HEALTHCARE RECOVERIES INC, 10-K, 2000-03-14

HEALTHCARE RECOVERIES INC
10-K, 2000-03-14
HEALTH SERVICES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 14, 2000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 0-22585

HEALTHCARE RECOVERIES, INC.
(Exact Name of Registrant as Specified in its Charter)

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DELAWARE 61-1141758
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1400 WATTERSON TOWER
LOUISVILLE, KENTUCKY 40218
(Address of principal executive offices) (Zip Code)
(502) 454-1340
Registrant's telephone number, including area code
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Securities registered pursuant to Section 12(b) of the Act

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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None
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Securities registered pursuant to Section 12(g) of the Act:

TITLE OF CLASS
Common Stock, par value $.001 per share
(including rights attached thereto)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to be
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]

As of March 13, 2000, 11,225,188 shares of the registrant's Common Stock,
$0.001 par value were outstanding. The aggregate market value of Registrant's
Common Stock held by non-affiliates of the Registrant as of March 10, 2000 was
approximately $47,033,537 (based on the last sale price of a share of Common
Stock as of March 10, 2000 ($4.19)), as reported by The Nasdaq National Market.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 28, 2000 are incorporated herein by reference
in Part III.

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TABLE OF CONTENTS

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ITEM PAGE
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PART I
1. Business.................................................... 1
2. Properties.................................................. 10
3. Legal Proceedings........................................... 10
4. Submission of Matters to a Vote of Security Holders......... 13
Supplementary Item. Certain Risk Factors.................... 13
PART II
Market for the Registrant's Common Equity and Related
5. Stockholder Matters......................................... 13
6. Selected Financial Data..................................... 13
Management's Discussion and Analysis of Financial Condition
7. and Results of Operations................................... 15
7A. Quantitative and Qualitative Market Risk Disclosures........ 23
8. Financial Statements and Supplementary Data................. 23
Changes in and Disagreements with Accountants on Accounting
9. and Financial Disclosure.................................... 40
PART III
10. Directors and Executive Officers of the Registrant.......... 40
11. Executive Compensation...................................... 40
Security Ownership of Certain Beneficial Owners and
12. Management.................................................. 40
13. Certain Relationships and Related Transactions.............. 40
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
14. 8-K......................................................... 40
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THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
HEALTHCARE RECOVERIES, INC. OR ITS MANAGEMENT TEAM CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, 15 U.S.C.A. SECTIONS 77Z-2 AND
78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF HEALTHCARE RECOVERIES, INC. AND MEMBERS OF ITS
MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-K, AND ARE
HEREBY INCORPORATED BY REFERENCE. HEALTHCARE RECOVERIES, INC. UNDERTAKES NO
OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED
ASSUMPTIONS OR CIRCUMSTANCES, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES
TO FUTURE OPERATING RESULTS OVER TIME.

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PART I

ITEM 1. BUSINESS

GENERAL

Healthcare Recoveries, Inc. (the "Company" or "HCRI"), a Delaware
corporation, believes it is the leading independent provider of health insurance
subrogation recovery and other medical cost containment services for private
healthcare payors in the United States, based on the Company's experience and
assessment of its market. HCRI's primary service is subrogation claims recovery,
which entails the identification, investigation and recovery of accident-related
medical benefits incurred by its clients on behalf of their insureds, but for
which other persons or entities have primary responsibility. The Company's other
medical cost containment services primarily involve non-accident based recovery
or analyses and investigation of medical costs originating from illness or
injury. The Company's medical cost management services include hospital bill
auditing, contract compliance review, cost management consulting, coordination
of benefits and other overpayments recovery services. HCRI offers its services
on a nationwide basis to health maintenance organizations ("HMOs"), indemnity
health insurers, self-funded employee health plans, companies that provide
claims administration services to self-funded plans (referred to as "third-party
administrators"), Blue Cross and Blue Shield organizations and provider
organized health plans. Current clients include UnitedHealth Group, Humana Inc.,
Kaiser Permanente, The Principal Financial Group, Group Health, Inc. and
Prudential HealthCare, a member company of Aetna US Healthcare. The Company had
55.6 million lives under contract from its clientele at December 31, 1999, a 37%
increase from December 31, 1998.

ORGANIZATIONAL STRUCTURE

HCRI was incorporated on June 30, 1988 under the laws of the State of
Delaware. The Company was co-founded by its present Chief Executive Officer and
was initially funded by two venture capital investors. The Company operated as
an independent entity until August 28, 1995, when Medaphis Corporation
("Medaphis"), a Delaware corporation, acquired the Company for approximately
$79.1 million in a stock-for-stock exchange accounted for as a pooling of
interests. Medaphis sold the Company in an initial public offering in May 1997.
The Company is now publicly held and is traded on The Nasdaq National Market
under the symbol "HCRI."

ACQUISITIONS

On January 25, 1999, HCRI acquired the assets and certain liabilities of
Subro-Audit, Inc., a Wisconsin corporation ("SAI"), and a related entity,
O'Donnell Leasing Co., LLP, a Wisconsin limited liability partnership ("ODL"
and, together with SAI, "Subro Audit"), for approximately $24.4 million (the
"Subro Audit Acquisition"), using available unrestricted cash. HCRI may pay up
to $7.0 million through January 2001, pursuant to an earn-out arrangement. (An
amount of $8.5 million is held in escrow for the potential earn-out in
connection with the Subro Audit Acquisition and is included in restricted cash
at December 31, 1999). SAI is based in Wisconsin and provides subrogation
recovery services to an installed base of lives, which are covered by insurers,
HMOs and employer-funded plans, throughout the United States. The Subro Audit
Acquisition was accounted for using the purchase method of accounting.

On February 15, 1999, HCRI acquired the assets and certain liabilities of
MedCap Medical Cost Management, Inc., a California corporation ("MedCap"), for
approximately $10 million, using available unrestricted cash and borrowed funds
(the "MedCap Acquisition" and, together with the Subro Audit Acquisition, the
"Acquisitions"). The Company paid approximately $4.5 million on February 15,
2000, pursuant to an amendment to the original earn-out agreement. Pursuant to
the same amendment, through January 15, 2001, the Company may pay up to 50% of
the fees collected in relation to certain negotiated contracts, less associated
expenses. MedCap provides a variety of medical cost management services to
health insurers and HMOs, primarily in California. These services include
hospital bill auditing, contract compliance review, identification of certain
other payments, and cost management consulting services. The MedCap Acquisition
was accounted for using the purchase method of accounting.

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STRATEGY

HCRI intends to pursue a two-fold growth strategy. First, with respect to
its existing subrogation recovery business (which includes the Subro Audit
Acquisition), HCRI will focus on (i) servicing its existing client base, (ii)
selling and installing those additional lives covered by contracts with existing
clients and (iii) selling and installing new clients and cross-selling expanded
product offerings. HCRI will continue to explore strategic acquisitions, which
meet its selection criteria. The February 1999 acquisition of MedCap enabled
HCRI to broaden its product base to provide medical cost management services to
healthcare insurers and HMOs. In addition to medical cost management services,
HCRI is in the initial stages of rolling out a service which offers its clients
the ability to detect, audit and recover a variety of claims overpayments.

Under the second aspect of its growth strategy, HCRI intends to extend its
systems-driven, process-oriented approach, through acquisitions and internal
development, to outsourcing opportunities in other service industries. The
defining characteristics of HCRI's business model are (i) the ability to
automate clerical and administrative tasks, using sophisticated and proprietary
computer applications; and (ii) the ability to standardize and scale work using
process management and classical work measurement techniques. Using this model,
HCRI believes that it can dramatically increase the productivity of the skilled
knowledge workers who make up its labor force, and successfully implement
pricing strategies that will reward HCRI for those productivity gains.

HCRI believes that future development opportunities are likely to be
characterized by outsourcing business services that will produce predictable and
recurring revenue streams; competitive advantages from effective process
management, proprietary systems and the provision of knowledge-rich services;
the development of niche markets; value-based pricing; and a non-exclusive focus
on healthcare information services.

INDUSTRY

Outsourcing. The Company believes that in recent years, businesses have
increasingly outsourced non-core specialized business functions. Because of
expertise and economies of scale, companies that provide specialized services
are often able to deliver the requisite service at lower costs and of similar or
higher quality than could be achieved by their clients.

Since the late 1980s, healthcare payors have experienced increasing (i)
price competition, (ii) regulatory complexity and related administrative
burdens, (iii) costs of healthcare claims, and (iv) average age of the insured
population. These factors, resulting from the rapid growth of managed care,
improvements in medical technology, consumer-oriented political pressure and an
aging U.S. population, tend to result in healthcare payors concentrating their
resources on their core business. This, in turn, provides on-going opportunities
for enterprises, like the Company, which are able to perform non-core business
functions on behalf of healthcare payors.

The recovery process is complex and although many healthcare payors operate
internal recovery departments, HCRI believes that these departments are not
generally as effective per insured life as the Company's operations. HCRI
believes that (i) the relatively small size of recoverable funds as a percentage
of claims paid, (ii) the need for healthcare payors to focus on core
competencies and (iii) the complexity of the recovery process and economies of
scale will continue to provide opportunities for growth of the Company.

Recovery Rights of Healthcare Payors. By contract and state law,
healthcare payors are generally entitled to certain rights with respect to paid
healthcare claims that may be the primary obligation of other insurance
carriers. For example, an HMO may pay the hospitalization and related health
expenses of a member who is injured in an automobile accident. However, the
responsible party is generally liable to the injured person for the damages
arising from the injury, which include lost wages, property loss, pain and
suffering and medical benefits. The responsible party usually has a liability
insurance policy that will pay covered damages, including medical benefits, upon
the acceptance of the injured party's claim. The healthcare payor actually
providing or paying for the medical benefits conferred on the injured party (in
this example, an

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HMO) may have a variety of rights through which it is entitled to recover the
value of such medical benefits from the responsible party and the responsible
party's liability insurer.

These recovery rights include:

(i) the right of subrogation, which allows the healthcare payor to
recover accident-related medical claims directly from the responsible party or
the responsible party's insurance carrier;

(ii) the right of reimbursement, which allows the healthcare payor to
recover from the injured party any payment received from the responsible party
or the responsible party's insurance carrier relating to this injury;

(iii) the right of reimbursement for medical benefits provided for
work-related injuries, which are typically excluded from the healthcare
insurer's coverage; and

(iv) other recovery rights against automobile insurers and other
liability insurers arising from coordination of benefits provisions in
healthcare and property and casualty insurance coverages.

The industry conditions described above have contributed to the growing
need for a cost-effective provider of subrogation services. HCRI believes that
it is the leading independent provider of subrogation and other related medical
cost containment recovery services for private healthcare payors in the United
States. HCRI's success is a result of the implementation of its recovery
process, the skill and knowledge of its employees, its approach to sales and
marketing, its client base, and its proprietary information management system,
all described below:

THE RECOVERY PROCESS

HCRI utilizes a recovery process to implement its post-payment cost
containment services, which include subrogation, hospital bill audit and
overpayment recovery services. HCRI uses proprietary and other software and
various business processes to identify those claims that have recovery
potential. Client-specific threshold dollar amounts are utilized to identify
files where its clients may have a recovery right for subrogation for the
medical benefits provided. In the case of hospital bill audit services, HCRI
utilizes specific threshold dollar amounts to investigate proper payment for
medical procedures.

Following the identification and investigation of identified claims, HCRI
proceeds to recover from the financially responsible party the value of those
covered medical benefits provided. HCRI has automated this complex processing of
all raw data and the management, follow-up and generation of correspondence. The
use of an automated process substantially increases productivity and enables
specially trained personnel to focus more intently on matters requiring their
professional judgement and expertise. The automated process also allows the
Company to pursue claims that would otherwise be deemed too small to pursue
economically. HCRI believes that its ability to effectively recover a broad
range of claim sizes is an important competitive advantage in the market. In
addition to automating the recovery process, HCRI's proprietary software and
other systems generate significant operations and management information, which
enables the Company to employ production and quality standards in the context of
providing specialized services.

The recovery process has been refined to four major, interrelated steps:
(i) automated identification of related claims provided electronically by its
clients; (ii) investigation of potentially recoverable claims; (iii) assertion
and management of potentially recoverable claims; and (iv) negotiation and
settlement of claims. The Company dedicates staff with specialized skills to
individual services to optimize recoveries.

Automated Identification of Claims with Recovery Potential. The Company's
specialty is using systematic identification methods to determine which files to
pass on to the investigation stage. Criteria specific to each recovery service
identify potential recoveries. The automated selection, analysis and processing
of raw claims data are handled primarily through HCRI's proprietary selection
software. Information regarding diagnoses, the cost of treatments, insured
demographics (names, addresses and telephone numbers, etc.) and related claims
is provided to HCRI electronically by the payor. The automated systems include
direct connections to HCRI's clients' claims information systems, subject to
various security controls to limit

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access internally. HCRI's trained staff identifies, sorts, vets and organizes
raw claims data into usable form, essentially engaging in "data mining."

For the subrogation service, the primary vehicle for the identification of
injured insureds is an automated analysis of the clients' claims data. This
system identifies potentially recoverable claims and, using client-specific
protocols, opens an on-line, electronic file for such claims. After files are
opened, the systems automatically track the addition of medical expenses to
these files, so that they are updated as additional expenses are paid. Since its
inception, HCRI has automatically opened over 29.7 million of such on-line
files.

The Company's database of information captures over 500 data elements of
financial, demographic and clinical data from members, providers and payers. The
Company utilizes this data to project potential savings outcomes and pre-screen
claims for its various audit services. Hospital contract terms are also
programmed into the system, which then reviews claims against the specific
contract provisions to identify discrepancies. The database of statistical
information is refined to include the results of each completed audit. Hospital
bill claims are selected for audit based upon statistical analysis and a
comparison to previously audited claims. Typically, claims with billed charges
greater than specified thresholds are selected for audit. For hospital bill
audit services, every claim is automatically reviewed in a complete, focused
audit to refine selection criteria.

Investigation of Potentially Recoverable Claims. By focusing
investigations only on those cases with the greatest potential for recovery,
HCRI minimizes member contacts and maximizes recovery potential. The process for
investigation is tailored to the specific dynamics of the individual service as
follows.

Subrogation. Recoveries are typically related to accidental injuries.
Claims may involve automobile accidents, property & premises injuries,
workers compensation, product liability or medical malpractice. When a file
of claims reaches a value determined by HCRI, the system automatically
generates a series of inquiry letters that are sent to the injured insured.
These individuals respond by calling the Company's customer service
department to provide the facts of the accident. HCRI also initiates phone
calls if the insured does not respond to the inquiry letters in a
reasonable period of time. Historically, approximately 90% of the injured
insureds ultimately respond to HCRI's inquiries and approximately 18% of
the claims investigated by customer service representatives are classified
as recoverable. Once a file of related claims is identified as recoverable,
the system updates the backlog and assigns the file to the appropriate
recovery person who begins the assertion and management of recoverable
claims. Since its inception, HCRI has investigated over 5.3 million
accidents.

Hospital Bill Audit. Claims may be reviewed under the Company's
hospital bill audit services, which is a process for establishing accurate
billing based on the care and services documented by healthcare
professionals and ordered by the physician in the medical record as
compared to the itemized billed charges. When a claim is identified, it is
automatically assigned to a nurse auditor who will conduct an audit of all
the line items that make up the claim at the site of the hospital. Based on
historical experience, approximately 93% of reviewed claims generate
recoveries.

Assertion and Management of Potentially Recoverable Claims. The workflow
performed by the various recovery personnel is directed and guided step-by-step
by the Company's proprietary and other software. The Company's systems document
activity on the claim files and provide an interconnected record of
correspondence and notes taken by the recovery personnel with respect to each
file. HCRI recovery personnel annotate the files on-line, as necessary, to
document progress, developments and status and otherwise maintain the history of
each claim.

Subrogation. Once a file of claims is classified as recoverable, HCRI
recovery personnel, who are required to undergo extensive training, proceed
to assert the recovery rights of HCRI's clients and track the claims'
history and development. The employees contact all necessary parties to
inform them of the existence and value of the recovery claim. These parties
generally include the liability insurer for the responsible party, the
insured and the insured's attorney, if any, in conjunction with the claim.
Recovery personnel maintain contact with the parties involved, including
the responsible party (or insurance carrier), until the claim is settled.
Settlement may not occur until several years after the date of payment.
During this phase of the recovery process, approximately 40% of the amounts
initially entered into

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backlog (the dollar amount of potentially recoverable claims that the
Company is pursuing) as recoverable are rejected, in which case further
activity is terminated and backlog is reduced.

Hospital Bill Audit. Registered nurses review hospital bills line by
line to determine if inaccuracies exist. This review is completed on-site
at the hospital facility where the medical record exists. These audits
benefit any health plan that pays a portion of a claim based on a percent
of billed charges. Nurse auditors review the total claim file to compare
the medical record to the line item bill to ascertain that a physician
ordered the service performed, the supplies billed were actually used and
the medication billed was actually administered. The nurse auditor also
verifies that the billing is in compliance with the provider contract and
that stoploss or outlier provisions are correctly billed. Historically,
hospital bill audits have resulted in savings of approximately 5% to 6%.

Negotiation and Settlement of Claims. The recovery process culminates in
the negotiation and settlement of claim files.

Subrogation. Within the settlement guidelines established by each
client and HCRI's standard operating procedures, recovery personnel close
recoverable files and remove them from backlog by making recoveries or by
rejecting files and terminating recovery efforts. Once a settlement is made
and recorded in the system, receipt of cash is anticipated and monitored by
the responsible employee. Cash receipts are posted to the credit of the
appropriate client.

Claims remain the property of HCRI's clients and litigation is
commenced solely at their written direction; similarly, clients may
terminate litigation or other recovery efforts at any time for any reason.
HCRI customarily bears the cost of legal services as part of the services
to its clients. HCRI has established what it believes are cost-effective
relationships with providers of legal services, including its relationship
with Sharps & Associates, PSC, a law firm solely owned by Douglas R.
Sharps, HCRI's Executive Vice President -- Finance and Administration,
Chief Financial Officer and Secretary. This law firm employs 25 attorneys,
9 paralegals and 1 administrative assistant at its offices in Louisville,
Kentucky; Pleasanton, California; Chicago, Illinois; Tampa, Florida;
Pittsburgh, Pennsylvania; Dallas, Texas; and Milwaukee, Wisconsin. Mr.
Sharps receives no personal benefit from his ownership of the firm. See
Note 7 in Item 8. "Financial Statements and Supplementary Data."

Although some recoveries will be made during the first year of
service, the average time to make a recovery is 18 to 24 months from
installation, with substantially all recoveries made by the sixth year. The
timing of recoveries is driven by the payment cycle of claims (which is the
source of recoveries made by the Company) and circumstances specific to
each claim (e.g., identification of responsible party, responsiveness of
responsible party, cooperation of parties involved, factual complexity and
litigation). The amount of claims recoveries made by the Company on behalf
of a client is generally less than the amount of backlog generated on
behalf of such client. This is for a number of reasons, including (i) the
inadequacy of insurance coverage or other available source of funds to pay
the claim; (ii) the absence of third-party liability; or (iii) the
settlement of the claim for less than full value in accordance with HCRI's
established policies.

Historically, approximately 68% of HCRI's recoveries on behalf of
clients involved automobile liability insurance, 15% involved premises
liability insurance, 10% involved workers' compensation insurance and 7%
involved product liability or other insurance.

Hospital Bill Audit. Once the audit is completed, the Company reviews
its findings with a provider representative to reach agreement. If there is
no response from the provider within forty-five days, the audit results are
considered final and the claim is closed. The savings are reported to the
client for recoupment or HCRI will collect them from the provider.

EMPLOYEES

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the necessary industry-specific skills. The Company believes the tight labor
market, in general, could have an impact on future hiring. HCRI employed
approximately 741 persons as of December 31, 1999.

HCRI requires all employees to enter into confidentiality and nondisclosure
agreements, which generally prohibit them from divulging confidential
information and trade secrets after they terminate employment. Employees are
also required to enter into non-compete agreements, preventing them from working
for a competitor during the first year after they terminate employment. In
addition, the Company's customers generally agree not to employ HCRI employees
during the client's contract term plus a specified period.

The Company's employees are not represented by a labor union or a
collective bargaining agreement. The Company regards its employee relations as
good.

MARKETING, SALES AND CLIENT SERVICE

HCRI primarily markets to and contracts with healthcare payors, including
HMOs, other types of managed healthcare plans, indemnity health insurers,
self-funded employee health plans, insured healthcare plans, third-party
administrators, Blue Cross and Blue Shield organizations and provider organized
health plans. HCRI employs a staff of sales managers, a marketing manager and
client services managers. Sales are made directly through contacts with
prospective clients, trade show presentations and employer seminars. Additional
business is also generated from existing clients, who have expanded their
business by growth or acquisitions or who have business segments not already
under contract with HCRI.

Due to the nature of the business, the sales process is lengthy and
involves demonstrating to prospective clients that HCRI's economies of scale,
proprietary processes and value-added services allow (i) HCRI to generate and
return to the clients a greater dollar amount of recoveries than the clients'
in-house recovery department and (ii) the clients to focus greater resources on
core business functions. New customer relationships are often established
through pilot programs, which have typically lasted 12 to 18 months.

Complementing the technical aspects of the recovery process, the client
support function is primarily responsible for communications with clients and
problem resolution. To facilitate strong working relationships, individual
members of the client services staff are assigned to specific clients. HCRI
believes that its investment in resources to resolve a wide variety of business
issues with clients is an important factor in obtaining customers and
maintaining good business relationships. During the last three years, HCRI has
lost sixteen clients representing approximately 5.8 million lives. Terminations
occurred due to, among other things, consolidations, the selection of another
vendor, or because the process was taken in-house. The Company has re-sold
services to three of the companies previously lost, representing approximately
1.7 million lives.

CLIENT BASE

Major clients include the following:

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HealthNet UnitedHealth Group
Humana Inc. The Principal Financial Group
General American Life Insurance Prudential HealthCare, a member company of
Group Health, Inc. Aetna US Healthcare
FIRST HEALTH Blue Cross of California, a division of
WellPoint
Kaiser Permanente Health Network Inc.
</TABLE>

HCRI's largest client is UnitedHealth Group. During 1999 and 1998,
UnitedHealth Group generated 23% and 28%, respectively, of HCRI's revenues. The
loss of this account could have a material adverse effect on HCRI's business,
results of operations and financial condition. However, HCRI's contracts
generally provide that in the event of termination, HCRI is entitled to complete
the recovery process on the backlog for that client. On December 31, 1999, HCRI
had backlog of $1,084.5 million.

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HCRI's revenues are earned under written contracts with its clients that
generally provide for contingency fees from recoveries under a variety of
pricing regimes. The pricing arrangements offered by HCRI to its clients include
a fixed fee percentage, a fee percentage that declines as the number of lives
covered by the client and subject to HCRI's service increases and a fee
percentage that varies with HCRI's recovery performance.

HCRI performs its services on a reasonable efforts basis and does not
obligate itself to deliver any specific result. Contracts with its customers are
generally terminable on 60 to 180 days' notice by either party, although in a
few cases the contracts extend over a period of years. Pursuant to the terms of
its client contracts, HCRI is generally entitled to continue to make recoveries
for the client and earn its fees on the backlog existing at the time of
termination.

COMPETITION

HCRI competes primarily with the internal recovery departments of potential
customers and other subrogation recovery service vendors. To the Company's
knowledge, there are two smaller, but significant, independent providers of
subrogation recovery services in addition to HCRI. Both independent competitors
preceded HCRI's entry into the recovery industry, and no major competitors have
entered the market since that time. HCRI believes that it has competitive
advantages in the bulk of its market, including process expertise, capital
requirements necessitated by the unusually long revenue cycle in the recovery
industry, assembling and training a qualified and productive employee base
possessing appropriate industry expertise, and an information processing system
designed to aid investigators and examiners engaged in the recovery process.
However, there are participants in the healthcare, insurance and transaction
processing industries that possess sufficient capital, and managerial and
technical expertise to develop competitive services.

PROPRIETARY INFORMATION MANAGEMENT SYSTEMS

General. HCRI's computer systems consist of inter-related proprietary
software programs that function as automated data and process management
systems. HCRI holds a copyright registration from the United States Copyright
Office on the software (the "SubroSystem") that supports its subrogation
operations. HCRI utilizes another proprietary system to support its hospital
bill audit operations.

The SubroSystem software is a character-based application that was
originally run on Intel-based personal computers in an MS-DOS operating
environment. The personal computers were arranged in local area networks
("LANs"), representing logical units of work. Typically one LAN serviced one to
four clients and up to 25 HCRI employees.

System Upgrade. Although the SubroSystem, a key component of HCRI's
recovery process, historically served the Company's operational and management
information needs, HCRI developed a plan (the "System Upgrade") under which it
would, over a 24-month to 36-month period, migrate the SubroSystem to a modern
network operating system and database architecture. The System Upgrade included
a detailed process for the comprehensive testing of all key elements prior to
implementation of each step of the upgrade.

At the end of January 1998, HCRI successfully migrated the SubroSystem to a
Windows NT environment, the first step of the System Upgrade. In the course of
migration, the Company encountered technical difficulties generally of the type
and number management believes are common with conversions of similar size and
scope. Following migration, HCRI has continued to maintain an inventory of
platform components for redundancy, to store on-line data on redundant devices,
and, on a daily basis, to copy all on-line storage systems to magnetic tapes,
which are then removed to a security vault off-site. HCRI's systems department
handles development and maintenance of the SubroSystem.

7
<PAGE> 10

data and process to the data warehouse to support client reporting and ad hoc
analysis, was completed in 1999. In total the Company spent approximately $4
million on this project.

Quality and Management Controls. The computer systems control, measure and
generate reports on the recovery processes. From data recorded in these systems,
a series of financial reports are generated for clients that allow them to
monitor HCRI's success in making recoveries on their behalf. The data used for
financial reports are also used to produce a wide array of accounting and
management information used by HCRI to operate its business. HCRI employs a
variety of quality control techniques to ensure consistently high-quality
service.

LEGAL AND REGULATORY ENVIRONMENT

The healthcare industry is subject to numerous regulations, which may
adversely affect HCRI's business. In addition to laws and regulations affecting
healthcare and insurance, changes in federal fair debt collection regulations
may also adversely affect HCRI's business.

General. From time to time, legislation is introduced in Congress and in
various state legislatures which would materially affect the Company's business.
The most significant legislation, laws and regulations may, for clarity, be
grouped into three categories: (i) legislation that would substantially limit
the ability of healthcare insurers to recover from third-parties
accident-related medical benefits incurred by injured insureds ("Health
Insurance Primacy Laws"); (ii) legislation that would substantially limit the
Company's ability to receive and utilize individual claim information from
healthcare insurers ("Confidentiality Laws"); and (iii) other federal and state
laws. The following identifies specific risks in these three categories:

Health Insurance Primacy Laws

Auto Choice Reform Act. In each of the last three sessions of Congress,
legislation known as the Auto Choice Reform Act (the "Proposed Act") was
introduced but not enacted. Under this Proposed Act, in those states not opting
out of its provisions, individual drivers may choose to be covered by an auto
insurance system in which healthcare insurers, with some exceptions, could be
made primarily responsible for healthcare costs incurred by those injured in
automobile accidents. Consequently, even if the insured's injuries were caused
by the negligence of another driver, the healthcare insurer might have no rights
of recovery against the negligent party or that party's liability insurer.
Revenue generated from recoveries against automobile liability insurers
represents approximately 68% of the Company's revenues. Should this or similar
legislation be enacted, it could have a material adverse effect on the Company's
business, results of operations and financial condition.

