SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
Commission file number 0-18902
Health Risk Management, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1407404
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
10900 Hampshire Avenue South, Minneapolis, MN
55438 (Address of principal executive offices, the
zip codes)
Registrant's telephone number, including area code: 612/829-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Preferred Stock Purchase Rights
Indicate by check mark, whether the Registrant (1) has filed all reports
required to be filed by Section 12 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 the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of September 15, 1999 was approximately $36,250,000 based upon the
closing sale price of the Registrant's Common Stock on such date.
Shares of $.01 par value Common Stock outstanding at September 15, 1999:
4,639,496 shares.
Documents Incorporated by Reference
NONE
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PART I
Item 1. Business.
(a) General Development of Business.
Unless the context otherwise requires, references in this Form 10-K to
"HRM" and the "Company" refer to Health Risk Management, Inc., and its
wholly owned domestic subsidiaries, HRM Claim Management, Inc., Institute
for Healthcare Quality, Inc., Health Benefit Reinsurance, Inc.,
Pennsylvania HRM, Inc., and HRM Health Plans (PA), Inc. HRM was
incorporated in Minnesota in 1977.
HRM delivers a variety of evidence-based medical information products and
health plan management services to the managed care and indemnity markets.
Service and contracting options range from a single product/service sold on
a subscription, fee or per member per month basis, to total management of
the financial risk of a health plan to outright ownership of a health plan.
Our principal health plan management services and products include care
management (formerly known as utilization review), provider network
management, claim administration, partial and total risk management and
computer-based medical information software and related management
services.
During fiscal year 1999, we realigned these products and services into
three market-focused business units, which focus on the specific needs of
our three major businesses. This was also done so we can manage more
efficiently the specific segments within each market that have the highest
revenue potential. This annual report highlights the products, services,
programs and financials of the three business units, and is a departure
from previous reports that reported only for the single business segment.
The three new business units are the Risk Business Unit, the Service
Business Unit and the QualityFIRST Business Unit.
1. Risk Business Unit. This unit produces larger revenues than any of the
other units because it reflects the full risk of the benefits provided
by the health plan including the cost of services, administrative
costs and profits. This unit accounted for 0%, 29% and 74% of the
Company's total revenue for fiscal years 1997, 1998 and 1999,
respectively. Its revenue is derived primarily from monthly payments
paid to the health plan by members and/or state and federal agencies.
Operating expenses from this unit are listed as "Medical costs, net,"
the cost of service, and administrative expense related to the health
plan. Medical costs, net of ceded amounts, refer to the cost of
providing medical services to health plan members. This unit's market
is managed care organizations that are underperforming; that is, they
are operating at a deficit, or they are not able to manage their
medical loss ratio, but provide a premium rate that supports the
medical costs, cost of service expense, administrative expense and
profit potential.
During the year we concentrated our marketing efforts for this unit on
health maintenance organizations (HMOs), especially Medicaid HMOs.
We use our 20 years' experience in health plan management to apply
virtually all of our services and products to the goal of turning
around failing health plans. To accomplish this, we assume management
of all operational functions of the health plan, and we assume either
a portion or all of the plan's financial risk, or we acquire the plan.
With each increase in level of risk assumed, HRM increases its access
to the health plan's premium dollars and assets and increases its
assumption of financial risk, which may be reinsured via various
reinsurance vehicles.
In February 1998, we signed, through our wholly-owned subsidiary,
Pennsylvania HRM, Inc., our first full-risk, total health plan
management contract with Oxford Health Plans (PA), Inc., Philadelphia,
a 60,000-member Medicaid HMO. Under the terms of the agreement,
beginning April 16, 1998, we provided health plan management services
and assumption of the medical cost risk under the HealthChoices
Physical Health Agreement between the Commonwealth of Pennsylvania and
Oxford. On January 27, 1999, we purchased the health plan, which today
operates under the name OakTree Health Plan(TM). See Note 2 to the
Consolidated Financial Statements and Current Report on Form 8-K filed
February 11, 1999, for further information concerning our purchase of
the health plan.
<PAGE>
2. Service Business Unit. This unit, known under the brand name HRM(R)
CarePASS(R) USA, is HRM's second highest revenue generating business
unit, accounting for 94%, 67% and 24% of the Company's total revenue
for fiscal years 1997, 1998 and 1999, respectively. This unit's
revenue, management service fees, results from fees charged for health
care management services and is usually based on either the number of
members covered by the particular benefit plan or on a fee per
transaction basis. Operating expenses for this unit are included in
cost of services.
Basic services in this unit include acute care management (review)
services, coordinated care management for catastrophic or long-term
illnesses, provider network management, and health care claim and
related administrative services. This business unit's markets are
mainly employer self-funded health benefit plans and fully insured
benefit plans operated by insurance companies. This unit provides
effective comprehensive health plan management to help clients ensure
their employees or health plan members have: The right care, At the
right time, In the right setting, From the right professional, At the
right price, For the optimal outcomeSM.
The sales objective is to sell all or as many services to a client as
possible with the aim of providing total health plan management. When
we meet this objective, clients can maximize the effectiveness and
efficiency of their health plan, and HRM is in a position to maximize
the returns for both the client and itself.
3. QualityFIRST Business Unit. This unit's revenue is included in
QualityFIRST revenues, and accounted for 6%, 4% and 2% of the
Company's revenues for fiscal years 1997, 1998 and 1999, respectively.
Most of these revenues are in the form of software license,
subscription and related fees. During the year, we re-focused what had
been mainly a health care practice guideline software product into an
enterprise-wide financial, liability and clinical management system to
be used by managed care organizations in managing their medical loss
ratio. We also re-named the product series QualityFIRST(R)
Evidence-based Solutions for Effective Medical ManagamentSM and added
separate medical information, continuing medical education and medical
education core curriculum components.
Among other services, QualityFIRST(R) delivers scientific,
evidence-based medical and financial risk management solutions to help
health plans and providers deliver quality care for members, maintain
control over medical loss ratios and minimize exposure to liability
risk.
(b) Financial Information about Industry Segments.
The company is engaged at the present time in three industry segments,
namely health insurance and medical service plans (Risk Business Unit),
health care management services (Management Services Business Unit) and
medical information software systems and services (QualityFIRST Business
Unit). Financial information concerning the company's business units is
included in Items 6,7,8 and 14.
(c) Narrative Description of Business.
(1) Products.
HRM's products and services are developed, packaged, managed, sold and
operated by one of our three main business units, which were formed
during the year to allow us to focus our attention on the high revenue
components and the specific needs of each of our three primary
markets: the at-risk health plan market; the self-insured/indemnity
service market; and the QualityFIRST provider market. Products and
services are assigned to a business unit based on the specific needs
of the market being served.
<PAGE>
Marketplace: Health Plans At Risk
Health plans at risk - primarily HMOs - represent the market for the
Risk Business Unit. This business unit is described in (a) above. It
makes use of all of the company's services and products as it assumes
partial or full financial risk for a health plan. When accepting
contracted financial risk, we may obtain reinsurance against losses
above specific levels. In cases when we share risk, contracts also may
include the awarding of specified bonus to us or payment by us of a
penalty for the achievement or non achievement of specified
performance targets.
In January 1999, the unit undertook the ownership and management of a
60,000 member Medicaid HMO in Philadelphia (formerly known as Oxford
Health Plans (PA), Inc.) and that today is known as OakTree Health
Plan(TM) (the Plan). HRM had been managing the Plan since April 1998.
Our objective is to improve the delivery of medical care services for
members and to reduce the Plan's medical loss ratio through improved
operational efficiency and effectiveness. To accomplish this, we
employ virtually all of HRM's health care management, provider
contracting and claim administration products and services together
with management expertise gained during over 20 years of hands on
administration. This business unit plans to expand its management
and/or ownership of similar HMO organizations with various financial
or reinsurance arrangements.
Marketplace: Self Insured/Indemnity
The self-insured/indemnity marketplace is the focus of the Service
Business Unit. This group of products is called CarePASS(R) USA.
During the year, the Service Business Unit focused sales efforts
toward only large employers (more than 1000 employees) and insurance
plans, which represented a shift in marketing strategy away from
smaller organizations. Because this market had been the exclusive
focus of HRM for most of its history, most of our client base falls
within this business unit. The client base is nationwide, with
clients' employees or members located in nearly every state.
During the year, this unit also repackaged and bundled its many
separate services, into essentially one total health plan management
product. This product includes everything a self-insured employer or
an insurance company with a health insurance plan needs if it is to
offer a health plan to employees/members. This product is sold on a
fixed monthly fee per covered employee based on expected transaction
volume or on a per transaction or case basis. Components of this
product include health care utilization management for acute and
chronic medical, surgical and behavioral health cases; complete claim
administration services, including reinsurance products when requested
and pharmacy management (provided through subcontractors); and
provider network management (usually through an affiliated preferred
provider network).
Case Example
In a typical case, a plan participant or the participant's
physician must call a toll-free telephone number several days
prior to commencement of elective medical or surgical treatment,
or whenever possible, prior to an emergency admission. This
toll-free call can be placed by the plan participant or the
participant's physician 24 hours per day, seven days per week,
365 days per year. (The plan participant's physician, other
medical provider, hospital, outpatient center, etc. already will
have been determined by HRM's Provider Network Services in
conjunction with the participant's employer or insurer.) From
these calls, our nurses gather information on the participant's
medical condition and the attending physician's proposed
treatment plan, and then compare these with our QualityFIRST(R)
guidelines to determine the validity of the proposed diagnosis
and appropriateness of the proposed treatment. In the event of
any discrepancies between the proposed diagnosis and treatment
and our QualityFIRST(R) guidelines, or at the request of the
attending physician (and in all cases involving certain
complicated illnesses), these determinations are reviewed by one
of our consulting physicians who is available 24 hours a day,
seven days per week, 365 days per year, and, in certain
instances, by an independent physician (second opinion). A second
opinion provides the patient with additional information to
enable him or her to make an informed decision before proceeding
with a certain treatment. The determination of whether the
diagnosis, plan of treatment, and setting for care are medically
necessary and appropriate is entered into our computer system to
determine health plan reimbursement, to begin the claim
administration process, and to communicate the determination to
the client's health plan administrator and the patient. Under no
circumstances does HRM prohibit the provision of any clinical
services. If we do not authorize the payment of the physician's
or hospital's fee, the health plan administrator may nonetheless
choose to pay such fee. Even if the health plan administrator
chooses not to pay such fee, the patient remains free to engage
any physician, hospital, or outpatient facility to perform any
<PAGE>
treatment based upon any diagnosis, at the patient's expense. The
participant receives the appropriate treatment from the
appropriate practitioner, in the appropriate setting and our
claim administration division processes the appropriate claims
and pays the appropriate charges for the services that are
covered according to the employer's health plan or the
participant's health insurance policy. Also, any plan participant
is encouraged to use our HRM(R) CareCALL(R) 24-hour health
information, assessment, triage and referral phone line, which
provides personal health management and promotes illness and
injury prevention by educating and empowering the caller to make
appropriate decisions about their health, their health care, and
the health care resources they use.
Marketplace: Managed Care Organizations/Insurance Companies/Provider
Organizations
Managed care organizations, insurance companies, and various provider
organizations represent the market for the QualityFIRST Business Unit.
This unit is described in (a) above. As noted, during fiscal year
1999, this unit re-focused its marketing efforts toward offering an
integrated, enterprise-wide product aimed at improving not only
overall health care consistency and quality, but also the customer's
overall bottom line results. This is in contrast to previous marketing
efforts aimed at selling the product as a tool to assist in clinical
decision-making.
QualityFIRST(R) products are offered on a license and subscription fee
basis, which allows, for example, HMOs and other managed care
organizations, insurance companies, and provider organizations to use
our software in their health plan management system. We also have
signed numerous joint venture/partnership agreements whereby companies
that license operating systems to providers and provider organizations
will include our decision support QualityFIRST(R) guidelines on their
systems or, as an option, on their systems for a fee.
The products of this Business Unit are bundled under a single brand
name:
QualityFIRST(R) Evidence-based Solutions for Effective Medical
ManagementSM.
These services and products, which include computer-based
clinical decision support systems based on current clinical
research findings and published clinical practice evidence,
provide solutions for the medical risk management challenges
being faced by HMOs, various managed care organizations,
physicians and health plan members interested in selecting the
right care from the right provider at the right time. This series
includes the following components:
QualityFIRST(R) Medical Risk Management System(TM). This
system, which is used on an enterprise-wide basis, delivers
medical and financial risk management strategies to help
health plans, providers and others deliver quality care,
maintain maximum control over medical loss ratios and
minimize liability.
This integrated system is based on QualityFIRST(R)
guidelines, which may also be sold as a stand alone product.
The Medical Risk Management System is a clinical decision
support software system that uses evidence-based guidelines
to evaluate and confirm proposed diagnoses, suggest
treatment selection options, identify resource options, and
to capture decisions for profiling, accountability reporting
and outcomes measurement. This information is especially
valuable for financial risk and outcomes management,
identification of educational needs and for management of
the medical loss ratio. The Medical Risk Management System
integrates medical and financial management to create a
portfolio of risk management solutions.
The key component of the Medical Risk Management System is
the QualityFIRST(R) health care practice guidelines software
and related systems software. QualityFIRST(R) provides
decision support for evaluating diagnosis, treatment
<PAGE>
selection and resource use for each episode of care. In
addition, the guidelines provide consistent criteria and
practice standards against which care quality and related
costs can be measured. Physicians working with health plans,
health plan medical directors, health care professionals
working with physicians, and other providers use these
diagnosis-driven guidelines to promote consistency in
decision making, to influence quality of care; to promote
clinically appropriate decisions prospectively,
concurrently, and retrospectively; to promote optimal
outcomes; and to allow the practitioner flexibility in care
decisions on the basis of individual patient factors. The
guidelines software operates under a standard, easy-to-use
platform and provides primary baseline data needed for
Continuous Quality Improvement (CQI) such as usage
characteristics and patterns of care for a given
organization or practitioner.
The clinical evidence-based guideline content is supported
by full academic research and clinical outcome analysis and
addresses the clinical value of a particular intervention
both on an individual basis and on an aggregate long-term
basis. On-line access to clinical documentation of guideline
recommendations, research abstracts and full bibliographic
references to the clinical literature contribute to the
product's high acceptance. The interactive operating
platform promotes quality care through its ability to
facilitate and document acute care clinical decisions. The
patented, directed questioning format mirrors the sequential
"decision tree" process of clinical decision making,
promotes clinical consistency and is user friendly. The
product's capability to document clinical decisions,
including variances to guideline recommendations, provides a
consistent baseline for measurement, assessment, education
and continuous quality improvement.
QualityFIRST(R) offers Medical/Surgical, Workers'
Compensation/Disability, Behavioral Health, and Specialist
Referral guidelines as well as Alternative Setting
indicators. These modules comprise 500 guidelines and more
than 3,630 treatments/procedures covering approximately 80%
of significant clinical events. The Workers'
Compensation/Disability package includes
on-line-return-to-work parameters to identify the expected
length of disability and to expedite return to work as well
as on-line access to individual state workers' compensation
treatment guidelines to facilitate compliance with local
workers' compensation regulations. Alternative Setting
indicators are designed to help streamline the transfer of
care from an acute setting to the next appropriate care
level based on medical, physical, economic and psychosocial
issues particular to each patient. Specialist Referral
guidelines are used to facilitate the referral decision
process from the primary care physician to the specialist.
These guidelines are designed to help ensure appropriate
referrals and appropriate timing of referrals, to support
first line treatment by the primary care physician and to
document referral decisions so the result is optimal,
cost-effective care. Each of the guidelines is reviewed at
least yearly and is updated as necessary to reflect the
latest clinical advances.
QualityFIRST(R) software is made available to clients on a
software license basis. Licensees include hospitals,
insurance companies, HMOs, and others. Fees are based on a
license fee at inception with a monthly subscription fee
during the term of the license agreement based on number of
plan members or number of workstations using the guidelines.
QualityFIRST Triple WinSM Program. This program was launched
this year, and is a breakthrough in offering health plans a
method of aligning the interests and incentives of all
stakeholders in health care: members, providers and health
plans. It achieves its goals by using a unique combination
of medical management tools and strategies, consulting and
education. Success can be measured objectively using
QualityFIRST(R) Medical Risk Management System(TM) data. The
Triple WinSM Program provides the health plan CEO with a
method to assess issues related to managing medical risk,
including evaluation of current clinical practices and
corrective plan development, implementation and measurement.
<PAGE>
QualityFIRST Triple WinSM Program components include:
- Clinical decision support using the QualityFIRST(R)
Medical Risk Management System(TM)
- Alignment of physician compensation and incentive
strategies
- Evidence-based clinical benchmarking using providers'
clinical practice results as measured using
QualityFIRST(R) data. Comparisons of practice profiles
generated using QualityFIRST(R) data help health plan
medical directors manage health plan quality and
consistency and identify continuing medical education
needs.
- Physician education. During the year, HRM, in
conjunction with major medical schools across the U.S.
began co-sponsoring an evidence-based curriculum to
introduce the next generation of physicians to
evidence-based QualityFIRST(R)interactive, clinical
decision support software. Evidence-based medicine is
an approach that promotes the application of scientific
evidence and research to clinical decision-making at
the point of care. A key objective is to provide
physicians with the opportunity for hands-on experience
with an advanced tool such as QualityFIRST(R). This
program re-enforces the value of guideline use. As of
September 1999, we were co-sponsoring residency
programs, clerkships and CME programs and medical
curriculums for medical students at 12 medical schools:
University of Alabama, University of California at
Davis, University of California at Irvine, University
of Colorado, University of Illinois, University of
Miami, University of Missouri, Penn State University
College of Medicine, SUNY Buffalo, University of
Tennessee, University of Vermont and University of
Wisconsin. When used as a component of residency
programs, such as the six residencies co-sponsored by
HRM and the Minnesota Academy of Family Medicine, and
clerkship programs, our guideline curriculum elements
prepare students for the use of guidelines when they
begin practice. We anticipate that their exposure to
our guidelines in school could lead them to select and
purchase our guidelines as their system of choice in
practice for effective medical management. Currently,
we do not directly generate revenue from our CME
program, but health plan executives and potential
customers recognize the value of this approach, seeing
it as a value-added aspect unique to our products and
services.
QualityFIRST Quick Reference Manual(TM). During the year,
development began on the QualityFIRST Quick Reference
Manual(TM), which provides portable and easy access in a
booklet format to the 20 most frequently encountered
diagnoses covered by the evidence-based QualityFIRST(R)
Medical Risk Management System(TM). The manuals are intended
for use in conjunction with health plans that have purchased
the QualityFIRST(R) Medical Risk Management System(TM) as
its primary clinical decision support system for promoting
quality-centered care delivery and managing resource use.
The purpose of this manual is to open the QualityFIRST(R)
medical content "black box" for significant medical events
and help clinicians work more efficiently and effectively
with the health plan's clinical decision and management
processes in determining initial therapy recommendations.
Intended as a quick reference, the manual is easy to use.
The information helps users confirm the diagnosis and
determine an initial plan of therapy based on key clinical
findings in much the same way as the software version of
QualityFIRST(R) guidelines.
Internet Strategy Will Change Mode of Product and Service Delivery
Also during the year, we announced a significant new business strategy
for our products and services that is based on various Internet
applications. We began the process of transforming HRM from a service
company centered on information to an information company doing some
service functions.
Internet technology will radically change the overall dynamics of
today's medical care system for payers, providers and patients. To
expand and prosper, we must take full advantage of these
opportunities, which are summarized below:
<PAGE>
1. The Internet has expanded in a quantum leap the member's,
provider's and payer's access to information, in many ways
placing all three parties on a nearly equal knowledge basis. This
will ultimately restructure the health care industry.
2. The increasing health care co-pay fees being born by members will
give members the right to demand more control of their health
care.
3. The burdensome administrative processes in the health care
industry can be significantly reduced with much cheaper and more
efficient Internet technology.
4. The Internet will affect HRM's current processes, products and
services as follows:
(a) Health care benefit plans will instantly be available in
their complete form and open to members, payers and
providers equally.
(b) Eligibility files can be maintained in real time and updated
daily, which will greatly reduce the administrative burden
and costs and result in more accurate files.
(c) Provider network management can be done in real time with
significant administrative savings and greater accuracy.
(d) Utilization Management can make use of two-way communication
on the Internet and many other features for instant access
for all involved parties and data bases at any time.
(e) Claim Adjudication is a process with many Internet
applications that will greatly simplify the process, make it
more efficient and member friendly and save money.
(f) Member Services will combine state of the art computer
telephony and the Internet to streamline access to
information and lead to enhanced member satisfaction.
(2) Status of products in development.
HRM continually expands its medical and cost databases and medical
expertise for self-funded benefit plans, fully insured benefit plans,
HMOs, providers, plan members, medical students, workers' compensation
and disability insurance programs; refines its QualityFIRST(R) System
to address an ever enlarging number of provider organizations and
medical conditions, and will continue expanding its software package
containing HRM's proprietary QualityFIRST(R) System for license to
third parties. HRM also expects to continue to develop programs for
management of health care services, medical education programs and
costs associated with particular illnesses or conditions. HRM
anticipates that, as computer hardware, computer software and
telecommunications equipment become more technologically
sophisticated, and as Internet applications become feasible, the
Company will create new or enhanced software and health care
information products using the Company's medical expertise, database
systems and technology. HRM will also respond to changes required by
health care reform in the nation.
(3) Source and Availability of Raw Materials.
Not applicable.
(4) Patents, trademarks, licenses, franchises and concessions.
The Company has filed patent applications covering its "Health Care
Management System" which is an automated, real-time, interactive
health care management data processing system for use by hospitals,
physicians, insurance companies, health maintenance organizations
(HMOs) and others in the health care field to serve as a diagnostic,
evaluation and utilization tool for health care providers to
individuals. The system is implemented on computer hardware and
software and is used by the Company in providing health care
management services. One U. S. patent has been issued on a component
of the health care management system. Three other applications remain
pending.
<PAGE>
HRM claims copyrights to software developed by the Company. In
addition HRM has obtained perpetual licenses to use certain software
developed by other companies which HRM uses in providing services to
its clients. HRM has various safeguards in place, including
authorization codes and encryption, to limit access to the Company's
databases and operating systems. HRM markets its services and products
under a number of trade names and trademarks. The following are
principal trademarks or registered trademarks of HRM or its
subsidiaries: AutoPILOTTM HRM(R) Evidence-based SolutionsSM, HRM(R)
CarePASS(R) USA, HRM(R) CarePASS(R) USA-Your Passport to HealthSM,
HRM(R) CareCALLSM, HRM(R)DisabilityCARESM, HRM(R) MEDIATM,
HRM(R)QualityBIRTH(R), ReviewPLUS(R), HRM(R) Coordinated Care
ManagementSM, HRM(R) Rainbow Plan(R), QualityFIRST(R), QualityFIRST
Health Decision ScienceSM, QualityFIRST(R) Medical Risk Management
SystemSM, QualityFIRST(R) The Gold Standard for Evidence-based
BenchmarkingTM, QualityFIRST(R) Evidence-based Solutions for Effective
Medical ManagementSM, QualityFIRST Index: A Benchmark for Measuring
Healthcare QualityTM, QualityFIRST Triple WinSM Program, QualityFIRST
Quick Reference ManualTM, QualityFIRST Clinical Evidence SummaryTM,
QualityFIRST(R) Clinician Reference GuidelinesTM, CarePLUSSM,
ReviewPlus(R), Together We Can Make a Healthy Difference(R), Institute
for Healthcare Quality(R), IHQ(R)and OakTree Health PlanTM HRM relies
to varying degrees upon its common law rights of trademark ownership,
copyrights and registration of its trademarks.
(5) Seasonality.
