SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
March 4, 1996
SIERRA HEALTH SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 1-8865 88-0200415
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(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
2724 North Tenaya Way
Las Vegas, Nevada 89128
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 242-7000
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Item 5. Other Events
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, Sierra Health Services, Inc. ("Sierra"
or the "Company") is hereby filing cautionary statements identifying important
risk factors that could cause the company's actual results to differ materially
from those projected in forward-looking statements of the Company made by or on
behalf of the Company.
Sierra wishes to caution readers that the following important risk
factors, among others, in some cases have affected, and in the future could
cause, Sierra's actual financial or enrollment results to differ materially from
those expressed in any projected, estimated or forward-looking statements
relating to Sierra.
Lack of Control Over Premium Structure; Lack of Control Over and
Unpredictability of Medical Costs. A substantial amount of Sierra's revenues are
generated by premiums, including capitation payments, which represent fixed
monthly payments for each person enrolled in Sierra's plans. If Sierra is unable
to obtain adequate premiums because of competitive or regulatory considerations,
Sierra could incur decreased margins or significant losses. Because a
significant portion of Sierra's premium revenues are paid by the federal
government in connection with the Medicare program, to the extent Medicare
premium rates do not keep pace with rising medical costs, Sierra's profitability
could be materially adversely affected. Historically, these rates have been
subject to wide variations from year to year and have decreased in two of the
past six years.
Sierra's profitability is also dependent, in large part, upon its
ability to accurately project and manage health care costs. Health care costs
are affected by a variety of factors that are difficult to predict and not
entirely within Sierra's control, including the severity and frequency of
claims. Medical cost inflation, new technologies, natural disasters, epidemics
and other external factors relating to the delivery of health care services may
adversely affect Sierra's ability to manage the costs of providing health care
services. Hospital utilization and associated costs constitute the most variable
components of Sierra's Medical expenses. Although Sierra attempts to manage its
health care costs effectively, there can be no assurance that Sierra will be
able to continue to do so in the future.
Dependence on Key Enrollment Contracts. For the year ended December 31,
1995, Sierra received approximately 24% of its total revenues pursuant to its
contract with the United States Health Care Finance Administration ("HCFA") to
provide health care services to Medicare enrollees. Sierra's contract with HCFA
is subject to annual renewal at the election of HCFA and requires Sierra to
comply with federal HMO and Medicare laws and regulations and may be terminated
if Sierra fails to so comply. The termination of Sierra's contract with HCFA
would have a material adverse effect on Sierra's business. In addition, there
have been, and Sierra expects that there will continue to be, a number of
legislative proposals to limit Medicare reimbursements. Future levels of funding
of the Medicare program by the federal government cannot be predicted with
certainty.
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Sierra's ability to obtain and maintain favorable group benefit
agreements with employer groups affects Sierra's profitability. The agreements
are generally renewable on an annual basis but are subject to termination on 60
days' prior notice. Although no employer group accounts for more than 5% of
total revenues, the loss of one or more of the larger employer groups could have
a material adverse effect upon Sierra's business.
Health Care Reform. As a result of the continued escalation of health
care costs and the inability of many individuals to obtain health care
insurance, numerous proposals relating to health care reform have been or may be
introduced in the United States Congress and in state legislatures. It is
uncertain what reforms will ultimately be enacted by the federal government or
any state government. Any proposals affecting underwriting practices, limiting
rate increases or affecting contracting arrangements (including proposals to
require HMOs and Preferred Provider Organizations ("PPOs") to accept any health
care providers willing to abide by an HMO's or PPO's contract terms) may have a
material adverse effect on Sierra's business.
Competition. Managed care companies and HMOs operate in a highly
competitive environment. Sierra has numerous types of competitors, both local
and national, including, among others, HMOs, PPOs, self-insured employer plans
and traditional indemnity carriers, many of which have substantially larger
total enrollments, have greater financial resources and offer a broader range of
products than Sierra. The Company has encountered the effects of increased
competition in the Las Vegas market. Additional competitors with needs or
desires for immediate market share or those with greater financial resources
than Sierra have or may enter Sierra's market. Certain competitive pressures
have limited Sierra's ability to increase, or in some instances, maintain the
premiums charged to certain employer groups. The inability of Sierra to manage
costs effectively may have an adverse impact on Sierra's future results of
operations by reducing profitability margins. In addition, competitive pressures
may also result in reduced membership levels or decreasing profit margins and
there can be no assurance that the Company will not incur increased pricing and
enrollment pressure from local and national competitors. Any such pressures
could materially affect Sierra's results of operations.