Proponents of the Proposed Act assert that (i) the costs of operating a
motor vehicle are excessive due to legal and administrative costs associated
with the processing of claims under the fault-based liability system; and (ii)
the costly fault-based liability insurance system often fails to provide
compensation commensurate with loss and takes too long to pay benefits. Even if
the Proposed Act is ultimately abandoned, these policy reasons may result in
future legislation designed to significantly alter the fault-based liability
system used in most states, eliminate recovery rights of healthcare insurers and
materially adversely affect the Company's business.

Certain No Fault Insurance Systems. Certain states have adopted versions
of automobile "no fault" insurance systems in which the injured party's health
insurance carrier or provider is primarily responsible for healthcare related
expenses (and not the responsible party and his or her insurer or the injured
insured's automobile liability insurer). In 1996, California voters rejected a
no-fault automobile insurance measure, Proposition 200, which would have
required drivers with bodily injuries to be compensated by their healthcare
insurers. Although Proposition 200 was rejected by the voters, there can be no
assurance that similar measures will not again be presented in a ballot
initiative or as legislation in California or elsewhere in the future. Growth in
the number of states adopting similar systems could significantly reduce the
amounts otherwise recoverable by the Company in connection with automobile
injuries in such states.

8
<PAGE> 11

Confidentiality Laws

Confidentiality Provisions of the Health Insurance Portability and
Accountability Act of 1996 and Related Regulations. On November 3, 1999, the
Secretary of Health and Human Services (the "Secretary") issued a Notice of
Proposed Rulemaking (64 Fed. Reg. 59918 (1999) and 65 Fed. Reg. 427 (2000))
(collectively, the "Proposed Rule") setting standards to protect the privacy of
individually identifiable health information that is transmitted electronically
to health care providers, health plans and similar health care entities. The
requirements of the Proposed Rule also extend to the "business partners" (as
defined in the rule) of the covered entities. The covered entities are required
to enter into agreements with their business partners extending the provisions
of the Proposed Rule to those business partners. The covered entities are
responsible for enforcing those contractual provisions. The Secretary is
expected to issue a final rule by an undetermined date in 2000, after receiving
public comment on the Proposed Rule. The Secretary's actions are mandated by
Section 264 of the Health Insurance Portability and Accountability Act of 1996
("HIPAA") because Congress did not pass legislation protecting medical privacy
by the August 1999 deadline set by HIPAA.

The Proposed Rule establishes a complex regulatory framework on a variety
of subjects, including (a) disclosures and uses of health information that
require patient consent (b) individuals' rights to access and amend their health
information and (c) administrative, technical and physical safeguards required
of entities that use protected health information. The Proposed Rule generally
prohibits any disclosure of protected health information except as authorized
either by the Proposed Rule or by the patient under standards set by the
Proposed Rule. Disclosures for subrogation are expressly authorized by the
Proposed Rule.

The Secretary has received a large volume of public comment that may prompt
material changes in the final rule. Even if the provisions directly addressing
subrogation are unchanged, the final rule could impair subrogation recovery
practices by creating administrative burdens (for example, individual's right to
amend health information or to restrict subsequent uses) or liability risks that
lead health plans to voluntarily restrict their subrogation recovery practices.
In addition, the Proposed Rule does not prevent states from imposing more strict
privacy standards that could have similar impacts on subrogation.

The provisions of the final rule or of future federal legislation and
regulations could impair or prevent the acquisition and use by the Company of
claims and insurance information necessary to process recovery claims on behalf
of its clients. Congress is likely to consider legislation this year that may
expand or contract the scope of the Proposed Rule. In addition, state laws
governing privacy of medical or insurance records and related matters may
significantly affect the Company's business.

Other Federal and State Laws

Changes in the regulation of insurance and debt collection could also
affect the Company's business. Similarly, changes in law that would bar
healthcare subrogation or impair an injured party's ability to collect insured
damages (that is, an injured person would be prevented from recovering from the
wrongdoer damages for accident-related medical benefits covered by health
insurance) could similarly adversely affect the Company's business. Existing
debt collection laws also may be amended or interpreted in a manner that could
adversely affect the Company's business. Additionally, although the Company does
not believe that it engages in the unauthorized practice of law, changes in the
law or a judicial or administrative decision defining some of the Company's
activities as the practice of law, could have a material adverse effect on the
Company's business.

Certain Legal Doctrines

With respect to recoverable claims, the rights of subrogation and
reimbursement may be limited in some cases by (i) the "made whole doctrine."
This doctrine subordinates the healthcare provider's ability to recover to that
of the injured party when the settlement damage award received by the injured
party is inadequate to cover the injured party's damages. And (ii) the "common
fund doctrine," which permits plaintiff's attorneys to deduct their fees for the
claim based on the entire amount covered by a damage award and may, in some
cases, proportionally diminish the amount recoverable by HCRI on behalf of the
healthcare payor out of that damage award.
9
<PAGE> 12

ITEM 2. PROPERTIES

As of December 31, 1999, the Company leased property at the following three
locations: (i) approximately 105,718 square feet of space for its executive
offices and main operations in Louisville, Kentucky, under a lease agreement and
amendment expiring in 2009; (ii) approximately 10,206 square feet at its
regional operating office in Pittsburgh, Pennsylvania, under a lease agreement
with a five-year term expiring 2001; and (iii) approximately 8,125 square feet
at its Encino, California location under a 5-year term expiring in 2004.

In addition, the Company owns its offices in Wisconsin and Georgia, which
are located at 5445 South Westridge Drive New, Berlin, Wisconsin 53151, and 1940
The Exchange, Suite 200, Atlanta, Georgia 30339, respectively.

ITEM 3. LEGAL PROCEEDINGS

On March 15, 1994, a class action complaint ("Complaint") was filed against
HCRI in the United States District Court for the Northern District of West
Virginia, Michael L. DeGarmo, et al. v. Healthcare Recoveries, Inc. The
plaintiffs assert that HCRI's subrogation recovery efforts on behalf of its
clients, violate a number of state and federal laws, including the Fair Debt
Collection Practices Act and the Racketeering Influenced and Corrupt
Organizations Act ("RICO"). The Complaint also seeks a declaratory judgment that
HCRI as the subrogation agent for various healthcare payors be limited, in
recovering from persons who caused accidents or from the healthcare payors'
injured insureds, to the actual costs of the medical treatment provided to such
injured insureds by such healthcare payors, healthcare policies or agreements,
which generally allow recovery by the healthcare payors of the "reasonable
value" of such treatments. The Complaint alleges that HCRI made fraudulent
representations to recover sums in excess of those actually expended by the
applicable healthcare payor to pay for medical treatment. On March 30, 1999, the
court entered an order certifying a class of all members of one HCRI client
health plan located in Wheeling, West Virginia (The Health Plan of the Upper
Ohio Valley) who have been subject to subrogation and/or reimbursement
collection practices by HCRI. Plaintiffs, on behalf of the class as certified,
demand compensatory damages, punitive damages, and treble damages under RICO,
costs and reasonable attorneys' fees.

On October 1, 1999, a First Amended Class Action Complaint ("Amended
Complaint") was filed against HCRI in the United States District Court for the
Southern District of Florida, in a putative class action brought by William
Conte and Aaron Gideon, individually and on behalf of all others similarly
situated. In that action, Conte v. Healthcare Recoveries, Inc., No. 99-10062,
plaintiffs assert that HCRI's subrogation recovery efforts on behalf of its
clients violate a number of state and federal laws, including the Fair Debt
Collection Practices Act and the Florida Consumer Collection Practices Act. The
Complaint also seeks a declaratory judgment that HCRI, as the subrogation agent
for various healthcare payors, is not entitled to assert and recover upon
subrogation or reimbursement liens it asserts on settlements obtained from third
party tortfeasors when the settlement is in an amount less than the amount
required to fully compensate (or "make whole") the injured party for all
elements of damage caused by the tortfeasor. Plaintiffs purport to represent a
class consisting of all participants or beneficiaries of ERISA plans nationwide
whose net recovery of damages through judgments, settlements or otherwise
against liable third parties has been reduced or potentially reduced by HCRI's
alleged assertion and/or recovery of unlawful subrogation/reimbursement rights
of its clients. Plaintiffs also seek compensatory and statutory damages,
exemplary and punitive damages, injunctive relief, prejudgment interest, costs
and attorneys' fees.

The original complaint in the Conte matter, filed in June 1999, asserted
similar claims on behalf of a putative class of participants or beneficiaries of
one client's health plans located in Florida, Alabama, and Georgia. In response
to HCRI's motion to dismiss that complaint, the Plaintiffs filed the Amended
Complaint on behalf of a putative national class. On November 5, 1999, HCRI
filed a motion to dismiss the Amended Complaint. That motion, now fully briefed,
remains pending. The court has not yet addressed the question of whether to
certify the putative class; plaintiffs are expected to file a motion by May 2,
2000, seeking class certification. HCRI intends to oppose the motion.

10
<PAGE> 13

On October 20, 1999, a class action complaint ("Baker Complaint") was filed
against HCRI and one HCRI client in the Circuit Court of Jefferson County
Alabama, Darrell DeWayne Baker v. Healthcare Recoveries, Inc., United Healthcare
of Alabama, Fictitious Party Defendants A, B, C et al. On December 6, 1999, the
defendants removed the lawsuit to the United States District Court for the
Northern District of Alabama, Southern Division. On January 3, 2000, a First
Amended Complaint was filed, retaining all counts from the original complaint
and seeking an additional declaratory judgment that the health plan and HCRI
have a right to recover through subrogation only the actual benefits paid to
medical providers on behalf of the class. The Baker Complaint, as amended,
asserts claims on behalf of two putative subclasses, both consisting of members
nationwide of the client health plan, who either: (1) allegedly paid inflated
subrogation claims due to alleged failure by the health plan or by HCRI, to
disclose discounts in the health plan's payments to medical providers; or (2)
allegedly were denied coverage of certain claims by the health plan. The
plaintiffs assert claims against HCRI under a variety of theories including
unjust enrichment, breach of contract, breach of fiduciary duty and violations
of RICO. Plaintiffs demand, on behalf of the putative classes, compensatory
damages, punitive damages, treble damages under RICO, and reasonable attorneys'
fees.

On January 27, 2000, the defendants filed a motion to dismiss the Amended
Complaint, which remains pending. The court has not yet addressed the question
whether to certify the putative class.

On October 28, 1999, a class action Plaintiff's Original Petition
("Petition") was filed against HCRI and one HCRI client in the District Court
for the 150th Judicial District, Bexar County, Texas, Joseph R. Cajas, on behalf
of himself and all others similarly situated v. Prudential Health Care Plan,
Inc. and Healthcare Recoveries, Inc. The plaintiff asserts that HCRI's
subrogation recovery efforts on behalf of its client Prudential Health Care
Plan, Inc. ("Prudential") violated a number of common law duties, as well as the
Texas Insurance Code and the Texas Business and Commerce Code. The Petition
alleges that HCRI, as the subrogation agent for Prudential, made fraudulent
misrepresentations in the course of unlawfully pursuing subrogation and
reimbursement claims that plaintiffs assert are unenforceable because (1)
prepaid medical service plans may not exercise rights of subrogation and
reimbursement; (2) the subrogation and reimbursement claims asserted by the
Company are not supported by contract documents that provide enforceable
recovery rights and/or do not adequately describe the recovery rights; and (3)
the sums recovered pursuant to such claims unlawfully exceed the amount
Prudential paid for medical goods and services. HCRI was served with the
Petition in early November and has answered, denying all allegations. The court
has not yet addressed the question of whether to certify the putative class.

In late 1999, the Cajas plaintiff's counsel filed two lawsuits in Texas and
South Carolina that raise issues similar to those in the Cajas lawsuit. On
December 7, 1999, a class action complaint ("Complaint") was filed against HCRI
and one HCRI client in the United States District Court for the Western District
of Texas, San Antonio Division, Timothy Patrick Franks, on behalf of himself and
similarly situated persons v. Prudential Health Care Plan, Inc. and Healthcare
Recoveries, Inc. The plaintiff asserts claims on behalf of members of ERISA
governed health plans. The Complaint alleges that HCRI's subrogation recovery
efforts on behalf of its client Prudential violated a number of common law
duties, as well as the terms of certain ERISA plan documents, RICO, the federal
Fair Debt Collection Practices Act, the Texas Insurance Code and the Texas
Business and Commerce Code. The Complaint alleges that HCRI, as the subrogation
agent for Prudential, made fraudulent misrepresentations in the course of
unlawfully pursuing subrogation and reimbursement claims that plaintiffs assert
are unenforceable because (1) prepaid medical service plans may not exercise
rights of subrogation and reimbursement; (2) the subrogation and reimbursement
claims asserted by the Company are not supported by contract documents that
provide enforceable recovery rights and/or do not adequately describe the
recovery rights; and (3) the sums recovered pursuant to such claims unlawfully
exceed the amount Prudential paid for medical goods and services. The Complaint
further alleges that HCRI unlawfully pursued subrogation and reimbursement
claims by (1) failing to pay pro rata attorney's fees to attorneys who
represented class members with respect to tort claims underlying the subrogation
and reimbursement claims; and (2) recovering subrogation and reimbursement
claims from class members who have not been fully compensated for their
injuries. Plaintiffs, on behalf of the class, demand compensatory damages,
punitive damages, and treble damages under RICO, costs and reasonable attorneys'
fees. On

11
<PAGE> 14

January 18, 2000, the defendants filed a motion to dismiss the Complaint, which
remains pending. The court has not yet addressed the question of whether to
certify the putative class.

On December 22, 1999, a class action Complaint was filed against HCRI and
one HCRI client in the Court of Common Pleas of Richland County, South Carolina,
Estalita Martin et al. vs. Companion Health Care Corp., and Healthcare
Recoveries, Inc. On January 21, 2000, defendant Companion Healthcare Corp.
("CHC") filed an Answer and Counterclaim and plaintiff Martin filed a First
Amended Complaint ("Amended Complaint"). The Amended Complaint asserts that
HCRI's subrogation recovery efforts on behalf of its client CHC violated a
number of common law duties, as well as the South Carolina Unfair Trade
Practices Act. The Amended Complaint alleges that HCRI as the subrogation agent
for CHC, made fraudulent misrepresentations in the course of unlawfully pursuing
subrogation and reimbursement claims that plaintiffs assert are unenforceable
because (1) prepaid medical service plans may not exercise rights of subrogation
and reimbursement; (2) the subrogation and reimbursement claims asserted by the
Company are not supported by contract documents that provide enforceable
recovery rights and/or do not adequately describe the recovery rights; and (3)
the sums recovered pursuant to such claims unlawfully exceed the amount CHC was
entitled to collect for such medical goods and services. The Amended Complaint
further alleges that HCRI and CHC unlawfully pursued subrogation and
reimbursement claims by (1) failing to pay pro rata costs and attorney's fees to
attorneys who represented class members with respect to tort claims underlying
the subrogation and reimbursement claims; and (2) failing to include in
subrogation and reimbursement claims all applicable discounts that CHC received
for such medical goods and services. Plaintiffs, on behalf of the class, demand
compensatory damages, punitive damages, and treble damages, disgorgement of
unjust profits, costs, and prejudgment interest and attorneys' fees. HCRI was
served with the original Complaint in late December and is preparing a formal
response. The court has not yet addressed the question of whether to certify the
putative class.

The DeGarmo, Cajas, Franks, Baker and Martin lawsuits, or any one of them,
if successful, could prevent the Company from recovering the "reasonable value"
of medical treatment under discounted fee for service ("DFS"), capitation and
other payment arrangements. The DeGarmo, Conte, Cajas, Franks, Baker and Martin
lawsuits, or any one or more of them, if successful, could require the Company
to refund, on behalf of its clients, recoveries in a material number of cases.
In addition, an adverse outcome in any of the above referenced lawsuits could
impair materially HCRI's ability to assert subrogation or reimbursement claims
on behalf of its clients in the future.

In terms of the Company's business practices and the allegations underlying
the DeGarmo, Cajas, Franks, Baker and Martin cases, at the end of 1993 HCRI had
ceased the practice of recovering the "reasonable value" of medical treatment
provided by medical providers in circumstances where HCRI has entered into DFS
arrangement with its clients. From that date, the Company's policy has been not
to recover the "reasonable value" of medical treatment in DFS arrangements.
However, HCRI historically and currently recovers the "reasonable value" of
medical treatment provided under capitation arrangements and other payment
arrangements with medical providers on behalf of those clients that compensate
medical providers under these payment mechanisms, to the extent that these
benefits are related to treatment of the injuries as to which clients have
recovery rights. The Company believes that its clients' contracts, including the
contracts that provide for recovery under DFS, capitation and other payment
arrangements are enforceable under the laws potentially applicable in these
cases. As a result, and taking into account the underlying facts in each of
these cases, the Company believes it has meritorious grounds to defend these
lawsuits, it intends to defend the cases vigorously, and it believes that the
defense and ultimate resolution of the lawsuits should not have a material
adverse effect upon the business, results of operations or financial condition
of the Company. Nevertheless, if any of these lawsuits or another lawsuit
seeking relief under similar theories were to be successful, it is likely that
such resolution would have a material adverse effect on the Company's business,
results of operations and financial condition.

12
<PAGE> 15

threatened, directed at healthcare payors and related parties. In addition,
certain attorneys who have gained prominence in representing plaintiffs in
recent actions against tobacco companies have publicly stated their intentions
to institute class action lawsuits against healthcare payors, particularly those
in the so-called "managed care industry", and related parties including,
specifically, the Company. As a result of the foregoing, there can be no
assurance that the Company will not be subject to further class action
litigation, that existing and/or future class action litigation against the
Company and its clients will not consume significant management time and or
attention and that the cost of defending and resolving such litigation will not
be material.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of stockholders of the Company during
the quarter ended December 31, 1999.

SUPPLEMENTARY ITEM. CERTAIN RISK FACTORS

See "Healthcare Recoveries, Inc. Private Securities Litigation Reform Act
of 1995 Safe Harbor Compliance Statement For Forward-Looking Statements,"
included as Exhibit 99.1 to this Form 10-K and incorporated herein by reference.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "HCRI." The charts set forth the high and low closing prices for the
Company's Common Stock for the periods indicated, as reflected in The Nasdaq
National Market.

<TABLE>
<CAPTION>
QUARTER ENDED: HIGH LOW
- -------------- ------ ------
<S> <C> <C>
March 31, 1999.............................................. $17.00 $ 4.00
June 30, 1999............................................... 4.91 4.06
September 30, 1999.......................................... 5.31 2.75
December 31, 1999........................................... 4.13 2.75
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED: HIGH LOW
- -------------- ------ ------
<S> <C> <C>
March 31, 1998.............................................. $23.50 $20.25
June 30, 1998............................................... 24.13 15.88
September 30, 1998.......................................... 18.13 9.75
December 31, 1998........................................... 17.13 8.56
</TABLE>

On March 10, 2000, there were approximately 53 holders of record of the
Company's Common Stock.

The Company has paid no cash dividends since the sale of the Company by
Medaphis Corporation in May 1997. Any future determination to pay cash dividends
will be at the discretion of the Board of Directors (the "Board") and will be
dependent upon the Company's financial condition, results of operations, credit
agreements, capital requirements and other such factors, as the Board deems
relevant. The Company's current credit facility limits its ability to pay
dividends on its Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth historical selected financial data of the
Company as of the dates and for the periods indicated, which have been derived
from, and are qualified by reference to, the Company's financial statements. The
information set forth below should be read in conjunction with the Company's
financial

13
<PAGE> 16

statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

The selected historical financial data as of December 31, 1999 and 1998 and
for the years ended December 31, 1999, 1998 and 1997 have been derived from, and
are qualified by reference to, the Company's financial statements appearing
elsewhere herein, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected historical financial data as of December
31, 1997 and 1996 and for the years ended December 31, 1996 and 1995 have been
derived from, and are qualified by reference to, the Company's financial
statements included in the Company's registration statement on Form S-1 (which
have been audited by PricewaterhouseCoopers LLP, independent accountants).

STATEMENTS OF INCOME DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Claims Revenues................................ $61,409 $48,734 $39,277 $30,248 $22,496
Other Revenues................................. -- -- -- 1,171 --
------- ------- ------- ------- -------
Total Revenues......................... 61,409 48,734 39,277 31,419 22,496
Cost of Services................................. 31,451 22,199 18,523 15,026 10,265
------- ------- ------- ------- -------
Gross Profit..................................... 29,958 26,535 20,754 16,393 12,231
Support Expenses................................. 15,870 10,692 8,922 7,215 6,204
Depreciation & Amortization...................... 4,954 2,334 1,181 878 695
Other Charges(1)................................. -- -- 2,848 -- --
------- ------- ------- ------- -------
Operating Income................................. 9,134 13,509 7,803 8,300 5,332
Special Committee Expenses....................... (451) -- -- -- --
Interest Income, net............................. 144 1,657 1,158 486 580
------- ------- ------- ------- -------
Income Before Income Taxes....................... 8,827 15,166 8,961 8,786 5,912
Provision for Income Taxes....................... 3,665 6,266 4,959 3,685 2,486
------- ------- ------- ------- -------
Net Income............................. $ 5,162 $ 8,900 $ 4,002 $ 5,101 $ 3,426
======= ======= ======= ======= =======
Basic Earnings per Common Share.................. $ 0.46 $ 0.78 $ 0.37 $ 0.52
======= ======= ======= =======
Diluted Earnings per Common Share................ $ 0.46 $ 0.77 $ 0.37 $ 0.52
======= ======= ======= =======
</TABLE>

- ---------------

(1) In connection with the sale of the Company by Medaphis in May 1997, the
Company incurred a one-time $2.8 million non-cash compensation charge. This
charge was from the issuance by the Company of 200,000 shares of Common
Stock to the Company's management group, as a bonus for the successful
completion of the sale of the Company by Medaphis. This represents 2% of the
shares of Common Stock outstanding after the Company's initial public
offering and 1.7% of the shares of Common Stock outstanding following the
exercise of the underwriters' over-allotment option.

14
<PAGE> 17

BALANCE SHEET DATA
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents..................... $ 1,670 $31,133 $ 24,674 $ 53 $ --
Working Capital............................... 8,042 30,898 22,911(1) 1,730 1,675
Total Assets.................................. 82,183 61,003 48,170 23,969 13,390
Total Indebtedness............................ 11,000 -- -- -- --
Stockholders' Equity.......................... 41,092 37,193 27,865 4,110 3,274
</TABLE>

- ---------------

(1) The increase in working capital, including cash and cash equivalents, is
primarily attributable to the $19.2 million of proceeds received by the
Company from the exercise of the underwriters' over-allotment option granted
by the Company in connection with the May 1997 initial public offering.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW OF COMPANY

HCRI provides insurance subrogation and other medical cost containment
services to the private healthcare payor industry. HCRI's services comprise the
complete outsourcing of the identification, investigation and recovery of
accident-related medical benefits incurred by its clients on behalf of their
insureds, but for which other persons or entities have primary responsibility.
The rights of HCRI's clients to recover the value of these medical benefits
arise by law or contract, are known generally as the right of subrogation and
are generally paid from the proceeds of liability or workers' compensation
insurance. The Company's other medical cost containment services include
hospital bill auditing, contract compliance review, cost management consulting,
coordination of benefits and overpayment recovery services. HCRI offers its
services on a nationwide basis to health maintenance organizations, indemnity
health insurers, self-funded employee health plans, companies that provide
claims administration services to self-funded plans (referred to as "third-party
administrators"). The Company had 55.6 million lives under contract from its
clientele at December 31, 1999.

ACQUISITIONS

On January 25, 1999, HCRI acquired the assets and certain liabilities of
Subro Audit (which consisted of SAI and ODL), for approximately $24.4 million,
using available unrestricted cash. HCRI currently estimates that it may pay up
to $7.0 million through January 2001, pursuant to an earn-out arrangement. (An
amount of $8.5 million is held in escrow for the potential earn-out and is
included in restricted cash at December 31, 1999). SAI is based in Wisconsin and
provides subrogation recovery services to an installed base of lives, which are
covered by insurers, HMOs and employer-funded plans, throughout the United
States. The Subro Audit Acquisition was accounted for using the purchase method
of accounting.

On February 15, 1999, HCRI acquired the assets and certain liabilities of
MedCap, for approximately $10 million, using available unrestricted cash and
borrowed funds. The Company paid approximately $4.5 million on February 15, 2000
pursuant to an amendment to the original earn-out agreement. Pursuant to the
same amendment, through January 15, 2001, the Company may pay up to 50% of the
fees collected in relation to certain negotiated contracts, less associated
expenses. MedCap provides a variety of medical cost management services to
health insurers and HMOs, primarily in California. These services include
hospital bill auditing, contract compliance review, identification of certain
other payments, and cost management consulting services. The MedCap Acquisition
was accounted for using the purchase method of accounting.

OVERVIEW OF OPERATIONS

For a typical new client, it takes up to six months from the contract
signing (when the lives are "sold") to complete the construction of electronic
data interfaces necessary for the Company to begin providing service. At this
point, the client is considered "installed." During the installation period, the
Company must also hire

15
<PAGE> 18

and train quality staff necessary to provide contractual services. After
installation, HCRI receives files and data from the client from which it creates
an inventory of backlog.

"Backlog" is the total dollar amount of potentially recoverable claims that
the Company is pursuing or auditing on behalf of its clients at a given point in
time. These claims are gross figures, prior to estimates of claim settlements
and rejections. Backlog increases when the Company opens new files of
potentially recoverable claims and decreases when files are recovered and closed
or, after further investigation, determined to be nonrecoverable. Backlog for a
client will range from newly identified potential recoveries to potential
recoveries that are in the late stages of the recovery process. Historically,
recoveries (the amount actually recovered for its clients prior to the Company's
fee) have been produced from backlog in a generally predictable cycle. Any group
of potential recoveries, sufficiently large in number to display statistically
significant characteristics and that originates from a defined time period, tend
to produce recovery results that are comparable to other groups having similar
characteristics.

For the most part, the Company is paid contingency fees from the amount of
claims recoveries it makes from backlog or recoveries it identifies through
other cost containment and related recovery services on behalf of its clients.
The Company's revenues are a function of recoveries and effective fee rates.
Effective fee rates vary depending on the mix between services provided and
client fee schedules. The fee schedules for each client are separately
negotiated and reflect the Company's standard fee rates, the services to be
provided and anticipated volume of services. The Company grants volume discounts
and, for its recovery services, negotiates a lower fee when it assumes backlog
from a client because the client will have already completed some of the
recovery work. Because the Company records expenses as costs are incurred and
records revenues only when a file is settled, there is a lag between the
recording of expenses and related revenue recognition.

The Company's expenses are determined primarily by the number of employees
directly engaged in recovery activities ("cost of services") and by the number
of employees engaged in a variety of support activities ("support expenses").
Recovery personnel must be hired and trained in advance of the realization of
recoveries and revenues. The number of employees accounted for in support
expenses generally grows less rapidly than revenue due to economies of scale.