HRM's revenues have, in recent history, not been seasonal. The
acquisition of Oxford Health Plans (PA), Inc. is not expected to
introduce seasonality into the Company's revenues.
(6) Working Capital.
HRM's working capital requirements are not generally subject to
significant fluctuations. In fiscal 1999, the use of working capital
was required for the purchase of Oxford Health Plans (PA), Inc. The
consolidated statements of cash flows show sources and uses of working
capital.
(7) Major Customers.
The Company services a small number of large clients that have
accounted for a significant portion of the Company's revenues in prior
years. HRM Health Plans (PA), Inc. (f/k/a Oxford Health Plan (PA)
Inc.), became a new client in fiscal 1998 and accounted for
approximately 26% of total revenues in fiscal 1998 and was acquired in
January, 1999 and accounted for 71% of total revenue in fiscal 1999
with the majority of the revenue from a contract for Medicaid members
with the Commonwealth of Pennsylvania. Keystone Mercy Health Plan
(KMHP) accounted for approximately 16% and 17% of total revenues in
fiscal 1998 and 1997, respectively. The contract with KMHP terminated
September 30, 1998. Columbia/HCA Healthcare Corporation accounted for
16% of total revenues in fiscal 1997.
(8) Backlog.
The Company's revenues are principally derived through the provision
of services as and when needed by the contracting client and no
backlog amounts are maintained.
(9) Government contracts.
A material portion of the Company's business is subject to negotiation
on an annual basis or termination of contract for convenience with one
hundred twenty days (120) notice or for cause with forty-five days
notice at the election of a government entity. HRM's subsidiary HMO
holds a contract with the Commonwealth of Pennsylvania for
approximately 60,000 Medicaid members under the Healthy Choices
Program in a five (5) County Philadelphia area.
(10) Competition.
The health care management industry historically has been highly
fragmented and competitive. HRM's principal competitive strengths are
its medical and cost databases, QualityFIRST(R) health care practice
guidelines and the proprietary software systems. The Company is able
to provide clients with a full range of integrated health care
management services, focusing not only on improving its quality, but
also on reducing the price of health care.
<PAGE>
The Risk Business Unit competes with other HMO's or health plans in
the geographic region where HRM has management risk contracts or
ownership in a health plan. This unit competes with HMO's, provider
organizations and insurance companies who are significantly larger and
possess greater financial resources than the Company.
The Service Business Unit competes directly with approximately 100
independent utilization review firms as well as approximately 120
insurance carriers, approximately 200 third-party administrators that
have established their own utilization review procedures, and a
limited number of software vendors. In addition the Company's care
management services compete indirectly with HMOs and several hundred
PPOs. Some of the Company's competitors are substantially larger and
possess greater financial resources than the Company. The Company,
however, believes that the trend toward consolidation of services will
continue as employers and insurance companies recognize the
convenience of dealing with a single health care management
organization.
The QualityFIRST Business Unit competes with a number of other
software companies, but believes that the Company offers the most
comprehensive evidence-based medical guidelines content available in
the marketplace today.
(11) Research and development.
HRM continually enhances its databases and proprietary software
systems. Costs capitalized for these enhancements, excluding acquired
software, by the Company were $8,696,000 in fiscal 1999, $9,057,000 in
fiscal 1998 and $7,396,000 in fiscal 1997.
(12) Effect of environmental regulation.
To the extent that the Company's management can determine, there are
no federal, state or local provisions regulating the discharge of
materials into the environment or otherwise relating to the protection
of the environment, with which compliance by the Company has had or is
expected to have a material effect upon the capital expenditures,
earnings, or competitive position of the Company.
(13) Employees.
As of September 1999, the Company employed approximately 900 persons,
including approximately 250 physicians, nurses, and other health
professionals. The Company uses approximately 150 independent
consulting physicians. None of the Company's employees is covered by a
collective bargaining agreement.
(d) Foreign Operations and Export Sales.
In Canada, health care prices and payments are set and administered by the
provincial governments. HRM has marketed all of its managed health care
services and software, other than price control services, to employers,
insurance companies, hospitals and governmental agencies in Canada through
HRM's wholly owned Canadian subsidiary. Revenues for services derived from
Canada totaled U.S. $46,000 in fiscal 1999, U. S. $195,000 in fiscal 1998
and U.S. $325,000 in fiscal 1997. The Company closed its office in Alberta
in fiscal 1999.
<PAGE>
Item 2. Properties.
HRM's principal corporate offices consist currently of approximately 142,500
square feet in a building in Minneapolis, MN with a lease expiring in or by
2009, 31,000 square feet in Kalamazoo, MI with a lease expiring in or by 2001,
28,000 square feet in Philadelphia, PA with a lease expiring in or by 2004 and
4,000 square feet in Sacramento, CA with a lease expiring in or by 1999. All of
the Company's facilities are used exclusively by the Company for office space or
computer operations and are anticipated to be adequate, but will be expanded as
business needs require.
Item 3. Legal Proceedings.
The Company is not a party to any material pending legal proceedings. Care
Management Services provided by the Company are advisory in nature, and
determinations as to payment or nonpayment of benefits are made by the plan
sponsor or its administrator, which can be the Company as a health plan third
party administrator. All determinations as to the medical care rendered to the
patient are made by the patient or the attending physician. Nevertheless
patients or others might assert claims against the Company for damages due to
adverse medical consequences. New or existing legal theories by which patients
or attending physicians may seek to assert liability against the Company or
other companies in the health care industry are evolving and are expected to
continue to evolve. Although the Company believes that its procedures for making
care management and claims benefit recommendations and decisions result in
reasonable and accurate recommendations, there can be no assurance that the
Company's procedures for limiting liability are effective or that the Company
will not be subject to liability from litigation which might adversely affect
the Company's business. The Company maintains professional liability insurance
and such other coverages as the Company believes are reasonable in light of the
Company's experience to date.
In April 1999, four parties (Banco Panamericano, Inc., Chiplease, Inc., Leon
Greenblatt III and Leslie Jabine) claiming to be shareholders of the Company
brought suit against the Company in the United States District Court for the
Northern District of Illinois. The essence of their complaint is that the four
plaintiffs, as alleged shareholders of the Company, had properly demanded that
the Company call a special meeting of shareholders under Minnesota corporate
law, yet the Company had failed to call one. The complaint seeks an order from
the court declaring that the plaintiffs may call such a meeting directly and
that the Company would be responsible for paying the costs of calling and
conducting the meeting. At the meeting, the plaintiffs want the shareholders to
discuss and vote upon six resolutions that would, inter alia, change the make-up
of the Company's board of directors and terminate the Company's April 4, 1997
Rights Agreement, the Company's shareholder rights plan. The Company does not
believe the plaintiffs are entitled to require the holding of a special meeting
or to take shareholder action on all of the resolutions proposed. The Company
intends to defend this matter vigorously. In response to the lawsuit, the
Company has brought a motion to transfer the case to the United States District
Court for the District of Minnesota and both sides have brought motions for
summary judgment. All motions have been briefed, and the parties are waiting the
decision of the court.
Item 4. Submission of Matters to a Vote of Security Holders.
The information required by this Item is incorporated by reference to Item 4 of
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
a) Health Risk Management, Inc. Common Shares are traded on the Nasdaq
National Market under the symbol HRMI. The following table shows the
quarterly range of high and low sale prices of the Common Shares on the
National Market during the fiscal periods indicated.
High Low
Fiscal 1998
First Quarter 14-1/8 11
Second Quarter 16 9-5/8
Third Quarter 16-1/8 8-3/8
Fourth Quarter 16-3/8 13-1/8
Fiscal 1999
First Quarter 16-1/2 8-1/2
Second Quarter 11-7/8 5-1/4
Third Quarter 13-1/4 6-15/16
Fourth Quarter 11-1/4 7-3/8
Fiscal 2000
First Quarter 11-1/2 7-3/4
Through September 15, 1999
b) Holders
As of September 15, 1999, there were approximately 73 holders of record of
the Company's Common Stock.
c) Dividends
The Company has never paid cash dividends on its Common Shares and has no
present intention to pay cash dividends in the foreseeable future. Under
the Company's Revolving Credit and Term Loan Agreement with its bank, the
Company is prohibited from paying cash dividends on its stock without the
bank's consent.
<PAGE>
Item 6. Selected Financial Data.
Health Risk Management, Inc.
SELECTED CONSOLIDATED FINANCIAL DATA
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------
1995 1996 1997 1998 1999
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums- gross $ -- $ -- $ -- $27,457 $144,639
Ceding allowance -- -- -- -- 2,457
Management services fees 47,873 51,454 59,076 63,395 48,731
QualityFIRST revenues 1,429 3,053 3,647 3,648 4,064
Investment income 128 158 187 337 969
--------- --------- --------- --------- ---------
Total revenues 49,430 54,665 62,910 94,837 200,860
Less ceded premiums -- -- -- -- (37,821)
--------- --------- --------- --------- ---------
Net revenues 49,430 54,665 62,910 94,837 163,039
Operating expenses:
Medical costs, net 0 0 0 23,625 90,572
Cost of services, net 35,834 38,106 44,640 55,141 55,441
Selling, marketing and administration, net 11,458 12,602 14,081 13,386 14,049
Oxford transition costs 0 0 0 0 1,350
Interest expense 759 708 535 489 974
-------- -------- -------- -------- -------
Total operating expenses 48,051 51,416 59,256 92,641 162,386
-------- -------- -------- -------- -------
Income before income taxes and cumulative
effect of accounting change 1,379 3,249 3,654 2,196 653
Income taxes 535 1,253 1,413 868 282
-------- -------- -------- -------- -------
Income before cumulative effect
of accounting change 844 1,996 2,241 1,328 371
Cumulative effect
of accounting change, net of
income tax benefit of $1,342(1) 0 0 0 (2,371) 0
-------- -------- -------- -------- -------
Net income (loss) $ 844 $ 1,996 $ 2,241 $ (1,043) $ 371
======== ======== ======== ======== =======
Basic earnings per share(2):
Income before cumulative effect
of accounting change $ .21 $ .49 $ .52 $ .29 $ .08
Cumulative effect of accounting change (1) -- -- -- (.52) --
-------- -------- -------- -------- -------
Net income (loss) $ .21 $ .49 $ .52 $ (.23) $ .08
======== ======== ======== ======== =======
Diluted earnings per share(2):
Income before cumulative effect
of accounting change $ .21 $ .47 $ .50 $ .29 $ .08
Cumulative effect of accounting change (1) -- -- -- ( 51) --
-------- -------- -------- -------- -------
Net income (loss) $ .21 $ .47 $ .50 $ (.22) $ .08
======== ======== ======== ======== =======
Weighted average number of shares outstanding:
Basic 3,947 4,081 4,291 4,524 4,615
Diluted 3,982 4,219 4,458 4,663 4,675
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) $3,763 $5,246 $8,578 $3,474 $(8,511)
Total assets 39,962 44,822 51,723 70,514 88,569
Current portion of notes payable and capitalized equipment
Leases 1,946 2,427 1,988 5,025 8,117
Long-term portion of notes payable and capitalized
Equipment leases 5,155 4,550 3,487 3,047 3,628
Shareholders' equity 25,101 28,474 34,044 33,785 34,396
</TABLE>
(1) As discussed in Note 3 of the consolidated financial statements, the
Company changed its method of accounting for management service revenue. On
a pro-forma basis, this change would have decreased 1997 net income by
$1,382,000, increased 1996 net income by $494,000, and decreased 1995 net
income by $79,000.
(2) Earnings per share amounts prior to 1998 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share." For further discussion of earnings per share, see the notes to
the consolidated financial statements.
(3) Certain items in the 1995, 1996, 1997 and 1998 selected consolidated
financial data have been reclassified to conform to the 1999 presentation.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company's revenues consist primarily of Medicaid premiums for providing
administrative services while assuming all the medical cost risk, management
service fees for health plan management and QualityFIRST revenues for software
licenses and subscription fees.
The Company's operating expenses are comprised of medical costs, net (consisting
primarily of the net medical costs after the ceded portion of medical services
and reinsurance, net of recoveries), its cost of services, net (consisting
primarily of net costs after ceded portions of compensation of personnel,
including nurses and physicians, telephone expenses, depreciation and
amortization, rent, costs related to the Company's computer operations, costs
related to customer service, and costs related to development of new services),
and selling, marketing and administration expenses, net (consisting primarily of
the net costs after ceded portions of sales commissions, advertising, sales
account management personnel, bad debts, administration, professional services,
insurance, compensation and depreciation). The medical costs, cost of services
and selling, marketing and administration expenses are affected to varying
degrees by the 50% quota share agreement related to the Medicaid block of
business which became effective January 1, 1999.
Results of Operations
The following table sets forth certain consolidated financial data as a
percentage of total revenues for the three fiscal years ended June 30, 1997,
1998, and 1999 and compares the percentage change in the dollar amounts of these
items for the period indicated.
<TABLE>
<CAPTION>
Year Ended June 30, Period to Period Increase (Decrease)
1997 1998 1999 1997 vs 1998 1998 vs 1999
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues 100% 100% 100% 51% 112%
=== === ====
Operating expenses:
Medical costs, net 0 86(1) 85(1) -- 283
Cost of services, net 71(2) 58(2) 34(2) 24 1
Selling, marketing and administration, net 22(2) 14(2) 9(2) (5) 5
Oxford transition costs 0 0 1(2) -- --
Interest expense 1(2) 0 1(2) (9) 99
---- ---- ----
Total operating expenses 94(2) 98(2) 100(2) 56 75
---- ---- ----
Income before income taxes and cumulative
effect of accounting change 6 2 * (40) (70)
Income taxes 2 1 * (39) (68)
-- --
Income before cumulative effect
of accounting change 4 1 * (41) (72)
Cumulative effect of accounting change
net of income tax 0 (2) 0 -- --
---- ----- ----
Net income (loss) 4 (1) * (147) 135
==== ===== ====
</TABLE>
(1) Computed as a % of HMO premiums, net (gross premiums less ceded premiums).
(2) Computed as a % of net revenues.
* Less than 1% on a rounded basis
Total Revenues: Total revenues increased $106,023,000 (112%) from fiscal 1998 to
fiscal 1999 (from $94,837,000 to $200,860,000) and increased $31,927,000 (51%)
from fiscal 1997 to fiscal 1998 (from $62,910,000 to $94,837,000). These
increases are primarily attributable to revenues from HMO operations which began
April 16, 1998, sales of additional products to existing clients and increased
sales of the QualityFIRST(R) software, net of decreases in the number of covered
participants enrolled in the Company's management services related to an HMO
that terminated services on September 30, 1998.
<PAGE>
Following is a breakout of revenue:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Premiums - gross $ 0 $ 27,457,000 $ 144,639,000
Ceding allowance 0 0 2,457,000
Management service fees 59,076,000 63,395,000 48,731,000
QualityFIRST revenues 3,647,000 3,648,000 4,064,000
Investment income 187,000 337,000 969,000
------------- ------------- -------------
Total revenues 62,910,000 94,837,000 200,860,000
Less ceded premiums 0 0 (37,821,000)
------------- ------------- -------------
Net revenues $ 62,910,000 $ 94,837,000 $ 163,039,000
============= ============= =============
</TABLE>
Revenues from the HMO operations were the result of obtaining in the fourth
quarter of fiscal 1998 the revenue from a client contract under which the
Company was at risk for the total medical services costs. The Company received a
significant portion of the total premium from this HMO through December 31,
1998. The Company did not have this business in the first three quarters of
fiscal 1998. The Company then acquired this HMO in January 1999. The
premiums-gross increased 427% or $117,182,000, from fiscal 1998 to fiscal 1999
(increasing from $27,457,000 to $144,639,000). The increase was the result of
two and one-half months of premium in fiscal 1998 compared to twelve months of
premiums in fiscal 1999, membership category changes and rate adjustments
effective January 1999. Total revenues include the ceding allowance and net
revenues reflect the premiums that are ceded under the reinsurance agreement
that was entered into January 1999.
Revenues from management services decreased 23% or $14,664,000, from fiscal 1998
to fiscal 1999 (decreasing from $63,395,000 to $48,731,000) mainly the result of
the decrease in the number of covered participants enrolled in the Company's
management services related to an HMO that terminated services on September 30,
1998 and other clients who terminated services. The management services revenue
increased 7% or $4,319,000, from fiscal 1997 to fiscal 1998 (increasing from
$59,076,000 to $63,395,000) which was the result of the growth of existing
business and new contracts entered into by the Company.
Revenues from QualityFIRST(R) increased 11% or $416,000, from fiscal 1998 to
fiscal 1999 (increasing from $3,648,000 to $4,064,000) and was unchanged between
fiscal 1997 and fiscal 1998. The increase was the result of an increased number
of clients or expansion of systems with existing clients.
Investment income increased 188% or $632,000 from fiscal 1998 to fiscal 1999
(increasing from $337,000 to $969,000 and increased 80% or $150,000 from fiscal
1997 to fiscal 1998 (increasing from $187,000 to $337,000). This increase is the
result of higher levels of short-term investments in fiscal 1998 and fiscal
1999.
Medical Costs, Net: Medical costs, net of amounts ceded, for the HMO increased
283% or $66,947,000 from fiscal 1998 to fiscal 1999 (from $23,625,000 to
$90,572,000) due to the HMO operations that began in the fourth quarter of
fiscal 1998. As a percentage of HMO premiums, net medical costs was 86.0% in
fiscal 1998 and 84.8% in fiscal 1999. The decrease in fiscal 1999 was the result
of higher premium rates for the year versus the cost of medical expenses, net of
insurance recoveries.
Cost of Services, Net: Cost of services, net of amounts ceded, increased 1% or
$300,000 from fiscal 1998 to fiscal 1999 (from $55,141,000 to $55,441,000), and
increased 24% or $10,501,000 from fiscal 1997 to fiscal 1998 (from $44,640,000
to $55,141,000). The increases were primarily due to increased payroll and
expenses related to the HMO and implementing management services for additional
covered lives. As a percentage of net revenues, the cost of service, net of
amounts ceded, was 71% in fiscal 1997, 58% in fiscal 1998 and 34% in fiscal
1999. These decreasing percentages were the result of higher premium revenue in
fiscal 1998 and still higher premium revenue in fiscal 1999.
Selling, Marketing and Administration, Net: Selling, marketing and
administration, net of amounts ceded, increased 5% or $663,000, from fiscal 1998
to fiscal 1999 (from $13,386,000 to $14,049,000), and decreased 5% or $695,000
from fiscal 1997 to fiscal 1998 (from $14,081,000 to $13,386,000). The increases
<PAGE>
or decreases were due primarily to additions or decreases to staff, travel,
commission, bad debts, insurance, training programs and other expenses. This
expense as a percentage of net revenues (22%, 14%, and 9%) for fiscal 1997,
fiscal 1998 and fiscal 1999, respectively, decreased because of the higher
premium revenue in fiscal 1998 and still higher premium revenue in fiscal 1999.
Oxford Transition Costs : The Company incurred transition costs related to the
purchase of Oxford Health Plans (PA), Inc. of approximately $920,000 in the
quarter ended December 31, 1998, and $430,000 in the quarter ended September 30,
1998 , due to increased operational costs for HMO related activities without a
corresponding increase in the management service fees.
Interest Expense: Interest expense increased 99% or $485,000 from fiscal 1998 to
fiscal 1999 (from $489,000 to $974,000), and increased as a percentage of net
revenue from 0.5% to 0.6%. Interest expense decreased 9% or $46,000 from fiscal
1997 to fiscal 1998 (from $535,000 to $489,000) and decreased as a percentage of
net revenue from 0.9% to 0.5%. Interest expense was impacted in fiscal 1998 by
lower interest rates and lower average principal balances outstanding. In fiscal
1999, additional loans were obtained to acquire the HMO.
Income Taxes: Income taxes decreased in fiscal 1999 from fiscal 1998 by
$586,000, or 68% (from $868,000 to $282,000), and decreased in fiscal 1998 from
fiscal 1997 by $545,000, or 39% (from $1,413,000 to $868,000) primarily due to
fluctuations in levels of income before income taxes. Net income had been
reported as fully taxed in fiscal year 1999, 1998 and 1997 at the effective tax
rate of 39%. See Note 10 in the Notes to Consolidated Financial Statements.
Cumulative effect of accounting change: See Note 3 in the Notes to Consolidated
Financial Statements.
Liquidity and Capital Resources
The Company's cash flow from operations was $6,892,000 and $23,685,000 for
fiscal 1999 and 1998, respectively. Cash flow from operations has exceeded net
income primarily due to non-cash charges such as depreciation and amortization,
deferred income taxes, cumulative effect of the accounting change and changes in
operating assets and liabilities, particularly the medical services payable.
Cash of $7,734,000, net of cash acquired, was used in the third quarter of
fiscal 1999 to purchase Oxford Health Plans (PA), Inc. on January 27, 1999. Cash
has been used to invest in software and program enhancements ($8,696,000 and
$9,057,000 in fiscal 1999 and fiscal 1998, respectively). The Company also
acquired property and equipment of $5,602,000 and $2,734,000 for fiscal 1999 and
fiscal 1998, respectively. Approximately $3,000,000 of the fiscal 1999 property
and equipment purchases were related to the corporate office move in the first
quarter of fiscal 1999. HRM expects to continue to acquire property and
equipment and enhance software and products but a lower rate in fiscal year
2000.
HRM also used approximately $2,327,000 and $2,153,000 in fiscal 1999 and fiscal
1998, respectively, to repay principal on notes payable and capital leases. The
Company borrowed $6,000,000 and $4,750,000 in fiscal 1999 and fiscal 1998,
respectively. The Company received cash proceeds of $306,000 and $784,000 in
fiscal 1999 and fiscal 1998, respectively, from stock option exercises for
common stock by current or former employees and directors.
The Company had a working capital deficit of $8,438,000 at June 30, 1999 and
working capital of $3,474,000 at June 30, 1998. The medical services payables
reduced working capital by $21,215,000 and $15,452,000 at June 30, 1999 and
1998, respectively. The Company has fixed maturity investments of $8,406,000
available at June 30, 1999 to be used to pay medical services payables, if the
need arises.
The Company has a net operating loss carryforward of approximately $35,000,000
for income tax purposes at June 30, 1999, which can be used to reduce taxable
income and cash flow necessary to pay taxes.
The Company believes that its cash and cash flow from operations, together with
credit facilities which the Company has obtained, will be sufficient to finance
the Company's anticipated normal expansion in fiscal 2000. The Company has a
term loan and revolving loan (principal balance of $5,245,000 and $5,765,000,
respectively, as of June 30, 1999) with its bank and a revolving credit facility
expiring January 31, 2000, under which the Company has borrowed the full amount
available under the facility. The revolving credit and term loan are secured by
liens on the assets of the Company.
<PAGE>
Year 2000
State of Year 2000 Readiness
The Company began work on its Year 2000 Project in 1997 and established a Year
2000 Project Office and Year 2000 Project Team in early 1998. The Company's Year
2000 Project Office is comprised of the Company's senior Information Services
("I.S.") management team, which provides business support and resources for the
overall project. The Company's Year 2000 Project Team, under the leadership of
the CIO, consists of the Company's I.S. employees, independent consultants, and
business representatives on an as-needed basis.
There are five phases to the Company's Year 2000 Project: Phase 1: Identify and
Analyze; Phase 2: Plan and Schedule; Phase 3: Execute the Plan (Remediate;
Upgrade; Replace; or Eliminate); Phase 4: Test and Integrate; and Phase 5:
Maintain Year 2000 Integrity. The goal of the Company's Year 2000 Project is to
prepare the Company's computer systems, applications, facilities (including
non-information technology systems, such as security systems) and external
relationships for the Year 2000. The primary focus of the Year 2000 Project
effort has been, and continues to be, on the Company's mission critical systems,
which are those that support and interface with our clients or vendors. The
Company's Year 2000 Project is comprised of many different platforms and
components and the Company is at varying Project phases with respect to the
different components.
