decreased from 20,000 at January 1, 2013 due to these changes. MA segment membership increased 43,000 compared to December 31, 2012, mainly from the results of the annual election period, which resulted in an increase of approximately 37,000 members effective January 1, 2013, as well as our continued focus on dually-eligible beneficiaries and expansion into new counties. In our PDP segment, membership decreased by 112,000 compared to December 31, 2012 as a result of our 2013 PDP bids, which resulted in the reassignment to other plans, effective January 1, 2013, of members who were auto-assigned to us in 2012 or prior years.

Net Income

Our net income for the three months ended March 31, 2013 decreased by approximately $29.7 million compared to the same period in 2012, mainly due to a lower amount of favorable development of prior years' medical benefits payable in 2013 compared to 2012, increased medical expense associated with the flu, lower results in our PDP segment and increased SG&A expense, partially offset by improved results in our Medicaid segment. The decline in PDP segment results is mainly due to the decrease in membership and higher medical benefits expense ratio ("MBR"). The increase in SG&A is related to the growth in membership and premiums, integration of our recent acquisitions, and infrastructure costs required by regulatory changes and investigation-related litigation and other resolution costs. Investigation-related litigation and other resolution costs increased $9.2 million on a pre-tax basis in 2013 compared to 2012, but was mostly offset by an increased tax deduction associated with such costs. The improved result in our Medicaid segment was largely driven by the rate increase and increased membership in our Kentucky Medicaid program, membership growth in Florida and the impact of rate increases in certain other markets.

Premium Revenue

Premium revenue for the three months ended March 31, 2013 increased by approximately $463.8 million, or 26%, compared to the same period in the prior year. The increase is primarily attributable to our acquisitions and organic membership growth in our Medicaid and MA segments and rate increases in certain of our Medicaid markets, including the 7% increase in Kentucky that was effective January 1, 2013. These increases were partially offset by the impact to lower membership in our PDP segment. Premium revenue includes $21.3 million . . .

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