16
<PAGE> 19

RESULTS OF OPERATIONS

The following tables present certain key operating indicators and results
of operations data for the Company for the periods indicated:

KEY OPERATING INDICATORS
LIVES AND DOLLARS IN MILLIONS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999(1) 1998 1997
-------- ------ ------
<S> <C> <C> <C>
Cumulative Lives Sold, Beginning of Period.................. 40.5 38.5 29.5
Lives from Acquisitions..................................... 18.6 -- --
Lives from Existing Client Growth (Loss).................... (7.7) (3.1) 1.9
Lives Added from Contracts with Existing Clients............ 0.7 2.0 5.9
Lives Added from Contracts with New Clients................. 3.5 3.1 1.2
-------- ------ ------
Cumulative Lives Sold, End of Period........................ 55.6 40.5 38.5
======== ====== ======
Lives Installed............................................. 51.9 38.5 36.4
Backlog(2).................................................. $1,084.5 $770.7 $668.3
Claims Recoveries........................................... 226.1 177.7 144.9
Throughput(3)............................................... 20.8% 24.7% 24.1%
Effective Fee Rate.......................................... 27.2% 27.4% 27.1%
Claims Revenues............................................. $ 61.4 $ 48.7 $ 39.3
Employees:
Direct Operations......................................... 597 386 399
Support................................................... 144 109 84
-------- ------ ------
Total Employees................................... 741 495 483
======== ====== ======
</TABLE>

- ---------------

(1) The 1999 key operating indicators include the operating performance of Subro
Audit and MedCap from their respective acquisition dates of January 25, 1999
and February 15, 1999.
(2) Backlog represents the total dollar amount of potentially recoverable claims
that the Company is pursuing on behalf of clients at any point in time.
(3) Throughput equals recoveries for the period divided by the average of
backlog at the beginning and end of the period.

STATEMENTS OF INCOME AS A PERCENTAGE OF SUBROGATION REVENUES

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Claims Revenues............................................. 100.0% 100.0% 100.0%
Cost of Services............................................ 51.2 45.6 47.2
Support Expenses............................................ 25.8 21.9 22.7
Operating Income............................................ 14.9 27.7 19.9
Income Before Income Taxes.................................. 14.4 31.1 22.8
Net Income.................................................. 8.4 18.3 10.2
</TABLE>

1999 COMPARED TO 1998

Revenues. Total revenues for the year ended December 31, 1999 increased
26.1%, to $61.4 million from $48.7 million in 1998. Growth in claims revenues
occurred primarily because of increased claims recoveries, from $177.7 million
in 1998 to $226.1 million in 1999. In response to operational changes which
affect the Company's ability to identify when the parties reached agreement on
all material terms, refinements were made to the estimation process with the
intent of maintaining consistency in the timing of revenue recognition.

17
<PAGE> 20

The Company believes this change had no significant impact on its revenues for
1999. The effective fee rate decreased modestly to 27.2% from 27.4% due to the
broader mix of services and contracts since the Acquisitions. The increase in
total claims recoveries resulted principally from the Acquisitions, which
increased the baseline recovery operations, backlog and lives installed. Backlog
increased 40.7% to $1,084.5 million at December 31, 1999 from $770.7 million at
December 31, 1998. The Company had a throughput rate of approximately 20.8% and
24.7% during 1999 and 1998, respectively. Lives installed grew 34.8% in 1999 to
51.9 million.

During the first quarter of 1999, subrogation services generated a lower
than historical level of yield from its backlog of subrogation claims. As used
here, yield, referred to as "throughput," means recoveries for the period stated
as a percentage of the average backlog for the period. The deterioration in
throughput of subrogation claims during 1999 appears to have resulted from
certain changes made in its claims recovery operations during the second half of
1998 and the first quarter of 1999. The changes in operations entailed
materially increasing the number of files assigned to recovery personnel, which
management believes caused the unforeseen decline in throughput. In response to
the decline in throughput, management implemented a plan to reduce the ratio of
files to recovery personnel. Management believes that the execution of this plan
by year end enabled the Company to improve subrogation throughput and recoveries
in the fourth quarter.

Cost of Services. Cost of services increased 41.9% in 1999 to $31.5
million from $22.2 million in 1998. The increase primarily results from costs
associated with operating the acquired companies and additional direct
operational employees, including employees hired in response to the plan to
reduce the ratio of files to recovery personnel, as described above. As a
percentage of claims revenues, cost of services increased to 51.2% in 1999 from
45.6% in 1998. The increase in cost of services resulted primarily from the
Acquisitions and a lower growth rate in revenues than in cost of services.

As a result of the nature of the Company's contingent fee arrangements with
its clients, the Company incurs significant current expense in an effort to
generate revenue, a significant portion of which will be recorded in future
periods. Because relatively little revenue is earned during the first year
following the installation of new lives, unless the Company assumes
responsibility for the new client's existing backlog, the growth rate for lives
installed exceeds the revenue growth rate.

Support Expenses. Support expenses increased 48.4% to $15.9 million for
the year ended December 31, 1999, from $10.7 million for the comparable period
in 1998 due to hiring of additional support staff for the SubroSystem Upgrade
project, the integration of the Acquisitions, and year 2000 issues. Support
expenses increased as a percentage of claims revenues from 21.9% for the year
ended December 31, 1998 to 25.8% for the comparable period in 1999. The increase
in support expenses as a percentage of claims revenues resulted from revenues
being lower than anticipated. Support costs do not vary in proportion to
revenues.

Depreciation and Amortization. Depreciation and amortization expenses
increased 112.3% to $5.0 million for the year ended December 31, 1999 from $2.3
million for the comparable period in 1998. The increase in depreciation expense
was attributable to the purchase of fixed assets related to the Acquisitions and
increased system cost upgrades. The increase in amortization expense was
attributable to the addition of intangible assets related to the Acquisitions.

Special Committee Expenses. In August 1999, the Board of Directors
appointed the Special Committee to evaluate strategic alternatives available to
the Company, including its possible sale. The Company incurred $451,000 of
expenses related to the work of the Special Committee during 1999. The Special
Committee is continuing its evaluation process.

Interest Income. Interest income totaled $1.1 million and $1.8 million for
the years ended December 31, 1999 and 1998, respectively. The decrease in
interest income resulted primarily from utilizing available cash for the
Acquisitions.

Interest Expense. Interest expense totaled $0.9 million and $0.1 million
for the years ended December 31, 1999 and 1998, respectively. The increase in
interest expense for 1999 resulted from an increase in borrowed funds for the
Acquisitions and stock repurchases.

18
<PAGE> 21

Tax. Provision for income taxes was approximately 41.5% of pre-tax income
for the year ended December 31, 1999 and 41.3% for the year ended December 31,
1998. The effective tax rate exceeded the Federal statutory tax rate as a
consequence of state and local taxes and non-deductible expenses.

Net Income. Net income for the year ended December 31, 1999 decreased $3.7
million, or 42%, to $5.2 million or $0.46 per diluted share, from $8.9 million
or $0.77 per diluted share for the year ended December 31, 1998. Net income
decreased as a result of lower than anticipated subrogation recoveries and the
additional expenses, such as amortization and interest expense, associated with
the Acquisitions.

1998 COMPARED TO 1997

Revenues. Total revenues for the year ended December 31, 1998 increased
24%, to $48.7 million from $39.3 million in 1997. Growth in subrogation revenues
occurred primarily because of increased subrogation recoveries, from $144.9
million in 1997 to $177.7 million in 1998. The effective fee rate increased
slightly to 27.4% from 27.1%. The increase in total subrogation recoveries was
due primarily to growth in backlog, which in turn grew primarily because of an
increase in the number of lives installed. Backlog increased 15.3% to $770.7
million at December 31, 1998 from $668.3 million at December 31, 1997. The
Company was also able to obtain subrogation recoveries at a rate of
approximately 6% of average backlog per quarter during 1998 and 1997. Lives
installed grew 5.8% in 1998 to 38.5 million.

Cost of Services. Cost of services increased in 1998 to $22.2 million from
$18.5 million in 1997, which is an increase of 19.8%. As a percentage of
subrogation revenues, cost of services decreased to 45.6% in 1998 from 47.2% in
1997. The decrease is a result of lower growth of lives installed and their
associated costs in 1998 relative to the growth in revenue for the year and
increased efficiencies by the Company.

As a result of the nature of the Company's contingent fee arrangements with
its clients, the Company incurs significant current expenses in an effort to
generate revenue, a significant portion of which will be recorded in future
periods. Because relatively little revenue is earned during the first year
following the installation of new lives, unless the Company assumes
responsibility for the new client's existing backlog, the growth rate for lives
installed exceeds the revenue growth rate.

Support Expenses. Support expenses increased 19.8%, to $10.7 million for
the twelve months ended December 31, 1998, from $8.9 million for the comparable
period in 1997 due to hiring of additional support staff for the SubroSystem
Upgrade project. Support expenses decreased as a percentage of subrogation
revenues from 22.7% for the twelve months ended December 31, 1997 to 21.9% for
the comparable period in 1998. The decline in support expenses as a percentage
of subrogation revenues resulted from improved economies of scale in the support
functions and also the capitalization of $564,000 of certain software
development cost associated with the SubroSystem Upgrade project in 1998. These
costs were capitalized in compliance with the requirements under Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," adopted by the Company January 1, 1998, which were
historically expensed.

Depreciation and Amortization. Depreciation and amortization expenses
increased 97.6% to $2.3 million for the twelve months ended December 31, 1998
from $1.2 million for the comparable period in 1997. The increase in
depreciation expense was mainly attributable to the capital expenditures for the
SubroSystem Upgrade project.

Compensation Charge. In connection with the sale of the Company by
Medaphis in May 1997, the Company incurred a one-time $2.8 million non-cash
compensation charge. This charge was from the issuance by the Company of 200,000
shares of Common Stock to the Company's management as a bonus for the successful
completion of the sale of the Company by Medaphis. These shares represented 2%
of the shares of Common Stock outstanding after the Company's initial public
offering and 1.7% of the shares of Common Stock outstanding after the exercise
of the underwriters' over-allotment option.

Interest Income, net. Interest income, net totaled $1.7 million and $1.2
million for the years ended December 31, 1998 and 1997, respectively. The
increase in interest income was a result of continued interest income earned on
$19.2 million of proceeds from the issuance by the Company of 1,470,000 shares
of Common Stock as of June 9, 1997 upon the exercise of the underwriters'
over-allotment option and on HCRI's cash provided by operating activities.
19
<PAGE> 22

Tax. The provision for income taxes was approximately 41.3% of pre-tax
income for the year ended December 31, 1998 and 42% for the year ended December
31, 1997. The effective tax rate exceeded the Federal statutory tax rate as a
consequence of state and local taxes and non-deductible expenses.

Net Income. Net income for the year ended December 31, 1998 increased $2.1
million, or 30.8%, to $8.9 million, or $0.77 per share, from $6.8 million, or
$0.63 per share, in the comparable period of 1997, excluding the $2.8 million
non-cash ($0.26 per diluted share), compensation charge incurred in 1997. Net
income, as reported for the years ended December 31, 1997, was $4.0 million or
$0.37 per diluted share, including the non-recurring compensation charge. Net
income and earnings per share for the year ended December 31, 1998, excluding
$564,000 of certain software development costs associated with the upgrade of
the SubroSystem and capitalized in conjunction with the requirements under SOP
98-1, would have been $8.57 million and $0.74 per diluted share, respectively.
These capitalized costs were historically expensed prior to the Company
implementing Statement of Position 98-1 on January 1, 1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company's statements of cash flows for the years ended December 31,
1999, 1998 and 1997 are summarized below:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Cash Provided by Operations............................. $ 8,890 $ 9,814 $10,764
Net Cash Used In Investing Activities....................... (48,078) (3,783) (3,096)
Net Cash Provided by Financing Activities................... 9,725 428 16,953
-------- ------- -------
Net (Decrease) Increase in Cash and Cash Equivalents........ $(29,463) $ 6,459 $24,621
======== ======= =======
</TABLE>

The Company had working capital of $8.2 million at December 31, 1999,
including cash and cash equivalents of $1.7 million, compared with working
capital of $30.9 million at December 31, 1998. The decrease is attributable to
the use of available cash to fund the Acquisitions.

Net cash provided by operations decreased $0.9 million for the year ended
December 31, 1999, compared to the year ended December 31, 1998, primarily as a
result of timing of recurring cash receipts and disbursements related to accrued
expenses and subrogation recoveries.

Net cash used in investing activities primarily reflects the Company's cost
of the Acquisitions of $34.4 million, $8.5 million escrowed for earn-out
potential and ongoing capital expenditures for facility expansion and system
enhancements. Capital expenditures for the year ended December 31, 1999 were
approximately $3.9 million. Over the next 12 months, the Company anticipates
capital expenditures approximating $5.2 million for system upgrades and other
fixed asset requirements to meet the requirements of the Company's growing
revenue base.

Net cash provided by financing activities for the year ended December 31,
1999 reflects $11.0 million in net cash borrowings from the Company's credit
facility as discussed below and $1.4 million as a reduction in stockholders'
equity, resulting from the stock repurchase program. See "-- Other
Matters -- Stock Repurchase Program".

In February 1998, the Company entered into a $50 million senior secured
line of credit agreement (the "Credit Facility") with National City Bank of
Kentucky and the lenders named therein, replacing the Company's $10 million line
of credit. The principal amount outstanding under the Credit Facility will
mature on January 31, 2001 and bears interest at the Company's option, at
either: (i) the Prime Rate plus the applicable margin in effect or (ii) the
Eurodollar Rate plus the applicable margin in effect. The applicable margin is
determined in accordance with a Pricing Grid based on the Company's ratio of
total indebtedness to earnings before interest, taxes, depreciation and
amortization. The agreement contains usual and customary covenants including,
but not limited to, financial tests for interest coverage, net worth levels and
leverage that may limit the Company's ability to pay dividends. The Company's
obligations under the Credit Facility are

20
<PAGE> 23

secured by substantially all of the Company's assets, subject to certain
permitted exceptions. As of December 31, 1999, the Company was in compliance
with the covenants. The Credit Facility was amended in May 1998 and March 1999
to enable the Company to acquire entities that do not maintain audited financial
statements and to use proceeds from the Credit Facility to repurchase up to $10
million of outstanding stock, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Other Matters."

By contract, with respect to its standard subrogation recovery services,
the Company disburses recoveries to its clients, for the most part, no later
than the month following the month in which recoveries are made. At December 31,
1999 and December 31, 1998, the Company reported as a current asset on its
balance sheets, restricted cash of $26.1 million, which includes the $8.5
million held in escrow related to the Subro Audit Acquisition earn-out, and
$16.9 million, respectively, representing subrogation recoveries effected by
HCRI for its clients. At December 31, 1999 and December 31, 1998, HCRI reported
on its balance sheets, as a current liability, funds due clients of $13.2
million and $13.1 million, respectively, representing recoveries to be
distributed to clients, net of the fee earned on such recoveries.

The Company believes that its available cash resources, together with the
borrowings available under the Credit Facility, will be sufficient to meet its
current operating requirements and acquisitions and internal development
initiatives.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

There are no recently issued accounting pronouncements, which are expected
to have a significant impact on the Company, other than those previously
disclosed and currently being applied.

OTHER MATTERS

Stock Repurchase Program

On March 12, 1999, HCRI's Board approved a stock repurchase program
("Plan") under which the Company may repurchase up to $10 million of HCRI Common
Stock in the open market, from time to time, at prices per share deemed
favorable by it. During the second quarter of 1999, HCRI repurchased 305,000
shares of its Common Stock, at an average purchase price per share of $4.50,
which is reflected as treasury stock on the Balance Sheet as of December 31,
1999. No additional shares have been repurchased since the second quarter of
1999.

Adoption of a Rights Plan

On February 12, 1999, the Board adopted a Stockholder Rights Plan and
declared a dividend of one preferred stock purchase right (a "Right") for each
outstanding share of Common Stock of the Company. The dividend was payable to
stockholders of record on March 1, 1999. The Rights, which will initially trade
with the Common Stock, separate and become exercisable only upon the earlier to
occur of (i) 10 days after the date (the "Stock Acquisition Date") of a public
announcement that a person or group of affiliated persons has acquired 20% or
more of the Common Stock (such person or group being hereinafter referred to as
an "Acquiring Person") or (ii) 10 days (or such later date as the Board of
Directors shall determine) after the commencement of, or announcement of an
intention to make, a tender offer or exchange offer that could result in such
person or group owning 20% or more of the Common Stock (the earlier of such
dates being called the "Distribution Date"). When exercisable, each Right
initially entitles the registered holder to purchase from the Company one
one-hundredth of a share of a newly created class of preferred stock of the
Company at a purchase price of $65 (the "Purchase Price"). The Rights are
redeemable for $0.001 per Right at the option of the Board of Directors. The
Rights expire on March 1, 2009.

21
<PAGE> 24

of all the outstanding shares of Common Stock immediately prior to the
consummation of the transaction are not the holders of all of the surviving
corporation's voting power, or (ii) more than 50% of the Company's assets, cash
flow or earning power is sold or transferred other than in the ordinary course
of business, then each holder of a Right shall thereafter have the right (the
"Flip-Over Right") to receive, in lieu of shares of preferred stock and upon
exercise and payment of the Purchase Price, common shares of the acquiring
company having a value equal to two times the Purchase Price. If a transaction
would otherwise result in a holder having a Flip-In as well as a Flip-Over
Right, then only the Flip-Over Right will be exercisable. If a transaction
results in a holder having a Flip-Over Right subsequent to a transaction
resulting in the holder having a Flip-In Right, a holder will have a Flip-Over
Right only to the extent such holder's Flip-In Rights have not been exercised.

Related Party Transaction

On February 12, 1999, the Board of Directors approved a loan in the amount
of $350,000 to Patrick B. McGinnis, the Chairman and Chief Executive Officer of
the Company, in exchange for a full recourse promissory note in the same amount
from Mr. McGinnis. The full recourse promissory note bears interest at a rate
equal to the Company's cost of borrowing under its Credit Facility, or if no
loan amount is outstanding under the Credit Facility, the federal short-term
rate. The $350,000 note and accrued interest of $18,641 were outstanding at
December 31, 1999. The effective rate of interest was approximately 7.2%

EXTERNAL FACTORS

The business of recovering subrogation and other claims for healthcare
payors is subject to a wide variety of external factors. Prominent among these
are factors that would materially change the healthcare payment, fault-based
liability or workers' compensation systems. Examples of these factors include,
but are not limited to, 1) the non-availability of recovery from such sources as
property and casualty and workers' compensation coverages, 2) law changes that
limit the use of or access to claims and medical records, or 3) the ability of
healthcare payors to recover related claims and audit medical records. Because
the Company's profitability depends in large measure upon obtaining and using
claims data and medical records, the non-availability or decrease in their
availability could have a material adverse effect on the Company.

Moreover, because the Company's revenues are derived from the recovery of
the costs of medical treatment, material changes in such costs will tend to
affect the Company's backlog or its rate of backlog growth, as well as its
revenue or its rate of revenue growth. The healthcare industry, and particularly
the business of healthcare payors, is subject to various external factors that
may have the effect of significantly altering the costs of healthcare and the
environment for the sale or delivery of recovery and cost containment services.
The Company is unable to predict which of these factors, if any, could have a
potentially material impact on healthcare payors and through them, the
healthcare recovery and cost containment industry.

The Company provides services to healthcare plans that as of December 31,
1999 covered approximately 55.6 million lives. HCRI's clients are national and
regional healthcare payors, large third-party administrators or self-insured
corporations. During 1999 and 1998, HCRI's largest client generated 23% and 28%,
respectively, of HCRI's revenues. The loss of this account could have a material
adverse effect on HCRI's business, results of operations and financial
condition. On December 31, 1999, HCRI had backlog of $1,084.5 million. HCRI's
revenues are earned under written contracts with its clients that generally
provide for contingency fees from recoveries under a variety of pricing regimes.
The pricing arrangements offered by HCRI to its clients include a fixed fee
percentage, a fee percentage that declines as the number of lives covered by the
client and subject to HCRI's service increases and a fee percentage that varies
with HCRI's recovery performance.

YEAR 2000 ISSUES

22
<PAGE> 25

systems, including the internally-written systems that support subrogation and
bill audit recovery; and internal non-IT systems, including office equipment;
and material third-party relationships. Management believes that the Company has
completed all of the activities within its control to ensure that the Company's
systems are Year 2000 compliant and the Company has experienced no interruptions
to normal operations due to the start of the Year 2000.

The Company spent approximately $216,000 during 1999 related to Year 2000
readiness, which was higher than the expected total expenditure of $175,000
previously disclosed due to the additional costs of contract labor for continued
retesting. The Company funded these costs through funds generated from
operations and such costs were generally not incremental to existing IT budgets;
internal resources were re-deployed and timetables for implementation of
replacement systems were accelerated. The Company does not currently expect to
apply any further funds to address Year 2000 issues.

To date, the Company has not experienced any material disruptions of its
internal computer systems or software applications, or with the computer systems
or software applications of its third party vendors, suppliers or service
providers. The Company will continue to monitor these third parties to determine
the impact, if any, on the business of the Company and the actions the Company
must take, if any, in the event of non-compliance by any of these third parties.
Based upon the Company's assessment of compliance by third parties, there
appears to be no material business risk posed by any such noncompliance.
Moreover, the Company generally believes that the vendors that supply products
to the Company for resale are responsible for the products' Year 2000
functionality.

Although the Company's Year 2000 rollover did not present any material
business interruptions, there are some remaining Year 2000-related risks,
including risks due to the fact that Year 2000 is a leap year. These risks
include potential product supply issues and other non-operational issues.
Management believes that appropriate action has been taken to address these
remaining Year 2000 issues and contingency plans are in place to minimize the
financial impact to the Company. Management, however, cannot be certain that
Year 2000 issues will not have a material adverse impact on the Company, since
the evaluation process is not yet complete and it is early in the Year 2000.

ITEM 7A. QUANTITATIVE & QUALITATIVE MARKET RISK DISCLOSURES

The Company is exposed to market risk from changes in interest rates
related to its Credit Facility. The impact on earnings and value of any debt
under its Credit Facility is subject to change as a result of movements in
market rates and prices. The Credit Facility is subject to variable interest
rates. As of December 31, 1999, the Company had $11 million outstanding under
its Credit Facility.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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<PAGE> 26

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Healthcare Recoveries, Inc.

In our opinion, the accompanying balance sheets and the related statements
of income, changes in stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Healthcare Recoveries, Inc. (the
Company) at December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion expressed above.

PricewaterhouseCoopers LLP

Louisville, Kentucky
February 15, 2000

24
<PAGE> 27

HEALTHCARE RECOVERIES, INC.

BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,670 $31,133
Restricted cash........................................... 26,121 16,927
Accounts receivable, less allowance for doubtful accounts
of $380 in 1999 and $307 in 1998....................... 6,870 3,607
Other current assets...................................... 1,669 1,583
-------- -------
Total current assets.............................. 36,330 53,250
-------- -------
Property and equipment, at cost:
Buildings and land........................................ 5,482 --
Furniture and fixtures.................................... 3,095 2,527
Office equipment.......................................... 1,946 1,783
Computer equipment........................................ 11,253 7,991
Leasehold improvements.................................... 1,073 845
-------- -------
22,849 13,146
Accumulated depreciation and amortization................. (10,002) (6,962)
-------- -------
Property and equipment, net....................... 12,847 6,184
-------- -------
Cost in excess of net assets acquired, net.................. 26,296 --
Identifiable intangibles, net............................... 5,496 --
Other assets................................................ 1,274 1,569
-------- -------
Total assets...................................... $ 82,243 $61,003
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 1,914 $ 1,234
Accrued expenses.......................................... 11,986 5,516
Funds due clients......................................... 13,178 13,118
Income taxes payable...................................... 1,018 2,484
-------- -------
Total current liabilities......................... 28,096 22,352
Other liabilities........................................... 2,055 1,458
Long-term borrowings........................................ 11,000 --
-------- -------
Total liabilities................................. 41,151 23,810
-------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 2,000 shares authorized;
no shares issued or outstanding........................ -- --
Common stock, $.001 par value; 20,000 shares authorized;
11,209 shares and 11,503 shares issued and outstanding
at December 31, 1999 and 1998, respectively............ 12 12
Capital in excess of par value............................ 22,541 22,428
Treasury stock at cost, 305 shares........................ (1,373) --
Retained earnings......................................... 19,912 14,753
-------- -------
Total stockholders' equity........................ 41,092 37,193
-------- -------
Total liabilities and stockholders' equity........ $ 82,243 $61,003
======== =======
</TABLE>

The accompanying notes are an integral part of the financial statements.

25
<PAGE> 28

HEALTHCARE RECOVERIES, INC.

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Claims revenues............................................. $61,409 $48,734 $39,277
Cost of services............................................ 31,451 22,199 18,523
------- ------- -------
Gross profit.............................................. 29,958 26,535 20,754
Support expenses............................................ 15,870 10,692 8,922
Depreciation and amortization............................... 4,954 2,334 1,181
Non-recurring compensation charge (See Note 8).............. -- -- 2,848
------- ------- -------
Operating income.......................................... 9,134 13,509 7,803
Interest income............................................. 1,084 1,790 1,158
Interest expense............................................ (940) (133) --
Other -- Special Committee expenses......................... (451) -- --
------- ------- -------
Income before income taxes................................ 8,827 15,166 8,961
Provision for income taxes.................................. 3,665 6,266 4,959
------- ------- -------
Net income................................................ $ 5,162 $ 8,900 $ 4,002
======= ======= =======
Earnings per common share (basic)........................... $ 0.46 $ 0.78 $ 0.37
======= ======= =======
Earnings per common share (diluted)......................... $ 0.46 $ 0.77 $ 0.37
======= ======= =======
</TABLE>

The accompanying notes are an integral part of the financial statements.

26
<PAGE> 29

HEALTHCARE RECOVERIES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
EQUITY
CAPITAL IN FUNDING
COMMON STOCK EXCESS OF FROM (TO) RETAINED
------------------- PAR MEDAPHIS EARNINGS TREASURY
SHARES AMOUNT VALUE CORPORATION (DEFICIT) STOCK TOTAL
---------- ------ ---------- ----------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996......... 9,800,000 $10 $ -- $ 182 $ 3,918 $ -- $ 4,110
Net Income.......................... 4,002 4,002
Issuance of Common Stock............ 1,470,000 1 19,241 19,242
Non-recurring compensation charge... 200,000 2,800 2,800
Distributions to Medaphis
Corporation....................... (182) (2,067) (2,249)
Other............................... (40) (40)
---------- --- ------- ----- ------- ------- -------
BALANCES, DECEMBER 31, 1997......... 11,470,000 11 22,001 -- 5,853 -- 27,865
Net income.......................... 8,900 8,900
Issuance of Common Stock............ 32,987 1 427 428
---------- --- ------- ----- ------- ------- -------
BALANCES, DECEMBER 31, 1998......... 11,502,987 12 22,428 -- 14,753 -- 37,193
Net income.......................... 5,162 5,162
Issuance of Common Stock............ 10,720 98 98
Repurchase of Common Stock.......... (305,000) (1,373) (1,373)
Other............................... 15 (3) 12
---------- --- ------- ----- ------- ------- -------
BALANCES, DECEMBER 31, 1999......... 11,208,707 $12 $22,541 $ -- $19,912 $(1,373) $41,092
========== === ======= ===== ======= ======= =======
</TABLE>

The accompanying notes are an integral part of the financial statements.