In Phase I of the Year 2000 Project, the Company completed a general inventory
of its work environment. The inventory included system hardware, system
software, utilities (phone, electric, etc.), as well as additional facility
components. The Project Team has completed its inventory of mission critical
components.
During Phase 2 of the Company's Year 2000 Project, the Year 2000 Project Team
provided initial size estimates for the scope of each mission critical system
component that was identified, and developed a strategy including a timetable,
for achieving compliance for each of these components. In addition, the Year
2000 Project Team developed a communication plan for internal and external
communications regarding the year 2000.
As of June 30, 1999, the Company had completed the majority of the remediation
of its mission critical applications (Phase 3). The Company's QualityFIRST(R)
product is Year 2000 ready in that it processes four-digit year dates, in
accordance with the Software Release Note delivered to customers. Remediation of
the Claims System, implementation of the remediated Claims System, and
future-date testing on the Claims System were completed as of July 1999. The
remediation of the critical elements of the Care Management System was completed
in July 1999. The future-date testing on this system is scheduled to be
completed in October 1999. The Company continues to seek and review year 2000
information of critical vendors, including phone service and utilities, to
determine the impact of their year 2000 readiness on the Company's business and
to request additional year 2000 information. We expect that the majority of the
remaining Year 2000 Project activities, including the majority of contingency
planning, will be completed by November 1999. Nevertheless, because of the
unique nature of the year 2000 issue, there will be some contingency planning
and ongoing maintenance activities that will continue into the year 2000.
Year 2000 Project Costs
Costs of the Company's Year 2000 Project through June 30, 1999 were
approximately $1.1 million. An additional $.5 million is expected to be incurred
during fiscal year 2000. The costs associated with the Year 2000 Project has
been and will be expensed as incurred.
Year 2000 Risks
The Company is reliant on technology and outside vendors to deliver its
services. While the Company may have more than one vendor to provide a specific
service to the Company, for those services for which the Company does not have
more than one vendor, the Company does not intend to hire backup vendors. There
could be a material adverse effect on the Company if there is a failure by the
Company, or a third party dealing with the Company, to be year 2000 ready with
respect to such things as: (1) a mission critical computer system or software
application; (2) facilities and equipment; or (3) the ability to provide
necessary services or products. Possible consequences of such a failure include
temporary disruption of the Company's ability to deliver services to its
clients. The scope and length of time of such a disruption will depend upon the
particular circumstances, some of which may be beyond the Company's control.
The Company's Year 2000 Project plans are subject to change and are necessarily
dependent upon management's business decisions and other factors, both internal
and external, and the Company is making adjustments to its Year 2000 Project as
<PAGE>
it deems necessary. The information contained in this statement is based on
management's best estimates. There can be no guarantee that these estimates will
be achieved, or that third parties on which the Company relies, or that the
Company itself, will be year 2000 ready. The results of the Year 2000 Project
could differ materially from those anticipated as a result of factors such as:
the impact of the Company's external relationships including the year 2000
readiness of the Company's business partners, its key vendors, its customers,
and its customers' key vendors; the availability and cost of personnel trained
in this area; and the ability to identify relevant computer codes.
Year 2000 Contingency Plans
In June 1999, the Company began to focus on contingency planning efforts. The
Company will be using contingency plans already in place relating to back-up of
information systems, as well as some business operations. The Company is
developing additional and/or supplemental contingency plans where necessary.
Contingency plans have been developed for most of the Company's significant
business processes, and the Company will complete contingency plans for the
remaining significant business processes by November 1999. Ongoing contingency
planning activities will continue into the year 2000.
Forward Looking Statements
Forward looking statements in this report reflected as expectations, plans,
anticipations, prospects or future estimates are subject to the risks and the
uncertainties present in the Company's business and the competitive healthcare
marketplace including, but not limited to clients and vendors commonly
experiencing mergers or acquisitions, use of estimates for incurred but not yet
reported claims including medical services payable, use of estimates of bonus
accruals including accounts receivable, reconciliations, volume fluctuations,
provider relations and contracting, participant enrollment fluctuations, changes
in member mix or utilization levels, fixed price contracts, contract disputes,
contract modifications, contract renewals and non-renewals, regulatory issues
and requirements, various business reasons for delaying contract closings, and
the operational challenges of matching case volume with optimum staffing, having
fully trained staff, having computer and telephonic supported operations and
managing turnover of key employees and outsourced services to performance
standards. While occurrences of these risks, and others periodically detailed in
the Company's SEC reports, cannot be predicted exactly, such occurrences can be
expected to have an impact on the HRM's anticipated level of revenue growth or
profitability.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the Company is exposed to market risk from
changes in interest rates. The Company does not enter into any derivative
transactions. The Company's note payable and term loan obligations are subject
to interest rate risk. A 100 basis point increase in interest rates related to
the note payable to bank under revolving credit agreement, assuming the amount
borrowed remains constant, would result in an annual increase in the Company's
then current interest expense of approximately $58,000. A 100 basis point
increase in interest rates related to the Company's term loans payable would not
result in a material change in its fair value.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company and its subsidiaries are
included in a separate section of this report. See Part IV, Item 14.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
The following table provides certain information with respect to all directors
of the Company.
<TABLE>
<CAPTION>
Name of Director Current Position(s) Principal Occupation(s) Director
(Class) Age with Company During Past Five Years Since
<S> <C> <C> <C> <C>
Gary T. McIlroy, M.D. 59 Chairman of the Board, Chairman and Chief Executive Officer of 1977
(Class C) Chief Executive Officer the Company since 1977. Dr. McIlroy is
and Director married to Marlene O. Travis.
Marlene O. Travis 60 President, Chief President of the Company since 1987 and 1977
(Class B) Operating Officer, Chief Operating Officer of the Company
Secretary and Director from 1987 to 1992 and since June 1993;
and Chief Administrative Officer from
1992 to June 1993. Ms. Travis is married
to Gary T. McIlroy, M.D.
Gary L. Damkoehler 60 Director Chairman, Chief Executive Officer and 1996
(Class A) President since 1988 of JSA Healthcare
Corporation of St. Petersburg, Florida, a
direct provider of healthcare services.
Raymond G. Schultze, 65 Director Chief Executive Officer and Medical 1996
M.D. (Class A) Director since 1997 of Toiyabe Dialysis
Unit. Consultant regarding healthcare
management consulting (self-employed)
since1997.
Prior to this he was Professor of
Medicine at the UCLA School of Medicine
from 1980 to 1995; and Administrative
Vice Chancellor for UCLA from 1986 to
1992. Dr. Schultze currently is providing
consulting services to the County of Los
Angeles for the re-engineering of their
healthcare system.
Vance Kenneth Travis 73 Director Chairman of the Board of Triad 1984
(Class B) International, Inc., a plant engineering
and project management operation for
petro-chemical and refinery process
plants located in Calgary, Alberta,
Canada. Mr. Travis is Marlene Travis'
uncle.
Ronald R. Hahn 54 Director Chairman and President, ESE Partners, 1992
(Class C) LLC, a venture capital management
company, since 1996 and President of
Stroben & Hahn, Inc., a venture capital
management company, since 1981. Consultant
regarding the U.S. healthcare industry
to Union d'Etudes et d'Investissements
("UI"), the merchant banking subsidiary
of Credit Agricole principally from 1992
and 1995. Mr. Hahn currently serves on
the Board of Directors of JAMS/Endispute,
a provider of dispute resolution services.
Robert L. Montgomery 62 Director Consultant regarding Health System 1993
(Class C) Management to Sutter Health since 1999.
Prior to this he was President-Western
Division of Sutter Health from 1996 to
1999. Prior to this, he was President
and Chief Executive Officer of Alta Bates
Health System of Emeryville, California,
a vertically integrated full service
healthcare system, from 1989 to 1996,
and from 1979 to 1983.
</TABLE>
<PAGE>
The Company's Articles of Incorporation provide for the election of three
classes of directors with terms staggered so as to require the election of only
one class of directors each year. The term of the Class B directors expires at
the 2000 annual meeting, the term of the Class C directors expires at the 2001
annual meeting, and the term of the Class A Directors expires at the 2002 annual
meeting.
Executive Officers
The following sets forth the names and ages of current executive officers of the
Company, in addition to information regarding their positions with the Company,
their periods of service in such positions, and their business experience for at
least the past five years.
Name Age Position
Gary T. McIlroy, M. D. 59 Chairman of the Board, Chief Executive
Officer and Director
Marlene O. Travis 60 President, Chief Operating Officer,
Secretary and Director
Thomas P. Clark 51 Senior Vice President, Finance and Chief
Financial Officer
Adele M. Kimpell 53 Executive Vice President, Operations
Russell A. Peterson 58 Chief Information Officer
Gerald L. McNair 52 President, HRM Health Plans (PA), Inc.
Pamela N. Hursh 37 Acting President, Indemnity Business Unit
Steven K. Isaacs 44 Vice President, Indemnity Sales
Dianne L. Kuss 52 Vice President, Corporate Marketing
Michael T. McKim 55 Vice President and General Counsel
William M. Smith 39 Vice President, Managed Care Sales
Gary T. Mcllroy, M.D., a co-founder of the Company, has been an officer of the
Company since 1977 and Chairman of the Board, Chief Executive Officer, and a
director of the Company since 1984. Dr. McIIroy has owned and operated three
medically-related businesses. Dr. McIIroy was co-founder, President, and Chief
Executive Officer of Midwest Laboratory Associates, a medical testing laboratory
from 1977 until its sale in 1980. From 1973 to 1978, he was President and Chief
Executive Officer of Upper Mississippi Pathologists, P.A., serving several
hospitals in central Minnesota. Dr. McIIroy holds an M.D. degree from the
University of California-Los Angeles, and is Board Certified in Anatomical and
Clinical Pathology following four years of specialty training at the Mayo Clinic
in Rochester, Minnesota. He is also a member of the American College of
Utilization Review Physicians. Dr. McIIroy is married to Marlene O. Travis.
Marlene O. Travis, a co-founder of the Company, has been the Secretary, a
director and an officer of the Company since 1977, and currently serves as
President and Chief Operating Officer. Ms. Travis has served as Chief Operating
Officer since June 1993 and also held the position from January 1987 through
December 1991. Ms. Travis has been President since 1987, and Chief
Administrative Officer from January 1992 to June 1993, and Executive Vice
President prior to 1987. Ms. Travis is Chairman and Chief Executive Officer of
the Company's subsidiaries, Health Resource Management Ltd. and Institute for
Healthcare Quality, Inc. Ms. Travis was co-founder, Vice President and Director
of Operations of Midwest Laboratory Associates from 1977 to 1980. She was
Business Manager of Upper Mississippi Pathologists, P. A. from 1973 to 1978. Ms.
Travis is married to Dr. Gary T. McIIroy.
Thomas P. Clark, joined the Company as Controller in 1985, and has been Senior
Vice President, Finance and Chief Financial Officer of the Company since 1986.
From 1976 to 1985, Mr. Clark maintained his own public accounting practice.
Prior to such time Mr. Clark was an accountant with the accounting firms of KPMG
Peat Marwick and Breitman, Orenstein & Schweitzer.
<PAGE>
Adele M. Kimpell, R. N., became Executive Vice President, Operations in
September 1999, and had previously served as Executive Vice President, Health
Plan Operations since March 1996. Ms. Kimpell also served as Senior Vice
President, Health Plan Operations since August 1993, and Senior Vice President,
Care Management Services since August 1993. Ms. Kimpell joined the Company as a
Clinical Reviewer in March 1985. Ms. Kimpell has served in various capacities
within HRM since January 1990, including Vice President, Strategic Business
Implementation, Vice President, Special Projects, Vice President, Claims
Administration and Assistant Vice President, Sales Operations. Ms. Kimpell has a
B.S. degree in nursing and had 15 years experience in intensive care and
emergency room units prior to joining HRM.
Russell A. Peterson, became Chief Information Officer in April 1998. Mr.
Peterson joined the Company as Vice President, Applications Software in March
1993. Prior to joining the Company, Mr. Peterson was a director for Medtronic,
Inc. in Fridley Minnesota from 1989 to 1992. Mr. Peterson received his B.A.
degree from Macalester College in 1963 and his MBA from the University of St.
Thomas in 1979.
Gerald L. McNair, joined the Company as President, HRM Health Plans (PA), Inc.
in September 1999. Prior to joining the Company, Mr. McNair served as President
and Chief Executive Officer for a Medicaid HMO, CarePartners, LLC of Baltimore,
MD from 1997 to 1999. Prior to that time, Mr. McNair served as President and
Chief Executive Officer for a Medicaid HMO Americaid of New Jersey, Inc. of
Newark, NJ from 1995 to 1997 and as Executive Director for Aetna Professional
Management Corporation in Purchase, NY from 1993 to 1995. Mr. McNair received
his B.A. from Brandeis University in 1971 and his MPH (Hospital Administration)
from Yale University and is a Fellow, American College of Health Care
Executives.
Pamela N. Hursh R.N., became Acting President, Indemnity Business Unit in July
1999, and had previously served as Vice President, Operational Effectiveness.
Ms. Hursh joined the Company as an Account Manager in March 1991. Ms. Hursh has
served in various capacities within HRM since June 1992, including Senior
Account Manager, National Account Executive, Director of Account Management and
Client Services and VP, Strategic Business Improvement. Ms. Hursh received her
B.S. degree from Northern Illinois University in 1987.
Steven K. Isaacs, joined the Company as Vice President, Sales, Payer Markets in
September 1997. Prior to joining the Company, Mr. Isaacs was Vice President,
Group Sales, for Ameritas Life Insurance Corporation from 1993 to 1997. He also
served as Regional Vice President for Fortis Benefits Insurance Company in
Kansas City, MO from 1986 to 1993. Mr. Smith received his B.S.B.A. from the
University of Nebraska in 1978.
Dianne L. Kuss, became Vice President, Corporate Marketing in June 1999. Ms.
Kuss joined the Company as a Marketing Manager in November 1997. Ms. Kuss has
served since April 1998 as Director of Indemnity Marketing and Vice President,
Marketing. Prior to joining the Company, Ms. Kuss served as a Consultant for
Integrated Healthcare Advisory Group, Inc. in Richmond, VA from 1994 to 1997.
Ms. Kuss received her B.A.S. degree from the University of Minnesota and her
M.S. from Kennedy-Western University in Agoura Hills, CA.
Michael T. McKim, Esq., joined the Company as Vice President and General Counsel
in December 1992. Prior to joining the Company, Mr. McKim was a partner in the
Minneapolis law firm of Larkin, Hoffman, Daly & Lindgren, Ltd. from 1986 to
1992. Mr. McKim received his B. A. degree from the University of Notre Dame and
his J. D. degree from Creighton University School of Law in Omaha. He is a
member of the Ramsey County, Minnesota State and Nebraska State Bar
associations, where he serves on various standing and ad hoc committees.
William M. Smith, joined the Company as Vice President, Managed Care Markets in
June 1997. Prior to joining the Company, Mr. Smith was Vice President, Sales and
Marketing for Healthsource, Inc. in Aurora, OH from 1992 to 1997. He also served
as Sales District Manager for Plymouth Savings Bank in Foxborough, MA from 1988
to 1992. Mr. Smith received his B.S.B.A. from Central Michigan University in
1983.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Such forms include: Form 3, due within 10 days after becoming an
officer, director or greater than ten-percent holder; Form 4, due within 10 days
after any calendar month during which a reportable transaction occurred; and
Form 5 due within 45 days after the end of the fiscal year. Officers, directors
and greater than ten-percent shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they files.
Based on its review of the copies of such forms received by it, or written
representations from certain reporting persons that no Forms 5 were required for
those persons, the Company believes that, during the period from July 1, 1998
through June 30, 1999, all Section 16(a) filing requirements applicable to its
current and former officers, directors, and greater than ten-percent beneficial
owners were complied with except that one Form 5 (reporting one transaction) was
filed late by Russell Peterson and one Form 4 was filed late by each of Robert
Montgomery (reporting one transaction), Thomas Clark (reporting one
transaction), and Gary McIlroy (reporting one transaction).
<PAGE>
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth the cash and noncash compensation for each of the
last three fiscal years, of the Company's Chief Executive Officer and the four
other highest paid executive officers of the Company whose salary and bonus for
fiscal 1999 exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
Other
Annual Securities
Compen- Stock Underlying LTIP All Other
Name and Position Year Salary Bonus sation(1) Awards Options Payouts Compensation
- ----------------- ---- ------ ----- --------- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary T. McIlroy, M.D. 1999 $278,000 0(2) $ 9,859(10) 0 10,000(4) 0 $23,986(6)
Chairman & CEO 1998 $278,000 0(2) $ 9,837(10) 0 40,000(4) 0 $23,484(6)
1997 $278,000 0(2) $ 9,395(10) 0 15,000(2) 0 $23,150(6)
40,000(4)
Marlene Travis 1999 $250,000 0(2) $9,859(10) 0 10,000(4) 0 $21,009(7)
President & COO 1998 $250,000 0(2) $9,837(10) 0 30,000(4) 0 $20,336(7)
1997 $250,000 0(2) $9,395(10) 0 12,500(2) 0 $20,150(7)
33,333(4))
Thomas P. Clark 1999 $200,000 0(2) $10,902(10) 15,000(11) 0(4) 0 $35,752(8)
CFO 1998 $200,000 0(2) $10,902(10) 0 30,000(4) 0 $9,555(8)
1997 $200,000 0(2) $10,460(10) 0 10,000(2) 0 $9,150(8)
26,667(4)
Adele M. Kimpell 1999 $171,600 0(2) 0 0 0(4) 0 $4,290(5)
Executive V.P., 1998 $156,420 0(2) 0 0 3,600(4) 0 $3,361(5)
Operations 1997 $153,542 0(2) 0 0 4,000(2) 0 $2,663(5)
9,000(4)
William M. Smith 1999 $237,506 0(2) 0 0 1,500(4) 0 $61,086(9)
Vice President 1998 $128,181 $15,000 0 0 6,000(4) 0 $11,074(9)
Managed Care Sales
</TABLE>
(1) Does not include the payment of professional and monthly club dues, term
group life insurance and other personal benefits, the aggregate amount of
which was less than 10% of the individual's listed compensation.
(2) Stock options were issued under the Amended and Restated 1992 Long-Term
Incentive Plan or the 1990 Stock Option Plan in lieu of cash bonus under
the annual Executive Incentive Plan and are fully exercisable.
(3) Stock options were issued under the 1990 Stock Option Plan, and become
exercisable in annual increments of one-fourth per year.
(4) Stock options were issued under the Amended and Restated 1992 Long-Term
Incentive Plan and become exercisable in annual increments of one-third per
year.
(5) The Company matching contribution under its 401(k) Salary Savings Plan.
(6) The amount reflected includes $3,150, $3,484, and $3,986 as Company
matching contributions under its 401(k) Salary Savings Plan or other
retirement payments for fiscal 1997, 1998, and 1999, respectively, and
$20,000 per year for the total premiums paid by the Company on the life
insurance policy covered by the Split-Dollar Agreement referred to below in
"Employment Agreements" for fiscal 1997, 1998 and 1999, respectively.
<PAGE>
(7) The amount reflected includes $3,150, $3,336, and $4,009 as Company
matching contributions under its 401(k) Salary Savings Plan or other
retirement payments for fiscal 1997, 1998 and 1999, respectively, and
$17,000 per year for a total premiums paid by the Company on the life
insurance policy covered by the Split-Dollar Agreement referred to below in
"Employment Agreements" for fiscal 1997, 1998 and 1999, respectively.
(8) The amount reflected includes $3,150, $3,555, and $4,435 as Company
matching contributions under its 401(k) Salary Savings Plan or other
retirement payments for fiscal 1997, 1998 and 1999, respectively, and
$6,000 per year for the total premiums paid by the Company on the life
insurance policy covered by the Split-Dollar Agreement referred to below in
"Employment Agreements" for fiscal 1997, 1998 and 1999, respectively, and
payment in fiscal 1999 of vacation accrual in lieu of taking time off of
$25,317.
(9) The amount reflected includes $2,492 for fiscal 1998 and $4,800 for fiscal
1999 as Company matching contributions under its 401(k) Salary Savings Plan
and a moving allowance of $8,582 for fiscal 1998 and $56,286 for fiscal
1999.
(10) Includes auto allowance and medical coverage.
(11) Issuance of 15,000 common shares as a bonus.
The following two stock option tables summarize option grants and exercises
during fiscal 1999 for the Chief Executive Officer and other named executive
officers, and the values of options granted during fiscal 1999 and held by such
persons at June 30, 1999.
<TABLE>
<CAPTION>
Stock Option Grants in Fiscal 1999
Potential Realizable Value at Assumed Annual
Rates of Stock Price Appreciation for Option Term
---------------------------------------------
Individual Grants 5%(2) 10%(2)
-------------------------------------------------- --------------------- --------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise Expiration Stock Stock
Name Granted in Fiscal or Base Date(1) Price Gain Price Gain
Year Price
---- ---------- ---------- -------- ---------- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary McIlroy, M.D. 10,000(1) 12.9% $10.00 06/30/03 $12.76 $ 27,600 $16.11 $61,100
Marlene Travis 10,000(1) 12.9% $10.00 06/30/03 $12.76 $ 27,600 $16.11 $61,100
Thomas P. Clark 0 0.0% $ 0 -- $ 0.00 $ 0 $ 0.00 $ 0
Adele M. Kimpell 0 0.0% $ 0 -- $ 0.00 $ 0 $ 0.00 $ 0
William M. Smith 1,500(1) 1.9% $10.00 06/30/03 $12.76 $ 4,140 $16.11 $9,165
</TABLE>
(1) One-third of the stock options granted as a long-term incentive to the
individuals become exercisable on February 17, 1999, the date of grant, and
the next two anniversaries of the date of grant. Under the terms of the
Plan, the Board may provide for the protection of all optionees to whom
options have been granted in the event of a merger, liquidation,
reorganization or similar transaction.
(2) The stock price is calculated using a 5% and 10% rate of appreciation
(solely for illustrative purposes) for the term of the option, compounded
annually. The gain is the difference between the resulting illustrative
compounded stock price and the exercise price times the number of options
granted.
<PAGE>
Aggregated Option Exercises in Fiscal 1999 and Fiscal Year-End Option Value
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Acquired Options at Fiscal In-the-Money Options
on Exercise Value Year-End Exercisable/ at Fiscal Year-End(1)
Realized Unexercisable Exercisable/Unexercisable
--------------- ------------- ----------------------- ----------------------------
<S> <C> <C> <C> <C>
Gary T. McIlroy, M.D. 0 -- 141,471/46,667 $205,884/$0
Marlene Travis 0 -- 111,853/29,778 $160,122/$0
Thomas P. Clark 15,000 $142,035 55,537/28,889 $37,298/$0
Adele M. Kimpell 2,000 $ 11,626 15,200/5,400 $7,500/$0
William M. Smith -- -- 6,500/1,000 $0/$0
</TABLE>
(1) Market value of underlying securities at June 30, 1999 ($9.875), the
closing price of the Common Stock, minus the exercise price.
Director Fees and Options
Annual Retainer and Meeting Fees. All directors of the Company are reimbursed
for expenses incurred by them in connection with attending meetings of the Board
and performing duties as a director. Each nonemployee director receives an
annual retainer of $12,500 and meeting fees as follows: $750 for each Board
meeting attended; $500 ($650 for committee chairs) for each committee meeting
attended unless the committee meeting is held in conjunction with a Board
meeting; $500 for each meeting of the board of directors of a subsidiary of the
Company that is attended; $500 for each Board meeting in which the nonemployee
director participates by telephone; and $250 for each committee meeting in which
the nonemployee director participates by telephone. A director of the Company
may elect to receive the payment of his or her annual retainer, meeting fees and
committee fees on a monthly basis or in one lump sum at the end of the fiscal
year.