Absence of Accreditation from the National Committee on Quality
Assurance. Sierra has been denied accreditation from the National Committee on
Quality Assurance (the "NCQA"). In 1995, Health Plan of Nevada, Inc., Sierra's
largest subsidiary, voluntarily applied for accreditation from the NCQA with
respect to its operations in southern Nevada. The Company has addressed most of
the NCQA's findings and intends to reapply in 1996. Southwest Medical Associates
("SMA"), the Company's multi-specialty clinic, has received a full three year
accreditation from the American Association for Ambulatory Health Care -- the
highest accreditation issued to ambulatory care facilities. SMA is the only
multi-specialty site in Nevada to be awarded this accreditation. Also, HPN,
along with the Company's managed indemnity subsidiary, have received "excellent"
ratings from the A.M. Best Company. There can be no assurance, however, that
Sierra will receive or maintain NCQA or other accreditations in the future and
there is no basis to predict what effect, if any, the lack of NCQA or other
accreditations will have on HPN's competitive position in southern Nevada.
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Geographic Concentration; Current Expansion Program; Limited Success of
Previous Expansion Program. Sierra's operations are currently concentrated in
southern Nevada. Any adverse economic, regulatory or other developments that may
occur in southern Nevada may negatively impact Sierra's operations and financial
condition. In the past, Sierra also attempted to expand its operations outside
of Las Vegas. These activities met with limited success and, in some cases,
resulted in Sierra incurring significant losses. Although Sierra believes that
it is now more experienced, there can be no assurance that Sierra will be able
to recover its initial investments or expand into other regions successfully and
without incurring losses.
Government Regulation; Potential Decline in Enrollment. Sierra's
business is subject to extensive federal and state laws and regulations,
including, but not limited to, financial requirements, licensing requirements,
enrollment requirements and periodic examinations by governmental agencies. In
particular, Sierra's HMO and insurance subsidiaries are subject to regulations
relating to cash reserves, minimum net worth, premium rates and approval of
policy language and benefits. Although such regulations have not significantly
impeded the growth of Sierra's business to date, there can be no assurance that
Sierra will be able to continue to obtain or maintain required governmental
approvals or licenses or that regulatory changes will not have a material
adverse effect on Sierra's business.
Dependence Upon Health Care Providers. Sierra's profitability is
dependent, in large part, upon its ability to contract favorably with hospitals,
physicians and other health care providers. Sierra's contracts with its primary
providers are generally renewable annually, but certain contracts may be
terminated on 90 days' prior written notice by either party. There can be no
assurance that Sierra will be able to continue to renew such contracts or enter
into new contracts enabling it to service its members profitably. Sierra expects
that it will be required to expand its health care provider network in order to
service membership growth adequately; however, there can be no assurance that it
will be able to do so on a timely basis or under favorable terms.
Litigation and Insurance. Sierra is, and is likely in the future to be,
subject to certain types of litigation, including medical malpractice claims and
claim disputes pertaining to its contracts and other arrangements with
providers, employer groups and their employees and individual members. Sierra
maintains general and professional liability, property and fidelity insurance
coverage and its multi-specialty medical group maintains excess malpractice
insurance for the providers presently employed by the group. Additionally,
Sierra requires all of its independently contracted provider physician groups,
individual practice physicians, specialists, dentists, podiatrists and other
health care providers (with the exception of certain hospitals) to maintain
professional liability coverage. Certain of the hospitals with which Sierra
contracts are self-insured. Sierra may incur losses not covered by insurance,
beyond the limits of its insurance coverage for its employed physicians and
staff, for acts or omissions by independent providers who do not carry
sufficient malpractice coverage, or for other acts or omissions. Sierra may in
the future be unable to obtain adequate insurance. Generally, punitive damage
awards are not covered by insurance. Although Sierra believes that it currently
carries adequate insurance, no assurance can be given that Sierra's insurance
coverage will be adequate in amount or type, or as to the future availability or
cost of such insurance.
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Management Information System. Sierra's management information system
is critical to its current and future operations. The information gathered and
processed by Sierra's management information system assists Sierra in, among
other things, pricing its services, monitoring utilization and other cost
factors, processing provider claims, providing bills on a timely basis and
identifying accounts for collection. Sierra regularly modifies its management
information system. Any difficulty associated with or failure of such system, or
any inability to expand processing capability or to develop and maintain
networking capability, could have a material adverse effect on Sierra's
business.
Dependence on Management. The success of Sierra has been dependent to a
large extent upon the efforts of Sierra's founder, Anthony M. Marlon, M.D., the
Chairman of the Board and Chief Executive Officer of Sierra, who has an
employment agreement with Sierra. Erin E. MacDonald has recently assumed the
duties of President from Dr. Marlon. Although Sierra believes that this change
and the development of the management staff have made Sierra less dependent on
Dr. Marlon, the loss of Dr. Marlon could still have a material adverse effect on
Sierra.
California Workers' Compensation Industry; Profit Uncertainties Related
to New Open Rating Environment. CII Financial, Inc. ("CII") is a workers'
compensation company, which Sierra acquired on October 31. 1995. CII, through
two of its subsidiaries, writes workers' compensation insurance principally in
California. The workers' compensation industry in California has undergone major
changes in the past several years. In 1991 and 1992, the California recession
and abuses of the workers' compensation system, including a significant increase
in "stress and strain" claims, adversely affected the workers' compensation
insurance industry, including CII. Although fraudulent claims still occur,
management of CII believes that subsequent legislation has decreased the level
of abuse by requiring, among other changes, that a preponderance of an injury
must be caused by work-related activities while prior law only required 10%, and
additionally, by restricting post-termination claims by requiring that the
injured employee notify the employer of the injury prior to the employee's
termination. Also, subsequent to such legislation, the frequency and severity of
"stress and strain" claims have been reduced.