27
<PAGE> 30

HEALTHCARE RECOVERIES, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 5,162 $ 8,900 $ 4,002
Adjustments to reconcile net income to net cash provided by
operating activities:
Non-recurring compensation charge......................... -- -- 2,848
Depreciation and amortization............................. 4,954 2,334 1,181
Deferred income taxes..................................... 511 341 (295)
Other..................................................... 15 -- --
Changes in operating assets and liabilities:
Restricted cash........................................ 603 (2,720) 4,548
Accounts receivable.................................... (2,153) (1,100) (581)
Other current assets................................... 45 (960) (379)
Other assets........................................... 41 (318) (1,085)
Trade accounts payable................................. 1,175 248 400
Accrued expenses....................................... 1,327 746 1,109
Funds due clients...................................... (852) 1,475 (3,310)
Income taxes payable................................... (1,466) 730 1,754
Other liabilities...................................... (472) 138 572
-------- ------- -------
Net cash provided by operating activities......... 8,890 9,814 10,764
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......................... (44,215) -- --
Purchases of property and equipment......................... (3,863) (3,783) (3,096)
-------- ------- -------
Net cash used in investing activities............. (48,078) (3,783) (3,096)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................... 98 428 19,242
Distribution to Medaphis Corporation........................ -- -- (2,249)
Repurchase of common stock.................................. (1,373) -- --
Line of credit proceeds..................................... 14,300 -- --
Line of credit repayments................................... (3,300) -- --
Other....................................................... -- -- (40)
-------- ------- -------
Net cash provided by financing activities......... 9,725 428 16,953
-------- ------- -------
Net (decrease) increase in cash and cash equivalents........ (29,463) 6,459 24,621
Cash and cash equivalents, beginning of period.............. 31,133 24,674 53
-------- ------- -------
Cash and cash equivalents, end of period.................... $ 1,670 $31,133 $24,674
======== ======= =======
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Income tax payments......................................... $ 4,819 $ 5,293 $ 3,753
======== ======= =======
Cash paid for interest expense.............................. $ 844 $ 132 $ --
======== ======= =======
DETAILS OF BUSINESSES ACQUIRED IN PURCHASE TRANSACTIONS:
Fair value of assets acquired............................... $ 45,813 $ -- $ --
Less: liabilities assumed................................... 1,598 -- --
-------- ------- -------
Cash paid for acquired businesses, net of cash acquired..... $ 44,215 $ -- $ --
======== ======= =======
</TABLE>

The accompanying notes are an integral part of the financial statements.

28
<PAGE> 31

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Healthcare Recoveries, Inc. (hereinafter referred to as the "Company" or
"HCRI"), a Delaware corporation, was incorporated on June 30, 1988. The Company
provides complete outsourcing of certain medical cost containment services to
the private healthcare payor industry. Its primary service is claims recovery,
which entails the identification, investigation and recovery of accident-related
medical benefits incurred by its clients on behalf of their insureds, but for
which other persons or entities have primary responsibility. The Company's
clients' rights to recover the value of these medical benefits, arising by law
or contract, are generally known as the right of subrogation and paid from the
proceeds of liability or workers' compensation insurance. The Company's other
medical cost containment services include hospital bill auditing, contract
compliance review and cost management consulting, coordination of benefits and
overpayments recovery services.

The Company operated as an independent entity until August 28, 1995 when it
was merged with and into a subsidiary of Medaphis Corporation ("Medaphis") in a
transaction accounted for as a pooling of interests (the "Merger"). Prior to the
Merger, the Company's redeemable convertible preferred stock was converted to
Common Stock. As of the effective time of the Merger, each share of the then
issued and outstanding Company Common Stock was exchanged for Medaphis common
stock. Employee stock options of the Company outstanding at the effective time
of the Merger were also substituted with similar options on Medaphis common
stock. Subsequent to the Merger, Medaphis recapitalized the Company, effectively
canceling all but 100 shares of common stock (not adjusted for the Stock Split
as discussed in Note 12), pledged the assets and shares as collateral for
Medaphis' bank debt, and made the Company a guarantor for Medaphis' bank debt.

On May 21, 1997, the Company completed its initial public offering (the
"Offering") of 9,800,000 shares of Common Stock, excluding 200,000 shares issued
in connection with the non-recurring compensation charge (see Note 8). Medaphis
sold all the shares. As a result, the Company received no proceeds from the sale
of shares in the Offering. On June 9, 1997, the Company sold 1,470,000 shares of
Common Stock to the underwriters of the Offering in satisfaction of the exercise
of an over-allotment option, resulting in proceeds to the Company of
approximately $19.2 million.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash, demand deposits and highly liquid
investments with an original maturity of three months or less. Carrying values
of cash and cash equivalents approximate fair value due to the short-term nature
of the instruments.

Restricted cash represents the balance in client-specific bank accounts of
amounts collected on behalf of certain clients. A portion of the balance will be
disbursed to clients in accordance with the terms of the contracts between the
Company and its clients, while the remainder will be released to the Company.
Restricted cash at December 31, 1999 includes $8.5 million for the potential
Subro Audit (as defined herein) earn-out amount held in escrow (See Note 3).

The Company's cash, cash equivalents and restricted cash have been placed
with one financial institution.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets. Estimated useful lives of property and equipment range from three to
forty years. Depreciation expense for the years ended 1999, 1998, and 1997 was
$3.1 million, $2.0 million, and $0.1 million, respectively.

29
<PAGE> 32
HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Effective January 1, 1998, the Company adopted Statement of Position 98-1,
which requires the capitalization of internal and external costs incurred to
develop or obtain computer software for internal use.

Intangible Assets

Cost in excess of net assets acquired represents the unamortized excess of
cost over the fair value of tangible and identifiable intangible assets acquired
and is being amortized on a straight-line basis over twenty years. Identifiable
intangible assets are being amortized on a straight-line basis over varying
periods, ranging from four to fifteen years. Amortization expense for the years
ended 1999, 1998 and 1997 was $1.9 million, $0.3 million, and $0, respectively.

Revenue Recognition

Subrogation revenues are generally derived from contingent fee arrangements
based on the recoveries effected by the Company on behalf of its clients.
Revenue is recognized when a fee is earned based on the settlement of a case. A
case is deemed settled when the parties agree on all material terms associated
with the settlement. In response to operational changes which affect the
Company's ability to identify when the parties reached agreement on all material
terms, refinements were made to the estimation process with the intent of
maintaining consistency in the timing of revenue recognition. The Company
believes this change had no significant impact on its revenues for 1999.

Special Committee

In August 1999, the board of directors appointed a special committee to
evaluate strategic alternatives available to the Company, including its possible
sale. The Company incurred $451,000 of expenses related to the work of the
special committee during 1999.

Provision for Income Taxes

The provision for income taxes has been prepared as if the Company was an
independent entity for all periods presented and in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."

Stock-Based Compensation Plans

The Company accounts for its employee stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Effective in 1996, the Company implemented the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires companies that elect not to account for
stock-based compensation as prescribed by SFAS No. 123, to disclose the pro
forma effects on earnings and earnings per share as if SFAS No. 123 had been
adopted. Additionally, certain other disclosures are required with respect to
stock compensation and the assumptions used in determining the pro forma effects
of SFAS No. 123.

30
<PAGE> 33
HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Earnings per Common Share

A reconciliation of the numerators and denominators of the basic and
diluted earnings per common share calculations follows (dollars in thousands,
except per share results):

<TABLE>
<CAPTION>
PER-SHARE
NET INCOME SHARES RESULTS
---------- ---------- ---------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Basic earnings per common share..................... $5,162 11,287,724 $ 0.46
Effect of dilutive stock options.................... -- 43,547 --
Diluted earnings per common share................... 5,162 11,331,271 0.46
YEAR ENDED DECEMBER 31, 1998:
Basic earnings per common share..................... 8,900 11,484,266 0.78
Effect of dilutive stock options.................... --...... 70,676 (0.01)
Diluted earnings per common share................... 8,900 11,554,942 0.77
YEAR ENDED DECEMBER 31, 1997:
Basic earnings per common share..................... 4,002 10,752,384 0.37
Effect of dilutive stock options.................... -- 66,293 --
Diluted earnings per common share................... 4,002 10,818,677 0.37
</TABLE>

Basic earnings per common share for 1997 were computed based on the
weighted-average number of shares outstanding during the period after giving
retroactive effect to the Stock Split (see Note 12). The dilutive effect of
stock options is calculated using the treasury stock method. Options to purchase
1,088,358 and 360,550 shares for the years ended December 31, 1999 and 1998,
respectively, were not included in the computation of diluted earnings per
common share as the options' exercise prices were greater than the average
market price of the common shares during the period.

Use of Estimates and Assumptions

Preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect (i) reported amounts of
assets and liabilities, (ii) disclosure of contingent assets and liabilities at
the date of the financial statements and (iii) reported amounts of revenues and
expenditures during the reporting period. Actual results may differ from those
estimates.

3. ACQUISITIONS

On January 25, 1999, HCRI acquired the assets and certain liabilities of
Subro-Audit, Inc., a Wisconsin corporation ("SAI"), and a related entity,
O'Donnell Leasing Co., LLP, a Wisconsin limited liability partnership ("ODL"
and, together with SAI, "Subro Audit"), for approximately $24.4 million (the
"Subro Audit Acquisition"), using available unrestricted cash. HCRI currently
estimates that it may pay up to $7.0 million through January 2001, pursuant to
an earn-out arrangement. SAI is based in Wisconsin and provides subrogation
recovery services to an installed base of lives, which are covered by insurers,
HMOs and employer-funded plans, throughout the United States. The Subro Audit
Acquisition was accounted for using the purchase method of accounting.

31
<PAGE> 34
HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

expenses. MedCap provides a variety of medical cost management services to
health insurers and HMOs, primarily in California. These services include
hospital bill auditing, contract compliance review, identification of certain
other payments, and cost management consulting services. The MedCap Acquisition
was accounted for using the purchase method of accounting.

If the Acquisitions had taken place on January 1, 1999, approximate claims
revenues, net income and earnings per share for the year ended December 31, 1999
would have been $62.7 million, $5.1 million and $0.45 per share, respectively.
If the Acquisitions had taken place on January 1, 1998, approximate claims
revenues, net income and earnings per share for the year ended December 31, 1998
would have been $61.3 million, $7.5 million and $0.65 per share, respectively.
The cost in excess of net tangible and identifiable intangible assets acquired,
allocated and recorded in connection with the Acquisitions, was approximately
$27.3 million and is being amortized over a 20-year period. These results may
not necessarily reflect future results of operations or what the results of
operations would have been had the Acquisitions actually been consummated at the
beginning of the periods presented.

4. LEASE COMMITMENTS

The Company leases office space in Louisville, Kentucky, Encino,
California, and Pittsburgh, Pennsylvania. Future minimum lease payments, by year
and in the aggregate, under noncancelable operating leases with initial or
remaining terms in excess of one year at December 31, 1999 are as follows (in
thousands):

<TABLE>
<S> <C>
2000........................................................ $1,614
2001........................................................ 1,621
2002........................................................ 1,559
2003........................................................ 1,741
2004........................................................ 1,681
Thereafter.................................................. 6,647
</TABLE>

Rental expense, which includes amounts applicable to short-term leases, was
approximately $1,302,000, $1,110,000, and $979,000 for the years ended December
31, 1999, 1998 and 1997, respectively.

5. INCOME TAXES

The provision for income taxes for the years ended December 31, 1999, 1998
and 1997 consists of the following (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................... $2,310 $4,961 $3,941
State and local........................................... 844 964 1,313
------ ------ ------
3,154 5,925 5,254
------ ------ ------
Deferred:
Federal................................................... 428 286 (246)
State and local........................................... 83 55 (49)
------ ------ ------
511 341 (295)
------ ------ ------
$3,665 $6,266 $4,959
====== ====== ======
</TABLE>

32
<PAGE> 35
HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following is a reconciliation of the effective tax rate to the federal
statutory rate for the years ended December 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 34.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit........... 6.9 6.8 6.8
Non-recurring compensation charge........................... -- -- 13.3
Other, net.................................................. 0.6 (0.5) 0.2
---- ---- ----
41.5% 41.3% 55.3%
==== ==== ====
</TABLE>

Temporary differences giving rise to deferred taxes in the accompanying
balance sheets at December 31, 1999 and 1998 consist of the following (in
thousands):

<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Accrued bonuses.................................... $ 667 $ 585
Accounts receivable................................ $1,846 $1,395
Accrued litigation................................. 832 596
Other.............................................. 315 545 163 15
------ ------ ------ ------
$1,814 $2,391 $1,344 $1,410
====== ====== ====== ======
</TABLE>

Management believes that the deferred tax assets are realizable based
primarily on the existence of sufficient taxable income within the allowable
carryback period.

6. MAJOR CLIENTS

United HealthCare Group accounted for 23%, 28% and 31% of the Company's
total revenues for the years ended December 31, 1999, 1998 and 1997,
respectively. No other client accounted for more than 10% of the Company's total
revenues. The loss of this client could have a material adverse effect on the
Company's results of operations, financial position and cash flows.

7. RELATED PARTY TRANSACTIONS

The Company has entered into a contract for legal services with a
professional service corporation that is wholly owned by one of the Company's
officers. This arrangement exists solely for the purpose of minimizing the costs
of legal services purchased by the Company on behalf of its clients. For the
years ended December 31, 1999, 1998 and 1997, approximately $2,040,000,
$1,320,000 and $1,001,000, respectively, was paid to this law firm for such
legal services.

8. NON-RECURRING COMPENSATION CHARGE

During the second quarter of 1997, the Company recognized a non-recurring,
non-cash compensation charge of approximately $2.8 million relating to a bonus
comprised of 200,000 shares of the Company's Common Stock granted by the Company
to certain members of the Company's executive management upon

33
<PAGE> 36
HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

consummation of the Offering. The amount of the charge approximated the fair
value of the shares granted based on the Offering price of $14.00 per share.

9. EMPLOYEE BENEFIT PLAN

Pension Plan

Effective on January 1, 1997, the Company's employees began participation
in the Company's 401(k) defined contribution pension plan. An annual expense
provision for the plan is based upon the level of employee participation, as the
plan requires the Company to match a certain portion of the employees'
contributions. Total retirement plan expense was approximately $877,200,
$522,300 and $235,800 for the years ended December 31, 1999, 1998 and 1997,
respectively.

OTHER

Accrued bonuses included in the accompanying balance sheets at December 31,
1999 and 1998 approximate $4.5 and $4.4 million, respectively.

10. CONTINGENCIES

The Company is engaged in the business of identifying and recovering
subrogation and related claims of its clients, many of which arise in the
context of personal injury lawsuits. As such, the Company operates in a
litigation-intensive environment. The Company has, from time to time, been, and
in the future expects to be, named as a party in litigation incidental to its
business operations. To date, the Company has not been involved in any
litigation which has had a material adverse effect upon the Company, but there
can be no assurance that pending litigation or future litigation will not have a
material adverse effect on the Company's business, results of operations and
financial condition.

11. CREDIT FACILITY

On February 1, 1998, the Company entered into an agreement providing for an
unsecured revolving line of credit (the "Credit Facility"), with borrowings of
up to a maximum of $50 million, expiring on January 31, 2001. An amount of $11
million was outstanding as of December 31, 1999. The Credit Facility replaced an
existing $10 million revolving line of credit. Principal amounts outstanding
under the Credit Facility bear interest at a variable rate based on the Prime
Rate or Eurodollar Rate, as applicable, plus a pre-determined margin based on
the ratio of the Company's total indebtedness to earnings before interest,
taxes, depreciation and amortization. The agreement contains customary covenants
and events of default including maintenance of certain minimum interest coverage
and leverage ratios and a minimum level of net worth. The agreement also
contains a material adverse change clause. The Company does not expect changes
in interest rates to have a material effect on its financial position, results
of operations or cash flows in 2000. The Credit Facility was amended in May 1998
and March 1999 to enable the Company to acquire entities that do not maintain
audited financials and to use proceeds from the Credit Facility to repurchase up
to $10 million of outstanding Common Stock.

12. RECAPITALIZATION

On May 16, 1997, the Company amended its Certificate of Incorporation to
authorize 2,000,000 shares of $.001 par value preferred stock and 20,000,000
shares of $.001 par value Common Stock, of which 9,800,000 shares of Common
Stock were issued and outstanding after a 98,000-for-1 Common Stock split
("Stock Split"), which the Company declared to be effective immediately prior to
the Offering. The Stock Split was effected in the form of a stock dividend.
Accordingly, all references in the accompanying financial statements to number
of shares and related per share results have been restated to reflect these
changes.

34
<PAGE> 37
HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

13. SEPARATION AGREEMENT WITH MEDAPHIS

Effective May 21, 1997, the Company and Medaphis entered into a separation
agreement (the "Separation Agreement") that provided for the separation of the
Company from Medaphis. The Separation Agreement provided that on the date of the
Offering (i) the Company would (assuming none of the underwriters'
over-allotment option had been exercised) have a nominal amount of unrestricted
cash, and would not owe any amount to Medaphis (except as discussed below with
respect to purchased goods and services, certain employee benefit plan payments
and a distribution to be paid to Medaphis to reduce the Company's stockholders'
equity to $4,110,000) and (ii) Medaphis would not owe any amount to the Company.

The Separation Agreement also provided that (i) the Company would pay
(without markup or markdown) Medaphis after the consummation of the Offering for
any goods or services purchased from or through Medaphis prior to consummation
but not paid for prior to such consummation; (ii) Medaphis would cause its bank
lenders to release in connection with the Offering the Company's guaranty of
Medaphis' bank debt, all liens on the Company's assets and the common stock to
be sold by Medaphis pursuant to the Offering; (iii) the Company would upon
consummation of the Offering assume responsibility for providing health
insurance or insurance coverage to former company employees (and their eligible
dependents) who had exercised their right under federal law to obtain such
insurance or insurance coverage in accordance with applicable federal law; (iv)
assets and liabilities under the Medaphis "cafeteria" employee benefit plan
relating to the Company's employees would be transferred to a new Company
"cafeteria" benefit plan, together with an adjusting payment to or from the
Company to reflect any difference between plan assets and liabilities; (v) after
consummation of the Offering, Medaphis would transfer assets in the Medaphis
401(k) retirement plan that relate to the Company's employees to a new 401(k)
retirement plan in a manner that satisfies legal requirements for interplan
asset transfers; (vi) all stock options held by the Company's employees as of
the consummation of the Offering would, in accordance with the particular option
plan under which such options were granted, become immediately vested as of such
date and any such optionees would be entitled to exercise their options in
accordance with the terms of the particular option agreements relating to the
granting of such options; (vii) effective as of the consummation of the
Offering, the Company was required to have in place certain insured and
self-funded welfare benefit plans and arrangements to cover those Company
employees who were covered by such types of plans prior to such date; and (viii)
Medaphis would pay, in one lump sum, the account balances under the Medaphis
Executive Deferred Compensation Plan due to those plan participants who would be
continuing employment with the Company after consummation of the Offering.

With respect to indemnification, the Separation Agreement provided that (i)
the Company would indemnify Medaphis for federal, state and local income and
other tax liability relating to the Company for all periods ending on or prior
to August 28, 1995, the date of the Merger, and for all periods after the
consummation of the Offering; (ii) Medaphis would indemnify the Company for
federal income tax liability relating to Medaphis or any of its subsidiaries
(including the Company), and for state and local income and other tax liability
relating to Medaphis or any subsidiaries (other than the Company), from August
29, 1995 to the date of consummation of the Offering; (iii) the Company would
indemnify Medaphis from liability due to or arising out of acts or failures to
act of the Company in the periods described in clause (i); (iv) Medaphis would
indemnify the Company from liability due to or arising out of the acts or
failures to act of Medaphis or any of its subsidiaries (other than the Company)
for all periods described in (i) and (ii); and (v) Medaphis would indemnify the
non-employee directors of the Company from certain liabilities arising out of
the Offering, including liabilities under the Securities Act of 1933.

35
<PAGE> 38
HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

14. COMMON STOCK OPTIONS

Upon consummation of the Offering, the Company adopted the Healthcare
Recoveries, Inc. Non-Qualified Stock Option Plan for Eligible Employees (the
"Employee's Plan"), the Healthcare Recoveries, Inc. Amended and Restated
Directors' Stock Option Plan (the "Directors' Plan") and the Healthcare
Recoveries, Inc. Employee Stock Purchase Plan (the "Purchase Plan"). On December
8, 1997, the Company adopted the Healthcare Recoveries, Inc. 1997 Stock Option
Plan for Eligible Participants (the "1997 Plan").

The Employees' Plan provides for the award of stock options to certain
officers and key employees of the Company. Options under the Employees' Plan are
exercisable at 100% of the market value of the Company's Common Stock on the
date of grant. Awards under the Employees' Plan vest ratably over a three-year
period and expire ten years from the date of grant. As provided in the
Employees' Plan, all options granted to the Company's employees automatically
vest in the event of a change in control. At December 31, 1999, 673,750 shares
of Common Stock were reserved for issuance under the Employees' Plan, including
139,861 shares available for future award.

The Directors' Plan provides for the grant of options to purchase the
Company's Common Stock to each non-employee director of the Company. Options
under the Directors' Plan are exercisable at 100% of the market value of the
Company's Common Stock on the date of grant. Pursuant to the Directors' Plan,
each eligible director is to be granted on the date he or she first becomes a
director an option to purchase 10,000 shares of Common Stock, and each eligible
director is to be granted on the date of each annual meeting of stockholders of
the Company beginning in 1998 an option to purchase 2,000 shares of Common
Stock, for so long as shares are available under the Directors' Plan, but not
after March 31, 2002. Terms of options granted under this plan commence on the
date of grant and expire on the tenth anniversary of the grant date. Each option
is to become exercisable when vested. The options vest ratably over a three-year
period, provided that the optionee must be a non-employee director of the
Company on each such anniversary in order for options to vest on such date. At
December 31, 1999, 150,000 shares of Common Stock were reserved for issuance
under the Directors' Plan, including 80,000 shares available for future award.

Under the Purchase Plan, eligible employees may purchase shares of the
Company's Common Stock, subject to certain limitations, at 85% of its market
value. Purchases are made from payroll deductions up to a maximum of 15% of an
employee's eligible annual compensation. During the year ended December 31,
1999, 10,720 shares of the Company's Common Stock were purchased under the
Purchase Plan, resulting in 282,543 reserved shares of Common Stock being
available for purchase at December 31, 1999.

The 1997 Plan provides for the grant of options to purchase the Company's
Common Stock to eligible participants of the Company at 100% of the market value
of the Company's Common Stock on the date of grant. Awards under the 1997 Plan
expire ten years from the date of grant and vest according to the terms that the
compensation committee of the Board of Directors determines in its sole
discretion. As provided in the 1997 Plan, all options granted to the Company's
employees automatically vest in the event of a change in control. At December
31, 1999, 1,760,000 shares of Common Stock have been reserved under the 1997
Plan, of which 801,614 shares are available for future award.

36
<PAGE> 39
HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Activity related to the Employees' Plan, Directors' Plan and 1997 Plan for
the years ended December 31, 1999, 1998 and 1997 is summarized as follows:

<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
as of January 1.... 1,085 $16.58 723 $14.93 -- $ --
Granted............ 640 6.01 537 17.85 728 14.94
Exercised.......... -- -- (26) 17.60 -- --
Canceled........... (163) 13.51 (149) 15.79 5 15.87
------ ------ ------
Options outstanding
as of December 31.. 1,562 12.55 1,085 16.58 723 14.93
====== ====== ======
Weighted-average fair
value of options
granted during the
year (per share)... $ 1.94 $ 8.07 $ 6.54
====== ====== ======
</TABLE>

The following table summarizes information about options outstanding under
the Employees' Plan, Directors' Plan and 1997 Plan at December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- OUTSTANDING WEIGHTED-
DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
1999 CONTRACTUAL EXERCISE 1999 EXERCISE
RANGE OF EXERCISE PRICES (000) LIFE (YEARS) PRICE (000) PRICE
------------------------ ------------ ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$2.75 - $15.938................ 1,088 8.3 $9.67 388 $14.36
$16.37 - $23.50................ 474 8.2 19.16 207 18.63
----- ---
1,562 8.3 12.55 595 15.84
===== ===
</TABLE>

Employee stock options of the Company outstanding at the effective time of
the Merger were substituted with similar options on Medaphis common stock.
Subsequent to the Merger and prior to the Offering, employees of the Company
participated in the Non-Qualified Stock Option Plan and the Non-Qualified Stock
Option Plan for Non-Executive Employees (the "Medaphis Plans") of Medaphis.
Granted options under the Medaphis Plans expire 10 to 11 years after the date of
grant and generally vest over a three-to-five-year period; however, in
accordance with the terms of the Medaphis Plans, all options granted to the
Company's employees automatically vested in connection with the Offering. All
unexercised options held by the Company's employees under the Medaphis Plans
expired on November 21, 1997. Stock options granted to the Company's employees
under the Medaphis Plans do not affect the number of shares used in determining
the Company's earnings per common share results. The following presents
information related to the Company's employees' participation in the Medaphis
Plans prior to the Offering.

37
<PAGE> 40
HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

All options under the Medaphis Plans were either exercised or canceled as
of December 31, 1997. Activity related to 1997 is summarized as follows:

<TABLE>
<CAPTION>
1997
-------------------------
SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE
------ ----------------
<S> <C> <C>
Options outstanding as of January 1......................... 412 $14.06
Exercised................................................. (227) 7.37
Canceled.................................................. (185) 28.64
----
Options outstanding as of December 31....................... --
====
</TABLE>

On October 25, 1996, Medaphis changed the exercise price of approximately
81,000 of its then outstanding stock options, which had an exercise price of
$15.00 or greater, to a new exercise price of $9.875. On April 25, 1997,
Medaphis re-priced all options then outstanding under the Medaphis Plans to the
market price of Medaphis common stock on that date of $5.375. No other terms of
these options were changed. The Company has not recognized compensation expense
as a result of the re-pricing of the stock options granted under the Medaphis
Plans.

The Company accounts for options granted under its employee stock-based
compensation plans in accordance with APB No. 25. As a result, the Company has
not recognized compensation expense for stock options granted with an exercise
price equal to the quoted market price of the common stock on the date of grant
and which vest based solely on continuation of employment by the recipient of
the option award. The Company adopted SFAS No. 123 for disclosure purposes in
1996. For SFAS No. 123 purposes, the fair value of each option grant and stock
based award has been estimated as of the date of grant using the Black-Scholes
option pricing model. The following summarizes the weighted average assumptions
used in valuing awards under the Employees' Plan, Directors' Plan and 1997 Plan:

<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Expected life (years)....................................... 5.0 5.0 5.0
Risk-free interest rate..................................... 5.7% 5.5% 5.8%
Dividend yield.............................................. 0.0 0.0 0.0
Expected volatility......................................... 137.3 38.2 40.0
</TABLE>

Had compensation expense been recognized under the provisions of SFAS No.
123, utilizing the assumptions in the table above, the Company's net income for
the years ended December 31, 1999, 1998 and 1997 and earnings per common share
(basic and diluted) for the years ended December 31, 1999, 1998 and 1997 would
have decreased to the following pro forma amounts:

<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net Income As reported...................................... $5,162 $8,900 $4,002
Proforma.................................................... 3,021 7,333 3,534
Earnings per common share:
As reported (basic)......................................... 0.46 0.78 0.37
As reported (diluted)....................................... 0.46 0.77 0.37
Proforma (basic and diluted)................................ 0.27 0.64 0.33
</TABLE>

The effects of applying SFAS No. 123 in the pro forma disclosures are not
likely to be representative of the effects on pro forma net income or earnings
per common share for future years because variables such as option grants,
option exercises, and stock price volatility included in the disclosures may not
be indicative of actual future activity.