Deferred Compensation Plan for Directors. The Board of Directors of the Company
adopted the Deferred Compensation Plan for Directors, effective for fiscal 1994,
and for all fiscal years thereafter until the Plan is terminated. Under the
Deferred Compensation Plan, members of the Company's Board of Directors and
members of the Board of any subsidiary may elect, prior to July 1 of any fiscal
year, to defer the receipt of all or any portion of any annual retainer and
meeting fees that may be payable to the director during the fiscal year for
which the election is effective. The Deferred Compensation Plan is administered
by the Compensation Committee. All amounts deferred by the director are credited
to an account established for the director for accounting purposes only, and the
amounts credited to such account generally accrue interest, compounded
quarterly, at a rate equal to two percentage points above the Prime Rate. The
Deferred Compensation Plan is and will remain unfunded, and the director will
stand in the position of a general unsecured creditor of the Company with
respect to all payments made pursuant to the Deferred Compensation Plan.
Director Options. Under the Amended and Restated 1992 Long-Term Incentive Plan,
directors who are not employees of the Company are eligible for nonqualified
stock options. As specified in the Plan, an option for 3,800 shares of the
Company's Common Stock was granted to each nonemployee director who was serving
on the Board on September 14, 1992, the date the Board originally adopted the
Plan and is granted to each new nonemployee director on the date that such new
director is first elected to the Board. All nonemployee directors will also
receive an option for 1,900 shares of the Company's Common Stock at the end of
each fiscal year during which such director continues to serve on the Board. The
Board may, in its discretion, grant additional nonqualified stock options to
nonemployee directors, subject to such terms and conditions as the Board may
deem appropriate.
In addition, a nonemployee director may elect in writing to receive a
nonqualified stock option in lieu of all or any portion of the annual retainer
and meeting fees to which such director may be entitled and which would
otherwise be payable to such director during the fiscal year for which the
election has been made. The number of shares subject to such option is
determined by dividing the total dollar amount specified in the election by 75%
of the fair market value of the Company's Common Stock as of the date the option
is granted, which shall be the last day of the fiscal year for which the
election has been made. Any election by the nonemployee director to receive a
nonqualified stock option in lieu of annual retainer and meeting fees must be
made prior to the date the option is granted.
Except for options granted in lieu of retainer or meeting fees, the option price
per share for all nonqualified stock options granted to nonemployee directors is
generally the fair market value of a share of the Company's Common Stock as of
the date such option is granted. The exercise price per share for all
nonqualified stock options granted to nonemployee directors in lieu of retainer
or meeting fees pursuant to the election described above equals 75% of the fair
market value of a share of the Company's Common Stock as of the date such option
is granted. All nonqualified stock options granted to the nonemployee directors
<PAGE>
ordinarily expire five years after the date they are granted, and become
exercisable as to one-third of the shares subject to the option on each of the
succeeding three anniversaries of the option grant.
Employment Agreements
The Company has an Employment Agreement, dated June 20, 1996, with Gary T.
McIlroy, M.D. whereby Dr. McIlroy will continue to serve as Chief Executive
Officer with the term continuing indefinitely unless terminated under the terms
of the Agreement. Dr. McIlroy received a base salary for fiscal 1999 of $278,000
(subject to increase upon annual review by the Compensation Committee of the
Board) and is eligible to receive an annual incentive bonus under the Executive
Incentive Plan. The Employment Agreement is terminable by the Company for cause,
in which case the Company is obligated to pay only Dr. McIlroy's accrued base
salary and a portion of annual incentive bonus for the fiscal year in which his
termination occurs. The Agreement is also terminable by the Company upon thirty
(30) days written notice, without cause, in which case the Company is obligated
to (i) pay the then-current annualized base salary and provide health, dental,
life and other benefits for a twenty-four month period; (ii) pay out-placement
services; (iii) pay a portion of any annual incentive bonus for the fiscal year
in which his termination occurs; and (iv) transfer to Dr. McIlroy all cash value
and life insurance policies owned by the Company. In the event Dr. McIlroy
resigns for "good reason" or within twelve (12) months after a "change of
control" of the Company, the Company is obligated to make all of the payments
and provide all of the benefits described in the preceding sentence, and shall
accelerate the vesting of all stock options which shall then remain exercisable
until the options expire. The Agreement also addresses the benefits payable and
the treatment of the life insurance policies owned by the Company upon
termination for death or disability and, in the event of disability, provides
for supplemental disability payments and health, dental and life benefits for a
twelve (12) month period.
The Company also has a Split Dollar Agreement, dated June 5, 1991, which
requires the Company to pay the premiums on a life insurance policy owned by Dr.
McIlroy (or his assignee) and which requires repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater, upon Dr. McIlroy's death or termination of employment. Under the
Employment Agreement, if Dr. McIlroy's employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company, or if Dr.
McIlroy resigns for "good reason," the repayment obligations under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.
The Company has an Employment Agreement, dated June 21, 1996, with Marlene
Travis whereby Ms. Travis will continue to serve as President and Chief
Operating Officer with the term continuing indefinitely unless and until
terminated under the terms of the Agreement. Ms. Travis received a base salary
for fiscal 1999 of $250,000 (subject to increase upon annual review by the Chief
Executive Officer) and is eligible to receive an annual incentive bonus under
the Executive Incentive Plan. The Employment Agreement is terminable by the
Company for cause, in which case the Company is obligated to pay only Ms.
Travis' accrued base salary and a portion of any annual incentive bonus for the
fiscal year in which her termination occurs. The Agreement is also terminable by
the Company upon thirty (30) days written notice, without cause, in which case
the Company is obligated to (i) pay the then-current annualized base salary and
provide health, dental, life and other benefits for a twenty-four (24) month
period; (ii) pay out-placement services; (iii) pay a portion of any annual
incentive bonus for the fiscal year in which her termination occurs; and (iv)
transfer to Ms. Travis all cash value and life insurance policies owned by the
Company. In the event Ms. Travis resigns for "good reason" or within twelve (12)
months after a "change of control" of the Company, the Company is obligated to
make all of the payments and provide all of the benefits described in the
preceding sentence and shall accelerate the vesting of all stock options which
shall then remain exercisable until the options expire. The Agreement also
addresses the benefits payable and the treatment of the life insurance policies
owned by the Company upon termination for death or disability and, in the event
of disability, provides for supplemental disability payments and health, dental
and life benefits for a twelve (12) month period.
The Company also has a Split Dollar Agreement, dated June 5, 1991, which
requires the Company to pay the premiums on a life insurance policy owned by Ms.
Travis (or her assignee) and which requires repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater, upon Ms. Travis' death or termination of employment. Under the
Employment Agreement, if Ms. Travis' employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company, or if Ms.
Travis resigns for "good reason," the repayment obligations under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.
The Company has an Employment Agreement dated June 21, 1996, with Thomas P.
Clark whereby Mr. Clark will continue to serve as Chief Financial Officer, with
the term continuing indefinitely unless and until terminated under the terms of
<PAGE>
the Agreement. Mr. Clark received an annual base salary for fiscal 1999 of
$200,000 (subject to increase upon annual review by the Chief Executive Officer)
and is eligible to receive an annual incentive bonus under the Executive
Incentive Plan. The Employment Agreement is terminable by the Company for cause,
in which case the Company is obligated to pay only Mr. Clark's accrued base
salary and a portion of any annual incentive bonus for the fiscal year in which
his termination occurs. The Agreement is also terminable by the Company upon
thirty (30) days written notice, without cause, in which case the Company is
obligated to (i) pay the then-current annualized base salary and provide health,
dental, life and other benefits for a twenty-four (24) month period; (ii) pay
out-placement services; (iii) pay a portion of any annual incentive bonus for
the fiscal year in which his termination occurs; and (iv) transfer to Mr. Clark
all cash value and life insurance policies paid by the Company. In the event Mr.
Clark resigns for "good reason" or within twelve (12) months after a "change of
control" of the Company, the Company is obligated to make all of the payments
and provide all of the benefits described in the preceding sentence and shall
accelerate the vesting of all stock options which shall then remain exercisable
until the options expire. The Agreement also addresses the benefits payable and
the treatment of the life insurance policies owned by the Company upon
termination for death or disability and, in the event of disability, provides
for supplemental disability payments and health, dental and life benefits for a
twelve (12) month period.
The Company also has a Split Dollar Agreement, dated September 19, 1991, which
requires the Company to pay the premiums on a life insurance policy owned by Mr.
Clark (or his assignee) and which requires repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater, upon Mr. Clark's death or termination of employment. Under the
Employment Agreement, if Mr. Clark's employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company, or if Mr.
Clark resigns for "good reason," the repayment obligations under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.
<PAGE>
Performance Graph
Set forth below are line graphs comparing the Company's cumulative total
shareholder return on the Company's Common Stock, from June 30, 1994 through
June 30, 1999 with the cumulative total return of The Nasdaq Market Index (U.S.
Companies) and of the selected peer group (the "SIC Peer Group Index"). The SIC
Peer Group Index includes all Nasdaq companies which are in the same three-digit
SIC ("Standard Industrial Classification") labeled 632 Accident and Health
Insurance and Medical Service Plans
[PERFORMANCE GRAPH OMITTED]
<TABLE>
<CAPTION>
06/30/94 06/30/95 06/30/96 06/30/97 06/30/98 06/30/99
- --------------------- --------------- -------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
HRM 100.00 161.54 161.54 207.69 234.62 151.92
SIC Code Index 100.00 101.41 131.50 171.23 180.82 175.19
Nasdaq Market 100.00 117.28 147.64 177.85 235.75 330.37
</TABLE>
The Nasdaq Market Index and SIC Peer Group Index is provided by Media General
Financial Services. The Peer Group includes the following companies: Aetna,
Inc.; AFLAC Incorporated; American Medical SEC Inc., Chartwell RE Corp.;
Citizens Financial Corp.; Conseco, Inc.; Everest Reinsurance Hld.; First
Commonwealth Inc.; Health Power, Inc.; Humana, Inc.; Maxicare Health Plans;
Medical Control, Inc.; Mid Atlantic Medical Services, Inc.; Morrison Management
Specialists; Oxford Health Plans, Inc.; Pacificare Health Services, Inc.;
Penncorp Financial Group; Provident American Corp.; Reinsurance Group of
America; RightChoice Managed Care; Safeguard Health Enterprises; Sierra Health
Services, Inc.; Torchmark Corporation; Transamerica Corporation; Trigon
Healthcare, Inc.; United Healthcare Corporation; United Wisconsin Ser.; Unum
Provident Corporation; and Wellpoint Health Network.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned by each person known to the Company to beneficially own
more than 5% of the Company's Common Stock, by each of the Company's current
directors, by each executive officer named in the Summary Compensation Table (on
page 24), and by all of the Company's current directors and current executive
officers as a group, as of September 15, 1999.
Name of Director, Executive Number of Shares Percent of
Officer or Identity of Group Beneficially Owned(1) Class
Chiplease, Inc. 675,500(2) 14.56%
640 N. LaSalle Street, Suite 300
Chicago, IL 60610
Summit Capital Management, LLC 439,550(3) 9.47%
601 Union Street Suite 3900
Seattle, WA 98101
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor 251,300(4) 5.42%
Santa Monica, CA 90401
Gary T. McIlroy, M.D. 403,441(5) 8.44%
10900 Hampshire Avenue South
Minneapolis, MN 55438
Marlene Travis 406,101(6) 8.55%
10900 Hampshire Avenue South
Minneapolis, MN 55438
Thomas P. Clark 118,105(7) 2.52%
Adele M. Kimpell 16,200(8) *
W. Michael Smith 9,775(9) *
Vance Kenneth Travis 11,009(10) *
Ronald R. Hahn 13,301(11) *
Robert L. Montgomery 20,380(12) *
Gary L. Damkoehler 16,701(13) *
Raymond G. Schultze, M.D 6,701(14) *
All Current Executive Officers and
Current Directors as a
Group (16 persons) 1,048,265(15) 20.86%
- -----------
* Less than one percent.
(1) Except as otherwise noted, each person or group named in the table has sole
voting and investment power with respect to all shares of Common Stock
listed opposite the name of such person or group. Shares not outstanding
but deemed beneficially owned by virtue of the right of a person to acquire
them as of September 15, 1999, or within 60 days of such date are treated
as outstanding only when determining the amount and percent owned by such
person or group named in the table.
<PAGE>
(2) Includes 399,100 (8.60%) shares which Chiplease, Inc. represents are owned
by it and 276,400 (5.96%) shares which Chiplease, Inc. represents are owned
by the secretary of Chiplease, Inc. and for which the secretary has sole
voting power and which was owned on August 28, 1998, the date of the most
recent Schedule 13D/A received by the Company from such shareholder.
(3) Includes 439,550 shares for which Summit Capital Management, LLC represents
it has sole voting power and which was owned on February 10, 1999, the date
of the most recent Schedule 13G received by the Company from such
shareholder.
(4) In its most recent Schedule 13G filing with the Securities and Exchange
Commission on February 11, 1999 Dimensional Fund Advisors, Inc. (DFI),
represents it has sole voting power and investment power over such shares.
DFI disclaims beneficial ownership of the shares.
(5) The number of shares set forth in the above table (i) includes 257,970
shares held by Gary T. McIlroy Revocable Trust, for which Dr. McIlroy is
grantor and trustee, (ii) includes 141,471 shares which Dr. McIlroy has the
right to acquire upon exercise of options, (iii) excludes 75 shares
beneficially owned by Dr. McIlroy's and Ms. Travis' adult children, (iv)
excludes the shares beneficially owned by Ms. Travis and (v) includes 4,000
shares held by a foundation controlled by Dr. McIlroy. Dr. McIlroy
disclaims beneficial ownership of such excluded shares.
(6) The number of shares set forth in the above table (i) includes 290,248
shares held by the Marlene O. Travis Revocable Trust, for which Ms. Travis
is grantor and trustee, (ii) includes 111,853 shares which Ms. Travis has
the right to acquire upon exercise of options, (iii) excludes 75 shares
beneficially owned by Ms. Travis' and Dr. McIlroy's adult children, (iv)
excludes the shares beneficially owned by Dr. McIlroy and (v) includes
4,000 shares held by a foundation controlled by Ms. Travis. Ms. Travis
disclaims beneficial ownership of such excluded shares.
(7) Includes 62,568 shares held by Mr. Clark and 55,537 shares which Mr. Clark
has the right to acquire upon exercise of options.
(8) Includes 1,000 shares held by Ms. Kimpell and 15,200 shares which Ms.
Kimpell has the right to acquire upon exercise of options.
(9) Includes 3,275 shares held by Mr. Smith and 6,500 shares which Mr. Smith
has the right to acquire upon exercise of options.
(10) Includes 5,308 shares held by Mr. Travis and 5,701 shares which Mr. Travis
has the right to acquire upon exercise of options.
(11) Includes 7,600 shares held by Mr. Hahn and 5,701shares which Mr. Hahn has
the right to acquire upon exercise of options.
(12) Includes 9,462 shares held by Mr. Montgomery and 10,918 shares which Mr.
Montgomery has the right to acquire upon exercise of options.
(13) Includes 11,000 shares held by Mr. Damkoehler and 5,701 shares which Mr.
Damkoehler has the right to acquire upon exercise of options.
(15) Includes 1,000 shares held by Mr. Schultze and 5,701 shares which Mr.
Schultze has the right to acquire upon exercise of options.
(16) Includes 661,781 shares held by the current officers and directors, and
386,484 shares that current executive officers and directors as a group
have the right to acquire as of September 15, 1999, or within 60 days of
such date, upon exercise of options.
Item 13. Certain Relationships and Related Transactions.
None.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this report.
(1) Financial Statements. The financial statements listed below are
included in this Annual Report on Form 10-K on the pages
indicated.
Page in this
Form 10-K
Report of Independent Auditors........................... 36
Consolidated Balance Sheets as of June 30, 1999
and 1998................................................. 37
Consolidated Statements of Operations for the years
ended June 30, 1999, 1998 and 1997....................... 38
Consolidated Statements of Changes in Shareholders'
Equity for the years ended June 30, 1999, 1998
and 1997................................................. 39
Consolidated Statements of Cash Flows for the years
ended June 30, 1999, 1998 and 1997....................... 40
Notes to Consolidated Financial Statements............... 41
(2) Financial Statement Schedules. The following schedule is included
in this Annual Report on Form 10-K on the pages indicated.
Page in this
Form 10-K
II. Valuation and Qualifying Accounts................... 56
Schedules I, III, IV, and V are omitted for the reason that they
are not applicable, not required or the information is presented
in the consolidated financial statements or related notes.
<PAGE>
(b) Exhibits.
2.1 Stock Purchase Agreement dated as of October 14, 1998 between Health Risk
Management, Inc. and Oxford Health Plans, Inc. - incorporated by reference
to Exhibit 2.1 to the Company's Form 8-K filed February 11, 1999 (SEC File
No. 0-18902).
2.2 Closing Agreement dated as of January 27, 1999 between Health Risk
Management, Inc. and Oxford Health Plans, Inc. - incorporated by reference
to Exhibit 2.2 to the Company's Form 8-K filed February 11, 1999 (SEC File
No. 0-18902).
3.1 Amended and Restated Articles of Incorporation, as amended to date --
incorporated by reference to Exhibit 3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 (SEC File No. 0-18902).
3.2 Composite Bylaws of the Company, as of April 21, 1999--incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999 (SEC File No. 0-18902)
4.1 Specimen form of the Company's Common Share Certificate -- incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form
S-1 (SEC File No. 33-37595).
4.2 Amended and Restated Articles of Incorporation, as amended to date (see
Exhibit 3.1).
4.3 Composite Bylaws of the Company, as of April 21, 1999 (see Exhibit 3.2).
4.4 Rights Agreement dated as of April 4, 1997 between health Risk Management,
Inc. and Norwest Bank Minnesota, N.A. as Rights Agent, together with the
following exhibits thereto:
(a) Certificate of Designations of Series A Preferred Stock,
(b) Summary of Rights to Purchase Shares of Series A Preferred Stock,
(c) Form of Rights Certificate
-- incorporated by reference to Exhibit 1 to the Company's Form 8-A
Registration Statement filed April 10, 1997 (SEC File No. 0-18902).
10.1* Employment Agreement dated as of June 20, 1996 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy -- incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (SEC File No. 0-18902).
10.2* Split Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy and the Amendment to Split Dollar
Agreement dated July 28, 1992 between Health Risk Management, Inc. and Gary
T. McIlroy -- incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (SEC
File No. 0-18902).
10.3* Employment Agreement dated as of June 21, 1996 between Health Risk
Management, Inc. and Marlene O. Travis -- incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (SEC File No. 0-18902).
10.4* Split Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Marlene O. Travis and the Amendment to Split Dollar
Agreement dated July 28, 1992 between Health Risk Management, Inc. and
Marlene O. Travis -- incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (SEC File No. 0-18902).
10.5* Employment Agreement dated June 21, 1996 between Health Risk Management,
Inc. and Thomas P. Clark -- incorporated by reference to Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (SEC File No. 0-18902).
<PAGE>
10.6* Split Dollar Agreement dated as of September 1, 1991 between Health Risk
Management, Inc. and Thomas P. Clark -- incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (SEC File No. 0-18902).
10.7* Health Risk Management, Inc. 1990 Stock Option Plan -- incorporated by
reference to Exhibit 10.16 to the Company's Registration Statement on Form
S-1 (SEC File No. 33-37595).
10.8* Form of Stock Option Agreement to be used pursuant to 1990 Stock Option
Plan -- incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1991 (SEC File No.
0-18902).
10.9* Amended and Restated 1992 Long-Term Incentive Plan--incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1997 (SEC File No. 0-18902).
10.10* Form of Non-Employee Director Initial/Annual Option Agreement under the
1992 Long-Term Incentive Plan -incorporated by reference to Exhibit 10.30
to the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1992 (SEC File No. 0-18902).
10.11* Form of Non-Employee Director Elective Option Agreement under the 1992
Long-Term Incentive Plan -incorporated by reference to Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.12* Form of Incentive Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.13* Form of Non-Qualified Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.14* Form of Performance Unit Award under the 1992 Long-Term Incentive Plan --
incorporated by reference to Exhibit 10.34 to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1992 (SEC File No.
0-18902).
10.15* Deferred Compensation Plan for Directors -- incorporated by reference to
Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1992 (SEC File No. 0-18902).
10.16* Executive Incentive Plan -- incorporated by reference to the description
of such Plan as set forth under "Compensation Pursuant to Plans - Executive
Incentive Plan" in the Company's Proxy Statement for its 1992 Annual
Meeting of Shareholders (SEC File No. 0-18902).
10.17 Lease Agreement dated January 11, 1993 between Thomas L. Koster, Inc.,
d/b/a/ Realvesco Properties and Health Risk Management, Inc., as amended by
First Amendment to Lease Agreement dated January 29, 1993, related to the
Company's offices at 5250 Lovers Lane, Portage, Michigan -- incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 (SEC File No. 0-18902).
10.18 Second Amendment to Lease dated July 22, 1997 for the Lease Agreement
dated January 11, 1993 between Thomas L. Koster, Inc., d/b/a/ Realvesco
Properties and Health Risk Management, Inc., related to the Company's
offices at 5250 Lovers Lane, Portage, Michigan--incorporated by reference
to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1997 (SEC File No. 0-18902).
10.19 Security Agreement dated June 24, 1994 relating to Revolving Credit and
Term Loan Agreement of same date -- incorporated by reference to Exhibit
10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1994 (SEC File No. 0-18902).
10.20 Management Services Agreement dated February 24, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Oxford Health Plans (PA), Inc. - incorporated by
reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 (SEC File No. 0-18902).
<PAGE>
10.21 Health Care Excess Risk Insurance Policy dated April 13, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Kentucky Medical Insurance Company -- incorporated by
reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 (SEC File No. 0-18902).
10.22 Lease agreement dated May 5, 1998, between MEPC O &I, Inc. and Health Risk
Management, Inc. related to the Company's offices at 10900 Hampshire Avenue
South, Minneapolis, Minnesota and Amendment of Lease dated September 16,
1998 -- incorporated by reference to Exhibit 10.43 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1998 (SEC File No.
0-18902).
10.23 Amended and Restated Revolving Credit and Term Loan Agreement between
Health Risk Management, Inc. and U.S. Bank National Association dated May
1, 1998 - incorporated by reference to Exhibit 10.44 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1998 (SEC
File No. 0-18902).
10.24 First Amendment to the Credit Agreement between Health Risk Management,
Inc. and U.S. National Bank Association dated January 27, 1999 --
incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999 (SEC File No. 0-18902).
10.25 Second Amendment to the Credit Agreement between Health Risk Management,
Inc. and U.S. National Bank Association dated June 30, 1999.
10.26 Sublease Agreement dated February 10, 1999 between Day & Zimmermann, Inc.
and Health Risk Management, Inc. as amended by First Amendment to Sublease
dated April 6, 1999, related to the Company's offices at 1818 Market
Street, Philadelphia, Pennsylvania.
10.27 Amended and Restated HealthChoices Southeast Agreement between the
Commonwealth of Pennsylvania (Department of Public Welfare) and Oxford
Health Plans (PA), Inc. dated January 1, 1999.
21. List of subsidiaries.
23. Consent of Independent Auditors.
27.1 Financial Data Schedule for the Year ended June 30, 1999 (filed in
electronic format only).
- --------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
(c) Reports on Form 8-K.
During the quarter ended June 30, 1999, the Company filed three
amendments to its Form 8-K filed February 11, 1999 reporting under Item
2 its acquisition of Oxford Health Plans (PA), Inc.
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
of Health Risk Management, Inc.