Premium rates, which are regulated by the Department of Insurance in
California, have been under significant pressure and, at times, been required to
be reduced in 1992 through 1994. Pursuant to workers' compensation legislative
reforms enacted in 1993, "open rating" rules replaced "minimum rate" laws
effective January 1, 1995. Under minimum rate laws, insurers could not charge a
premium which was less than the published minimum rate and, therefore, competed
primarily on the basis of service to policyholders, the level of agent
commissions and policyholders' dividends. The new open rating environment has
resulted in lower premium rates and lower net income to CII in 1995 and brought
further uncertainties to premium revenues and continued operating profits due to
increased price competition and the risk of incurring adverse loss experience
over a smaller premium base.
Although CII intends to underwrite each account taking into
consideration the insured's risk profile, prior loss experience, loss prevention
plans and other underwriting considerations, there can be no assurance that CII
will be able to operate profitably in the California workers' compensation
industry, particularly with open rating, or that future workers' compensation
legislation will not be adopted in California or other states which might
adversely affect CII's results of operations.
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Geographic Concentration. For the year ended December 31, 1995,
approximately 84% of CII's direct written premiums were in California. As
discussed above, the California open rating environment has increased the risk
that CII will not be able to write workers' compensation insurance at adequate
rates. Consequently, CII's operating results are expected to be largely
dependent upon its ability to write profitable workers' compensation insurance
in California.
Loss Reserves. CII's loss reserves are estimates of future costs based
on various assumptions. The accuracy of these estimates may be affected by
external forces such as changes in the rate of inflation, the regulatory
environment, the judicial administration of claims, medical costs and other
factors. Because certain workers' compensation claims will not be fully paid for
several years or more, estimating reserves for such claims can be more difficult
and uncertain than estimating reserves in other lines of insurance in which the
period between the occurrence of the claim and final determination of the loss
is shorter. Included in the loss reserves are estimates for incurred but not
reported ("IBNR") claims which are established for unreported claims and adverse
loss developments relating to current and prior years. On a quarterly basis, CII
and an independent actuary review the adequacy of its loss reserves using
generally accepted actuarial methods, and annually, an opinion is issued by the
actuary as to the adequacy of the reserves. If the assumptions on which the
estimates are based prove to be incorrect and reserves are inadequate to cover
CII's actual experience, CII's profitability would be adversely affected.
CII Competition. Many of CII's competitors have been in business
longer, have larger volumes of business, offer a more diversified line of
insurance coverage, have greater financial resources, have greater distribution
capability and better financial risk ratings than CII. Under the new open rating
environment in California, CII believes that the price of workers' compensation
insurance will become an increasingly important factor. This is also true for
the other states in which CII does business. The future profitability of CII is
dependent upon its ability to effectively compete in these markets at premium
rates that will be adequate to fund claims and expenses and provide a profit.
The inability of CII to obtain adequate premium rates would have an adverse
effect on CII's results of operations. In addition, CII's largest insurance
subsidiary has not been able to pay policyholders' dividends since 1992 because
of regulatory restrictions and its other insurance subsidiary has not paid any
policyholders' dividends since 1992. The absence of policyholders' dividends
contributed to the decrease in premiums written in 1994 and could continue to be
a competitive disadvantage in the open rating environment.
Convertible Subordinated Debentures. CII has outstanding debentures
totalling $56,800,000. Sierra has a supplemental indenture providing that the
CII Debentures be convertible into shares of Sierra Common Stock at a current
conversion price $59.097 per share. The ability of CII insurance company
subsidiaries to upstream funds to CII to service the debentures is limited by
certain regulatory restrictions and capital requirements. Sierra has not
directly assumed CII's obligations under the CII Debentures or guaranteed their
repayment. Further, CII is making application to delist the debentures from the
American Stock Exchange. There can be no assurance that Sierra will be in a
position to prevent a default of the debentures in the future.
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Possible Volatility of Common Stock Price. Recently, there has been
significant volatility in the market prices of securities of companies in the
health care industry, including the price of the Sierra Common Stock. Many
factors, including medical cost increases, analysts' comments, announcements of
new legislative proposals or laws relating to health care reform, the
performance of, and investor expectations for, Sierra, the trading volume of the
Sierra Common Stock and general economic and market conditions, may influence
the trading price of the Sierra Common Stock. Accordingly, there can be no
assurance as to the price at which the Sierra Common Stock will trade in the
future.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SIERRA HEALTH SERVICES, INC.
(Registrant)
Date: March 4, 1996 /s/ James L. Starr
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James L. Starr
Vice President
Chief Financial Officer
and Treasurer
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