38
<PAGE> 41
HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

A summary of the Company's quarterly results of operations follows (dollars
in thousands, except per share amounts):

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Claims revenues................................... $13,860 $15,793 $15,247 $16,508
Income before income taxes........................ 2,391 2,417 2,098 1,924
Net income........................................ 1,398 1,415 1,227 1,124
Earnings per common share (basic)................. 0.12 0.13 0.11 0.10
Earnings per common share (diluted)............... 0.12 0.13 0.11 0.10

YEAR ENDED DECEMBER 31, 1998:
Claims revenues................................... $11,196 $12,025 $12,719 $12,794
Income before income taxes........................ 3,608 3,704 3,865 3,989
Net income........................................ 2,093 2,171 2,277 2,359
Earnings per common share (basic)................. 0.18 0.19 0.20 0.21
Earnings per common share (diluted)............... 0.17 0.19 0.20 0.21
</TABLE>

39
<PAGE> 42

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item with respect to Directors and
Executive Officers of the Registrant is included in the sections entitled
"Management of the Company", "Executive Officers", "Certain Relationships and
Related Transactions" and "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 28, 2000 and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is included in the sections entitled
"Executive Compensation", "Stock Option Grants", "Stock Option Exercises",
"Compensation Committee Report on Executive Compensation", "Compensation
Committee Interlocks and Insider Participation" and "Stock Price Performance
Graph" of the Proxy Statement for the Annual Meeting of Stockholders to be held
on April 28, 2000 and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is included in the sections entitled
"Management Common Stock Ownership" and "Principal Stockholders" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on April 28, 2000
and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is included in the sections entitled
"Executive Compensation" and "Certain Relationships and Related Transactions" of
the Proxy Statement for the Annual Meeting of Stockholders to be held on April
28, 2000 and is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

Report of Independent Accountants

Balance Sheets -- years ended December 31, 1999 and 1998

Statements of Income -- years ended December 31, 1999, 1998, and 1997

Statements of Changes in Stockholders' Equity -- years ended December 31,
1999, 1998, and 1997

Statements of Cash Flow -- years ended December 31, 1999, 1998, and 1997

2. Financial Statement Schedules (none required)

40
<PAGE> 43

3. Exhibits

The following list of Exhibits includes both exhibits submitted with this
Form 10-K as filed with the Commission and those incorporated by reference to
other filings:

<TABLE>
<C> <C> <S>
2.1 -- Asset Purchase Agreement, dated as of December 4, 1998, by
and among the Registrant, MedCap Medical Cost Management,
Inc. and Marcia Deutsch (incorporated by reference to
Exhibit 2.1 of Registrant's Current Report on Form 8-K,
filed December 11, 1998, File No. 000-22585).
2.2 -- Asset Purchase Agreement, dated as of January 3, 1999, by
and among the Registrant, Subro-Audit, Inc., O'Donnell
Leasing Co., LLP, Kevin M. O'Donnell and Leah Lampone
(incorporated by reference to Exhibit 2.1 of Registrant's
Current Report on Form 8-K, filed January 11, 1999, File No.
000-22585).
2.3 -- Amendment to Asset Purchase Agreement by and among the
Registrant, Subro-Audit, Inc., O'Donnell Leasing Co., LLP,
Kevin O'Donnell and Leah Lampone, dated as of January 25,
1999 (incorporated by reference to Exhibit 2.2 of
Registrant's Current Report on Form 8-K, filed February 3,
1999, File No. 000-22585).
3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 of
Registrant's Amendment No. 2 to Registration Statement on
Form S-1, File No. 333-23287).
3.2 -- Amended and Restated Bylaws of the Registrant (incorporated
by reference to Exhibit 3.2 of Registrant's Amendment No. 2
to Registration Statement on Form S-1, File No. 333-23287).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of Registrant's Amendment No. 1 to
Registration Statement on Form S-1, File No. 333-23287).
4.2 -- Rights Agreement, dated February 12, 1999, between the
Registrant and National City Bank, as Rights Agent, which
includes as Exhibit A the Form of Certificate of
Designations of the Preferred Stock, as Exhibit B the Form
of Right Certificate and as Exhibit C the Summary of Rights
to Purchase Preferred Stock (incorporated by reference to
Exhibit 4.1 of Registrant's Form 8-A, filed February 16,
1999, File No. 000-22585).
10.1 -- Healthcare Recoveries, Inc. Non-Qualified Stock Option Plan
for Eligible Employees (incorporated by reference to Exhibit
4.2 of Registrant's Registration Statement on Form S-1, File
No. 333-23287).
10.2 -- Healthcare Recoveries, Inc. Amended and Restated Directors'
Stock Option Plan (incorporated by reference to Exhibit 10.2
of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.3 -- Healthcare Recoveries, Inc. 1997 Stock Option Plan for
Eligible Participants (incorporated by reference to Annex A
of Registrant's Proxy Statement for a Special Meeting, dated
November 10, 1997).
10.4 -- Healthcare Recoveries, Inc. Employee Stock Purchase Plan
(incorporated by reference to Registrant's Registration
Statement on Form S-8, File No. 333-41557).
10.5 -- Employment Agreement between the Registrant and Patrick B.
McGinnis (incorporated by reference to Exhibit 10.2 to
Registrant's Registration Statement on Form S-1, File No.
333-23287).
10.6 -- Amendment No. 1 to Employment Agreement between the
Registrant and Patrick B. McGinnis, dated February 12, 1999
(incorporated by reference to Exhibit 10.6 of Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.7 -- Employment Agreement between the Registrant and Kevin M.
O'Donnell, dated January 25, 1999 (incorporated by reference
to Exhibit 10.9 of Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998).
10.8 -- Separation Agreement between Medaphis and the Registrant
(incorporated by reference to Exhibit 10.1 of Registrant's
Amendment No. 2 to Registration Statement on Form S-1, File
No. 333-23287).
10.9 -- Divestiture Bonus Agreement (incorporated by reference to
Exhibit 10.4 of Registrant's Amendment No. 2 to Registration
Statement on Form S-1, File No. 333.23287).
10.10 -- Supplemental Retirement Savings Plan (incorporated by
reference to Exhibit 10.5 of Registrant's Amendment No. 2 to
Registration Statement on Form S-1, File No. 333-23287).
</TABLE>

41
<PAGE> 44
<TABLE>
<C> <C> <S>
10.11 -- Lease between W&M Kentucky, Inc. and the Registrant
(incorporated by reference to Exhibit 10.6 of Registrant's
Registration Statement on Form S-1, File No. 333-23287).
10.12 -- Lease Addendum VI between W&M of Kentucky, Inc. and the
Registrant, dated December 22, 1999.
10.13 -- Annual Bonus Plan (incorporated by reference to Exhibit 10.7
of Registrant's Amendment No. 2 to Registration Statement on
Form S-1, File No. 333-23287).
10.14 -- Credit Agreement, dated as of February 1, 1998 by and among
the Registrant, the Lending Institutions Named Therein and
National City Bank of Kentucky (incorporated by Reference to
Exhibit 10.12 of Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997).
10.15 -- Amendment No. 1 to the Credit Agreement, dated as of May 15,
1998 by and among the Registrant, the Lending Institutions
Named Therein and National City Bank of Kentucky
(incorporated by reference to Exhibit 10.17 of Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.16 -- Amendment No. 2 to the Credit Agreement, dated as of March
19, 1999 by and among the Registrant, the Lending
Institutions Named Therein and National City Bank of
Kentucky (incorporated by reference to Exhibit 10.17 of
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).
10.17 -- Employment Agreement between the Registrant and Timothy E.
Cahill, dated October 19, 1999.
10.18 -- Employment Agreement between the Registrant and Robert L.
Jefferson, dated November 29, 1999.
10.19 -- Form of Change-in-Control Agreement between the Registrant
and Douglas R. Sharps, Debra M. Murphy, Mark J. Bates and
Robert G. Bader, dated February 24, 2000.
10.20 -- Form of Severance Agreement between the Registrant and
Douglas R. Sharps, Debra M. Murphy, Mark J. Bates and Robert
G. Bader dated February 24, 2000.
10.21 -- Promissory Note Payable to HealthCare Recoveries, Inc. from
Patrick B. McGinnis.
23.1 -- Consent of PricewaterhouseCoopers LLP.
27.1 -- Financial Data Schedule. (for SEC use only)
99.1 -- Healthcare Recoveries, Inc. Private Securities Litigation
Reform Act of 1995 Safe Harbor Compliance Statement for
Forward-Looking Statement.
</TABLE>

(b) Reports on Form 8-K

A report on Form 8-K/A, filed on December 8, 1999, related to a first
amendment to the Earnout Agreement among the Company, MedCap Medical Cost
Management, Inc. ("MedCap") and Marcia Deutsch (the "Asset Purchase
Agreement"). The first amendment revises the earn-out arrangement to
provide for a fixed payment and a negotiated amount to be calculated
monthly thereafter through January 15, 2001 based on a percentage of actual
collections received each month on certain claims from certain contracts.

42
<PAGE> 45

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

HEALTHCARE RECOVERIES, INC.

By: /s/ PATRICK B. MCGINNIS
------------------------------------
Patrick B. McGinnis
Chairman, President and Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ PATRICK B. MCGINNIS Chairman, President and Chief March 14, 2000
- ----------------------------------------------------- Executive Officer (Principal
Patrick B. McGinnis Executive Officer)

/s/ DOUGLAS R. SHARPS Executive Vice President and March 14, 2000
- ----------------------------------------------------- Chief Financial Officer
Douglas R. Sharps (Principal Financial and
Accounting Officer)

/s/ WILLIAM C. BALLARD, JR. Director March 14, 2000
- -----------------------------------------------------
William C. Ballard, Jr.

/s/ JILL L. FORCE Director March 14, 2000
- -----------------------------------------------------
Jill L. Force

/s/ JOHN H. NEWMAN Director March 14, 2000
- -----------------------------------------------------
John H. Newman

/s/ ELAINE J. ROBINSON Director March 14, 2000
- -----------------------------------------------------
Elaine J. Robinson

/s/ CHRIS B. VAN ARSDEL Director March 14, 2000
- -----------------------------------------------------
Chris B. Van Arsdel
</TABLE>

<PAGE> 1

EXHIBIT 10.12

LEASE ADDENDUM VI

THIS ADDENDUM is entered into as of this 22nd day of December, 1999, and
attached to and made a part of that certain Lease dated October 30, 1996 between
W & M OF KENTUCKY, INC., "Landlord," and HEALTHCARE RECOVERIES, INC., "Tenant,"
(as amended to date, the "Lease"). All capitalized terms used herein shall have
the meanings ascribed to them in the Lease.

WHEREAS, the parties wish to provide for the lease of additional space and
wish to extend the existing lease term on a staggered basis with respect to
different portions of the Premises;

NOW THEREFORE, the parties agree as follows:

1. Expansion Space. Tenant hereby leases an additional 8,374 rentable
square feet (Suite 900) and an additional 7,067 rentable square feet (Suite 901)
of the 1930 Bishop Lane Building for a term commencing February 1, 2000 and
ending on January 31, 2008. Tenant also leases 1,307 rentable square feet (Suite
947) for a term beginning on July 1, 2000 and ending on January 31, 2008. Suites
900, 901 and 947 are referred to herein as the "Expansion Space." The Base Year
for the Expansion Space shall be 1999. The rental rate shall be as set forth in
the following schedule:

<TABLE>
<CAPTION>
RENTABLE BASE RENTABLE MONTHLY
SUITE SQ. FT. YEAR TERM SQ. FT. RATE RATE
- ----- -------- ---- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
900.................................... 8,374 1999 2/1/00 - 6/30/00 $14.75 $10,293.04
901.................................... 7,067 1999 2/1/00 - 6/30/00 $10.25 $ 6,036.40
900, 901, 947.......................... 16,748 1999 7/1/00 - 1/31/03 $14.75 $20,586.08
900, 901, 947.......................... 16,748 1999 2/1/03 - 1/31/08 $16.75 $23,377.42
</TABLE>

The Tenant Improvement allowance for the Expansion Space shall be
$133,948.00. Following Tenant's occupancy of the Expansion Space, Landlord shall
promptly reimburse Tenant the tenant improvement cost upon presentation of
expenses and supporting backup material from Tenant's contractor with evidence
of payment by the Tenant of all such costs. The tenant improvements shall be
constructed in a good and workmanlike manner using materials of a similar
quality as used in Tenant's existing Premises. Tenant shall exercise its best
reasonable efforts to prevent the filing of a mechanic's or materialman's lien
on any part of the Premises and/or Landlord's Building. If such a lien should be
filed, Tenant shall promptly notify Landlord of such a filing, and either cause
the lien(s) to be released or post a bond for the benefit of Landlord in the
twice amount of the lien(s) if Tenant contests the validity of the filed lien.
<PAGE> 2

2. Extension of Lease Term. The current Lease term expiring on July 31,
2002 is extended for different periods of time with respect to different
portions of the space currently occupied by Tenant (all of which constitutes the
"Premises") and at the rental rates as set forth in the following schedule:

<TABLE>
<CAPTION>
RENTABLE BASE RENTABLE MONTHLY
SUITE SQ. FT. YEAR TERM SQ. FT. RATE RATE
- ----- -------- ---- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
1000................................... 1,327 2001 8/1/02 - 7/31/05 $14.75 $ 1,631.10
2001 8/1/05 - 7/31/09 $17.25 $ 1,907.56
1018................................... 4,003 2001 8/1/02 - 7/31/05 $14.75 $ 4,920.35
2001 8/1/05 - 7/31/09 $17.25 $ 5,754.31
1200................................... 7,841 2001 8/1/02 - 7/31/05 $14.75 $ 9,637.90
2001 8/1/05 - 7/31/09 $17.25 $11,271.44
1201................................... 8,907 2001 8/1/02 - 7/31/05 $14.75 $10,948.19
2001 8/1/05 - 7/31/09 $17.25 $12,803.81
1400A.................................. 16,748 2001 8/1/02 - 7/31/05 $14.75 $20,586.08
2001 8/1/05 - 7/31/08 $17.25 $24,075.25
1400B.................................. 16,748 2001 8/1/02 - 7/31/05 $14.75 $20,586.08
2001 8/1/05 - 7/31/08 $17.25 $24,075.25
1500................................... 16,648 2001 8/1/02 - 7/31/05 $14.75 $20,463.17
2001 8/1/05 - 7/31/09 $17.25 $23,931.50
1600................................... 16,748 2001 8/1/02 - 7/31/05 $14.75 $20,586.08
2001 8/1/05 - 1/31/08 $17.25 $24,075.25
Total.................................. 88,790
</TABLE>

Upon taking occupancy of the Expansion Space, Tenant shall be entitled to a
tenant improvement allowance of $183,170.00 to reimburse Tenant for improvements
in the Premises in the same manner and subject to the same conditions as set
forth in Paragraph 1 above. Notwithstanding the foregoing, Tenant shall be
entitled to $20,454.00 of unused tenant improvement monies previously allotted
for Tenant's existing Premises even if Tenant does not occupy the Expansion
Space.

3. Satisfaction of Prior Provisions. The Landlord has satisfied its
obligation set forth in Sections 28.03, 28.05, 28.07, 28.09 and 28.11. Those
sections of the Lease as well as Lease Addendum 1 and Section 28.10 are hereby
deleted and of no further force and effect. Tenant acknowledges that Landlord
has performed its obligations under the Lease as of the date hereof and no event
has occurred which with the giving of notice or the passage of time or both
could constitute a default on the part of the Landlord.

4. Special Condition. Landlord's obligation to lease Suite 900 and Suite
901 to Tenant and Tenant's obligation to pay rent on such expansion space is
subject to the following:

(a) the lease term of the current occupant of Suites 900 and 901
expires on January 31, 2000. The current occupant has no rights to renew or
extend its lease. Landlord will not grant any extensions or holdover
rights. Landlord shall use reasonable efforts to deliver possession of such
space to Tenant on February 1, 2000; however, Landlord shall have no
liability if the current occupant holds over. Landlord agrees to take
prompt legal action against the current occupant if it has not vacated
Suites 900 and 901 by lease expiration date.

(b) Tenant shall not be obligated to pay rent in either Suite 900 or
Suite 901 until the later of February 1, 2000 or one day after Landlord has
delivered possession of said space. Such delay shall not extend the lease
term for such space.

(c) If Landlord is unable to deliver possession of such space by June
1, 2000, either party may terminate its obligations with respect to this
Addendum and it will be null and void.
<PAGE> 3

Similarly, Landlord's obligation to lease Suite 947 and Tenant's obligation
to pay rent for such space is subject to the following:

(a) the lease term of the current occupant of Suite 947 expires on
June 30, 2000. Landlord shall use reasonable efforts to deliver possession
of such space to Tenant on July 1, 2000; however, Landlord shall have no
liability if the current occupant holds over.

(b) Tenant shall not be obligated to pay rent until the later of July
1, 2000 or one day after Landlord has delivered possession of said space.
Such delay shall not extend the lease term for such space.

(c) If Landlord is unable to deliver possession of such space by
November 1, 2000, either party may terminate its obligations with respect
to Suite 947 by written notice to the other.

5. Discussions Regarding Further Extensions. Tenant and Landlord shall
meet between July 1, 2005 and January 31, 2006 to consider a lease extension,
provided neither party shall be obligated to enter into any such lease
extension. Any extension shall be at prevailing market rates and the terms shall
be acceptable to both parties. If the lease extension is not executed by January
31, 2006, Landlord shall have the right to begin leasing activities for Tenant's
space for occupancy at the end of the Lease term. If Tenant and Landlord do not
agree to an extension of this Lease on or before January 31, 2006, Tenant shall
permit Landlord to enter the Premises outside normal business hours, and during
normal business hours where such will not unreasonably disturb or interfere with
Tenant's use of the Premises and operation of its business, to show the Premises
to persons wishing to lease them. Landlord shall whenever possible, except in an
emergency, consult with or give reasonable notice to Tenant prior to such entry,
but no such entry shall constitute an eviction or entitle Tenant to any
abatement of rent.

6. Incorporation. This Addendum VI shall, and does hereby, become part of
the original Lease and shall be in full force and effect for the term of the
Lease, and all portions of said original Lease except as expressly modified
hereby shall remain in full force and effect.

<TABLE>
<S> <C>
W & M OF KENTUCKY, INC.

Witness:
-----------------------------------------------------

By: /s/
------------------------------------------------ -----------------------------------------------------

HEALTHCARE RECOVERIES, INC.

Witness:
-----------------------------------------------------

By: /s/ MARY A. BLAKE /s/ DOUGLAS R. SHARPS
------------------------------------------------- -----------------------------------------------------
Mary A. Blake Douglas R. Sharps
Executive Vice President
</TABLE>

<PAGE> 1

EXHIBIT 10.17

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
October 19, 1999 between HEALTHCARE RECOVERIES, INC. (the "Company"), a Delaware
corporation") and TIMOTHY E. CAHILL ("Employee"), a resident of the State of
Illinois.

I. STATEMENT OF BACKGROUND INFORMATION

The Company provides recovery services for healthcare payors and assists
healthcare payors in recovering the cost or reasonable value of healthcare
benefits provided to persons who are injured under circumstances where a third
party is ultimately responsible for such healthcare benefits (the "Business");

The Company desires to employ Employee in an executive position, and
Employee desires to accept such employment.

II. STATEMENT OF AGREEMENT

In consideration of the mutual covenants, promises and conditions set forth
in this Agreement, and for other good and valuable consideration, the parties
hereto hereby agree as follows:

1. Employment. The Company hereby employs Employee and Employee hereby
accepts such employment upon the terms and conditions set forth in this
Agreement. For purposes of Sections 6, 7 and 8 of this Agreement, "employment"
shall mean any period of time during the term hereof which the Company is paying
the Employee salary under Section 5(a) of this Agreement, whether or not the
Employee is currently performing services for the Company at the time of such
payment. For all other purposes under this Agreement, "employment" shall have
its customary meaning.

2. Duties of Employee. Employee agrees to perform and discharge the duties
which may be assigned to Employee from time to time by the Company to the
reasonable satisfaction of the Company. Employee also agrees to comply with all
of the Company's policies, standards and regulations and to follow the
reasonable instructions and directives of Employee's superiors within the
Company, as promulgated by the Officers of the Company. Employee will devote
substantially all of Employee's time, attention and energies to the Business and
Employee will not, during the term of this Agreement, be engaged (whether or not
during normal business hours) in any other business or professional activity,
whether or not such activity is pursued for gain, profit or other pecuniary
advantage, other than business and professional activities which do not violate
Sections 7 and 8 of this Agreement and involve a time commitment by Employee
which is reasonably acceptable to the Company. Employee's principal place of
employment shall be the Company's headquarters in Louisville, Kentucky, and the
Company agrees that Employee's principal place of employment will not be
relocated outside of 50 miles of its current site.

This Section will not be construed to prevent Employee from (a) investing
personal assets in businesses which do not compete with the Company in such form
or manner that will not require any services on the part of Employee in the
operation or affairs if the companies in which such investments are made and in
which Employee's participation is solely that of investor; (b) purchasing
securities in any corporation whose securities are listed on a national
securities exchange or regularly traded in the over-the-counter market, provided
that Employee at no time owns, directly or indirectly, any class of any such
corporation engaged in a business competitive with that of the Company; or (c)
participating in conferences, preparing and publishing papers or books or
teaching, so long as the Chief Executive Officer of the Company give prior
approval to such participation, preparation and publication or teaching.

subject, in any case, subject to earlier termination as provided for in Section
4 below. For purposes of this Section 3, "Change in Control" means any of the
events described as Change in Control Events in Section 13.1 of the Healthcare
Recoveries, Inc. 1997 Stock Option Plan for Eligible Participants, or the
occurrence of the following: any individual, entity, group (within the meaning
of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and the
rules under that act), or other person acquires in a single transaction or a
series of transactions more than 30% of the outstanding shares of the Company's
common stock or common stock equivalents.

4. Termination.

(a) Termination by Company for Cause. Notwithstanding anything contained
in Section 3 to the contrary, the Company may terminate this Agreement and all
of its obligations hereunder immediately if any of the following events occur:

(i) Employee materially breaches any of the terms or conditions set
forth in this Agreement and fails to cure such breach within 10 days after
Employee's receipt from the Company of written notice of such breach, which
notice shall describe in reasonable detail the Company's belief that
Employee is in breach hereof (notwithstanding the foregoing, no cure period
shall be applicable to breaches by Employee of Sections 6, 7 or 8 of this
Agreement);

(ii) Employee commits any other act in bad faith materially
detrimental to the business or reputation of the Company;

(iii) Employee intentionally engages in dishonest or illegal
activities or commits or is convicted of any crime involving fraud, deceit
or moral turpitude; or

(iv) Employee dies or becomes mentally or physically incapacitated or
disabled so as to be unable to perform Employee's duties under this
Agreement. Without limiting the generality of the foregoing, Employee's
inability adequately to perform services under this Agreement for a period
of 60 consecutive days will be conclusive evidence of such mental or
physical incapacity or disability, unless such inability adequately to
perform services under this Agreement is pursuant to a mental or physical
incapacity or disability covered by the Family Medical Leave Act, in which
case such 60-day period shall be extended to a 120-day period.

(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate Employee's
employment pursuant to this Agreement without cause upon at least 30 days' prior
written notice to Employee. Subject to the provisions of Clause (ii) of Section
1 hereof, in the event Employee's employment with the Company is terminated by
the Company without cause, the Company shall remain subject to its obligations
hereunder as if Employee remained employed hereunder for the balance of the term
hereof, as provided in Section 3.

(c) No Duty to Mitigate. If the Company terminates Employee's employment
under this Agreement for any reason other than those specified in Section 4(a),
Employee shall not be required to mitigate the amount of any payment
contemplated by this Agreement (whether seeking new employment or in any other
manner), and the Company's obligations under Section 4(b) shall not be reduced
because of any employment of Employee after termination of employment under this
Agreement.

(d) Moving and Relocation Expense. The Company will reimburse Employee for
the costs incurred: (1) in moving all personal possessions to Louisville,
Kentucky; (2) in the sale of his personal residence; and (3) by him and his wife
in making up to 3 house-hunting trips to Louisville, Kentucky. Moreover, the
Company will pay to Employee a "Gross-up Payment" (as defined) in respect of any
income tax liability incurred by Employee in connection with the relocation
reimbursements described above. "Gross-up Payment" means an additional payment
made by the Company to Employee such that the amount received by Employee (i.e.,
all reimbursements under this Section 4(d), plus the Gross-up Payment) net of
all federal, state and local income taxes, equals his actual costs under Clauses
(1), (2) and (3) above.
<PAGE> 3

5. Compensation and Benefits.

(a) Annual Salary. For all services rendered by Employee under this
Agreement, the Company will pay Employee a base salary of One Hundred Fifty
Thousand Dollars ($150,000.00) per annum in equal bi-weekly installments. Such
annual salary will be subject to annual percentage increases for inflation
equivalent to those increases given the normal course of business to employees
of the Company, pursuant to the Company's present policy or, as the case may be,
a future policy approved by the Board to apply substantially on a Company-wide
basis.

(b) Incentive Compensation. During Employee's employment with the Company,
Employee shall be entitled to incentive compensation payments in accordance with
Schedule 1 to this Agreement. If Employee is terminated by the Company without
cause, Employee shall be entitled to a pro rata share of incentive compensation
payments.

(c) Stock Option Awards. Subject to the terms and conditions of the
Healthcare Recoveries, Inc. 1997 Stock Option Plan for Eligible Participants, as
amended from time to time, (the "Plan") and the approval of the Committee, as
defined in the Plan, Employee shall be entitled to purchase Fifty Thousand
(50,000) shares of the Company's common stock under the Plan at an option price
for each such share of stock which is fair market value on the date hereof.

(d) Other Benefits. Employee will be entitled to such fringe benefits as
may be provided from time-to-time by the Company to its employees, including,
but not limited to, group health insurance, retirement and any other fringe
benefits now or hereafter provided by the Company to its employees, if and when
Employee meets the eligibility requirements for any such benefit. The Company
reserves the right to change or discontinue any employee benefit plans or
programs now being offered to its employees; provided, however, that all
benefits provided for employees of the same position and status as Employee will
be provided to Employee on an equal basis.

(e) Business Expenses. Employee will be reimbursed for all reasonable
expenses incurred in the discharge of Employee's duties under this Agreement
pursuant to the Company's standard reimbursement policies.

(f) Withholding. The Company will deduct and withhold from the payments
made to Employee under this Agreement, state and federal income taxes, FICA and
other amounts normally withheld from compensation due employees.

6. Non-Disclosure of Confidential Information. Employee recognizes and
acknowledges that the trade secrets and confidential information of the Company
and its affiliates and all physical embodiments thereof (as they may exist from
time-to-time, collectively, the "Proprietary Information"), are valuable,
special and unique assets of the Business. Employee further acknowledges that
access to such Proprietary Information relating to the business of the Company
and its affiliates' businesses is essential to the performance of Employee's
duties under this Agreement. Therefore, in order to obtain access to such
Proprietary Information, Employee agrees that Employee will not, in whole or in
part, disclose such Proprietary Information to any person, firm, corporation,
association or any other entity for any reason or purpose whatsoever, nor will
Employee make use of any such information for Employee's own purposes or for the
benefit of any person, firm, corporation, association or other entity (except
the Company or its affiliates).