We have audited the accompanying consolidated balance sheets of Health Risk
Management, Inc. as of June 30, 1999 and 1998, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Health
Risk Management, Inc. at June 30, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 3 of the consolidated financial statements, the Company
changed its method of accounting for management service fees during the year
ended June 30, 1998.
August 27, 1999
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
June 30,
-------------------------
1999 1998
---------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,229 $ 20,624
Accounts receivable-net of allowance for doubtful accounts of $324
($265 in 1998) 23,774 11,019
Deferred income taxes 1,440 900
Other 2,263 837
--------- --------
Total current assets 36,706 33,380
Fixed maturity investments at fair value 8,406 --
Computer software costs, less accumulated amortization of $19,910 ($17,940 in
1998) 26,736 24,284
Property and equipment, less accumulated depreciation of $15,001 ($14,299 in
1998) 11,825 8,670
Other assets 4,896 4,180
--------- --------
$ 88,569 $ 70,514
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,954 $ 2,125
Medical services payable 21,215 15,452
Due to reinsurer 553 --
Accrued expenses 6,144 3,596
Unearned revenues 5,234 3,708
Current maturities of notes payable 7,865 4,429
Current portion of capitalized equipment leases 252 596
--------- --------
Total current liabilities 45,217 29,906
Deferred income taxes 2,828 3,776
Long-term portion of notes payable 3,145 2,313
Long-term portion of capitalized equipment leases 483 734
Surplus note payable 2,500 --
Commitments
Shareholders' equity:
Undesignated shares, $.01 par value, 9,700,000 authorized, none issued
Series A preferred shares, $.01 par value, 300,000 authorized, none
issued Common shares, $.01 par value, 20,000,000 authorized, 4,639,496
issued and outstanding (4,583,694 in 1998) 46 46
Additional paid-in capital 32,176 31,728
Retained earnings 2,382 2,011
Accumulated other comprehensive loss:
Net unrealized loss on fixed maturity investments (208) --
--------- --------
Total shareholders' equity 34,396 33,785
--------- --------
$ 88,569 $ 70,514
========= ========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Premiums-gross $144,639 $ 27,457 $ --
Ceding allowance 2,457 -- --
Management service fees 48,731 63,395 59,076
QualityFIRST revenues 4,064 3,648 3,647
Investment income 969 337 187
-------- -------- --------
Total revenues 200,860 94,837 62,910
Less ceded premiums 37,821 -- --
-------- -------- --------
Net revenues 163,039 94,837 62,910
Operating expenses:
Medical costs, net 90,572 23,625 --
Cost of services, net 55,441 55,141 44,640
Selling, marketing and administration, net 14,049 13,386 14,081
Oxford transition costs 1,350 -- --
Interest expense 974 489 535
-------- -------- --------
Total operating expenses 162,386 92,641 59,256
-------- -------- --------
Income before income taxes and cumulative
effect of accounting change 653 2,196 3,654
Income taxes expense 282 868 1,413
-------- -------- --------
Income before cumulative effect
of accounting change 371 1,328 2,241
Cumulative effect
of accounting change, net of
income tax benefit of $1,342 -- (2,371) --
-------- -------- --------
Net income (loss) $ 371 $ (1,043) $ 2,241
======== ======== ========
Basic earnings per share:
Income before cumulative effect
of accounting change $ .08 $ .29 $ .52
Cumulative effect of accounting change -- (.52) --
======== ======== ========
Net income (loss) $ .08 $ (.23) $ .52
======== ======== ========
Diluted earnings per share:
Income before cumulative effect
of accounting change $ .08 $ .29 $ .50
Cumulative effect of accounting change -- (.51) --
======== ======== ========
Net income (loss) $ .08 $ (.22) $ .50
======== ======== ========
Proforma net income and per share amounts assuming the new revenue
recognition accounting policy is applied retroactively:
Net income -- $ 1,328 $ 859
Basic earnings per share -- $ .29 $ .20
Diluted earnings per share -- $ .29 $ .19
Weighted average number of shares outstanding:
Basic 4,615 4,524 4,291
======== ======== ========
Diluted 4,675 4,663 4,458
======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Shares
Outstanding Accumulated
------------------------ Additional Other
Number of Paid-In Comprehensive Retained
Total Shares Amount Capital Loss Earnings
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 28,474 4,180,476 $ 42 $ 27,619 -- $ 813
Common shares issued 2,464 200,000 2 2,462 -- --
Options exercised, including
tax benefit of $120 865 97,769 1 864 -- --
Net income 2,241 -- -- -- -- 2,241
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1997 34,044 4,478,245 45 30,945 -- 3,054
Options exercised 784 105,449 1 783 -- --
Net loss (1,043) -- -- -- -- (1,043)
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1998 33,785 4,583,694 46 31,728 2,011
Options exercised 306 40,745 -- 306 -- --
Common shares issued 142 15,057 -- 142 -- --
Comprehensive income:
Net income 371 -- -- -- -- 371
Change in net unrealized
loss on fixed maturity
investments (208) -- -- -- $ (208) --
---------
Total comprehensive income 163 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1999 $ 34,396 4,639,496 $ 46 $ 32,176 $ (208) $ 2,382
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 371 $ (1,043) $ 2,241
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 3,480 3,199 2,816
Amortization 6,971 5,558 4,830
Cumulative effect of accounting change -- 2,371 --
Provision for deferred income taxes 262 (489) 1,398
Changes in operating assets and liabilities:
Accounts receivable (7,366) (1,023) (2,557)
Other assets (1,530) (1,360) 7
Accounts payable 1,804 560 (238)
Medical services payable (1,938) 15,452 --
Due to reinsurer 553 -- --
Accrued expenses 2,759 578 382
Unearned revenues 1,526 (118) 1,248
-------- -------- --------
Net cash provided by operating activities 6,892 23,685 10,127
Cash flows from investing activities:
Acquisition of net assets, net of cash acquired (7,734) -- (139)
Purchase of investments (234) -- --
Computer software costs (8,696) (9,057) (7,396)
Property and equipment (5,602) (2,734) (2,827)
-------- -------- --------
Net cash used in investing activities (22,266) (11,791) (10,362)
Cash flows from financing activities:
Proceeds from notes payable 6,000 4,750 1,275
Principal payments on notes payable (1,732) (1,308) (1,278)
Principal payments on capital leases (595) (845) (999)
Issuance of common shares 306 784 3,239
-------- -------- --------
Net cash provided by financing activities 3,979 3,381 2,237
-------- -------- --------
Increase (decrease) in cash (11,395) 15,275 2,002
Cash and cash equivalents at beginning of year 20,624 5,349 3,347
-------- -------- --------
Cash and cash equivalents at end of year $ 9,229 $ 20,624 $ 5,349
======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of Health
Risk Management, Inc. and its wholly owned subsidiaries (the Company).
All significant intercompany transactions have been eliminated.
B. Nature of Operations
The Company provides management services, which include administrative
services and products for integrated health plan management; generates
QualityFIRST revenues from the sale of evidence-based clinical
decision support software; and operates a wholly-owned health
maintenance organization (HMO). Each of the three is treated as a
business segment.
The Company provides its management services, including care
management, price control and claim administration, to self-insured
employers, unions, government entities, insurance companies, HMO's
preferred provider organizations and hospitals throughout the United
States.
QualityFIRST revenues are principally derived from software license
and subscription fees for the evidence based clinical decision support
software.
On April 16, 1998, the Company's wholly-owned subsidiary, Pennsylvania
HRM, Inc., entered into a five-year contract with Oxford Health Plans
(PA), Inc. (the Plan). The Plan is a HMO licensed by the Commonwealth
of Pennsylvania to offer certain insurance products to covered members
as defined in the HealthChoices Physical Health Agreement
(HealthChoices agreement) between the Commonwealth of Pennsylvania and
the Plan. The Company received a fixed amount per enrolled member per
month and certain per case fees to provide administrative services and
assumed all the medical cost risk through the date of acquisition of
the Plan. On January 27, 1999, the Company acquired the Plan (See Note
2). Premium revenues result from the Plan's operations from April 16,
1998. The Company continues to assume the medical cost risk through
the Plan.
Plan revenues were seventy-one percent (71%) and twenty-six percent
(26%) of total revenues in 1999 and 1998, respectively. In 1998,
revenues from a management services client was sixteen percent (16%)
of total revenues. In 1997, revenues from two management services
clients were seventeen percent (17%) and sixteen percent (16%) of
total revenues.
The markets serviced by the Company are principally domestic.
C. Uses of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes, the most significant of
which relates to incurred but not yet reported claims included in
medical services payable, performance bonus accruals included in
accounts receivable and the deferred tax asset valuation allowance.
Actual results could differ from such estimates.
<PAGE>
D. Revenue Recognition
Premiums and management service fees are generally recognized ratably
over the contract period. Included in management service fees are
estimated amounts for performance bonuses and contract adjustments.
These estimates are recognized when reasonably determinable.
Adjustments to these estimates are recorded in current operations.
Contractual relationships with management service clients subject the
Company to revenue fluctuations resulting from changes in client
employment levels or covered lives, restructuring of benefit plans and
price adjustments based on contractual experience and performance
bonuses.
E. Unearned Revenues
Unearned revenues represent amounts billed to clients for contract
services yet to be performed, QualityFIRST revenues yet to be earned
and ceding allowance yet to be earned.
F. Computer Software Costs
The Company capitalizes QualityFIRST(R) computer software costs in
accordance with Statement of Financial Accounting Standards (SFAS) No.
86, Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed. The capitalized costs are amortized based on
the greater of the amount computed using (a) the ratio of current
gross revenues for the product to the total of current and anticipated
future gross revenues or (b) a straight-line basis over their
estimated useful lives, ranging from three to ten years.
The Company currently capitalizes internal-use software related to its
Care Management software and Claim Administration software in a manner
consistent with SFAS No. 86. In March 1998, the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-1 "Accounting for Computer Software Developed For or Obtained
For Internal Use" (the SOP) which is effective for the Company
beginning on July 1, 1999. The SOP requires the capitalization of
certain costs incurred after the date of adoption in connection with
developing or obtaining software for internal use. If the SOP's
provisions had been applied in 1999, costs capitalized would have been
decreased by approximately $1.9 million in that the capitalization of
certain overhead costs would not have been allowed under the SOP.
G. Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the assets using straight-line
methods for financial reporting purposes and accelerated methods for
tax purposes. Estimated useful lives range from three to ten years.
Equipment under capital leases is amortized over the term of the
respective lease or over the service lives of the assets for those
leases which substantially transfer ownership.
H. Income Taxes
Deferred tax assets and liabilities are determined based on
differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
I. Medical Costs
Medical costs principally includes the estimated ultimate net cost of
all reported and unreported claims incurred during the year. The
liability for medical services payable is estimated primarily by the
use of cost per contract data and completion factors developed from
historical lag patterns. Subsequent to the Company's purchase of the
Plan, several issues with respect to claims processing were identified
<PAGE>
that impaired the credibility of historical claims data to estimate
future claim payments. These issues included large claims backlogs,
overpayments, and duplicate payments. Management believes that it has
initiated operational changes that have resolved these issues.
Accordingly, in estimating medical claims payable as of June 30,1999,
management has assumed improvements from historical claims trends
including a return of certain overpayments from providers. Although
management believes that these issues have been resolved, there can be
no guarantee that adjustments to historical trends factored into the
reserve analyses will be realized.
Management believes that the liability for medical services payable is
adequate. The estimates are continually reviewed and adjusted as
experience develops or new information becomes known. Such adjustments
are included in current operations.
J. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the years ended June 30 (in thousands, except
per share data)
<TABLE>
<CAPTION>
1999 1998 1997
------ -------- ------
<S> <C> <C> <C>
Numerator:
Income before cumulative effect of
accounting change $ 371 $ 1,328 $2,241
Cumulative effect of accounting change -- (2,371) --
------ -------- ------
Net income (loss) $ 371 $ (1,043) $2,241
====== ======== ======
Denominator:
Weighted-average shares-basic 4,615 4,524 4,291
Effect of dilutive stock options 60 139 167
------ -------- ------
Weighted-average shares-diluted 4,675 4,663 4,458
====== ======== ======
Basic earnings per share:
Income before cumulative effect of
accounting change $ .08 $ .29 $ .52
Cumulative effect of accounting change -- (.52) --
------ -------- ------
Net income (loss) $ .08 $ (.23) $ .52
====== ======== ======
Diluted earnings per share:
Income before cumulative effect of
accounting change $ .08 $ .29 $ .50
Cumulative effect of accounting change -- (.51) --
------ -------- ------
Net income (loss) $ .08 $ (.22) $ .50
====== ======== ======
</TABLE>
K. Shareholder Rights Plan
On April 4, 1997, the Company's Board of Directors established a
shareholder rights plan which provides for a dividend distribution of
one preferred stock purchase right (a "Right") to be attached to each
share of common stock then outstanding or thereafter issued. The
Rights are currently not exercisable or transferable apart from the
common stock. Each Right entitles the holder to purchase one
one-hundredth of a share of Series A Preferred Stock at a price of
$50.00 per one one-hundredth of a preferred share, subject to
adjustment. The Rights become exercisable if a person or group
acquires 15% or more of common stock or announces a tender offer for
15% or more of common stock, subject to certain exceptions. After the
Rights become exercisable, each Right entitles the holder (other than
the 15% holder) to purchase the Company's common stock having a market
value of two times the Right's exercise price. Also, if after a person
acquires 15% without Board approval, the Company is acquired in a
merger or similar transaction, each right thereafter would entitle a
holder (other than the 15% holder) to acquire shares of the acquiring
company or an affiliate having a market value of two times the Right's
exercise price, subject to certain exceptions. Each Right is
redeemable at $.001 at any time up to ten days after a person acquires
15% of the Company's common stock. The Rights expire on April 4, 2007
unless earlier redeemed by the Company.
L. Cash and Cash Equivalents
Short-term investments purchased within three months of their
maturities are considered cash equivalents. The Company invests in
U.S. government securities and high rated money market funds. The
carrying amount reported in the consolidated balance sheets for cash
and cash equivalents approximates its fair value.
M. Investments
The Company has determined that its fixed maturity investments might
be sold prior to maturity to support its liquidity requirements.
Accordingly, such investments have been classified as
available-for-sale and carried at fair value, with net unrealized
losses reported as a component of accumulated other comprehensive loss
in shareholders' equity. The fair value of fixed maturity investments
is based on quotations obtained from brokers for those or similar
investments. Gains and losses on sales of investments are recorded as
a component of investment income using the specific identification
method.
N. Reinsurance
Reinsurance premiums and benefits are accounted for on the basis
consistent with that used in accounting for the reinsured policy and
the terms of the reinsurance contract.
O. Merger Termination
On March 10, 1997, the Company and HealthPlan Services Corporation
(HPS) announced that the merger agreement dated September 12, 1996 had
been terminated by mutual arrangement and that HPS had purchased
200,000 unregistered shares of common stock from the Company at a
price of $2.5 million ($12.50 per share). The consolidated net income
for the year ended June 30, 1997 includes a one-time charge of
$390,000 in selling, marketing and administration expense ($0.05 per
share diluted, net of tax benefit) for the write-off of costs related
to the terminated merger agreement with HPS.
P. Reclassification
Certain items in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentations.
2. ACQUISITION
On January 27, 1999, the Company completed the acquisition of the Plan for
a purchase price of $10,400,000 less an adjustment of $812,500 for accounts
receivable and commercial product allocations. The resulting net purchase
price of $9,587,500 was settled by cash payments of $7,087,500 and Oxford
Health Plan, Inc. (the Parent of the Plan) retaining a $2,500,000 surplus
note (the Note). The Note has an interest rate of 8.5% annum. The Note is
classified long-term due to the fact that the principal and interest on the
Note is payable only upon the Plan's receipt of prior approval from the
Insurance Commissioner of the Commonwealth of Pennsylvania. Interest of
$89,980 was accrued as of June 30, 1999 on the Note. The acquisition was
accounted for by the purchase method. Goodwill arising from the transaction
of $1,337,000 is being amortized on a straight line basis over 10 years.
Historically, over 95% of the Plan's revenue was from the HealthChoices
agreement. The Plan also sold commercial HMO products. The marketing of
commercial products was discontinued in 1998.
The results of operations for the Plan for the period January 1, 1999 to
June 30, 1999 are included in the consolidated statements of operations for
the Company.
<PAGE>
Dividends by the Plan to the Company are limited to the Plan's surplus as
determined in accordance with accounting practices prescribed or permitted
by the Insurance Department of the Commonwealth of Pennsylvania. Statutory
surplus was $8,691,000 as of June 30, 1999. The Plan is required to
maintain statutory surplus at an amount that is equal to the greater of
$1,500,000 or 50% of one month's Medicaid premiums or approximately $5.6
million.
Unaudited pro forma results of operations, assuming the acquisition had
been completed as of July 1, 1997, are as follows (in thousands, except per
share data):
Year Ended
June 30
1999 1998
-------- --------
Net revenues $167,600 $204,170
Income (loss) before cumulative
effect of accounting change $ 338 $(18,398)
Net income (loss) $ 338 $(20,769)
Basic earnings (loss) per share:
Income (loss) before cumulative effect of
accounting change $ .07 $ (4.07)
Cumulative effect of accounting change -- $ (.52)
-------- --------
Net income (loss) $ .07 $ (4.59)
======== ========
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of
account change $ .07 $ (4.07)
Cumulative effect of accounting change $ (.52)
-------- --------
Net income (loss) $ .07 $ (4.59)
======== ========
The pro forma results of operations reflect the pro forma amortization of
goodwill over a ten year period, estimated interest expense related to the
borrowing of $4,000,000 to partially finance the acquisition at an interest
rate of 8.25%, estimated investment income forgone related to funding the
balance of the purchase from operations of $3,087,500 at a yield rate of
4.60%, and the recording of tax benefits on the pro forma adjustments at a
35% tax rate. No impact on the pro forma results has been assumed for the
50% quota share reinsurance agreement entered into effective January 1,
1999 for periods prior to January 1, 1999. The pro forma results of
operations are not necessarily indicative of the results of operations that
would have occurred had the acquisition of the Plan occurred as of July 1,
1997, nor are the results necessarily indicative of future operating
results.
3. ACCOUNTING CHANGE
Effective July 1, 1997, the Company changed its method of accounting for
management service fees from a policy of revenue being generally recognized
based on an estimate of the services to be provided over the service period
to a policy under which revenue is recognized ratably over the contract
period. The change was made because management believes that the new method
will provide for consistent accounting methods between its management
services and the full risk health plan premiums, is more prevalent in the
health management industry, and will reduce the administrative burden.
The cumulative effect of the change in accounting principles as July 1,
1997resulted in a pre-tax, non-cash charge of $3,713,000 ($2,371,000 after
tax benefit of $.52 per share for basic and $.51 per share for diluted).
Income before cumulative effect of accounting change and basic and diluted
earnings per share for 1998 would have been $1,826,000, $.40 and $.39,
respectively, without the accounting change compared to $1,328,000, $.29
and $.29, respectively, with the accounting change.
<PAGE>
4. INVESTMENTS
The amortized cost and fair value of available-for-sale fixed maturity
investments consists of the following at June 30, 1999 (in thousands). The
Company held no investments at June 30, 1998.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury securities $5,581 $11 $ 198 $5,394
Corporate bonds 3,033 -- 21 3,012
====== === ====== ======
$8,614 $11 $ 219 $8,406
====== === ====== ======
</TABLE>
All fixed maturity investments are due within five years as of June 30, 1999.
Actual maturities may differ from contractual maturities because the borrowers
may have the right to prepay such obligations without prepayment penalties.
There were no sales of fixed maturity investments during 1999.
At June 30, 1999, U.S. Treasury Securities with a book value of $100,000 were on
deposit with Commonwealth of Pennsylvania Insurance Department to satisfy
regulatory requirements.
The net unrealized loss on fixed maturity investments included in shareholder's
equity consists of the following at June 30, 1999 (in thousands):
Gross unrealized loss on fixed
maturity investments $ (208)
Adjustment for net deferred
tax benefit, net of valuation allowance --
-------
Net unrealized loss on fixed
maturity investments $ (208)
=======
<PAGE>
5. COMPUTER SOFTWARE COSTS
Computer software costs consist of the following at June 30:
1999 1998
(in thousands)
------- -------
Care Management Software
Cost............................... $ 18,936 $ 17,268
Less accumulated amortization...... 7,483 7,391
------- -------
Net book value..................... 11,453 9,877
Claim Administration Software
Cost............................... 9,709 8,852
Less accumulated amortization...... 4,302 3,708
------- -------
Net book value..................... 5,407 5,144
QualityFIRST(R) Software
Cost............................... 18,001 16,104
Less accumulated amortization...... 8,125 6,841
------- -------
Net book value..................... 9,876 9,263
------- -------
Computer Software Costs................. $ 26,736 $ 24,284
====== ======
Amortization of these costs was as follows for the years ended June 30:
1999 1998 1997
-------- -------- --------
(in thousands)
Care Management Software........ $ 2,603 $ 2,214 $ 1,791
Claim Administration Software... 919 795 735
QualityFIRST(R)Software......... 2,722 2,149 1,617
-------- -------- --------
Amortization Expense............ $ 6,244 $ 5,158 $ 4,143
======== ======== ========
Fully amortized software of $4,274,000 was written off in fiscal year
1999.
<PAGE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30:
1999 1998
(in thousands)
-------- --------
Owned
Office equipment, furniture and fixtures....... $ 7,811 $ 5,788
Leasehold improvements......................... 2,248 1,719
Data processing equipment...................... 15,101 10,348
-------- --------
25,160 17,855
Less accumulated depreciation.................. 13,763 10,676
-------- --------
Net property and equipment owned............... 11,397 7,179
-------- --------
Capitalized leases
Office equipment and furniture................. -- 1,271
Data processing equipment...................... 1,666 3,843
-------- --------
1,666 5,114
Less accumulated depreciation.................. 1,238 3,623
-------- --------
Net capitalized leases......................... 428 1,491
-------- --------
Property and equipment......................... $ 11,825 $ 8,670
======== ========
7. NOTES PAYABLE
Notes payable consist of the following at June 30:
1999 1998
------- -------
(in thousands)
Term loans payable to bank in monthly
installments of $175,000 plus
interest at the fixed rate of 7.93%,
with the last payment due January,
2002. Secured by accounts receivable,
equipment, fixtures and general intangibles. $ 5,245 $ 3,742
Note payable to bank under revolving credit
agreement with interest payable monthly at
the bank's reference rate (7.75% at June 30,
1999), due January 31, 2000. Secured by
accounts receivable, equipment, fixtures
and general intangibles. 5,765 3,000
------- -------
11,010 6,742
Less: Current maturities 7,865 4,429
------- -------
Long-term portion $ 3,145 $ 2,313
======= =======
The Company's revolving credit agreement includes a $6,000,000 revolving
credit facility. The revolving credit agreement terminates on January 31,
2000. The Company had available $235,000 under the revolving credit
facility at June 30, 1999.
The carrying amounts of the Company's borrowings
under its term loan and notes payable approximate their fair value.
<PAGE>
Under terms of the revolving credit and term loan agreements, the Company
is prohibited from paying dividends on its stock without the bank's
consent.
Scheduled payments by fiscal year under terms of the notes payable will be
$7,865,000 in 2000, $2,100,000 in 2001, and $1,045,000 in 2002.
Total interest paid on notes payable was $797,000, $335,000 and $299,000
for the years ended June 30, 1999, 1998 and 1997, respectively.
8. REINSURANCE AGREEMENT
For the period April 16, 1998 to December 31, 1998 the Company maintained a
reinsurance contract to control exposure to potential medical losses
arising from large risks. To the extent that the reinsurer does not meet
its obligations assumed under the reinsurance contract, the Company remains
primarily liable. Reinsurance premiums were $1,088,000 in 1999 and $445,000
in 1998 and are included in medical costs, net. Amounts recoverable under
terms of this reinsurance contract as of June 30, 1999 were $3,990,000 and
are included in accounts receivable on the consolidated balance sheet.
There were no amounts recoverable under terms of the reinsurance contract
as of June 30, 1998.
Effective January 1, 1999, the Company entered into a 50% quota-share
reinsurance agreement under which the reinsurer has assumed 50% of the
Medicaid medical cost risk and certain non-medical expenses in exchange for
50% of the related Medicaid premium. Under this agreement, the Company
received a $5,000,000 ceding allowance from the reinsurer. The ceding
allowance is being realized in relation to profits ceded to the reinsurer.
As of June 30, 1999, the Company realized $2,457,000 of the ceding
allowance as a component of net revenue. Amounts ceded under the contract
for premiums, medical costs and expenses for the six-months ended June 30,
1999 were $37,821,000, $31,464,000 and $3,569,000 respectively.
During the first three years of the agreement, the Company may recapture
the business ceded, subject to provisions of the agreement. There were no
amounts recoverable under terms of this reinsurance contract as of June 30,
1999.
<PAGE>
9. OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
At June 30, 1999, the Company's 1992 Long-Term Incentive Plan and the 1990
Stock Option Plan ("the Option Plans") permitted the granting of 1,200,000
options to officers, directors and employees. These can be either incentive
stock options or non-qualified stock options. Options are generally granted
at not less than market value at the date of grant and generally for a
five-year period. The options have been granted at prices ranging from
$5.250 to $15.50. A total of 85,440 common shares are available for future
issuance under the Option Plans at June 30, 1999.
Transactions related to outstanding options during the last three years are
summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Total Exercisable Exercise Price
--------- -------- --------
<S> <C> <C> <C>
Balance at June 30, 1996 533,814 364,865 8.72
Granted 260,550 -- 12.32
Became exercisable -- 99,324 7.41
Exercised (97,769) (97,769) 9.06
Expired (24,536) (24,536) 8.85
--------- --------
Balance at June 30, 1997 672,059 341,884 10.06
Granted 237,600 -- 12.61
Became exercisable -- 161,523 10.36
Exercised (105,449) (105,449) 8.89
Expired (77,341) (71,041) 11.23
--------- --------
Balance at June 30, 1998 726,869 326,917 10.72
Granted 77,250 -- 9.92
Became exercisable -- 184,606 11.57
Exercised (40,745) (40,745) 7.80
Expired (54,228) (31,895) 11.34
--------- --------
Balance at June 30, 1999 709,146 438,883 10.63
========= ========
</TABLE>
The following table summarizes information about the stock options at June
30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Exercise Contractual Average Average
Prices Number Life in Years Exercise Price Number Exercise Price
<S> <C> <C> <C> <C> <C>
$5.250 - $7.875 109,368 0.68 $7.05 109,368 $7.05
$8.00 74,695 1.42 8.00 74,695 8.00
$9.125 - $9.875 15,750 3.43 9.59 2,250 9.19
$10.00 59,750 4.00 10.00 23,247 10.00
$10.125 56,050 3.00 10.13 35,717 10.13
$10.50 - $11.00 63,533 2.70 10.91 60,368 10.90
$11.25 - $11.75 21,850 1.99 11.45 20,850 11.44
$12.625 166,700 3.00 12.09 57,234 12.63
$12.875 -$15.50 141,450 3.10 13.39 55,154 13.42
------- ------
$5.250 - $15.50 709,146 2.53 10.63 438,883 9.90
======= =======
</TABLE>
The number of options scheduled to expire by fiscal year are 111,257 in
2000, 104,939 in 2001, 402,200 in 2002, 79,750 in 2003 and 11,000 in 2004.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company has elected to follow Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," to measure compensation
<PAGE>
cost for employee stock options. Under APB No. 25, if the exercise price of
the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for the years ended June 30, 1999 and 1998:
risk-free interest rates ranging from 3.95% to 5.93% in 1999, and from
5.25% to 5.625% in 1998 and from 5.85% to 6.73% in 1997; dividend yield of
0%; volatility factor of the expected market price of the Company's common
stock of .622 in 1999, .577 in 1998 and .513 in 1997 and a weighted average
expected life of the option of 3.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restriction and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the option's vesting period. Had the compensation
cost been determined consistent with SFAS No. 123, on a pro-forma basis,
the Company's net income for 1999 would have decreased $540,000 or $.12 per
share for basic and diluted earnings per share purposes. For 1998, the net
loss would have been increased $282,000. For 1997, net income would have
been reduced $324,000. This represents for 1998 and 1997 a $.06 and $.07
per share unfavorable impact for basic and diluted earnings per share
purposes, respectively.
On May 14, 1999, the shareholders approved the Company's 1999 Employee
Stock Purchase Plan. The Plan permits employees to purchase stock of the
Company at a lower of 85% of the closing price of the Company's common
stock as of the commencement date of a plan year or 85% of the closing
price of the Company's common stock as of the last date of a plan year. The
first plan year begins November 1, 1999. Initially, 60,000 shares of the
Company's common stock have been reserved for issuance. Beginning November
1, 2000, and each year thereafter, the shares available for issuance will
be increased so that up to 60,000 shares will be available for each plan
year. The Plan will terminate on October 31, 2009, unless the Board of
Directors extends the term of the plan.
10. INCOME TAXES
The components of the provision for income taxes for the three years ended
June 30 were as follows:
1999 1998 1997
------ ------ ------
(in thousands)
Current:
Federal $ -- $ -- $ 5
State 20 15 10
Deferred 262 853 1,398
------ ------ ------
$ 282 $ 868 $1,413
====== ====== ======
A reconciliation of the statutory federal income tax rate to the effective
tax rate is as follows:
1999 1998 1997
----- ----- -----
Statutory rate 34.0% 34.0% 34.0%
State income taxes 3.6 2.8 2.7
Non-deductible meals and entertainment
expenses 4.0 1.4 .8
Other 1.6 1.3 1.2
----- ----- -----
43.2% 39.5% 38.7%
===== ===== =====
<PAGE>
The components of the deferred income tax liabilities and assets as of
June 30 were as follows:
1999 1998
(in thousands)
-------- --------
Deferred tax liabilities:
Prepaid expenses $ 72 $ 58
Other assets 330 172
Computer software costs 9,483 8,519
Tax over book depreciation 1,188 1,016
-------- --------
Total deferred tax liabilities 11,073 9,765
Deferred tax assets:
Receivables 135 1,747
Accrued expenses 558 428
Ceding allowance 890 --
Unrealized gain/loss on investments 73 --
Net operating loss carryforwards 12,704 5,487
-------- --------
Total deferred tax assets 14,360 7,662
Less valuation allowance (4,675) (773)
-------- --------
Total net deferred tax assets 9,685 6,889
-------- --------
Net deferred tax liabilities $ 1,388 $ 2,876
======== ========
At June 30, 1999, the Company had net operating loss (NOL) carryforwards of
$35,000,000 for income tax purposes only that expire in years 2000 through
2019. Included in the NOL is $10,400,000 and $2,270,000 related to the
estimated net operating carryforward of the Plan and stock options,
respectively, and each has a full valuation allowance. The amount of NOL
that will expire by year for which a deferred tax asset has been recognized
is $283,000 in 2000, $3,802,000 in 2001, $1,664,000 in 2002, $299,000 in
2003, $1,334,000 in 2004 and $14,948,000 thereafter. The amount of the net
operating loss carryforward related to the Plan is subject to the filing of
the 1999 consolidated tax return of the Parent of the Plan and the
application of the consolidated tax return rules. The amount of the Plan's
NOL that the Company will have available each year is further limited by
Section 382 of the Internal Revenue Code and is estimated to be $488,000
per year. The Plan's NOL will expire in the years 2012 through 2018. The
stock options when realized for financial statement purposes will be
recorded as additional paid-in capital and not as a reduction in income tax
expense. In addition, any Plan NOL's eventually realized would first be
used to reduce net goodwill of $1,284,000 at June 30, 1999, and then to
reduce income tax expense.
Total income tax paid for the years ended June 30, 1999, 1998 and 1997 was
$23,000, $14,786 and $15,090, respectively.
<PAGE>
11. COMMITMENTS
The Company leases its office facilities and various equipment under
operating and capital leases. Rental expense was approximately $4,507,000,
$4,276,000 and $3,564,000 for the years ended June 30, 1999, 1998 and 1997,
respectively. The following is a schedule of future minimum rental payments
required under operating leases (in thousands): Year ending June 30:
2000 $ 3,540
2001 3,540
2002 2,579
2003 2,163
2004 2,089
Thereafter 8,701
-------
Total minimum rental payments $22,612
=======
In addition to the above amounts, additional rental payments are due under
the office facility leases based on the lessor's operating costs.
The following is a schedule of future minimum lease payments under capital
leases (in thousands):
Years ending June 30:
2000 $ 303
2001 296
2002 222
-------
Total minimum lease payments 821
Less amount representing interest 86
-------
Net minimum lease payments 735
Less current maturities 252
-------
Long-term portion $ 483
=======
12. SAVINGS PLAN
The Company has a tax deferred savings plan in accordance with the
provisions of Section 401(k) of the Internal Revenue Code covering
substantially all employees. Under the plan, the Company matches a minimum
of 10% of eligible employees' contributions up to 6% of the employee's
salary. Employee and employer matching contributions to the plan are
remitted to a trustee on a biweekly basis. Company contribution expenses
were $567,000, $442,000, and $350,000 for the years ended June 30, 1999,
1998, and 1997, respectively.
13. SEGMENT REPORTING
The Company has adopted SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" in the fiscal year ending June 30,
1999. SFAS No. 131 requires that a company report financial and descriptive
information about its operating segments as used by its chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 also requires additional disclosures with respect
to products and services, geographic areas of operation, and major
customers. See Note 1, Nature of Operations, for information related to the
types of products and services from which each reportable segment derives
its revenues, geographic information and major customers.
<PAGE>
For the year ended June 30, 1999, reportable segment information is as follows
(in thousands):
<TABLE>
<CAPTION>
Risk
Management QualityFIRST (HMO)
Services Unit Unit Unit Total
------------- ------------ -------- --------
<S> <C> <C> <C> <C>
Revenues from external customers $ 48,731 $ 4,064 $109,275 $162,070
Intersegment revenues(1) -- 1,330 -- 1,330
Investment income(2) 196 -- 773 969
Interest expense(3) 714 170 90 974
Depreciation expense 3,230 149 101 3,480
Amortization expense 4,230 2,741 -- 6,971
Income (loss) before taxes(4) 1,608 (1,515) 560 653
Assets(4) 46,291 11,033 31,318 88,642
Purchases of property and equipment
and computer software 10,793 3,586 -- 14,379
</TABLE>
(1) Intersegment revenues represents amounts charged by the QualityFIRST Unit
to the Management Services Unit ($456,000) and the Risk (HMO) unit
($874,000) for use of the QualityFIRST(R) software. The revenue is based
upon covered members or employees and is eliminated in consolidation.
(2) Investment income earned on fixed maturity investments is recorded in the
Risk (HMO) Unit. All other investment income is recorded in the Management
Services Unit.
(3) Interest expense on the surplus note payable is recorded in the Risk (HMO)
Unit. The remaining interest expense has been allocated between the
Management Services Unit and the QualityFIRST based upon segment assets.
(4) Corporate amounts have been allocated back to the respective business units
based upon estimated resource usage. Oxford transition costs of $1,350,000
have been charged to the Risk (HMO) Unit.
For years prior to 1999, the Company was organized as a single segment managed
health care services organization. During 1999, the Company reorganized into the
three market focused business units noted above.
<PAGE>
14. QUARTERLY FINANCIAL DATA (Unaudited)
The following table presents certain unaudited quarterly results for fiscal
1999 and 1998 (in thousands, except per share data).
<TABLE>
<CAPTION>
Fiscal 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Net revenues $ 48,949 $ 45,018 $ 33,914 $ 35,158 $ 163,039
========== ========== =========== ============ ===========
Net income (loss) $ (23) $ (1,311) $ 1,069 $ 636 $ 371
========== ========== =========== ============ ===========
Earnings (loss) per share:
Basic $ (.01) $ (.28) $ .23 $ .14 $ .08
========== ========== =========== ============ ===========
Diluted $ (.01) $ (.28) $ .23 $ .14 $ .08
========== ========== =========== ============ ===========
Fiscal 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
Net revenues $ 17,046 $ 17,989 $ 16,972 $ 42,830 $ 94,837
========== ========== =========== ============ ===========
Income (loss) before cumulative
effect of accounting change $ 751 $ 787 $ 31 $ (241) $ 1,328
Cumulative effect of
accounting change (2,371) -- -- -- (2,371)
---------- ---------- ----------- ------------ -----------
Net income (loss) $ (1,620) $ 787 $ 31 $ (241) $ (1,043)
========== ========== =========== ============ ===========
Basic earnings per share:
Income (loss) before cumulative
effect of accounting change $ .17 $ .18 $ .01 $ (.05) $ .29
Cumulative effect of
accounting change (.53) -- -- -- (.52)
---------- ---------- ----------- ------------ -----------
Net income (loss) $ (.36) $ .18 $ .01 $ (.05) $ (.23)
========== ========== =========== ============ ===========
Diluted earnings per share:
Income (loss) before cumulative
effect of accounting change $ .16 $ .17 $ .01 $ (.05) $ .29
Cumulative effect of
accounting change (.51) -- -- -- (.51)
---------- ---------- ----------- ------------ -----------
Net income (loss) $ (.35) $ .17 $ .01 $ (.05) $ (.22)
========== ========== =========== ============ ===========
</TABLE>
<PAGE>
Schedule II
HEALTH RISK MANAGEMENT, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
<S> <C> <C> <C> <C>
Year ended June 30, 1999:
Allowance for uncollectible accounts $265,000 $113,159 $54,659(1) $323,500
Year ended June 30, 1998:
Allowance for uncollectible accounts $260,000 $113,339 $108,339(1) $265,000
Year ended June 30, 1997:
Allowance for uncollectible accounts $200,000 $127,014 $67,014(1) $260,000
</TABLE>
- ----------------
(1) Uncollectible accounts written off.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
HEALTH RISK MANAGEMENT, INC.
September 28, 1999 By: /s/ Gary T. McIlroy, M.D.
Gary T. McIlroy, M.D.
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.
September 28, 1999 By: /s/ Gary T. McIlroy, M.D.
Gary T. McIlroy, M.D.
Chairman of the Board, Chief Executive Officer
and Director (principal executive officer)
September 28, 1999 By: /s/ Marlene Travis
Marlene Travis
President, Secretary, Chief Operating Officer
and Director
September 28, 1999 By:/s/ Thomas P. Clark
Thomas P. Clark
Senior Vice President,
Finance and Chief
Financial Officer
(principal financial
officer and principal
accounting officer)
September 28, 1999 By: /s/ Vance Kenneth Travis
Vance Kenneth Travis, Director
September 28, 1999 By: /s/ Gary L. Damkoehler
Gary L. Damkoehler, Director
September 28, 1999 By: /s/ Raymond G. Schultze, M.D.
Raymond G. Schultze, M.D., Director
September 28, 1999 By: /s/ Ronald R. Hahn
Ronald R. Hahn, Director
September 28, 1999 By: /s/ Robert L. Montgomery
Robert L. Montgomery, Director
<PAGE>
EXHIBIT INDEX
No. Description
2.1 Stock Purchase Agreement dated as of October 14, 1998 between Health Risk
Management, Inc. and Oxford Health Plans, Inc. - incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K filed February 11,
1999 (SEC File No. 0-18902).
2.2 Closing Agreement dated as of January 27, 1999 between Health Risk
Management, Inc. and Oxford Health Plans, Inc. - incorporated by
reference to Exhibit 2.2 to the Company's Form 8-K (SEC File No.
0-18902).
3.1 Amended and Restated Articles of Incorporation, as amended to date --
incorporated by reference to Exhibit 3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997 (SEC File No. 0-18902).
3.2 Composite Bylaws of the Company, as of April 21, 1999--incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 (SEC File No. 0-18902)
4.1 Specimen form of the Company's Common Share Certificate -- incorporated
by reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (SEC File No. 33-37595).
4.2 Amended and Restated Articles of Incorporation, as amended to date (see
Exhibit 3.1).
4.3 Composite Bylaws of the Company, as of April 21, 1999 (see Exhibit 3.2).
4.4 Rights Agreement dated as of April 4, 1997 between health Risk
Management, Inc. and Norwest Bank Minnesota, N.A. as Rights Agent,
together with the following exhibits thereto:
(a) Certificate of Designations of Series A Preferred Stock,
(b) Summary of Rights to Purchase Shares of Series A Preferred Stock,
(c) Form of Rights Certificate
-- incorporated by reference to Exhibit 1 to the Company's Form 8-A
Registration Statement filed April 10, 1997 (SEC File No. 0-18902).
10.1* Employment Agreement dated as of June 20, 1996 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy -- incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (SEC File No. 0-18902).
10.2* Split Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy and the Amendment to Split
Dollar Agreement dated July 28, 1992 between Health Risk Management, Inc.
and Gary T. McIlroy -- incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (SEC File No. 0-18902).
10.3* Employment Agreement dated as of June 21, 1996 between Health Risk
Management, Inc. and Marlene O. Travis -- incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (SEC File No. 0-18902).
10.4* Split Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Marlene O. Travis and the Amendment to Split Dollar
Agreement dated July 28, 1992 between Health Risk Management, Inc. and
Marlene O. Travis -- incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (SEC File No. 0-18902).
10.5* Employment Agreement dated June 21, 1996 between Health Risk Management,
Inc. and Thomas P. Clark -- incorporated by reference to Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1996 (SEC File No. 0-18902).
<PAGE>
10.6* Split Dollar Agreement dated as of September 1, 1991 between Health Risk
Management, Inc. and Thomas P. Clark -- incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (SEC File No. 0-18902).
10.7* Health Risk Management, Inc. 1990 Stock Option Plan -- incorporated by
reference to Exhibit 10.16 to the Company's Registration Statement on
Form S-1 (SEC File No. 33-37595).
10.8* Form of Stock Option Agreement to be used pursuant to 1990 Stock Option
Plan -- incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1991 (SEC
File No. 0-18902).
10.9* Amended and Restated 1992 Long-Term Incentive Plan--incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.10* Form of Non-Employee Director Initial/Annual Option Agreement under the
1992 Long-Term Incentive Plan -incorporated by reference to Exhibit 10.30
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1992 (SEC File No. 0-18902).
10.11* Form of Non-Employee Director Elective Option Agreement under the 1992
Long-Term Incentive Plan -incorporated by reference to Exhibit 10.31 to
the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1992 (SEC File No. 0-18902).
10.12* Form of Incentive Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.13* Form of Non-Qualified Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.14* Form of Performance Unit Award under the 1992 Long-Term Incentive Plan --
incorporated by reference to Exhibit 10.34 to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1992 (SEC File No.
0-18902).
10.15* Deferred Compensation Plan for Directors -- incorporated by reference to
Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1992 (SEC File No. 0-18902).
10.16* Executive Incentive Plan -- incorporated by reference to the description
of such Plan as set forth under "Compensation Pursuant to Plans -
Executive Incentive Plan" in the Company's Proxy Statement for its 1992
Annual Meeting of Shareholders (SEC File No. 0-18902).
10.17 Lease Agreement dated January 11, 1993 between Thomas L. Koster, Inc.,
d/b/a/ Realvesco Properties and Health Risk Management, Inc., as amended
by First Amendment to Lease Agreement dated January 29, 1993, related to
the Company's offices at 5250 Lovers Lane, Portage, Michigan --
incorporated by reference to Exhibit 10.34 to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1993 (SEC File No.
0-18902).
10.18 Second Amendment to Lease dated July 22, 1997 for the Lease Agreement
dated January 11, 1993 between Thomas L. Koster, Inc., d/b/a/ Realvesco
Properties and Health Risk Management, Inc., related to the Company's
offices at 5250 Lovers Lane, Portage, Michigan--incorporated by reference
to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1997 (SEC File No. 0-18902).
10.19 Security Agreement dated June 24, 1994 relating to Revolving Credit and
Term Loan Agreement of same date -- incorporated by reference to Exhibit
10.31 to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1994 (SEC File No. 0-18902).
10.20 Management Services Agreement dated February 24, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Oxford Health Plans (PA), Inc. - incorporated by
reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 (SEC File No. 0-18902).
<PAGE>
10.21 Health Care Excess Risk Insurance Policy dated April 13, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Kentucky Medical Insurance Company -- incorporated
by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 (SEC File No. 0-18902).
10.22 Lease agreement dated May 5, 1998, between MEPC O &I, Inc. and Health
Risk Management, Inc. related to the Company's offices at 10900 Hampshire
Avenue South, Minneapolis, Minnesota and Amendment of Lease dated
September 16, 1998 -- incorporated by reference to Exhibit 10.43 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1998 (SEC File No. 0-18902).
10.23 Amended and Restated Revolving Credit and Term Loan Agreement between
Health Risk Management, Inc. and U.S. Bank National Association dated May
1, 1998 -- incorporated by reference to Exhibit 10.44 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1998 (SEC
File No. 0-18902).
10.24 First Amendment to the Credit Agreement between Health Risk Management,
Inc. and U.S. National Bank Association dated January 27, 1999 --
incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 (SEC File No.
0-18902).
10.25 Second Amendment to the Credit Agreement between Health Risk Management,
Inc. and U.S. National Bank Association dated June 30, 1999.
10.26 Sublease Agreement dated February 10, 1999 between Day & Zimmermann, Inc.
and Health Risk Management, Inc. as amended by First Amendment to
Sublease dated April 6, 1999, related to the Company's offices at 1818
Market Street, Philadelphia, Pennsylvania.
10.27 Amended and Restated HealthChoices Southeast Agreement between the
Commonwealth of Pennsylvania (Department of Public Welfare) and Oxford
Health Plans (PA), Inc. dated January 1, 1999.
21. List of subsidiaries.
23. Consent of Independent Auditors.
27.1 Financial Data Schedule for the Year ended June 30, 1999 (filed in
electronic format only).
- --------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
EXECUTION VERSION
SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), made and
entered into as of June 30, 1999, is by and between Health Risk Management,
Inc., a corporation organized under the laws of the State of Minnesota (the
"Borrower"), and U.S. Bank National Association, a national banking association
(the "Bank").
RECITALS
A. The Bank and the Borrower entered into an Amended and Restated
Revolving Credit and Term Loan Agreement dated as of May 1, 1998 as amended by a
First Amendment to Credit Agreement dated as of January 27, 1999 (the "Credit
Agreement").
B. The Borrower desires to amend certain provisions of the Credit
Agreement, and the Bank has agreed to make such amendments, subject to the terms
and conditions set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby covenant
and agree to be bound as follows:
Section 1. Capitalized Terms. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the Credit
Agreement, unless the context shall otherwise require.
Section 2. Amendments. The Credit Agreement is hereby amended as
follows:
2.1 Amended Definitions. The definitions of "EBITDA" and "Revolving
Credit Commitment" contained in Section 1.1 of the Credit Agreement are deleted
in their respective entirety and the following definitions are substituted in
lieu thereof in the correct alphabetical order:
"EBITDA": For any period of determination, the
non-consolidated net income of the Borrower before provision for income
taxes, interest expense (including, without limitation, implicit
interest expense on Capitalized Leases), depreciation and amortization,
all as determined in accordance with GAAP, excluding therefrom (to the
<PAGE>
extent included): (a) non-operating gains (including, without
limitation, extraordinary or nonrecurring gains, gains from the
discontinuance of operations and gains arising from the sale of assets
other than inventory) during the applicable period; and (b) similar
nonoperating losses during such period.
"Revolving Credit Commitment": The maximum unpaid principal
amount of Revolving Loans which may from time to time be outstanding
hereunder, being initially $6,000,000, as the same may be reduced from
time to time pursuant to Section 4.3 or 4.5 and, as the context may
require, the agreement of the Bank to make Revolving Loans to the
Borrower subject to the terms and conditions of this Agreement.