For purposes of this Agreement, the term "trade secrets" means the whole or
any portion of any scientific or technical or non-technical information, design,
process, procedure, formula, computer software product, documentation or
improvement relating to the Business which: (1) derives economic value, actual
or potential, from not being generally known to other persons who can obtain
economic value from its disclosure or use; and (2) is the subject of efforts
that are reasonable under the circumstances to maintain its secrecy or
confidentiality. The term "confidential information" means any and all data and
information relating to the Business which: (1) has value to the Company or its
affiliates; (2) is not generally known by their competitors or the public; and
(3) is treated as confidential by the Company or its affiliates. The provisions
of this Section 6 will apply during Employee's employment by the Company and
thereafter for a 2-year period with respect to confidential information, and
during Employee's employment by the Company and at any and all
<PAGE> 4

times thereafter with respect to trade secrets. These restrictions will not
apply to any Proprietary Information which: (i) is in the public domain,
provided that Employee was not responsible, directly or indirectly, for such
Proprietary Information entering the public domain without the Company's
consent; (ii) becomes known to Employee, during the term of this Agreement, from
a third party not known to Employee to be under a confidential relationship with
the Company or its affiliates; or (iii) is required by law or governmental
tribunal to be disclosed; provided, however, that if Employee is legally
compelled to disclose any Proprietary Information, Employee will provide the
Company with prompt written notice of such legal compulsion so that the Company
may seek a protective order or other available remedy.

7(a) Non-Competition Covenant. During Employee's employment by the Company
and for a period of 1 year following a termination of Employee's employment
under Section 4(b), and 2 years following a termination of Employee's employment
under Section 4(a), Employee will not, directly or indirectly, on Employee's own
behalf or in the service of or on behalf of any other individual or entity,
compete with the Company or its affiliates in the Business within the
Geographical Area (as hereinafter defined). The term "compete" means to engage,
directly or indirectly, on Employee's own behalf or in the service of or on
behalf of any other individual or entity, either as a proprietor, employee,
agent, independent contractor, consultant, director, officer, partner or
stockholder (other than a stockholder of a corporation listed on a national
securities exchange or whose stock is regularly traded in the over-the-counter
market, provided that Employee at no time owns, directly or indirectly, in
excess of one percent (1%) of the outstanding stock of any class of any such
corporation) in providing or marketing Business products or services. For
purposes of this Agreement, the term "Geographical Area" means those areas in
the United States and in foreign countries in which Employee or any member of
his staff is or has engaged in providing or marketing Business products or
services while Employee is employed by the Company under this Agreement.

(b) Non-Interference. During Employee's employment by the Company and for
a period of 2 years following any termination of Employee's employment for
whatever reason, Employee will not, directly or indirectly, on Employee's own
behalf or in the service of or on behalf of any other individual or entity,
interfere with, disrupt, or attempt to disrupt the past, present or prospective
relationships, contractual or otherwise, between the Company or its affiliates
and any supplier, consultant, or client of the Company or its affiliates with
whom Employee had material contact during Employee's employment by the Company
under this Agreement. The term "prospective relationship" is defined as any
relationship where the Company or its affiliates have actively sought an
individual or entity as a prospective supplier, consultant, or client.

(c) Non-Solicitation of Clients Covenant. Employee agrees that during
Employee's employment by the Company under this Agreement and for a period of 1
year following a termination of Employee's employment under Section 4(b), and 2
years following a termination of Employee's employment under Section 4(a),
Employee will not, directly or indirectly, on Employee's own behalf or in the
service of or on behalf of any other individual or entity, divert, solicit or
attempt to solicit for the purpose of providing Business services any individual
or entity (i) who is a client of the Company or its affiliates at any time
during the six (6)-month period prior to Employee's termination with the Company
("Client"), or was actively sought by the Company or its affiliates as a
prospective client during such period, and (ii) with whom Employee had material
contact while employed by the Company. Employee further agrees that during
Employee's employment by the Company and for a period of 2 years following the
termination of Employee's employment for whatever reason, Employee will not,
directly or indirectly, as an employee, independent contractor, agent or in any
other capacity, be employed by any Client:

(i) That received Business products or services from Employee, or with
which Employee otherwise had material contact while employed by the
Company; or

(ii) That received Business products or services from any office or
employee of the Company or its affiliates over which Employee had direct
management responsibility;

in either case to provide, directly or indirectly, Business products or
services.

base, prospective relationship or prospect list or any prohibited business
activity from the coverage of such Section and to apply the provisions of such
Section to the remaining portion of the Geographical Area, the client base or
the prospective relationship or prospect list, or the remaining business
activities not so severed by such judicial authority. In addition, it is the
intent of the parties that the judicial authority replace each such severed
provision with a provision as similar in terms to such severed provision as may
be possible and be legal, valid and enforceable. It is the intent of the parties
that Sections 7 and 8 be enforced to the maximum extent permitted by law. In the
event that any provision of either such Section is determined not to be
specifically enforceable, the Company shall nevertheless be entitled to bring an
action to seek to recover monetary damages as a result of the breach of such
provision by Employee.

8. Non-Solicitation of Employees Covenant. Employee further agrees and
represents that during Employee's employment by the Company and for a period of
2 years following any termination of Employee's employment for whatever reason,
Employee will not, directly or indirectly, on Employee's own behalf or in the
service of, or on behalf of any other individual or entity, divert or solicit,
or attempt to divert or solicit, to or for any individual or entity which is
engaged in providing Business services, any person employed by the Company or
its affiliates, whether or not such employee is a full-time employee or
temporary employee of the Company or its affiliates, whether or not such
employee is employed pursuant to written Agreement and whether or not such
employee is employed for a determined period or at-will, except as agreed to by
the Company.

9. Existing Restrictive Covenants. Employee represents and warrants that
Employee's employment with the Company does not and will not breach any
agreement which Employee has with any individual or entity to keep in confidence
confidential information or not to compete with any such individual or entity.
Employee will not disclose to the Company or its affiliates or use on either of
their behalf any confidential information of any other party required to be kept
confidential by Employee.

In order to assure compliance with this provision with respect to claims
that may, from time to time, be made by Employee's former employer, the Company
and Employee agree that he will not have responsibility for the sales and
marketing activities supporting the Company's hospital bill auditing and related
services during the term of the applicable provisions of the Employee Invention,
Confidentiality, and Noncompetition Agreement dated August 31, 1998 between
Concentra Preferred Payment Systems, Inc. and Employee (the "CPS Agreement").

10. Return of Confidential Information. Employee acknowledges that as a
result of Employee's employment with the Company, Employee may come into the
possession and control of Proprietary Information, such as proprietary
documents, drawings, specifications, manuals, notes, computer programs, or other
proprietary material. Employee acknowledges, warrants and agrees that Employee
will return to the Company all such items and any copies or excerpts thereof,
and any other properties, client lists, client contracts, files or documents
obtained as a result of Employee's employment with the Company, immediately upon
the termination of Employee's employment with the Company.

11. Proprietary Rights. During the course of Employee's employment with
the Company under this Agreement, Employee may make, develop or conceive of
useful processes, machines, compositions of matter, computer software,
algorithms, works of authorship expressing such algorithm, or any other
discovery, idea, concept, document or improvement which substantially related to
or is useful to the Business (the "Inventions"), whether or not subject to
copyright or patent protection, and which may or may not be considered
Proprietary Information. Employee acknowledges that all such Inventions will be
"works made for hire" under United States copyright law and will remain the sole
and exclusive property of the Company. Employee also hereby assigns and agrees
to assign to the Company, in perpetuity, all right, title and interest Employee
may have in and to such Inventions, including without limitation, all
copyrights, and the right to apply for any form of patent, utility model,
industrial design or similar proprietary right recognized by any state, country
or jurisdiction. Employee further agrees, at the Company's request and expense,
to do all things and sign all documents or instruments necessary, in the opinion
of the Company, to eliminate any ambiguity as to the ownership of, and rights of
the Company to, such Inventions, including filing copyright and patent
registrations and defending and enforcing in litigation or otherwise all such
rights.
<PAGE> 6

Employee will not be obligated to assign to the Company any Invention made
by Employee while in the Company's employ which does not relate to any business
or activity in which the Company or its affiliates is or may become engaged,
except that Employee is so obligated if the same relates to or is based on
Proprietary Information to which Employee will have had access during and by
virtue of Employee's employment or which arises out of work assigned to Employee
by the Company. Employee will not be obligated to assign any Invention which may
be wholly conceived by Employee after termination of this Agreement, except that
Employee is so obligated if such Invention involves the utilization of
Proprietary Information obtained while in the employ of the Company. Employee is
not obligated to assign any Invention which relates to or would be useful in any
business or activities in which the Company or its affiliates is engaged if such
Invention was conceived and reduced to practice by Employee prior to Employee's
employment with the Company, provided that all such Inventions are listed at the
time of employment on the attached Exhibit A.

12. Remedies. Employee agrees and acknowledges that the violation of any
of the covenants or agreements contained in Sections 6, 7, 8, 9, 10 and 11 of
this Agreement would cause irreparable injury to the Company, that the remedy at
law for any such violation or threatened violation thereof would be inadequate,
and that the Company will be entitled, in addition to any other remedy, to
temporary and permanent injunctive or other equitable relief without the
necessity of proving actual damages.

13. Indemnity. The Company agrees to indemnify Employee for, and hold him
harmless against, all losses, liabilities, damages and claims, including
reasonable legal fees and expenses, arising from any actual or threatened
litigation against Employee by his former employer in connection with this
Agreement, provided that (a) Employee gives the Company prompt written notice of
the institution of, and all material developments in, any such actual or
threatened litigation and cooperates with the Company's reasonable requests; and
(b) without knowledge of the Company, Employee violates material provisions of
the CPS Agreement.

14. Notices. Any notice or communication under this Agreement will be in
writing and sent by registered or certified mail addressed to the respective
parties as follows:

<TABLE>
<S> <C>
If to the Company: If to the Employee:
Healthcare Recoveries, Inc. Timothy E. Cahill
1400 Watterson Tower 40W047 Carl Sandberg Road
Louisville, Kentucky 40218 St. Charles, Illinois 60175

</TABLE>

15. Severability. Subject to the application of Section 7(d) to the
interpretation of Sections 7 and 8, in case one or more of the provisions
contained in this Agreement is for any reason held to be invalid, illegal or
unenforceable in any respect, the same will not affect any other provision in
this Agreement, and this Agreement will be construed as if such invalid or
illegal or unenforceable provision had never been contained herein. It is the
intent of the parties that this Agreement be enforced to the maximum extent
permitted by law.

16. Survival. Sections 6, 7, 8, 9, 10, 11, 12, 13 and this Section of this
Agreement shall survive termination of this Agreement.

17. Entire Agreement. This Agreement embodies the entire agreement of the
parties relating to the subject matter hereof and supersedes all prior
agreements, oral or written, regarding such subject matter. No amendment or
modification of this Agreement will be valid or binding upon the parties unless
made in writing and signed by the parties.

18. Binding Effect. This Agreement will be binding upon the parties and
their respective heirs, representatives, successors, transferrees and permitted
assigns.

19. Assignment. This Agreement is one for personal services and is not
assignable by Employee. The Company may assign this Agreement to any of its
affiliates; provided that the Company shall remain liable for the obligations of
its affiliates under this Agreement.

20. Governing Law. This Agreement is entered into and will be interpreted
and enforced pursuant to the laws of the Commonwealth of Kentucky. The parties
hereto hereby agree that the appropriate forum and venue for any disputes
between any of the parties hereto arising out of this Agreement shall be any
federal
<PAGE> 7

court in the Commonwealth of Kentucky, and each of the parties hereto hereby
submits to the personal jurisdiction of any such court. The foregoing shall not
limit the rights of any party to obtain execution of judgment in any other
jurisdiction. The parties further agree, to the extent permitted by law, that a
final and unappealable judgment against either of them in any action or
proceeding contemplated above shall be conclusive and may be enforced in any
other jurisdiction within or outside the United States by suit on the judgment,
a certified or exemplified copy of which shall be conclusive evidence of the
fact and amount of such judgment.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.

<TABLE>
<S> <C>
HEALTHCARE RECOVERIES, INC. TIMOTHY E. CAHILL

By: /s/ PATRICK B. MCGINNIS /s/ TIMOTHY E. CAHILL
- --------------------------------------------- ---------------------------------------------
Patrick B. McGinnis
Chairman & Chief Executive Officer
</TABLE>

<PAGE> 1

EXHIBIT 10.18

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
November 29, 1999 between HEALTHCARE RECOVERIES, INC. (the "Company"), a
Delaware corporation") and ROBERT L. JEFFERSON ("Employee"), a resident of the
Commonwealth of Kentucky.

I. STATEMENT OF BACKGROUND INFORMATION

The Company desires to employ Employee in an executive position, and
Employee desires to accept such employment.

II. STATEMENT OF AGREEMENT

In consideration of the mutual covenants, promises and conditions set forth
in this Agreement, and for other good and valuable consideration, the parties
hereto hereby agree as follows:

2. Duties of Employee. Employee agrees to perform and discharge the duties
which may be assigned to Employee from time to time by the Company to the
reasonable satisfaction of the Company. Employee also agrees to comply with all
of the Company's policies, standards and regulations and to follow the
reasonable instructions and directives of Employee's superiors within the
Company, as promulgated by the officers of the Company. Employee will devote
substantially all of Employee's time, attention and energies to the Business and
Employee will not, during the term of this Agreement, be engaged (whether or not
during normal business hours) in any other business or professional activity,
whether or not such activity is pursued for gain, profit or other pecuniary
advantage, other than business and professional activities which do not violate
Sections 7 and 8 of this Agreement and involve a time commitment by Employee
which is reasonably acceptable to the Company.

3. Term. The term of this Agreement will begin on the date hereof and
expire on the first anniversary hereof, unless within that period there shall
occur a Change in Control Event (as defined), in which case the term of this
Agreement shall expire on the first anniversary of the closing date of the
Change in Control Event; subject, in any case, subject to earlier termination as
provided for in Section 4 below. For purposes of this Section 3, "Change in
Control" means any of the events described as Change in Control Events in
<PAGE> 2

Section 13.1 of the Healthcare Recoveries, Inc. 1997 Stock Option Plan for
Eligible Participants, or the occurrence of the following: any individual,
entity, group (within the meaning of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended, and the rules under that act), or other person acquires
in a single transaction or a series of transactions more than 30% of the
outstanding shares of the Company's common stock or common stock equivalents.

4. Termination.

(ii) Employee commits any other act in bad faith materially
detrimental to the business or reputation of the Company;

(iii) Employee intentionally engages in dishonest or illegal
activities or commits or is convicted of any crime involving fraud, deceit
or moral turpitude; or

(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate Employee's
employment pursuant to this Agreement without cause upon at least 30 days' prior
written notice to Employee. If Employee's employment with the Company is
terminated by the Company without cause, the Company shall remain subject to its
obligations hereunder as if Employee remained employed hereunder for the balance
of the term hereof, as provided in Section 3.

5. Compensation and Benefits.

(a) Annual Salary. For all services rendered by Employee under this
Agreement, the Company will pay Employee a base salary of One Hundred Twenty
Thousand Dollars ($120,000.00) per annum in equal bi-weekly installments. Such
annual salary will be subject to annual percentage increases for inflation
equivalent to those increases given the normal course of business to employees
of the Company, pursuant to the Company's present policy or, as the case may be,
a future policy approved by the Board to apply substantially on a Company-wide
basis.

(b) Incentive Compensation. Starting with participation in the Management
Group Incentive Compensation Plan for the Year 2000, during Employee's
employment with the Company, Employee shall be entitled to incentive
compensation payments in accordance with the then current Management Group
Incentive Compensation Plan. If Employee is terminated by the Company without
cause, Employee shall be entitled to a pro rata share of incentive compensation
payments under the applicable plan, if any.

shares of the Company's common stock under the Plan at an option price for each
such share of stock which is fair market value on the date hereof.

The term "confidential information" means any and all data and information
relating to the Business which: (1) has value to the Company or its affiliates;
(2) is not generally known by their competitors or the public; and (3) is
treated as confidential by the Company or its affiliates. The provisions of this
Section 6 will apply during Employee's employment by the Company and thereafter
for a 2-year period with respect to confidential information, and during
Employee's employment by the Company and at any and all times thereafter with
respect to trade secrets. These restrictions will not apply to any Proprietary
Information which: (i) is in the public domain, provided that Employee was not
responsible, directly or indirectly, for such Proprietary Information entering
the public domain without the Company's consent; (ii) becomes known to Employee,
during the term of this Agreement, from a third party not known to Employee to
be under a confidential relationship with the Company or its affiliates; or
(iii) is required by law or governmental tribunal to be disclosed; provided,
however, that if Employee is legally compelled to disclose any Proprietary
Information, Employee will provide the Company with prompt written notice of
such legal compulsion so that the Company may seek a protective order or other
available remedy.

7. Employee Covenants.

(a) Non-Competition Covenant. During Employee's employment by the Company
and for a period of 2 years following a termination of Employee's employment for
whatever reason, Employee will not, directly or indirectly, on Employee's own
behalf or in the service of or on behalf of any other individual or entity,
compete with the Company or its affiliates in the Business within the
Geographical Area (as hereinafter defined). The
<PAGE> 4

term "compete" means to engage, directly or indirectly, on Employee's own behalf
or in the service of or on behalf of any other individual or entity, either as a
proprietor, employee, agent, independent contractor, consultant, director,
officer, partner or stockholder (other than a stockholder of a corporation
listed on a national securities exchange or whose stock is regularly traded in
the over-the-counter market, provided that Employee at no time owns, directly or
indirectly, in excess of one percent (1%) of the outstanding stock of any class
of any such corporation) in providing or marketing Business products or
services. For purposes of this Agreement, the term "Geographical Area" means
those areas in the United States and in foreign countries in which Employee or
any member of his staff is or has engaged in providing or marketing Business
products or services while Employee is employed by the Company under this
Agreement.

(b) Non-Interference Covenant. During Employee's employment by the Company
and for a period of 2 years following any termination of Employee's employment
for whatever reason, Employee will not, directly or indirectly, on Employee's
own behalf or in the service of or on behalf of any other individual or entity,
interfere with, disrupt, or attempt to disrupt the past, present or prospective
relationships, contractual or otherwise, between the Company or its affiliates
and any supplier, consultant, or client of the Company or its affiliates with
whom Employee had material contact during Employee's employment by the Company
under this Agreement. The term "prospective relationship" is defined as any
relationship where the Company or its affiliates have actively sought an
individual or entity as a prospective supplier, consultant, or client.

(c) Non-Solicitation of Clients Covenant. Employee agrees that during
Employee's employment by the Company under this Agreement and for a period of 2
years following a termination of Employee's employment for whatever reason,
Employee will not, directly or indirectly, on Employee's own behalf or in the
service of or on behalf of any other individual or entity, divert, solicit or
attempt to solicit for the purpose of providing Business services any individual
or entity (i) who is a client of the Company or its affiliates at any time
during the six (6)-month period prior to Employee's termination with the Company
("Client"), or was actively sought by the Company or its affiliates as a
prospective client during such period, and (ii) with whom Employee had material
contact while employed by the Company. Employee further agrees that during
Employee's employment by the Company and for a period of 2 years following the
termination of Employee's employment for whatever reason, Employee will not,
directly or indirectly, as an employee, independent contractor, agent or in any
other capacity, be employed by any Client:

(i) That received Business products or services from Employee, or with
which Employee otherwise had material contact while employed by the
Company; or

(ii) That received Business products or services from any office or
employee of the Company or its affiliates over which Employee had direct
management responsibility;

in either case to provide, directly or indirectly, Business products or
services.

(d) Construction. The parties hereto agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 below will be
empowered to sever any portion of the Geographical Area, client base,
prospective relationship or prospect list or any prohibited business activity
from the coverage of such Section and to apply the provisions of such Section to
the remaining portion of the Geographical Area, the client base or the
prospective relationship or prospect list, or the remaining business activities
not so severed by such judicial authority. In addition, it is the intent of the
parties that the judicial authority replace each such severed provision with a
provision as similar in terms to such severed provision as may be possible and
be legal, valid and enforceable. It is the intent of the parties that Sections 7
and 8 be enforced to the maximum extent permitted by law. In the event that any
provision of either such Section is determined not to be specifically
enforceable, the Company shall nevertheless be entitled to bring an action to
seek to recover monetary damages as a result of the breach of such provision by
Employee.

or its affiliates, whether or not such employee is a full-time employee or
temporary employee of the Company or its affiliates, whether or not such
employee is employed pursuant to written Agreement and whether or not such
employee is employed for a determined period or at-will, except as agreed to by
the Company.

13. Notices. Any notice or communication under this Agreement will be in
writing and sent by registered or certified mail addressed to the respective
parties as follows:

<TABLE>
<S> <C>
If to the Company: If to Employee:
Healthcare Recoveries, Inc. Robert L. Jefferson
1400 Watterson Tower 11000 Buckeye Trace
Louisville, Kentucky 40218 Goshen, Kentucky 40026
Attention: Chief Financial Officer
</TABLE>

14. Severability. Subject to the application of Section 7(d) to the
interpretation of Sections 7 and 8, in case one or more of the provisions
contained in this Agreement is for any reason held to be invalid, illegal or
unenforceable in any respect, the same will not affect any other provision in
this Agreement, and this Agreement will be construed as if such invalid or
illegal or unenforceable provision had never been contained herein. It is the
intent of the parties that this Agreement be enforced to the maximum extent
permitted by law.

15. Survival. Sections 6, 7, 8, 9, 10, 11, 12, 13, 14, 19, and this
Section of this Agreement shall survive termination of this Agreement.

16. Entire Agreement. This Agreement embodies the entire agreement of the
parties relating to the subject matter hereof and supersedes all prior
agreements, oral or written, regarding such subject matter. No amendment or
modification of this Agreement will be valid or binding upon the parties unless
made in writing and signed by the parties.

17. Binding Effect. This Agreement will be binding upon the parties and
their respective heirs, representatives, successors, transferrees and permitted
assigns.

18. Assignment. This Agreement is one for personal services and is not
assignable by Employee. The Company may assign this Agreement to any of its
affiliates; provided that the Company shall remain liable for the obligations of
its affiliates under this Agreement.

19. Governing Law. This Agreement is entered into and will be interpreted
and enforced pursuant to the laws of the Commonwealth of Kentucky. The parties
hereto hereby agree that the appropriate forum and venue for any disputes
between any of the parties hereto arising out of this Agreement shall be any
federal court in the Commonwealth of Kentucky, and each of the parties hereto
hereby submits to the personal jurisdiction of any such court. The foregoing
shall not limit the rights of any party to obtain execution of judgment in any
other jurisdiction. The parties further agree, to the extent permitted by law,
that a final and unappealable judgment against either of them in any action or
proceeding contemplated above shall be conclusive and may be enforced in any
other jurisdiction within or outside the United States by suit on the judgment,
a certified or exemplified copy of which shall be conclusive evidence of the
fact and amount of such judgment.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.

<TABLE>
<S> <C>
HEALTHCARE RECOVERIES, INC. EMPLOYEE:

By: /s/ PATRICK B. MCGINNIS /s/ ROBERT L. JEFFERSON
- --------------------------------------------- ---------------------------------------------
Patrick B. McGinnis Robert L. Jefferson
Chairman & Chief Executive Officer
</TABLE>

<PAGE> 1

EXHIBIT 10.19

CHANGE-IN-CONTROL AGREEMENT

AGREEMENT, dated as of February 24, 2000, between HEALTHCARE RECOVERIES,
INC. (including all of its subsidiaries, the "Company") and (the
"Employee").

WITNESSETH:

WHEREAS, the Employee is a key employee of the Company;

WHEREAS, the Company wishes to encourage continuity of management in the
event of any actual or threatened Change in Control of the Company; and

WHEREAS, the Employee wishes to be assured of adequate compensation if the
Employee's employment by the Company terminates because of a Change in Control
of the Company;

NOW, THEREFORE, the Company and the Employee agree as follows:

1. Operation of Agreement

1.1 This Agreement will be effective immediately but will be operative
only upon the occurrence of a Change in Control, as defined in Section 1.2,
which takes place during the period (the "Effective Period") from the date
of this Agreement through December 31, 2000.

1.2 A "Change in Control" shall mean the occurrence of any of the
following:

(a) the adoption of a plan of merger or consolidation of the
Company with any other corporation as a result of which the holders of
the outstanding voting stock of the Company as a group would receive
less than 50% of the voting stock of the surviving or resulting
corporation;

(b) the adoption of a plan of liquidation or the approval of the
dissolution of the Company;

(d) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on
the date of this Agreement, constitute the Board and any new director
(other than a director whose initial assumption of office is in
connection with an actual or threatened election contest, including but
not limited to a consent solicitation, relating to the election of
directors of the Company) whose appointment or election by the Board or
nomination for election by the Company's stockholders was approved or
recommended by a vote of at least two-thirds of the directors then still
in office who either were directors on the date of this Agreement or
whose appointment, election or nomination for election was previously so
approved or recommended; or

(e) any individual, entity, group (within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended, and the
rules promulgated under such act), or other person acquires in a single
transaction or a series of transactions more than 30% of the outstanding
shares of the Company's common stock.

2. Payments

2.1 If during the Effective Period (i) the Company undergoes a Change
in Control and (ii) the Employee is employed by the Company on the date of
such Change in Control, the Employee will be eligible to participate, with
such other senior employees of the Company as may be designated from time
to time prior to the Change in Control by the Special Committee of the
Board of Directors established on August 29, 1999 (the "Special
Committee"), in a bonus pool (the "Pool") to be established in an amount to
be determined by the Committee up to a maximum aggregate amount of
$400,000. Any participation in or payment from the Pool shall be determined
prior to the Change in Control in the sole discretion of the Special
Committee and shall be payable within ten business days after the consumma-
<PAGE> 2

tion of the Change in Control. The Special Committee shall not be obligated
to authorize payment of any portion of the Pool, but will determine the
portion, if any, which shall be payable, based upon its assessment of the
degree and quality of assistance provided by the Employee in completing the
Change in Control.

2.2 If (i) during the Effective Period the Company undergoes a Change
in Control and (ii) during the 12-month period following the Change in
Control there is a Termination, as defined in Section 2.3, with regard to
the Employee, the Company will pay to the Employee within 20 business days
after the date on which the Termination occurs, in lieu of any salary
(other than salary for the pay period in which the Termination occurs and
any unpaid salary for prior pay periods), bonus, severance or similar
payments, or damages, to which the Employee might otherwise be entitled
because of the Termination under any agreement with the Company or any plan
or program of the Company a lump sum equal to two times the Employee's
annual base salary then in effect (the "Severance Amount").

2.3 There will be a "Termination" with regard to the Employee if:

(i) the Company terminates the Employee's employment other than for
"Cause"; or

(ii) the Employee terminates the Employee's employment with the
Company for Good Reason.

(b) "Cause" means the occurrence of any of the following:

(i) the Employee materially breaches any employment or severance
agreement between the Employee and the Company, and the Employee fails
to cure such breach within ten days after the Employee's receipt from
the Company of written notice of such breach, which notice shall
describe in reasonable detail the Company's belief that the Employee is
in breach (notwithstanding the foregoing, no cure period shall be
applicable to breaches by the Employee of the provisions of Section 3,
4, 5, 6, 7 or 8 of the Severance Agreement, dated the same date as this
Agreement, between the Company and the Employee (the "Severance
Agreement"));

(ii) the Employee commits any other act in bad faith materially
detrimental to the business or reputation of the Company;

(iii) the Employee intentionally engages in dishonest or illegal
activities or commits or is convicted of (or pleads nolo contendere to)
any crime involving fraud, deceit or moral turpitude; or

(iv) the Employee dies or becomes mentally or physically
incapacitated or disabled so as to be unable to perform Employee's
duties, whether under the terms of any employment agreement between the
Company and the Employee or otherwise. Without limiting the generality
of the foregoing, Employee's inability adequately to perform services as
described in the preceding sentence for a period of 60 consecutive days
will be conclusive evidence of such mental or physical incapacity or
disability, unless such inability adequately to perform services is
pursuant to a mental or physical incapacity or disability covered by the
Family Medical Leave Act, in which case such 60-day period shall be
extended to a 120-day period.

(c) For purposes hereof, "Good Reason" means the occurrence of any of
the following without the prior express written consent of the Employee:

(i) the assignment to the Employee of duties materially less
significant than those normally associated with the position held by the
Employee immediately prior to the Change in Control; or

(ii) a material reduction in the Employee's base salary or bonus
opportunity, in either case, from the amount in effect immediately prior
to the Change in Control, or a material change in the employee benefits
provided by the Company to the Employee such that the package of
benefits provided after the change is in the aggregate materially less
beneficial to the Employee than the package provided immediately prior
to the Change in Control; or
<PAGE> 3

(iii) a mandated relocation of the Employee's site of employment to
a site more than 25 miles from 1400 Watterson Tower, Louisville,
Kentucky.

Notwithstanding the foregoing, no occurrence will constitute Good
Reason unless (a) at least 30 days before the termination of employment,
the Employee notifies the Company's Board of Directors of the conditions
which the Employee believes constitute Good Reason and states in the
notice that unless those conditions are cured the Employee will
terminate his or her employment with the Company, but those conditions
are not cured prior to the termination of employment, and (b) the
termination of employment occurs within 60 days after the Employee
learns of the conditions which constitute Good Reason.

3. Excise Tax Limitation

3.1 Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the
Company to or for the benefit of the Employee (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise) (the "Total Payments") would be subject to the excise tax
imposed under Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), the payments due hereunder shall be reduced, prior to
reduction of Total Payments under any other agreement or program, such that
the Employee shall be entitled to receive Total Payments not to exceed 2.99
times the Employee's applicable "base amount" under Section 280G of the
Code.

4. General Provisions

4.1 Nothing contained herein shall limit the right of the Company or
the Employee to terminate or alter the terms of the Employee's employment
prior to a Change in Control.

4.2 If any provisions of this Agreement are determined to be invalid,
the remaining provisions will remain in full force and effect to the
fullest extent permitted by law.

4.3 This Agreement will be binding upon and inure to the benefit of
the Company and any successor of the Company, including any corporation
which acquires (by merger, consolidation or otherwise) all or substantially
all the assets of the Company (which successor, after it acquires all or
substantially all the assets of the Company, will be the "Company" for the
purposes of this Agreement). This Agreement will be binding upon and inure
to the benefit of (and be enforceable by) the Employee and, after the
Employee dies or is determined not to be competent, the Employee's
executors or other legal representatives.

4.4 The Employee will be entitled to the payments specified in Section
2 without regard to whether the Employee seeks or obtains other employment
after a Termination and without reduction for any compensation received
from other employment after the Termination.

4.5 Any notices or other communications under or relating to this
Agreement must be in writing and will be deemed given on the day on which
it is delivered in person or by overnight courier service or sent by
facsimile transmission (with a confirmation from the sending facsimile
machine indicating receipt at the number to which sent), or on the third
business day after the day on which it is sent from within the United
States of America by first class mail, addressed (i) if to the Company or
its Board of Directors, at the principal offices of the Company, attention
General Counsel and (ii) if to the Employee, to the Employee's office or to
the Employee's home address as shown on the personnel records of the
Company, or at such other address as is specified by the Employee to the
Company after the date of this Agreement in the manner provided in this
Section.

4.6 This Agreement and the Severance Agreement together contain the
entire agreement of the parties with respect to the subject matter of this
Agreement and supersede all prior employment agreements and other
agreements and understandings with respect to that subject matter, whether
oral or written. This Agreement may be amended only by a writing signed by
the Company, with the approval of its Board of Directors, and the Employee.
<PAGE> 4

4.7 The Company may withhold from payments it is required to make
under this Agreement and from other payments of compensation to the
Employee all sums, including taxes, which the Company determines it is
required by law to withhold because of payments made under this Agreement.

4.8 This Agreement will be governed by, and construed under, the laws
of the State of Delaware applicable to contracts made and to be performed
in that state.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year shown on the first page.

HEALTHCARE RECOVERIES, INC.

By:
------------------------------------
Patrick B. McGinnis
President and Chief Executive
Officer

------------------------------------
[Employee]

<PAGE> 1

EXHIBIT 10.20

SEVERANCE AGREEMENT

AGREEMENT, dated as of February , 2000, between HEALTHCARE RECOVERIES,
INC. (including all of its subsidiaries, the "Company") and (the
"Employee").

WITNESSETH:

WHEREAS, the Employee is a key employee of the Company; and

WHEREAS, the Company desires to provide the Employee with severance
benefits under the conditions set forth in this Agreement;

NOW, THEREFORE, the Company and the Employee agree as follows:

1. Term of Agreement

The rights of the Employee under this Agreement shall commence as of the
date hereof, and shall terminate upon the earlier of (i) the voluntary
termination of the Employee's employment with the Company or (ii) the date one
year after written notice is given by the Company to the Employee of termination
of the Employee's rights under this Agreement (the period during which this
Agreement is in effect being hereinafter referred to as the "Term").

2. Payments

2.1 If there is a Termination, as defined in Section 2.2, with regard
to the Employee, (i) the Company will pay to the Employee within 20
business days after the day on which the Termination occurs, a lump sum
equal to the Employee's current annual base salary (the "Severance Amount")
and (ii) for a period of 12 months after the date of termination, the
Company shall continue to pay, or reimburse the Employee for, the
Company-paid portion of medical premiums under the Company's group health
plan that would apply to the Employee had he not terminated, provided that
the Employee makes a timely election of such continuation coverage under
COBRA; provided, however, that the Employee shall not be entitled to
payment of the Severance Amount upon a Termination if upon that Termination
the Employee is entitled to a severance or similar payment under any other
agreement with the Company including without limitation the
Change-in-Control Agreement, dated the same date as this Agreement, between
the Employee and the Company (the "CIC Agreement"); further provided,
however, that in such event the Employee nonetheless shall continue to be
bound by the provisions of Sections 3, 4, 5, 6, 7, 8 and 9. The Company's
obligation to pay the Severance Amount, to the extent accrued prior to the
expiration of the Term, shall survive the expiration of the Term.

2.2 There will be a "Termination" with regard to the Employee if the
Company terminates the Employee's employment during the Term other than for
"Cause."

"Cause" means the occurrence of any of the following:

(i) the Employee materially breaches the provisions of this
Agreement or any other employment-related agreement between the Employee
and the Company, and the Employee fails to cure such breach within ten
days after the Employee's receipt from the Company of written notice of
such breach, which notice shall describe in reasonable detail the
Company's belief that the Employee is in breach (notwithstanding the
foregoing, no cure period shall be applicable to breaches by the
Employee of the provisions of Section 3, 4, 5, 6, 7 or 8 of this
Agreement);

(ii) the Employee commits any other act in bad faith materially
detrimental to the business or reputation of the Company;

(iii) the Employee intentionally engages in dishonest or illegal
activities or commits or is convicted of (or pleads nolo contendere to)
any crime involving fraud, deceit or moral turpitude; or
<PAGE> 2

(iv) the Employee dies or becomes mentally or physically
incapacitated or disabled so as to be unable to perform the Employee's
duties, whether under the terms of any employment agreement between the
Company and the Employee or otherwise. Without limiting the generality
of the foregoing, the Employee's inability adequately to perform
services as described in the preceding sentence for a period of 60
consecutive days will be conclusive evidence of such mental or physical
incapacity or disability, unless such inability adequately to perform
services is pursuant to a mental or physical incapacity or disability
covered by the Family Medical Leave Act, in which case such 60-day
period shall be extended to a 120-day period.

3. Non-Disclosure of Proprietary Information

3.1 The Employee recognizes and acknowledges that the Trade Secrets
and Confidential Information of the Company and its affiliates and all
physical embodiments of the same (as they may exist from time-to-time,
collectively, the "Proprietary Information") are valuable, special and
unique assets of the Company's and its affiliates' businesses. The Employee
further acknowledges that access to such Proprietary Information is
essential to the performance of the Employee's duties under this Agreement.
Therefore, in order to obtain access to such Proprietary Information, the
Employee agrees that the Employee shall hold in confidence all Proprietary
Information and will not reproduce, use, distribute, disclose, publish or
otherwise disseminate any Proprietary Information, in whole or in part, and
will take no action causing, or fail to take any action necessary to
prevent causing, any Proprietary Information to lose its character as
Proprietary Information, nor will the Employee make use of any such
information for the Employee's own purposes or for the benefit of any
person, firm, corporation, association or other entity (except the Company)
under any circumstances.

3.2 For purposes of this Agreement, the term "Trade Secrets" means the
whole or any portion of any scientific or technical or other information,
design, process, procedure, formula, computer software product,
documentation or improvement relating to the Company's or its affiliates'
businesses which (i) derives economic value, actual or potential, from not
being generally known to other persons who can obtain economic value from
its disclosure or use; and (ii) is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy or
confidentiality. The term "Confidential Information" means any and all data
and information relating to the Company's or its affiliates' "Business,"
other than Trade Secrets, (x) which has value to the Company or its
affiliates; (y) is not generally known by its competitors or the public;
and (z) is treated as confidential by the Company or its affiliates. The
term "Business" means the provision of subrogation and related recovery
services, hospital bill auditing, contract compliance review,
identification of certain other healthcare-related payments and cost
management consulting for healthcare payors, including health maintenance
organizations, indemnity insurers, Blue Cross and Blue Shield
organizations, third-party administrators, self-funded employee health and
welfare benefit plans, and provider hospital organizations. The provisions
of this Section 3 will apply during the Employee's employment by the
Company and for a two-year period thereafter with respect to Confidential
Information, and during the Employee's employment by the Company and at any
and all times thereafter with respect to Trade Secrets. These restrictions
will not apply to any Proprietary Information which is in the public domain
provided that the Employee was not responsible, directly or indirectly, for
such Proprietary Information entering the public domain without the
Company's consent. This Section 3, together with Sections 4, 5, 6, 7, 8 and
9 of this Agreement, shall survive termination of this Agreement.

4. Non-Competition Covenant

4.1 During the Employee's employment by the Company and for a period
of two years following any termination of the Employee's employment for
whatever reason, the Employee will not, directly or indirectly, on the
Employee's own behalf or in the service of or on behalf of any other
individual or entity, compete with the Company within the Geographical Area
(as defined). The term "compete" means to engage in, have any equity or
profit interest in, make any loan to or for the benefit of, or render any
services of any kind to, directly or indirectly, on the Employee's own
behalf or in the service of or on behalf of any other individual or entity,
either as a proprietor, employee, agent, independent contractor,
<PAGE> 3

consultant, director, officer, partner or stockholder (other than a
stockholder of a corporation listed on a national securities exchange or
whose stock is regularly traded in the over-the-counter market, provided
that the Employee at no time owns, directly or indirectly, in excess of one
percent of the outstanding stock of any class of any such corporation) any
business which provides Business services. For purposes of this Agreement,
the term "Geographic Area" means the territory located within a
seventy-five mile radius of each facility for which the Employee has
management responsibility during the Employee's employment with the
Company.

4.2 Non-Interference. During the Employee's employment by the Company
and for a period of two years following the termination of the Employee's
employment for whatever reason, the Employee will not, directly or
indirectly, on the Employee's own behalf or in the service of or on behalf
of any other individual or entity, interfere with, disrupt, or attempt to
disrupt the past, present or prospective relationships, contractual or
otherwise, between the Company and any supplier, consultant, or client of
the Company with whom the Employee had material contact during the
Employee's employment by the Company. The term "prospective relationship"
is defined as any relationship where the Company has actively sought an
individual or entity as a prospective supplier, consultant, or client.

4.3 Non-Solicitation of Clients Covenant. The Employee agrees that
during the Employee's employment by the Company and for a period of two
years following the termination of the Employee's employment for whatever
reason, the Employee will not, directly or indirectly, on the Employee's
own behalf or in the service of or on behalf of any other individual or
entity, divert, solicit or attempt to solicit or accept business from any
individual or entity (i) who is a client of the Company at any time during
the six-month period prior to the Employee's termination of employment with
the Company ("Client"), or was actively sought by the Company as a
prospective client, and (ii) with whom the Employee had material contact
while employed by the Company to provide Business services to such Clients
or prospects. The Employee further agrees that during the Employee's
employment by the Company and for a period of two years following the
termination of the Employee's employment for whatever reason in accordance
with this Agreement, the Employee will not, directly or indirectly, as an
employee, independent contractor, agent or in any other capacity, be
employed by any Client:

a. which received Business services from the Employee, or with
which the Employee otherwise had material contact while employed by the
Company; or

b. which received Business services from any employee or officer of
the Company over which the Employee had management responsibility;

in either case to provide, directly or indirectly, Business
services.

4.4 Construction. The parties agree that any judicial authority
construing all or any portion of this Section 4 or Section 5 will be
empowered to sever any portion of the Geographical Area, client base,
prospective relationship or prospect list or any prohibited business
activity from the coverage of such Section and to apply the provisions of
such Section to the remaining portion of the Geographical Area, the client
base or the prospective relationship or prospect list, or the remaining
business activities not so severed by such judicial authority. In addition,
it is the intent of the parties that the judicial authority replace each
such severed provision with a provision as similar in terms to such severed
provision as may be possible and be legal, valid and enforceable. It is the
intent of the parties that Sections 4 and 5 be enforced to the maximum
extent permitted by law. If any provision of either such Section is
determined not to be specifically enforceable, the Company shall
nevertheless be entitled to bring an action to seek to recover monetary
damages as a result of the breach of such provision by the Employee.

5. Non-Solicitation of Employees Covenant

5.1 The Employee agrees and represents that during the Employee's
employment by the Company and for a period of two years following any
termination of the Employee's employment for whatever reason, the Employee
will not, directly or indirectly, on the Employee's own behalf or in the
service of, or on behalf of any other individual or entity, divert, solicit
or hire away, or attempt to divert, solicit or hire away, to or for any
individual or entity which is engaged in providing Business services, (i)
any person
<PAGE> 4

employed by the Company or (ii) any person who has left the employment of
the Company within the one-year period which follows the termination of
such employee's employment with the Company, in either case, whether or not
such employee is or was a full-time employee or temporary employee of the
Company, whether or not such employee is or was employed pursuant to a
written agreement and whether or not such employee is or was employed for a
determined period or at will.

6. Existing Restrictive Covenants

6.1 The Employee represents and warrants that the Employee's
employment with the Company does not and will not breach any agreement
which the Employee has with any former employer to keep in confidence
confidential information or not to compete with any such former employer.
The Employee will not disclose to the Company or use on its behalf any
confidential information of any other party required to be kept
confidential by the Employee.

7. Return of Confidential Information

7.1 The Employee acknowledges that as a result of the Employee's
employment with the Company, the Employee may come into the possession and
control of Proprietary Information, such as proprietary documents,
drawings, specifications, manuals, notes, computer programs, or other
proprietary material. The Employee acknowledges, warrants and agrees that
the Employee will return to the Company all such items and any copies or
excerpts thereof, and any other properties, files or documents obtained as
a result of the Employee's employment with the Company, immediately upon
the termination of the Employee's employment with the Company.

8. Proprietary Rights

8.1 During the course of the Employee's employment with the Company,
the Employee may make, develop or conceive of useful processes, machines,
compositions of matter, computer software, algorithms, works of authorship
expressing any such algorithm, or any other discovery, idea, concept,
document or improvement which relates to or is useful to the Company's
Business (the "Inventions"), whether or not subject to copyright or patent
protection, and which may or may not be considered Proprietary Information.
The Employee acknowledges that all such Inventions will be "works made for
hire" under United States copyright law and will remain the sole and
exclusive property of the Company. The Employee assigns and agrees to
assign to the Company, in perpetuity, all right, title and interest the
Employee may have in and to such Inventions, including without limitations
all copyrights, and the right to apply for any form of patent, utility
model, industrial design or similar proprietary right recognized by any
state, country or jurisdiction. The Employee further agrees, at the
Company's request and expense, to do all things and sign all documents or
instruments necessary, in the opinion of the Company, to eliminate any
ambiguity as to the ownership of, and rights of the Company to, such
Inventions, including filing copyright and patent registrations and
defending and enforcing in litigation or otherwise all such rights.

8.2 The Employee will not be obligated to assign to the Company any
Invention made by the Employee while in the Company's employ which does not
relate to any business or activity in which the Company is or may
reasonably be expected to become engaged, except that the Employee is so
obligated if the same relates to or is based on Proprietary Information to
which the Employee will have had access during and by virtue of the
Employee's employment or which arises out of work assigned to the Employee
by the Company. The Employee will not be obligated to assign any Invention
which may be wholly conceived by the Employee after the Employee leaves the
employ of the Company, except that the Employee is so obligated if such
Invention involves the utilization of Proprietary Information obtained
while in the employ of the Company. The Employee is not obligated to assign
any Invention which relates to or would be useful in any business or
activities in which the Company is engaged if such Invention was conceived
and reduced to practice by the Employee prior to the Employee's employment
with the Company, and if such Invention is listed on the attached Exhibit
A.
<PAGE> 5

9. Remedies

9.1 The Employee agrees and acknowledges that the violation of any of
the covenants or agreements contained in Section 3, 4, 5, 6, 7 and 8 of
this Agreement would cause irreparable injury to the Company, that the
remedy at law for any such violation or threatened violation thereof would
be inadequate, and that the Company will be entitled, in addition to any
other remedy, to temporary and permanent injunctive or other equitable
relief without the necessity of proving actual damages.

10. Excise Tax Limitation

10.1 Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the
Company to or for the benefit of the Employee (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise) (the "Total Payments") would be subject to the excise tax
imposed under Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), the payments due hereunder shall be reduced, prior to
reduction of Total Payments under any other agreement or program, such that
the Employee shall be entitled to receive Total Payments not to exceed 2.99
times the Employee's applicable "base amount" under Section 280G of the
Code.

11. General Provisions

11.1 Nothing contained herein shall limit the right of the Company or
the Employee to terminate or alter the terms of the Employee's employment
prior to a Termination.

11.2 If any provisions of this Agreement are determined to be invalid,
the remaining provisions will remain in full force and effect to the
fullest extent permitted by law.

11.3 This Agreement will be binding upon and inure to the benefit of
the Company and any successor of the Company, including any corporation
which acquires (by merger, consolidation or otherwise) all or substantially
all the assets of the Company (which successor, after it acquires all or
substantially all the assets of the Company, will be the "Company" for the
purposes of this Agreement). This Agreement will be binding upon and inure
to the benefit of (and be enforceable by) the Employee and, after the
Employee dies or is determined not to be competent, the Employee's
executors or other legal representatives.

11.4 The Employee will be entitled to the payments specified in
Section 2 without regard to whether the Employee seeks or obtains other
employment after a Termination and without reduction for any compensation
received from other employment after the Termination.

11.5 Any notices or other communications under or relating to this
Agreement must be in writing and will be deemed given on the day on which
it is delivered in person or by overnight courier service or sent by
facsimile transmission (with a confirmation from the sending facsimile
machine indicating receipt at the number to which sent), or on the third
business day after the day on which it is sent from within the United
States of America by first class mail, addressed (i) if to the Company or
its Board of Directors, at the principal offices of the Company, attention
General Counsel and (ii) if to the Employee, to the Employee's office or to
the Employee's home address as shown on the personnel records of the
Company, or at such other address as is specified by the Employee to the
Company after the date of this Agreement in the manner provided in this
Section.

11.6 This Agreement and the CIC Agreement together contain the entire
agreement of the parties with respect to the subject matter of this
Agreement and supersede all prior employment agreements and other
agreements and understandings with respect to that subject matter, whether
oral or written. This Agreement may be amended only by a writing signed by
the Company, with the approval of its Board of Directors, and the Employee.

11.7 The Company may withhold from payments it is required to make
under this Agreement and from other payments of compensation to the
Employee all sums, including taxes, which the Company determines it is
required by law to withhold because of payments made under this Agreement.
<PAGE> 6

11.8 This Agreement will be governed by, and construed under, the laws
of the State of Delaware applicable to contracts made and to be performed
in that state.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year shown on the first page.

HEALTHCARE RECOVERIES, INC.

By:
--------------------------------------
Patrick B. McGinnis
President and Chief Executive Officer

--------------------------------------
[Employee]

<PAGE> 1

EXHIBIT 10.21

PROMISSORY NOTE

$350,000.00 Louisville, Kentucky
March 31, 1999

FOR VALUE RECEIVED, PATRICK B. MCGINNIS, of Oldham County residing at 3906
Eagle Way, Prospect, Kentucky 40059 ("Maker"), hereby promises and agrees to pay
to the order of HEALTHCARE RECOVERIES, INC., a Delaware corporation with its
principal office located at 1400 Watterson Tower, Louisville, Kentucky
("Payee"), the principal sum of THREE HUNDRED FIFTY THOUSAND DOLLARS
($350,000.00), together with interest computed from the date of this Promissory
Note (the "Note") in accordance with the terms hereof.

1. Interest Rate; Payment of Principal and Interest.

1.1 Interest Rate. [a] During any period in which Payee has an
outstanding balance under that certain Credit Agreement dated as of
February 1, 1998 (the "Credit Agreement") among Payee, National City Bank
of Kentucky as administrative agent, and certain lenders, or under any
replacement credit facility that Payee may enter into while any portion of
the principal balance of this Note remains outstanding, the principal
balance of this Note shall bear interest at a variable annual rate equal to
the greater of [1] the Federal short-term rate (within the meaning of
section 1274(d)(1) of the Internal Revenue Code of 1986, as amended) as of
the date hereof (4.62%), changing to the Federal short-term rate as of each
January 1 and July 1 hereafter (the "Federal Short-term Rate"); or [2] the
interest rate as it may exist from time to time under the Credit Agreement.
If the interest rate under the Credit Agreement exceeds the then applicable
Federal Short-term Rate, the interest rate paid under this Note shall be
adjusted automatically, from time to time, on the same date on which the
rate changes under the Credit Agreement.

[b] During any period in which Payee has no outstanding balance under
the Credit Agreement, the principal balance of this Note shall bear
interest at a variable annual rate equal to the Federal Short-term Rate.

1.2 Payment of Principal and Interest. Upon Payee's demand, Maker
shall pay the entire outstanding principal balance and all accrued but
unpaid interest on the principal balance. Maker shall pay the principal and
interest due on this Note in legal tender of the United States, to Payee at
Payee's principal address as set forth in this Note, or at such other place
as Payee designates by notice to Maker.

1.3 Prepayment. Maker may prepay this Note in whole or in part
without penalty or premium at any time and from time to time. If the Maker
prepays any portion of the principal pursuant to this Section 1.3, the
amount prepaid shall be applied first to accrued but unpaid interest and
then to principal balance that remains unpaid.

2. Remedies; Forbearance.

2.1 Remedies. If maker fails to pay the entire principal balance and
all accrued but unpaid interest when due, and Payee institutes any suit or
action to enforce this Note, Maker shall pay to Payee, in addition to the
costs and disbursements otherwise allowed by law, such sums as may be
adjudged reasonable attorney's fees, court costs, and all other expenses in
collecting or attempting to collect this Note.

2.2 Forbearance. Payee may, at its sole discretion, grant an
extension of time for payment of any amount due under the terms of this
Note or any other indulgence or forbearance, without affecting the
liability of Maker under this Note and without waiving any rights Payee may
have under this Note or under the laws of the United States, the
Commonwealth of Kentucky or any other state.
<PAGE> 2

3. Miscellaneous Provisions.

3.1 Waiver of Presentment, Protest, and Notice of Dishonor. Maker
waives presentment, protest, notice of dishonor, and all other notices
normally required by law, except where notice is expressly provided for in
this Note.

3.2 Remedies Not Exclusive. No remedy herein conferred upon or
reserved to Payee is intended to be exclusive of any other remedy or
remedies available to Payee under this Note, at law, in equity or by
statute, and each and every such remedy shall be cumulative and in addition
to every other remedy given hereunder or now or hereafter existing at law,
in equity or by statute.

3.3 No Waivers by Payee. No delay or omission of Payee in exercising
any right or power accruing upon any default under this Note shall impair
any such right or power or shall be construed to be a waiver of any default
under this Note or any acquiescence herein, nor shall any single or partial
exercise of any such right or power or any abandonment or discontinuance of
steps to enforce such right or power, preclude any other or further
exercise hereof or the exercise of any other right or power. Acceptance of
any payment after the occurrence of a default under this Note shall not be
deemed to waive or cure such default under this Note; and every power and
remedy given by this Note to Payee may be exercised from time to time as
often as may be deemed expedient by Payee. Maker hereby waives any right to
require Payee at any time to pursue any remedy in Payee's power whatsoever.

3.4 Notices. All notices, requests, demands and other communications
required or permitted to be given or made under this Note shall be in
writing and shall be deemed to have been given on the date of personal
delivery or on the third business day following the date of deposit in the
United States Mail, postage prepaid, by registered or certified mail,
return receipt requested, or facsimile transmission, or on the first
business day following the date of delivery to a nationally recognized
overnight courier service, in each case, addressed to the address set forth
in this Note, or to such other address as the parties to this Note may
designate.

3.5 Time of the Essence. TIME SHALL BE OF THE ESSENCE IN THE PERFORMANCE
OF ALL OBLIGATIONS OF MAKER HEREUNDER.

3.6 Governing Law. This Note is executed and delivered in, and shall be
construed and enforced in accordance with the laws of, the Commonwealth of
Kentucky.

IN WITNESS WHEREOF, Maker has executed this Note on and as of the day and
year first above written.

/s/ PATRICK B. MCGINNIS
------------------------------------
Patrick B. MCGinnis

("Maker")

<PAGE> 1

EXHIBIT 23.1

[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File Nos. 333-41557, 333-41559, and 333-41561) of
Healthcare Recoveries, Inc. of our report dated February 15, 2000 relating to
the financial statements, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

Louisville, Kentucky
March 14, 2000

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHCARE RECOVERIES FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,670
<SECURITIES> 0
<RECEIVABLES> 7,250
<ALLOWANCES> 380
<INVENTORY> 0
<CURRENT-ASSETS> 36,330
<PP&E> 22,849
<DEPRECIATION> (10,002)
<TOTAL-ASSETS> 82,243
<CURRENT-LIABILITIES> 28,096
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 41,080
<TOTAL-LIABILITY-AND-EQUITY> 82,243
<SALES> 61,409
<TOTAL-REVENUES> 61,409
<CGS> 31,451
<TOTAL-COSTS> 31,451
<OTHER-EXPENSES> 21,275
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 940
<INCOME-PRETAX> 8,827
<INCOME-TAX> 3,665
<INCOME-CONTINUING> 5,162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,162
<EPS-BASIC> .46
<EPS-DILUTED> .46

</TABLE>

<PAGE> 1

EXHIBIT 99.1

HEALTHCARE RECOVERIES, INC.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS

In passing the Private Securities Litigation Reform Act of 1995 ("the
Reform Act"), 15 U.S.C.A. Section 77z-2 and 78u-5 (Supp. 1996), Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. Healthcare Recoveries, Inc. ("HCRI" or the
"Company") intends to qualify both its written and oral forward-looking
statements for protection under the Reform Act and any other similar safe harbor
provisions.

"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties, which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of HCRI. The Company
undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, HCRI undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.