2.2 Deleted Definitions. Section 1.1 of the Credit Agreement is further
amended by deleting the definition of "Consolidated Leverage Ratio",
"Consolidated Fixed Charge Coverage Ratio", "Consolidated Operating Income" and
"Consolidated Net Worth" in their respective entirety.
2.3 New Definitions. Section 1.1 of the Credit Agreement is further
amended by adding the definitions of "Asset Disposition," "Capital Stock," "Cash
Flow Leverage Ratio," "Consolidated Net Income," "Consolidated Net Worth,"
"EBT," "Equity Interests," "Fixed Charge Coverage Ratio," "Fixed Charge Tax
Deduction," "Net Available Proceeds," "Revolving Loan Facility Fee," "Surplus
Note," "Term Loan Facility Fee," and "Unused Revolving Commitment" thereto in
correct alphabetical order:
"Asset Disposition" means (a) the sale, lease, conveyance or
other disposition of any assets or rights (including, without
limitation, by way of a sale and leaseback) other than licensing of
software or the sale or other disposition of inventory, each in the
ordinary course of business consistent with past practices and (b) the
issue or sale by the Borrower or any of its Subsidiaries of Equity
Interests of any of the Borrower's Subsidiaries, in the case of either
clause (a) or (b), whether in a single transaction or a series of
related transactions.
"Capital Stock": (a) in the case of a corporation, corporate
stock, (b) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents
(however designated) of corporate stock, (c) in the case of a
partnership or limited liability company, partnership or membership
interests (whether general or limited) and (d) any other interest or
participation that confers on a Person the right to receive a share of
the profits and losses of, or distributions of assets of, the issuing
Person.
<PAGE>
"Cash Flow Leverage Ratio" means, for any period of
determination, the ratio of:
(a) the consolidated interest-bearing Indebtedness of the
Borrower and its Subsidiaries as of the last day of
such period, to
(b) EBITDA for such period, plus the maximum amount of
HRMPA's dividend payments to the Borrower permitted
during such period by any Insurance Regulatory
Authority, minus Capital Expenditures incurred during
such period, minus Software Capital Expenditures
incurred during such period,
all as calculated in accordance with GAAP.
"Consolidated Net Income": For any period of determination,
the consolidated net income of the Borrower and its Subsidiaries as
determined in accordance with GAAP.
"Consolidated Net Worth": As of any date of determination, the
sum of the amounts set forth on the consolidated balance sheet of the
Borrower as the sum of the common stocks, preferred stock, additional
paid-in capital and retained earnings of the Borrower (excluding
treasury stock), minus the positive amount, if any, by which book value
of all assets of the Borrower and its Subsidiaries that would be
treated as intangibles under GAAP as at such date (including, without
limitation, all such items as goodwill, trademarks, trade names,
service marks, copyrights, patents, licenses, unamortized debt discount
and unamortized deferred charges) exceeds the book value of such assets
as at June 30, 1999.
"EBT": For any period of determination, the non-consolidated
net income of the Borrower before provision for income taxes, all as
determined in accordance with GAAP, excluding therefrom (to the extent
included): (a) non-operating gains (including, without limitation,
extraordinary or nonrecurring gains, gains from the discontinuance of
operations and gains arising from the sale of assets other than
inventory) during the applicable period; and (b) similar nonoperating
losses during such period.
"Equity Interests" means Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding any
debt security that is convertible into, or exchangeable for, Capital
Stock).
<PAGE>
"Fixed Charge Coverage Ratio": For any period of
determination, the ratio of:
(a) the maximum amount of HRMPA's dividend payments to
the Borrower during such period permitted by any
Insurance Regulatory Authority, plus EBT for such
period, plus the Fixed Charge Tax Deduction for such
period, to
(b) consolidated interest expense of the Borrower and its
Subsidiaries during such period, plus all scheduled
payments of principal upon interest-bearing
Indebtedness of the Borrower or any Subsidiary during
such period, plus all obligations of the Borrower or
any Subsidiary as lessee under any Capitalized Lease
during such period, plus all scheduled payments of
interest or principal under the Surplus Note during
such period and without duplication, plus one-third
of the aggregate amount outstanding upon the
Revolving Note on the last day of such period,
all as determined in accordance with GAAP.
"Fixed Charge Tax Deduction": As of any period of
determination, the amount equal to the aggregate federal and state tax
deductions allowable to the Borrower in connection with its payment of
taxes upon the annualized assumed interest paid by the Borrower upon
the fixed charges specified in clause (b) of the definition of "Fixed
Charge Coverage Ratio" multiplied by the applicable tax rates, provided
that the Borrower pays or accrues the relevant taxes to which such
deduction is allowable.
"Net Available Proceeds": The aggregate cash proceeds received
by the Borrower or any of its Subsidiaries in respect of any Asset
Disposition (including, without limitation, any cash received upon the
sale or other disposition of any non-cash consideration received in any
Asset Disposition), net of the direct costs relating to such Asset
Disposition (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements) and any reserve for
adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"Revolving Loan Facility Fee": As defined in Section 3.2(b).
"Surplus Note" means that certain Promissory Note dated
January 22, 1999 from HRMPA to Oxford Health Plans, Inc. in the
original principal amount of $2,500,000, as the same may be amended,
restated or otherwise modified from time to time with the prior written
consent of the Bank.
<PAGE>
"Term Loan Facility Fee": As defined in Section 3.2(a).
"Unused Revolving Commitment": As of any date of
determination, the amount by which the Revolving Credit Commitment
exceeds the aggregate outstanding principal balance of the Revolving
Note on such date.
2.4 Facility Fees. Section 3.2 of the Credit Agreement is deleted in
its entirety and the following is substituted in lieu thereof:
Section 3.2 Facility Fees.
(a) Term Loan Facility Fee. The Borrower shall pay to the
Bank fees (the "Term Loan Facility Fee") in an amount
equal to 3/8% per annum applied to the daily amount
of the outstanding principal balance of the Term Loan
during the preceding quarter. Such Term Loan Facility
Fees are payable in arrears quarterly on the last day
of each quarter and on the earlier of the scheduled
maturity of the Term Loan or the date on which the
Term Loan is accelerated.
(b) Revolving Loan Facility Fee. The Borrower shall pay
to the Bank fees (the "Revolving Loan Facility Fee")
in an amount equal to 3/8% per annum applied to the
daily amount of the Revolving Commitment during the
preceding quarter. Such Revolving Commitment Fees are
payable in arrears quarterly on the last day of each
quarter and on the Revolving Loan Termination Date.
2.5 Mandatory Prepayment and Revolver Reduction. The following new
Section 4.5 is added to the Credit Agreement immediately following Section 4.4
thereof:
Section 4.5 Mandatory Prepayment and Revolver Reduction.
(a) The Borrower shall immediately notify the Bank upon
the receipt by the Borrower or any Subsidiary of any
Net Available Proceeds. With respect to each
transaction which generates Net Available Proceeds,
the Borrower shall pay, or cause to be paid, to the
Bank (a) 25% of the first $10,000,000 of such Net
Available Proceeds and (b) 100% of the portion of any
such Net Available Proceeds over $10,000,000. Such
monies shall be remitted to the Bank as soon as the
same shall have been received by the Borrower or any
Subsidiary and shall be applied as follows:
<PAGE>
(i) first, in payment of the installments of
principal upon the Term Loan, in inverse
order of their maturities and, if the Term
Loan has been converted to a Quoted Rate
Advance, to the amounts contemplated by
Section 2.3,
(ii) second, to the interest and commitment fees
accrued upon the Revolving Loans, and
(iii) third, to the principal amount outstanding
upon the Revolving Loans.
(b) The Revolving Credit Commitment shall be
automatically and permanently reduced by an amount
equal to any Net Available Proceeds allocable to the
principal amount of the Revolving Loans pursuant to
Section 4.5(a)(iii) of this Agreement.
2.6 Purchase of Assets. Section 8.3 of the Credit Agreement is deleted
in its entirety and the following is substituted in lieu thereof:
Section 8.3 Purchase of Assets. Except for the transactions
contemplated by the Acquisition Documents, purchase or lease or
otherwise acquire all or substantially all of the assets of any Person
(except for purchases or other transfers by the Borrower or a
wholly-owned Subsidiary from a wholly-owned Subsidiary) in an amount
not in excess of $1,000,000 for any such acquisition, and in an
aggregate amount which, together with Investments permitted under
Section 8.9; provided, that any such acquisition would not cause an
Adverse Event.
2.7 Amended Financial Covenants. Sections 8.16 through 8.21 of the
Credit Agreement are deleted in their respective entirety and the following
sections are substituted in lieu thereof:
Section 8.16 [Reserved]
Section 8.17 Consolidated Net Worth. At any time permit its
Consolidated Net Worth to be less than the sum of (a) its Consolidated
Net Worth as at June 30, 1999 plus (b) 85% of its cumulative positive
Consolidated Net Income attributable to the period from and after June
30, 1999.
Section 8.18 Consolidated Net Income. At any time permit its
Consolidated Net Income to be less than the following indicated amount
for the applicable fiscal quarter of the Borrower:
<PAGE>
Minimum Consolidated
Net Income Fiscal Quarter Ended
---------- --------------------
$900,000 September 30, 1999
$950,000 December 31, 1999
$1,050,000 March 31, 2000
$1,150,000 June 30, 2000
$1,250,000 September 30, 2000
$1,350,000 December 31, 2000
$1,450,000 March 31, 2001
$1,550,000 June 30, 2001
$1,650,000 September 30, 2001
$1,750,000 December 31, 2001
$1,850,000 March 31, 2002
Section 8.19 Cash Flow Leverage Ratio. At any time permit the
ratio of the Cash Flow Leverage Ratio for the period of four
consecutive fiscal quarters ending on such date to be greater than (a)
1.60 to 1.00 as of December 31, 1999, March 31, 2000 and June 30, 2000,
(b) 0.90 to 1.00 as of September 30, 2000, December 31, 2000, March 31,
2001 and June 30, 2001 and (c) 0.75 to 1.00 as of September 30, 2001
and the last day of each fiscal quarter occurring thereafter.
Section 8.20 Fixed Charge Coverage Ratio. At any time permit
the Fixed Charge Coverage Ratio for any period of four consecutive
fiscal quarters to be less than (a) 1.05 to 1.00 for the four fiscal
quarters ended on December 31, 1999, March 31, 2000 and June 30, 2000,
(b) 1.15 to 1.00 for the four fiscal quarters ended on September 30,
2000, December 31, 2000, March 31, 2001 and June 30, 2001 and (c) 1.75
to 1.00 for the four fiscal quarters ended on September 30, 2001 and on
the last day of any fiscal quarter occurring thereafter
Section 8.21 Unused Revolving Commitment. At any time permit
the average daily Unused Revolving Commitment to be less than the
following indicated amounts for the indicated fiscal quarters: (a)
$250,000 for the fiscal quarter ending September 30, 1999, (b) $500,000
for the fiscal quarter ending December 31, 1999 and (c) $750,000 for
the fiscal quarter ending on March 31, 1999 and for any fiscal quarter
ending thereafter.
Section 3. Effectiveness of Amendments. The amendments contained in
this Amendment shall become effective upon delivery by the Borrower of, and
compliance by the Borrower with, the following:
3.1 This Amendment, duly executed by the Borrower.
<PAGE>
3.2 A copy of the resolutions of the Board of Directors of the Borrower
authorizing the execution, delivery and performance of this Amendment certified
as true and accurate by its Secretary or Assistant Secretary, along with a
certification by such Secretary or Assistant Secretary (i) certifying that there
has been no amendment to the Articles of Incorporation or Bylaws of the Borrower
since true and accurate copies of the same were previously delivered to the
Bank, and (ii) identifying each officer of the Borrower authorized to execute
this Amendment and any other instrument or agreement executed by the Borrower in
connection with this Amendment (collectively, the "Amendment Documents"), and
certifying as to specimens of such officer's signature and such officer's
incumbency in such offices as such officer holds.
3.3 Certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if any) with
respect to this Amendment.
3.4 Reaffirmations of Security Agreement in the forms of Exhibits A-1,
A-2 and A-3, duly executed by the corporations indicated therein.
3.5 A good standing certificate for the Borrower issued not more than
10 days prior to the date of this Amendment.
3.6 The Bank shall have received a non-refundable amendment fee in the
amount of $7,500.
3.7 The Borrower shall have satisfied such other conditions as
specified by the Bank, including payment of all unpaid legal fees and expenses
incurred by the Bank through the date of this Amendment in connection with the
Credit Agreement and the Amendment Documents.
Section 4 Defaults and Waivers.
4.1 Events of Default and Unmeasured Events of Default.
(a) Capital Expenditures. The Borrower defaulted under Section
8.16 of the Credit Agreement by making Capital Expenditures in an
amount in excess of $14,500,000 during the four fiscal quarters ending
on or about March 31, 1999.
(b) Consolidated Tangible Net Worth. The Borrower defaulted
under Section 8.17 of the Credit Agreement by permitting its
Consolidated Tangible Net Worth to be less than $8,750,000 as at March
31, 1999.
(c) Consolidated Leverage Ratio. The Borrower defaulted under
Section 8.18 of the Credit Agreement by permitting the ratio of the
Borrower's consolidated total liabilities (as determined in accordance
with GAAP) to Consolidated Tangible Net Worth to be greater than 4.00
to 1.00 as at March 31, 1999.
<PAGE>
4.2 Waiver. Upon the date on which this Amendment becomes effective,
the Bank hereby waives the Borrower's Defaults and Events of Default described
in the preceding Sections 4.1(a) through 4.1(c) (the "Existing Defaults"). The
waiver of the Existing Defaults set forth above is limited to the express terms
thereof, and nothing herein shall be deemed a waiver by the Bank of any other
term, condition, representation or covenant applicable to the Borrower under the
Credit Agreement (including but not limited to any future occurrence similar to
the Existing Defaults) or any of the other agreements, documents or instruments
executed and delivered in connection therewith, or of the covenants described
therein. The waivers set forth herein shall not constitute a waiver by the Bank
of any other Default or Event of Default, if any, under the Credit Agreement,
and shall not be, and shall not be deemed to be, a course of action with respect
thereto upon which the Borrower may rely in the future, and the Borrower hereby
expressly waives any claim to such effect.
Section 5. Representations, Warranties, Authority, No Adverse Claim.
5.1 Reassertion of Representations and Warranties, No Default. The
Borrower hereby represents that on and as of the date hereof and after giving
effect to this Amendment (a) all of the representations and warranties contained
in the Credit Agreement are true, correct and complete in all respects as of the
date hereof as though made on and as of such date, except for changes permitted
by the terms of the Credit Agreement, and (b) there will exist no Default or
Event of Default under the Credit Agreement as amended by this Amendment on such
date which has not been waived by the Bank.
5.2 Authority, No Conflict, No Consent Required. The Borrower
represents and warrants that the Borrower has the power and legal right and
authority to enter into the Amendment Documents and has duly authorized as
appropriate the execution and delivery of the Amendment Documents and other
agreements and documents executed and delivered by the Borrower in connection
herewith or therewith by proper corporate, and none of the Amendment Documents
nor the agreements contained herein or therein contravene or constitute a
default under any agreement, instrument or indenture to which the Borrower is a
party or a signatory or a provision of the Borrower's Articles of Incorporation,
Bylaws or any other agreement or requirement of law, or result in the imposition
of any lien on any of its property under any agreement binding on or applicable
to the Borrower or any of its property except, if any, in favor of the Bank. The
Borrower represents and warrants that no consent, approval or authorization of
or registration or declaration with any person, including but not limited to any
governmental authority, is required in connection with the execution and
delivery by the Borrower of the Amendment Documents or other agreements and
documents executed and delivered by the Borrower in connection therewith or the
performance of obligations of the Borrower therein described, except for those
which the Borrower has obtained or provided and as to which the Borrower has
delivered certified copies of documents evidencing each such action to the Bank.
<PAGE>
5.3 No Adverse Claim. The Borrower warrants, acknowledges and agrees
that no events have been taken place and no circumstances exist at the date
hereof which would give the Borrower a basis to assert a defense, offset or
counterclaim to any claim of the Bank with respect to the Borrower's obligations
under the Credit Agreement as amended by this Amendment.
Section 6. Affirmation of Credit Agreement, Further References,
Affirmation of Security Interest. The Bank and the Borrower each acknowledge and
affirm that the Credit Agreement, as hereby amended, is hereby ratified and
confirmed in all respects and all terms, conditions and provisions of the Credit
Agreement, except as amended by this Amendment, shall remain unmodified and in
full force and effect. All references in any document or instrument to the
Credit Agreement are hereby amended and shall refer to the Credit Agreement as
amended by this Amendment. The Borrower confirms to the Bank that the Borrower's
obligations under the Credit Agreement, as amended by this Amendment are and
continue to be secured by the security interest granted by the Borrower in favor
of the Bank under the Security Agreement, and all of the terms, conditions,
provisions, agreements, requirements, promises, obligations, duties, covenants
and representations of the Borrower under such documents and any and all other
documents and agreements entered into with respect to the obligations under the
Credit Agreement are incorporated herein by reference and are hereby ratified
and affirmed in all respects by the Borrower.
Section 7. Merger and Integration, Superseding Effect. This Amendment,
from and after the date hereof, embodies the entire agreement and understanding
between the parties hereto and supersedes and has merged into this Amendment all
prior oral and written agreements on the same subjects by and between the
parties hereto with the effect that this Amendment, shall control with respect
to the specific subjects hereof and thereof.
Section 8. Severability. Whenever possible, each provision of this
Amendment and the other Amendment Documents and any other statement, instrument
or transaction contemplated hereby or thereby or relating hereto or thereto
shall be interpreted in such manner as to be effective, valid and enforceable
under the applicable law of any jurisdiction, but, if any provision of this
Amendment, the other Amendment Documents or any other statement, instrument or
transaction contemplated hereby or thereby or relating hereto or thereto shall
be held to be prohibited, invalid or unenforceable under the applicable law,
such provision shall be ineffective in such jurisdiction only to the extent of
such prohibition, invalidity or unenforceability, without invalidating or
rendering unenforceable the remainder of such provision or the remaining
<PAGE>
provisions of this Amendment, the other Amendment Documents or any other
statement, instrument or transaction contemplated hereby or thereby or relating
hereto or thereto in such jurisdiction, or affecting the effectiveness, validity
or enforceability of such provision in any other jurisdiction.
Section 9. Successors. The Amendment Documents shall be binding upon
the Borrower and the Bank and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Bank and the successors and assigns
of the Bank.
Section 10. Legal Expenses. As provided in Section 10.2 of the Credit
Agreement, the Borrower agrees to reimburse the Bank, upon execution of this
Amendment, for all reasonable out-of-pocket expenses (including attorneys' fees
and legal expenses of Dorsey & Whitney LLP, counsel for the Bank) incurred in
connection with the Credit Agreement, including in connection with the
negotiation, preparation and execution of the Amendment Documents and all other
documents negotiated, prepared and executed in connection with the Amendment
Documents, and in enforcing the obligations of the Borrower under the Amendment
Documents, and to pay and save the Bank harmless from all liability for, any
stamp or other taxes which may be payable with respect to the execution or
delivery of the Amendment Documents, which obligations of the Borrower shall
survive any termination of the Credit Agreement.
Section 11. Headings. The headings of various sections of this
Amendment have been inserted for reference only and shall not be deemed to be a
part of this Amendment.
Section 12. Counterparts. The Amendment Documents may be executed in
several counterparts as deemed necessary or convenient, each of which, when so
executed, shall be deemed an original, provided that all such counterparts shall
be regarded as one and the same document, and either party to the Amendment
Documents may execute any such agreement by executing a counterpart of such
agreement.
Section 13. Governing Law. THE AMENDMENT DOCUMENTS SHALL BE GOVERNED BY
THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT
OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO
NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES.
[The remainder of this page has been intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the date and year first above written.
BORROWER:
HEALTH RISK MANAGEMENT, INC.
By:
Title:
BANK:
U.S. BANK NATIONAL ASSOCIATION
By:
Title:
<PAGE>
EXHIBIT A-1 TO SECOND AMENDMENT
TO CREDIT AGREEMENT
REAFFIRMATION OF SECURITY AGREEMENT
June 30, 1999
U.S. Bank National Association
U.S. Bank Place - MPFP0907
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Re: Security Agreement Executed by the Undersigned dated June 24,
1994, (the "Security Agreement") Regarding the Liabilities (as
defined in the Security Agreement) of Health Risk Management,
Inc. (the "Borrower") to U.S. Bank National Association (the
"Bank")
This will confirm (a) that the undersigned hereby consents to the terms
of that Second Amendment to Credit Agreement dated concurrently herewith by and
between the Borrower and the Bank (the "Amendment") and to the execution and
delivery of the Amendment by the Borrower and (b) that the obligations of the
Borrower to the Bank under the Amended and Restated Revolving Credit and Term
Loan Agreement dated as of May 1, 1998, as previously amended and as amended by
the Amendment, constitute "Liabilities" of the Borrower to the Bank within the
meaning of the above-referenced Security Agreement. This will further confirm
that as modified by clause (b) of the immediately preceding sentence, all of the
terms, covenants and conditions of the Security Agreement remain in full force
and effect.
INSTITUTE FOR HEALTHCARE QUALITY, INC.,
a Minnesota corporation
By:
Its:
<PAGE>
EXHIBIT A-2 TO SECOND AMENDMENT
TO CREDIT AGREEMENT
REAFFIRMATION OF SECURITY AGREEMENT
June 30, 1999
U.S. Bank National Association
U.S. Bank Place - MPFP0907
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Re: Security Agreement Executed by the Undersigned dated June 24,
1994, (the "Security Agreement") Regarding the Liabilities (as
defined in the Security Agreement) of Health Risk Management,
Inc. (the "Borrower") to U.S. Bank National Association (the
"Bank")
This will confirm (a) that the undersigned hereby consents to the terms
of that Second Amendment to Credit Agreement dated concurrently herewith by and
between the Borrower and the Bank (the "Amendment") and to the execution and
delivery of the Amendment by the Borrower and (b) that the obligations of the
Borrower to the Bank under the Amended and Restated Revolving Credit and Term
Loan Agreement dated as of May 1, 1998, as previously amended and as amended by
the Amendment, constitute "Liabilities" of the Borrower to the Bank within the
meaning of the above-referenced Security Agreement. This will further confirm
that as modified by clause (b) of the immediately preceding sentence, all of the
terms, covenants and conditions of the Security Agreement remain in full force
and effect.
HEALTH RESOURCE MANAGEMENT, LTD,
an Alberta, Canada corporation
By:
Its:
<PAGE>
EXHIBIT A-3 TO SECOND AMENDMENT
TO CREDIT AGREEMENT
REAFFIRMATION OF SECURITY AGREEMENT
June 30, 1999
U.S. Bank National Association
U.S. Bank Place - MPFP0907
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Re: Security Agreement Executed by the Undersigned dated June 24,
1994, (the "Security Agreement") Regarding the Liabilities (as
defined in the Security Agreement) of Health Risk Management,
Inc. (the "Borrower") to U.S. Bank National Association (the
"Bank")
This will confirm (a) that the undersigned hereby consents to the terms
of that Second Amendment to Credit Agreement dated concurrently herewith by and
between the Borrower and the Bank (the "Amendment") and to the execution and
delivery of the Amendment by the Borrower and (b) that the obligations of the
Borrower to the Bank under the Amended and Restated Revolving Credit and Term
Loan Agreement dated as of May 1, 1998, as previously amended and as amended by
the Amendment, constitute "Liabilities" of the Borrower to the Bank within the
meaning of the above-referenced Security Agreement. This will further confirm
that as modified by clause (b) of the immediately preceding sentence, all of the
terms, covenants and conditions of the Security Agreement remain in full force
and effect.