HCRI provides the following risk factor disclosure in connection with its
continuing effort to qualify its written and oral forward-looking statements for
the safe harbor protection of the Reform Act and any other similar safe harbor
provisions. Important factors currently known to management that could cause
actual results to differ materially from those in forward-looking statements
include the following:

REGULATORY AND POLITICAL RISKS

Health Insurance Primacy Laws

Auto Choice Reform Act. In each of the last three sessions of Congress,
legislation known as the Auto Choice Reform Act (the "Proposed Act") was
introduced, but not enacted. Under this Proposed Act, in those states not opting
out of its provisions, individual drivers may choose to be covered by an auto
insurance system in which healthcare insurers, with some exceptions, could be
made primarily responsible for healthcare costs incurred by those injured in
automobile accidents. Consequently, even if the insured's injuries were caused
by the negligence of another driver, the healthcare insurer might have no rights
of recovery against the negligent party or that party's liability insurer.
Revenue generated from recoveries against automobile liability insurers
represented approximately 68% of the Company's revenues. Should this or similar
legislation be enacted, it could have a material adverse effect on the Company's
business, results of operations and financial condition.

with loss and takes too long to pay benefits. Even if the Proposed Act is
ultimately abandoned, these policy reasons may result in future legislation
designed to significantly alter the fault-based liability system used in most
states, eliminate recovery rights of healthcare insurers and materially
adversely affect the Company's business.

Confidentiality Laws

Confidentiality Provisions of the Health Insurance Portability and
Accountability Act of 1996 and Related Regulations. On November 3, 1999 the
Department of Health and Human Services (the "Secretary") issued a Notice of
Proposed Rulemaking (64 Fed. Reg. 59918 (1999) and 65 Fed. Reg. 427 (2000))
(collectively, the "Proposed Rule") setting standards to protect the privacy of
individually identifiable health information that is transmitted electronically
to health care providers, health plans and similar health care entities. The
requirements of the Proposed Rule also extend to the "business partners" (as
defined in the rule) of the covered entities. The covered entities are required
to enter into agreements with their business partners extending the provisions
of the Proposed Rule to those business partners. The covered entities are
responsible for enforcing those contractual provisions. The Secretary is
expected to issue a final rule by an undetermined date in 2000, after receiving
public comment on the Proposed Rule. The Secretary's actions are mandated by
Section 264 of the Health Insurance Portability and Accountability Act of 1996
("HIPAA") because Congress did not pass legislation protecting medical privacy
by the August 1999 deadline set by HIPAA.

Other Federal and State Laws

adversely affect the Company's business. Additionally, although the Company does
not believe that it engages in the unauthorized practice of law, changes in the
law or a judicial or administrative decision defining some of the Company's
activities as the practice of law, could have a material adverse effect on the
Company's business.

Certain Legal Doctrines

With respect to recoverable claims, the rights of subrogation and
reimbursement may be limited in some cases by (i) the "made whole doctrine."
This doctrine subordinates the healthcare provider's ability to recover to that
of the injured party when the settlement damage award received by the injured
party is inadequate to cover the injured party's damages: And (ii) the "common
fund doctrine," which permits plaintiff's attorneys to deduct their fees for the
claim based on the entire amount covered by a damage award and may, in some
cases, proportionally diminish the amount recoverable by HCRI on behalf of the
healthcare payor out of that damage award.

DEPENDENCE ON LARGE CLIENTS

The Company's clients include national and regional healthcare payors,
large third-party administrators or self-insured corporations. The loss of one
or more of the Company's clients could have a material adverse effect on the
Company's business, results of operations, financial condition and stock price.
During the last three years, HCRI has lost sixteen clients representing
approximately 5.8 million lives. Terminations occurred due to, among other
things, consolidations, the selection of another vendor, or because the process
was taken in-house. The Company has re-sold services to three of the companies
previously lost, representing approximately 1.7 million lives previously lost.
The Company's revenues are earned under written contracts with its clients that
provide for contingency fees from recoveries under a variety of pricing
strategies. These contracts are generally terminable on 60 to 180 days' notice
by either party. However, the Company's contracts generally provide that in the
event of termination, the Company is entitled to complete the recovery process
on the backlog for that client. See "Marketing, Sales and Client Services" and
"Client Base" sections.

LENGTHY REVENUE CYCLE AND FLUCTUATION IN OPERATING RESULTS

The Company's operating results may fluctuate from time to time as a result
of a number of factors. These factors include but are not limited to:

- the addition of new clients;

- the cancellation of client contracts;

- the postponement of client decisions to enter into contracts;

- delays in transmission of clients' claims data;

- changes in prices offered to new clients;

- timing of acquisitions; and

- introduction of new services or introduction of new technologies to the
Company's business processes.

HCRI expends substantial time, effort and funds to install lives and
generate active files. As a result, HCRI incurs expenses related to its revenue
before revenue is received which can result in fluctuations in operating
results.

In particular, during a fiscal quarter it is difficult to forecast when and
how many clients claims data will be received. The Company's clients
continuously update and modify their claims and medical encounter processing
systems often causing delays in or errors to the transmission of claims data.
The Company's expense levels are based in part on expectations of future receipt
of claims data and the Company has been significantly increasing and intends to
continue to increase operating expenditures and working capital balances as it
expands its operations. Specifically, material increases in new clients and
lives installed, and consequently client claims data received, will cause the
Company to increase its operating capacity before it expects to earn revenues
from such new clients. If operating results in any particular quarter do not
meet the expectations of securities analysts it is likely to cause volatility in
the price of the Company's Common Stock.
<PAGE> 4

LITIGATION

On March 15, 1994, a class action complaint ("Complaint") was filed against
HCRI in the United States District Court for the Northern District of West
Virginia, Michael L. DeGarmo, et al. v. Healthcare Recoveries, Inc. The
plaintiffs assert that HCRI's subrogation recovery efforts on behalf of its
clients violate a number of state and federal laws, including the Fair Debt
Collection Practices Act and the Racketeering Influenced and Corrupt
Organizations Act ("RICO"). The Complaint also seeks a declaratory judgment that
HCRI as the subrogation agent for various healthcare payors be limited, in
recovering from persons who caused accidents or from the healthcare payors'
injured insureds, to the actual costs of the medical treatment provided to such
injured insureds by such healthcare payors, healthcare policies or agreements,
which generally allow recovery by the healthcare payors of the "reasonable
value" of such treatments. The Complaint alleges that HCRI made fraudulent
representations to recover sums in excess of those actually expended by the
applicable healthcare payor to pay for medical treatment. On March 30, 1999, the
Court entered an order certifying a class of all members of one HCRI client
health plan located in Wheeling, West Virginia (The Health Plan of the Upper
Ohio Valley) who have been subject to subrogation and/or reimbursement
collection practices by HCRI. Plaintiffs, on behalf of the class as certified,
demand compensatory damages, punitive damages, and treble damages under RICO,
costs and reasonable attorneys' fees.

On October 1, 1999, a First Amended Class Action Complaint ("Amended
Complaint") was filed against HCRI in the United States District Court for the
Southern District of Florida, in a putative class action brought by William
Conte and Aaron Gideon, individually and on behalf of all others similarly
situated. In that action, Conte v. Healthcare Recoveries, Inc., No. 99-10062,
plaintiffs assert that HCRI's subrogation recovery efforts on behalf of its
clients violate a number of state and federal laws, including the Fair Debt
Collection Practices Act and the Florida Consumer Collection Practices Act. The
Complaint also seeks a declaratory judgment that HCRI, as the subrogation agent
for various healthcare payors, is not entitled to assert and recover upon
subrogation or reimbursement liens it asserts on settlements obtained from third
party tortfeasors when the settlement is in an amount less than the amount
required to fully compensate ("or make whole") the injured party for all
elements of damage caused by the tortfeasor. Plaintiffs purport to represent a
class consisting of all participants or beneficiaries of ERISA plans nationwide
whose net recovery of damages through judgments, settlements or otherwise
against liable third parties has been reduced or potentially reduced by HCRI's
alleged assertion and/or recovery of unlawful subrogation/reimbursement rights
of its clients. Plaintiffs also seek compensatory and statutory damages,
exemplary and punitive damages, injunctive relief, prejudgment interest, costs
and attorneys' fees.

The original complaint in the Conte matter, filed in June 1999, asserted
similar claims on behalf of a putative class of participants or beneficiaries of
one client's health plans located in Florida, Alabama, and Georgia. In response
to HCRI's motion to dismiss that complaint, the Plaintiffs filed the Amended
Complaint on behalf of a putative national class. On November 5, 1999, HCRI
filed a motion to dismiss the Amended Complaint. That motion, now fully briefed,
remains pending. The court has not yet addressed the question whether to certify
the putative class; plaintiffs are required to file a motion by March 1, 2000,
seeking certification. HCRI intends to oppose the motion.

On October 20, 1999, a class action complaint ("Baker Complaint") was filed
against HCRI and one HCRI client in the Circuit Court of Jefferson County
Alabama, Darrell DeWayne Baker v. Healthcare Recoveries, Inc., United Healthcare
of Alabama, Fictitious Party Defendants A, B, C et al. On December 6, 1999 the
Defendants removed the lawsuit to the United States District Court for the
Northern District of Alabama, Southern Division. On January 3, 2000 a First
Amended Complaint was filed, retaining all counts from the original complaint
and seeking an additional declaratory judgment that the health plan and HCRI
have a right to recover through subrogation only the actual benefits paid to
medical providers on behalf of the class. The Baker Complaint, as amended,
asserts claims on behalf of two putative subclasses, both consisting of members
nationwide of the client health plan, who either: (1) allegedly paid inflated
subrogation claims due to alleged failure by the health plan or by HCRI, to
disclose discounts in the health plan's payments to medical providers; or (2)
allegedly were denied coverage of certain claims by the health plan. The
plaintiffs assert claims against HCRI under a variety of theories including
unjust enrichment, breach of contract, breach of fiduciary duty and violations
of RICO. Plaintiffs demand, on behalf of the putative classes, compensatory
damages, punitive damages, treble damages under RICO, and reasonable attorneys'
fees.
<PAGE> 5

On January 27, 2000, the defendants filed a motion to dismiss the Amended
Complaint, which remains pending. The court has not yet addressed the question
whether to certify the putative class.

On October 28, 1999, a class action Plaintiff's Original Petition
("Petition") was filed against HCRI and one HCRI client in the District Court
for the 150th Judicial District, Bexar County, Texas, Joseph R. Cajas, on behalf
of himself and all others similarly situated v. Prudential Health Care Plan,
Inc. and Healthcare Recoveries, Inc. The plaintiff asserts that HCRI's
subrogation recovery efforts on behalf of its client Prudential Health Care
Plan, Inc. ("Prudential") violated a number of common law duties, as well as the
Texas Insurance Code and the Texas Business and Commerce Code. The Petition
alleges that HCRI as the subrogation agent for Prudential, made fraudulent
misrepresentations in the course of unlawfully pursuing subrogation and
reimbursement claims that plaintiffs assert are unenforceable because (1)
prepaid medical service plans may not exercise rights of subrogation and
reimbursement; (2) the subrogation and reimbursement claims asserted by the
Company are not supported by contract documents that provide enforceable
recovery rights and/or do not adequately describe the recovery rights; and (3)
the sums recovered pursuant to such claims unlawfully exceed the amount
Prudential paid for medical goods and services. HCRI was served with the
Petition in early November and has answered, denying all allegations. The court
has not yet addressed the question whether to certify the putative class.

In late 1999, the Cajas plaintiff's counsel filed two lawsuits in Texas and
South Carolina that raise issues similar to those in the Cajas lawsuit. On
December 7, 1999, a class action complaint ("Complaint") was filed against HCRI
and one HCRI client in the United States District Court for the Western District
of Texas, San Antonio Division, Timothy Patrick Franks, on behalf of himself and
similarly situated persons v. Prudential Health Care Plan, Inc. and Healthcare
Recoveries, Inc. The plaintiff asserts claims on behalf of members of ERISA
governed health plans. The Complaint alleges that HCRI's subrogation recovery
efforts on behalf of its client Prudential Health Care Plan, Inc. ("Prudential")
violated a number of common law duties, as well as the terms of certain ERISA
plan documents, the RICO, the federal Fair Debt Collection Practices Act, the
Texas Insurance Code and the Texas Business and Commerce Code. The Complaint
alleges that HCRI, as the subrogation agent for Prudential, made fraudulent
misrepresentations in the course of unlawfully pursuing subrogation and
reimbursement claims that plaintiffs assert are unenforceable because (1)
prepaid medical service plans may not exercise rights of subrogation and
reimbursement; (2) the subrogation and reimbursement claims asserted by the
Company are not supported by contract documents that provide enforceable
recovery rights and/or do not adequately describe the recovery rights; and (3)
the sums recovered pursuant to such claims unlawfully exceed the amount
Prudential paid for medical goods and services. The Complaint further alleges
that HCRI unlawfully pursued subrogation and reimbursement claims by (1) failing
to pay pro rata attorney's fees to attorneys who represented class members with
respect to tort claims underlying the subrogation and reimbursement claims; and
(2) recovering subrogation and reimbursement claims from class members who have
not been fully compensated for their injuries. Plaintiffs, on behalf of the
class, demand compensatory damages, punitive damages, and treble damages under
RICO, costs and reasonable attorneys' fees. On January 18, 2000, the defendants
filed a motion to dismiss the Complaint, which remains pending. The court has
not yet addressed the question whether to certify the putative class.

alleges that HCRI and CHC unlawfully pursued subrogation and reimbursement
claims by (1) failing to pay pro rata costs and attorney's fees to attorneys who
represented class members with respect to tort claims underlying the subrogation
and reimbursement claims; and (2) failing to include in subrogation and
reimbursement claims all applicable discounts that CHC received for such medical
goods and services. Plaintiffs, on behalf of the class, demand compensatory
damages, punitive damages, and treble damages, disgorgement of unjust profits,
costs, and prejudgment interest and attorneys' fees. HCRI was served with the
original Complaint in late December and is preparing a formal response. The
court has not yet addressed the question of whether to certify the putative
class.

In terms of the Company's business practices and the allegations underlying
the DeGarmo, Cajas, Franks, Baker and Martin cases, at the end of 1993 HCRI had
ceased the practice of recovering the "reasonable value" of medical treatment
provided by medical providers in circumstances where HCRI has entered into a DFS
arrangement with its clients. From that date, the Company's policy has been not
to recover the "reasonable value" of medical treatment in DFS arrangements.
However, HCRI historically and currently recovers the "reasonable value" of
medical treatment provided under capitation arrangements and other payment
arrangements with medical providers on behalf of those clients that compensate
medical providers under these payment mechanisms, to the extent that these
benefits are related to treatment of the injuries as to which clients have
recovery rights. The Company believes that its clients' contracts, including the
contracts that provide for recovery under DFS, capitation and other payment
arrangements are enforceable under the laws potentially applicable in these
cases. As a result, and taking into account the underlying facts in each of
these cases, the Company believes it has meritorious grounds to defend these
lawsuits, it intends to defend the cases vigorously, and believes that the
defense and ultimate resolution of the lawsuits should not have a material
adverse effect upon the business, results of operations or financial condition
of the Company. Nevertheless, if any of these lawsuits or another lawsuit
seeking relief under similar theories were to be successful, it is likely that
such resolution would have a material adverse effect on the Company's business,
results of operations and financial condition.

Recently, management of the Company has observed that, in parallel with
widely-reported legislative concerns with the healthcare payment system, there
also has occurred an increase in litigation, actual and threatened, directed at
healthcare payors and related parties. In addition, certain attorneys who have
gained prominence in representing plaintiffs in recent actions against tobacco
companies have publicly stated their intentions to institute class action
lawsuits against healthcare payors, particularly those in the so-called "managed
care industry" and related parties including, specifically, the Company. As a
result of the foregoing, there can be no assurance that the Company will not be
subject to further class action litigation, that existing and/or future class
action litigation against the Company and its clients will not consume
significant management time and or attention and that the cost of defending and
resolving such litigation will not be material.

COMPETITION

HCRI competes primarily with the internal recovery departments of potential
customers and other subrogation recovery service vendors. To the Company's
knowledge, there are two smaller, but significant, independent providers of
subrogation recovery services in addition to HCRI. Both independent competitors
preceded HCRI's entry into the recovery industry, and no major competitors have
entered the market since that time. HCRI believes that it has competitive
advantages in the bulk of its market, including process expertise, capital
requirements necessitated by the unusually long revenue cycle in the recovery
industry, assembling and training a qualified and productive employee base
possessing appropriate industry expertise, and an information processing system
designed to aid investigators and recovery personnel engaged in the recovery
process. However, there are participants in the healthcare insurance and
transaction processing
<PAGE> 7

industries that possess sufficient capital, and managerial and technical
expertise to develop competitive services.

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant degree upon the continued
contributions of members of the Company's senior management and other key sales,
marketing, computer systems and operations personnel, and the loss of any such
persons could have a materially adverse effect on the business of the Company.
The Company's success also depends upon its ability to attract and retain highly
qualified and skilled managerial, sales, marketing and computer software
development and operations personnel, the competition for whom is intense. There
can be no assurance that the Company will be successful in hiring or retaining
the requisite personnel, which could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
does not maintain insurance on key personnel. The Company has employment
agreements with Patrick B. McGinnis, Chairman and Chief Executive Officer,
Robert Jefferson, Sr. Vice President Business Development and Tim J. Cahill, Sr.
Vice President Sales & Marketing, and Kevin O'Donnell, Corporate Executive Vice
President -- SAI Sales Division. The Company has Change of Control and Severance
Agreements with Debra M. Murphy, Executive Vice President -- Subrogation
Operations, Douglas R. Sharps, Corporate Executive Vice President -- Finance and
Administration Chief Financial Officer and Secretary, Robert G. Bader, Executive
Vice President Overpayments Operations, and Mark J. Bates, Sr. Vice President
Systems.

HCRI employs, and facilitates the development of, skilled
knowledge-workers. HCRI maintains an extensive, in-house training program, which
it believes is attractive to employees and essential in developing the necessary
industry-specific skills. All HCRI employees participate in one of four
incentive compensation plans, depending upon the responsibilities of each
employee. The Company believes the tight labor market could have an impact on
future hiring. HCRI employed approximately 741 persons as of December 31, 1999.

UPGRADE OF INFORMATION MANAGEMENT SYSTEM AND LOSS OF PROPRIETARY TECHNOLOGY

System Upgrade. Although the SubroSystem, a key component of HCRI's
recovery process, historically served the Company's operational and management
information needs, HCRI developed a plan (the "System Upgrade") under which it
would, over a 24-month to 36-month period, migrate the SubroSystem to a modern
network operating system and database architecture. The System Upgrade includes
a detailed process for the comprehensive testing of all key elements prior to
implementation of each step of the upgrade.

Work was completed in late 1998 on the second step of the SubroSystem
Upgrade for the creation of a logical data model to support subrogation and
other processes. This work resulted in the initial implementation of a
relational database to support data warehousing. The last step of the System
Upgrade, the migration of data and process to the data warehouse to support
client reporting and ad hoc analysis, was completed in 1999. In total the
Company spent approximately $4 million on this project.

Dependence on Proprietary Software Applications. The Company's success
depends, in part, upon its proprietary technology, specifically the integrated
software programs comprising the SubroSystem. Although, federal copyright law
protects certain elements of the SubroSystem, such protection neither confers a
monopoly on the use of subrogation recovery software systems nor prevents
competitors from developing similar systems. The SubroSystem, like all other
software programs, may be subject to a variety of replication techniques (for
example, reverse engineering, logic tracing, disassembly and decompilation) that
would produce a functionally similar software system not covered by the
Company's registered copyright. Therefore, there can be no assurance that the
Company's registered copyright on the SubroSystem will preclude or deter
<PAGE> 8

circumvention by current or future competitors, with the effect that the Company
might lose any advantage conferred by the SubroSystem.

CONSOLIDATION AMONG HEALTHCARE PAYORS: PRESSURE ON MARGINS

Consolidation among healthcare payors could increase their bargaining
strength as the number of lives insured or otherwise covered by such healthcare
payors grows. This consolidation may place downward pressure on the Company's
historic margins and may create additional competition from such healthcare
payors in the form of better-equipped in-house recovery departments.
Additionally, existing clients have been and may in the future be lost through
acquisition by non-client healthcare payors.

LIMITATION ON DIVIDENDS

From August 28, 1995, the date Medaphis Corporation ("Medaphis") acquired
HCRI, until May 1997 when Medaphis sold HCRI in an initial public offering (the
"Offering"), the Company paid dividends to Medaphis totaling $13.6 million.
Following the Offering, however, the Company has retained earnings to finance
the growth and development of its business and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The Company's credit
facility limits its ability to pay dividends on its Common Stock.

YEAR 2000 ISSUES

The Company previously recognized the material nature of the business
issues surrounding the computer processing of dates into and beyond the Year
2000 and took corrective action. The Company's efforts included replacing and
testing three basic aspects of its business operations: internal information
technology ("IT") systems, including the internally-written systems that support
subrogation and bill audit recovery; internal non-IT systems, including office
equipment; and material third-party relationships. Management believes the
Company has completed all of the activities within its control to ensure that
the Company's systems are Year 2000 compliant and the Company has experienced no
interruptions to normal operations due to the start of the Year 2000.

ABILITY TO MANAGE GROWTH

The Company has experienced significant growth in its product offerings,
revenues and the number of its employees. This growth has resulted in an
increase in responsibilities placed upon the Company's management and has placed
added pressures on the Company's operating systems. The Company is expanding its
management, systems development and support, marketing, sales and customer
services, which may place a strain on the Company's operations. Furthermore, the
initial expenses associated with the addition of new clients may be incurred
before the Company recognizes any revenues from such new clients. There can be
no assurance that the Company will successfully manage its expanding operations
or implement its growth strategy; and if the Company's management is unable to
manage growth effectively, the Company's business, operating results and
financial condition could be adversely affected.

ABILITY TO EXECUTE GROWTH STRATEGY

In addition to growing its existing claims recovery business and other
medical cost containment services, HCRI intends to extend its systems-driven,
process-oriented approach, through acquisitions and internal developments, to
outsourcing opportunities in other service industries. HCRI believes that future
development opportunities are likely to be characterized by:

- outsourcing services that produce predictable and recurring revenue
streams;

- competitive advantages from processes, automation and the provision of
knowledge-rich services;

- development-stage niche markets;

- value-based pricing; and

- a focus on (non-exclusive) healthcare information services.

There can be no assurance that the Company will be successful in the
internal development or acquisition of new lines of business or that it will be
able to successfully integrate or manage new lines of business which it may
develop or acquire, and if the Company's management is unable either to execute
this growth strategy or to manage the resulting growth, the Company's business,
operating results and financial condition could be adversely affected.

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Amended and Restated Certificate of Incorporation
and Bylaws of the Company may be deemed to have the effect of making difficult
an acquisition of control of the Company in a transaction not approved by the
Company's Board of Directors. These provisions include the ability of the
Company's board of directors to issue shares of preferred stock in one or more
series without further authorization of the Company's stockholders. Accordingly,
the Company's Board of Directors is empowered, without stockholder approval, to
issue preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of Common Stock. In the event of such issuance, the preferred stock
could also be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Although the Company has no current intention to issue any shares of its
preferred stock, there can be no assurance that the Company will not do so in
the future. These provisions may also have the effect of discouraging a
third-party from making a tender offer or otherwise attempting to obtain control
of the Company even though such a transaction might be economically beneficial
to the Company and its stockholders. Furthermore, the Company is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law
which prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the time of the
transaction in which the person first becomes an "interested stockholder,"
unless the business combination is approved in a prescribed manner. The
application of Section 203 could have the effect of delaying or preventing a
change of control of the Company. Certain other provisions of the Company's
Amended and Restated Certificate of Incorporation and Bylaws may have the effect
of delaying or preventing
<PAGE> 10

changes of control or management of the Company, which could adversely affect
the market price of the Common Stock. Among these are provisions:

- requiring a classified board of directors;

- limiting the person able to, and the procedures for, calling a special
meeting of the stockholders; and

- requiring certain supermajority stockholder votes to amend certain of the
foregoing provisions.

On February 12, 1999, the Board of Directors adopted a Stockholder Rights
Plan and declared a dividend of one preferred stock purchase right (a "Right")
for each outstanding share of Common Stock of the Company. The dividend was
payable to stockholders of record on March 1, 1999. The Rights, which will
initially trade with the common stock, separate and become exercisable only upon
the earlier to occur of (i) 10 days after the date (the "Stock Acquisition
Date") of a public announcement that a person or group of affiliated persons has
acquired 20% or more of the common stock (such person or group being hereinafter
referred to as an "Acquiring Person") or (ii) 10 days (or such later date as the
Board of Directors shall determine) after the commencement of, or announcement
of an intention to make, a tender offer or exchange offer that could result in
such person or group owning 20% or more of the common stock (the earlier of such
dates being called the "Distribution Date"). When exercisable, each Right
initially entitles the registered holder to purchase from the Company one
one-hundredth of a share of a newly created class of preferred stock of the
Company at a purchase price of $65 (the "Purchase Price"). The Rights are
redeemable for $0.001 per Right at the option of the Board of Directors. The
Rights expire on March 1, 2009.

If any person becomes an Acquiring Person, each holder of a Right will
thereafter have the right (the "Flip-In Right") to receive, in lieu of shares of
preferred stock and upon payment of the Purchase Price, shares of Common Stock
having a value equal to two times the Purchase Price of the Right. Also, if at
any time on or after the Stock Acquisition Date, (i) the Company is acquired in
a transaction in which the holders of all the outstanding shares of Common Stock
immediately prior to the consummation of the transaction are not the holders of
all of the surviving corporation's voting power, or (ii) more than 50% of the
Company's assets, cash flow or earning power is sold or transferred other than
in the ordinary course of business, then each holder of a Right shall thereafter
have the right (the "Flip-Over Right") to receive, in lieu of shares of
preferred stock and upon exercise and payment of the Purchase Price, common
shares of the acquiring company having a value equal to two times the Purchase
Price. If a transaction would otherwise result in a holder having a Flip-In as
well as a Flip-Over Right, then only the Flip-Over Right will be exercisable. If
a transaction results in a holder having a Flip-Over Right subsequent to a
transaction resulting in the holder having a Flip-In Right, a holder will have a
Flip-Over Right only to the extent such holder's Flip-In Rights have not been
exercised.

PROFESSIONAL LIABILITY AND INDEMNITY OBLIGATIONS TO CLIENTS

From time to time, the Company may be subject to claims from its clients
that it failed to provide services in accordance with its contract or that its
recovery activities have harmed the client. The Company has agreed to indemnify
and hold certain of its clients harmless from negligent acts or omissions of the
Company in the performance of recovery services. Although the Company maintains,
and intends to continue maintaining, insurance covering these types of risks,
there can be no assurance that such insurance will be an adequate amount or will
be available at reasonable costs in the future.

STOCK PRICE VOLATILITY

The Company believes that a variety of factors could cause the price of the
Common Stock to fluctuate, perhaps substantially, including:

- announcements of developments related to the Company's business;

- changes in financial estimates by securities analysts; and

- developments in the Company's relationships with its customers,
distributors and suppliers.
<PAGE> 11

In addition, in recent years the stock prices of companies have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of such companies. Similar fluctuations may adversely affect the
market price of the Common Stock in the future.

During 1999, the market for the Company's Common Stock experienced material
price and volume fluctuations. An investment in the Company's Common Stock is
not suitable for any investor who is unwilling to assume the risk associated
with any such price and volume fluctuations.

This Safe Harbor Statement supersedes the Safe Harbor Statements filed as
Exhibit 99.1 to the Company's Annual Report on Form 10-K, for the year ended
December 31, 1998.