HRM CLAIM MANAGEMENT, INC.,
a Minnesota corporation
By:
Its:
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (the "Sublease") is made this 10th day of
February, 1999, between DAY & ZIMMERMANN, INC., a Maryland corporation (the
"Sublandlord"), and HEALTH RISK MANAGEMENT, INC. , a Minnesota corporation (the
"Subtenant"). (Sublandlord and Subtenant are hereinafter sometimes collectively
referred to as the "Parties").
W I T N E S S E T H
Sublandlord is party to a certain Lease Agreement, dated December 18,
1975, as amended by various amendments listed on Exhibit A attached hereto and
incorporated herein, wherein Sublandlord, as tenant, has leased certain space
(the "Demised Premises") in the building (the "Building") located at 1818 Market
Street, Philadelphia, PA. The documents comprising the aforesaid Lease Agreement
are listed on Exhibit A attached hereto and are referred to collectively herein
as the "Master Lease" By various assignments, the rights of the landlord
("Landlord") under the Master Lease have been assigned to 1818 Market - VEF II,
L.L.C.
Sublandlord desires to sublease to Subtenant that portion of the
Demised Premises consisting of a portion of the nineteenth (19th) floor, said
portion containing approximately [18,000] rentable square feet, as shown on the
floor plan attached hereto as Exhibit B and incorporated herein (the
"Premises"), and Subtenant desires to sublease the Premises from Sublandlord,
upon the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing preambles, the
payment of Ten Dollars ($10.00) by Subtenant to Sublandlord, the covenants and
agreements hereinafter set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the Parties hereby covenant, acknowledge, represent and
agree as follows:
1. DEMISE: TERM. Sublandlord hereby subleases to Subtenant, and
Subtenant hereby subleases from Sublandlord, the Premises, for the Sublease
Term. The Sublease Term shall commence on April 1, 1999 and shall expire at
11:59 p.m. on June 30, 2004 or on such earlier date upon which said term may
expire or terminate pursuant to any of the conditions of limitation or other
provisions of the Master Lease or this Sublease. Subtenant shall have no right
to extend the term of the Master Lease.
2. PREMISES. The Premises consist of approximately [18,000] r.s.f on
the 19th floor of the Building, as shown on Exhibit B. Subtenant shall have no
right to expand the size of the Premises by exercise of any expansion options or
rights of first refusal or rights of first offer contained in the Master Lease.
Subtenant shall have the Subtenant's ROFO Right as described in Section 21
below.
<PAGE>
Neither the Sublandlord nor its agents or employees have made any
representations or warranties, express or implied, written or oral, with respect
to the Premises or the Building containing the Premises and except as expressly
set forth in this Sublease, no rights, easements or licenses are acquired by the
Subtenant by implication or otherwise. The taking of possession of the Premises
by Subtenant shall be conclusive evidence that the Subtenant accepts the
Premises and the Building containing the Premises in their "as is, where is"
condition, that all obligations imposed upon Sublandlord under this Sublease
with respect to the condition of the Premises have been fully performed and that
the Premises were in good condition at the time possession was taken, provided,
however, that the foregoing is not intended to limit Landlord's repair and
maintenance obligations under the Master Lease. Further, Subtenant hereby agrees
that if Landlord requires removal of any alterations or improvements to the
Premises (other than those presently existing in the Premises) in accordance
with the provisions of the Master Lease, Subtenant shall remove the same and
restore the Premises in accordance with the Master Lease, at Subtenant's sole
cost and expense, prior to expiration of the Sublease Term. In addition,
Subtenant shall, if required by Sublandlord, prior to the expiration of the
Sublease Term, remove alterations and improvements made by or on behalf of
Subtenant (or any sub-subtenant or assignee) and shall repair all damage to the
Premises resulting from such removal and restore the Premises, at Subtenant's
sole cost and expense. At the time Subtenant requests approval for making any
alterations and improvements Subtenant may ask Sublandlord whether Sublandlord
will require the removal of those alterations under the previous sentence, and
Sublandlord shall so advise Subtenant in writing.
Notwithstanding anything contained in this Sublease to the contrary,
the Premises shall be measured by Landlord in accordance with the current BOMA
Standard, and the Landlord's measurement shall be used for all purposes in this
Sublease. Promptly after completion of that measurement, Sublandlord and
Subtenant shall enter into an amendment to this Sublease setting forth the
rentable square footage of the Premises, the total annual Fixed Rent, and the
subtenant's proportionate shares for real estate taxes and operating expenses.
3. RENT.
(1) Fixed Rent.
(i) Subtenant shall pay to Sublandlord annual rent (the "Fixed
Rent") during the Sublease Term in the amount equal to the product of the
rentable square feet in the Premises and $17.00 per r.s.f.. The Fixed Rent shall
be payable in equal monthly installments, in advance, without prior notice or
demand, and without any set-off or deduction, on the first day of each month
during the Sublease Term, (subject to Section 3(a)(iii) below), in lawful money
of the United States of America, at the address of Sublandlord set forth in
Section 16 of this Sublease or at such other address as Sublandlord may from
time to time designate by notice to Subtenant.
<PAGE>
(ii) All Fixed Rent and all other amounts payable by Subtenant
under this Sublease (collectively, "Rent"), shall constitute and be collectible
as rent under this Sublease, and shall be payable to Sublandlord at its address
as set forth herein, unless Sublandlord shall otherwise so direct in writing.
(iii) Subtenant shall receive a credit against the Fixed Rent
first coming due under this Sublease in the aggregate amount equal to the
product of the rentable square feet in the Premises and Fifteen Dollars and
Twenty-five Cents ($15.25) per r.s.f. Nothing contained in this Section
3(a)(iii) shall be construed to relieve Subtenant from any obligation to pay any
additional rent (including without limitation any use and occupancy taxes)
required to be paid under this Sublease.
(2) Additional Rent. Subtenant shall be responsible for all escalation
rental (as defined in Section XXXXV of the Lease but using a 1999 Base Year as
hereinafter provided) allocable to the Premises, as provided in this Section
2(b).
(i) Real Estate Taxes. (A) Subtenant shall pay to Sublandlord,
annually, Subtenant's proportionate share of any excess over the Base Real
Estate Tax (hereinafter defined) of the amount of the annual real estate taxes
assessed against the real estate of which the Demised Premises is a part,
including the Building, the underlying land and associated air rights, for each
year (and partial year) during the term of this Lease. Subtenant's proportionate
share of such excess shall equal a fraction, the numerator of which is the
rentable square footage in the Premises and the denominator of which is 985,066.
Subtenant's proportionate share of such excess shall be paid by Subtenant
annually within thirty (30) days after Subtenant receives from Sublandlord a
statement showing the amount of such annual real estate taxes and Subtenant's
proportionate share of such excess determined as aforesaid. The sums due under
this Section 2(b)(i) shall be apportioned for any partial calendar year included
within the term at the beginning and end of the term of this Sublease, as the
same may be extended.
(B) The term "Base Real Estate Tax" shall mean all real estate
taxes assessed against the real estate of which the Demised Premises is a part,
including the Building, the underlying land and associated air rights, for the
year 1999.
(C) If Sublandlord shall receive a refund of Real Estate Taxes
paid for a period of time including the Term of this Sublease, then Sublandlord
shall remit to Subtenant the portion thereof allocable to the Premises for the
period within the Sublease Term.
(ii) Operating Expenses.
(A) Unless otherwise defined in this Sublease, capitalized terms
used in this Section 3(b)(ii) shall have the meaning given them in the Master
Lease. For purposes of this Section 3(b)(ii), the following terms shall have the
following meanings:
"Subtenant's Proportionate Share" shall mean a
fraction, the numerator of which is the number of rentable
square feet in the Premises, and the denominator of which is
923,597.
<PAGE>
"Base Year Expenses" shall mean Operating
Expenses for the calendar year 1999.
"Sublandlord's Statement" shall mean a statement
by Sublandlord, to be delivered by Sublandlord to Subtenant
along with a copy of the Escalation Statement received by
Sublandlord from Landlord, which Sublandlord's Statement shall
set forth (a) Subtenant's Expense Differential for the year
covered by the Escalation Statement, (b) Subtenant's
Proportionate Share of Subtenant's Expenses Differential, and
(c) Subtenant's Monthly Expense Payment.
"Subtenant's Expense Differential" shall mean
the difference between the Current Year Expenses (as shown on
any Escalation Statement provided by Landlord under the Master
Lease) and Base Year Expenses (as defined in this Sublease).
"Subtenant's Monthly Expense Payment" shall mean
an amount equal to 1/12th of Subtenant's Proportionate Share of
Subtenant's Expense Differential.
(B) Subtenant shall pay to Sublandlord, as additional rent for
the Premises, Subtenant's Proportionate Share of Subtenant's Expense
Differential, in the amounts and at the times as hereinafter provided.
(I) Sublandlord shall send to Subtenant a copy of the
Escalation Statement received by Sublandlord from Landlord with respect to
calendar year 1999. The Operating Expenses shown on that Escalation Statement
for 1999 shall be the Base Year Expenses for purposes of this Sublease.
(II) After Sublandlord shall receive from Landlord an
Escalation Statement for calendar year 2000, Sublandlord shall forward a copy of
that Escalation Statement to Subtenant, accompanied by Sublandlord's Statement.
(III) Within 30 days after receipt of the Escalation
Statement and Sublandlord's Statement for calendar year 2000, Subtenant shall
pay to Sublandlord: (a) the amount of Subtenant's Proportionate Share of
Subtenant's Expense Differential; and (b) an amount equal to the product of
Subtenant's Monthly Expense Payment and the number of full calendar months
between January 1, 2001 and the first day of the first month following the date
on which the Sublandlord's Statement is received by Subtenant. Commencing on the
first day of the month following the month in which the Sublandlord's Statement
with respect to calendar year 2000 is received by Subtenant and on the first day
of each succeeding month thereafter, Subtenant shall pay to Sublandlord on
account of the Subtenant's Expense Differential for the then current calendar
year (i.e., 2001), the Subtenant's Monthly Expense Payment set forth in said
Sublandlord's Statement until and including the month during which Subtenant
shall receive the next Sublandlord's Statement.
<PAGE>
(IV) During each subsequent calendar year after 2000,
Sublandlord shall send to Subtenant a copy of the Escalation Statement received
by Sublandlord from Landlord, accompanied by Sublandlord's Statement. If such
Sublandlord's Statement shall disclose that the aggregate amount of Subtenant's
Monthly Expense Payments theretofore made by Subtenant on account of the Current
Year Expenses shall be less than the amount of Subtenant's Proportionate Share
of Subtenant's Expense Differential, then, within 30 days after receipt of such
Escalation Statement and Sublandlord's Statement, Subtenant shall pay to
Sublandlord the amount of the deficiency. If, however, the aggregate amount of
Subtenant's Monthly Expense Payments made by Subtenant on account of the Current
Year Expenses shall exceed the amount of Subtenant's Proportionate Share of the
Subtenant's Expense Differential, then, with the submission of such Escalation
Statement and Sublandlord's Statement, Sublandlord shall pay to Subtenant the
amount of such excess.
(V) Within 30 days after receipt of Sublandlord's Statement
and Escalation Statement for calendar years 2001 and thereafter, Subtenant shall
also pay to Sublandlord the amount, if any, by which (i) the product of the
Subtenant's Monthly Expense Payment specified in the Sublandlord's Statement and
the number of full calendar months between the commencement of the calendar year
during which such Sublandlord's Statement is rendered and the first day of the
first calendar month following the date on which the same is received by
Subtenant exceeds (ii) the Subtenant's Monthly Expense Payments made during the
then current calendar year. Commencing on the first day of the month following
the month in which such Sublandlord's Statement is received and on the first day
of each succeeding month thereafter, Subtenant shall pay to Sublandlord on
account of the Subtenant's Expense Differential for the then current calendar
year, the Subtenant's Monthly Expense Payment set forth in such Sublandlord's
Statement until and including the month during which Subtenant shall receive the
next Escalation Statement and Sublandlord's Statement.
(VI) The amount of Subtenant's Proportionate Share of
Subtenant's Expense Differential for the last year of the term of this Sublease
shall be apportioned to the date of expiration of the term. Any sums owing by
Subtenant or Sublandlord to the other, determined as provided in this Section
2(b)(ii), shall be paid within 30 days after the rendering of the Sublandlord's
Statement during the year following the year in which this Sublease shall
expire. The obligation to make such payment by either Sublandlord or Subtenant
shall survive the termination of this Lease.
(VII) If through the introduction of capital equipment, an
item of Operating Expenses which has been used in the computation of the amount
of the Base Year Expenses shall be eliminated, or reduced in amount, then,
commencing with the Escalation Statement rendered in the year following the year
in which such elimination or reduction occurs, the item of Operating Expenses
shall be eliminated or reduced in like amount from the Base Year Expenses for
purposes of calculating the Subtenant's Expense Differential.
<PAGE>
4. ASSIGNMENT: SUBLETTING. Subtenant will not sublet the Premises, or
any portion thereof, or assign this Sublease in whole or in part, for collateral
purposes or otherwise, or permit use or occupancy of the Premises, or any
portion thereof, by any other person or entity without (i) the prior written
consent of Sublandlord in each instance being first obtained, which consent
Sublandlord shall not unreasonably withhold or delay, and (ii) complying with
the provisions of the Master Lease relating to subleasing of the Premises or the
assignment of this Sublease. Subtenant shall be responsible for all reasonable
expenses (including without limitation attorneys fees) which Sublandlord
reasonably deems necessary to incur in order to protect its interest before
approving/disapproving any sublease or assignment. If Sublandlord approves,
Sublandlord shall request Landlord's consent to any assignment or subletting of
Subtenant's interest in the Premises in accordance with the provisions of the
Master Lease, provided Subtenant hereby acknowledges and agrees that, to the
extent required under the Master Lease, Landlord must ultimately approve any
such assignment or subletting and Sublandlord cannot and does not represent or
warrant as to its ability to obtain such consent. Notwithstanding any such
assignment or subletting of Subtenant's interest hereunder, Subtenant shall
remain liable to Sublandlord for the performance of its obligations under this
Sublease and, to the extent applicable to Subtenant hereunder, the Master Lease.
5. REFERENCE TO MASTER LEASE: SUBORDINATION. Subtenant hereby assumes
and agrees to fully keep, observe and perform all of the obligations on the part
of Sublandlord under the Master Lease, as tenant thereunder (other than payment
to Landlord of rent and additional rent under the Master Lease), to the extent
applicable to or pertaining to the Premises or the use of the Premises, and
Subtenant shall be and become jointly and severally liable with Sublandlord for
the nonperformance thereof, provided, however, that as between Sublandlord and
Subtenant, Subtenant shall be liable to Sublandlord for Subtenant's actions or
nonperformance with respect to the aforesaid obligations. As between Sublandlord
and Subtenant, Sublandlord shall enjoy all of the rights, privileges,
protections and remedies provided to Landlord under the Master Lease or
available to landlords under applicable law. At Subtenant's request, Sublandlord
shall request that Landlord perform Landlord's obligations under the Master
Lease with respect to the Premises. Notwithstanding the foregoing, Sublandlord
shall not have any of the obligations or liabilities of Landlord under the
Master Lease or applicable law and Subtenant shall look solely to Landlord for
the performance of those obligations and satisfaction of those liabilities.
Subtenant acknowledges and agrees that this Sublease is, and at all
times shall be, expressly subject and subordinate to the Master Lease and to any
mortgages, ground leases or other matters to which the Master Lease is or may
hereafter be subject and subordinate. Subtenant agrees to execute and deliver to
Landlord and Sublandlord, and their respective successors or assigns, or to any
other person or corporation designated by Landlord or Sublandlord, any
reasonable instrument(s) requested by Landlord or Sublandlord subordinating this
Sublease to any such items.
<PAGE>
6. INDEMNIFICATION
Subtenant hereby indemnifies and agrees to defend and hold Sublandlord
harmless from and against any and all costs, claims, actions, damages, demands,
expenses (including reasonable attorneys' fees), injuries, judgments,
liabilities, losses and suits, suffered, sustained or incurred by Sublandlord in
connection with or as a result of any accident, act or omission, claim, hazard,
injury, violation of any health, zoning, fire, building or safety code,
ordinance or regulation, death or damage to person or property occurring in the
Premises or arising, directly or indirectly, in whole or part, out of the
business conducted by Subtenant (or any subsubtenant or assignee of Subtenant)
in the Premises, or the use or occupancy of the Premises by Subtenant (or any
subsubtenant or assignee), or arising, directly or indirectly, in whole or in
part, from any act or omission of Subtenant (or any subsubtenant or assignee) or
its licensees, servants, agents, employees or contractors or the breach or
default by Subtenant of any term, provision, covenant, or condition contained in
the Master Lease which Subtenant, by virtue of its occupancy of the Premises or
the provisions of this Sublease, is obligated to perform or in this Sublease;
but excluding any of the foregoing due in whole or in part to the gross
negligence or willfull misconduct of Sublandlord.
7. REPAIR AND MAINTENANCE: UTILITY COSTS: CHARGES.
(1) Throughout the Sublease Term, Subtenant agrees to do the
following at its sole cost and expense:
(1) Make all repairs to and perform all
maintenance of the Premises required to be made or performed by
Sublandlord pursuant to the Master Lease;
(2) Procure at its expense all permits and
licenses pertaining to Subtenant's use of the Premises; and
(3) Comply with all rules and regulations
governing the use and occupancy of the Premises now existing or
hereafter promulgated by Landlord pursuant to the Master Lease.
(2) Throughout the Sublease Term, Subtenant agrees to pay for
all:
(1) charges for telephone usage within the
Premises; and, if Subtenant requires utility services not
required under the Master Lease to be provided by Landlord
without charge, charges for such additional public utility usage
within the Premises.
<PAGE>
(2) Any "special services" (in accordance with
the provisions of Article XXXIV of the Master Lease) requested
from time to time by Subtenant, and all sums payable, if any,
under Article IX(C) of the Master Lease for electricity consumed
in the Premises.
(3) taxes, assessments and other charges that
are due under the Master Lease or otherwise during the Sublease
Term against (x) Subtenant's personal property and (y) any
leasehold improvements to the Premises made by Subtenant. With
respect to such taxes, assessments and other charges, the same
shall be paid on or before the dates they are due and within the
calendar year in which they are assessed. At Landlord's or
Sublandlord's request, Subtenant shall provide to Landlord and
Sublandlord, each year during the Sublease Term, a copy of paid
tax receipts or other documented proof that Subtenant has paid
all taxes due by it on any leasehold improvements or other items
which are taxable as personal property which, if not paid, would
constitute a lien on the Premises. If the taxes on Subtenant's
leasehold improvements are not assessed directly against
Subtenant but result in an increase in operating cost escalation
payable by Sublandlord to Landlord, then Subtenant shall pay to
Sublandlord such portion of the operating cost escalation as
shall be attributable solely to Subtenant's leasehold
improvements.
(iv) If federal, state or local law now or
hereafter imposes any tax, assessment, levy or other charge
(other than any income tax) directly or indirectly upon
Sublandlord or Landlord with respect to this Sublease or the
value thereof, or upon the Subtenant's use or occupancy of the
Premises, or upon the rent, additional rent or any other sums
payable under this Sublease or upon this transaction, Subtenant
shall pay to Sublandlord, as additional rent and upon demand,
the amount of the same. Without limiting the generality of the
foregoing, Subtenant shall pay as additional rent any amounts
due with respect to the Premises for the Philadelphia School
District Use and Occupancy Tax.
8. SUBLANDLORD'S PAYMENT OF FIXED RENT; LATE CHARGES. Sublandlord shall
timely pay or cause to be paid to Landlord the Base Rent payable under the
Master Lease. To the extent Subtenant has not made any payments due hereunder
within five (5) business days after said amount is due, Subtenant shall pay to
Sublandlord a late charge equal to five percent (5%) of the amount of the
delinquent payment. In addition, all unpaid Rent shall bear interest at a rate
equal to the lower of twelve percent per annum or the highest rate permitted by
law, from the due date until the date paid. The amount of the late charges and
interest for any month shall be computed on the aggregate amount of all
delinquent payments, including all accrued late charges and interest, then
outstanding. The provisions of this Section 8 shall in no way relieve Subtenant
of the obligation to make all required payments when due, nor shall these
provisions in any way limit Sublandlord's remedies under this Sublease.
<PAGE>
9. USE; QUIET ENJOYMENT.
(1) The Premises may be used and occupied for general office purposes
permitted by the Master Lease and for no other purpose without the prior written
consent of Sublandlord. Subtenant agrees that the Premises will not be used at
any time for the storage or distribution of any hazardous materials or
substances, or for any other purpose which violates any federal, state or local
environmental statute, ordinance or regulation. Except as specifically set forth
in Section 11 below, Sublandlord makes no representation, express or implied,
with respect to the condition or fitness of the Premises for any particular
purpose.
(2) Subject to receipt of Landlord's Consent pursuant to Section 19
below, Sublandlord covenants that Sublandlord has the right to make this
Sublease and that Subtenant on paying the rent and performing its obligations
hereunder shall peacefully and quietly have, hold and enjoy the Premises
throughout the Term without any manner of hindrance, disturbance or molestation
from Sublandlord or anyone claiming under Sublandlord, subject however to all
the terms and provisions hereof.
10. ALTERATIONS; IMPROVEMENTS.
Subtenant will not make any alterations or improvements to the
Premises, or any portion thereof without: (i) the prior written consent of
Sublandlord in each instance being first obtained, which consent Sublandlord
shall not unreasonably withhold, and (ii) complying with the provisions of the
Master Lease relating to alterations and improvements. Sublandlord shall be
entitled to all of the rights afforded Landlord under the Master Lease with
respect to such alterations improvements without diminishing any of the rights
of Landlord thereunder.
11. SUBLANDLORD'S WORK
Prior to commencement of the term of this Sublease, Sublandlord shall
construct any necessary demising wall and shall perform any fire, life and
safety work required to be performed in any public corridors on the 19th floor
("Sublandlord's Work"), provided however that Subtenant shall be responsible at
its sole cost for providing and installing any doors that Subtenant desires in
the demising wall. Sublandlord's Work shall comply with all applicable codes and
shall be performed at Sublandlord's expense.
On or before February 19, 1999, Subtenant shall provide Sublandlord
with a plan sufficient for obtaining building permits for performance of
Sublandlord's Work, sealed by an architect licensed in Pennsylvania, which plan
shall be reasonably satisfactory to Sublandlord and shall be used as Exhibit B
to this Sublease.
<PAGE>
12. INSURANCE.
(1) Subtenant shall, at its sole cost and expense, obtain and maintain
in effect during the Sublease Term, with a reputable financially-sound company
reasonably acceptable to Sublandlord and Landlord and authorized to do business
in the Commonwealth of Pennsylvania, comprehensive public liability and property
damage insurance with a broad form contractual liability endorsement with a
minimum limit of liability of $3,000,000 for injury or death and damages to any
one person, of $3,000,000 for injury or death arising out of one occurrence, and
$3,000,000 for damage to property, naming Sublandlord, Landlord and Subtenant as
insureds, against any and all claims for personal injury, death or property
damage occurring in, upon, adjacent to, or connected with the Premises or any
part thereof. Subtenant shall pay all premiums and charges therefor and upon
failure to do so Sublandlord may, but shall not be obligated to, make such
payments, in which event Subtenant agrees to pay the amount thereof to
Sublandlord on demand. Such policies shall contain a provision that no act or
omission of Subtenant will affect or limit the obligation of the insurance
company to pay the amount of any loss sustained and shall be noncancellable
except upon thirty (30) days advance written notice to Sublandlord and Landlord.
In the event Subtenant shall fail to obtain such insurance, Sublandlord may, but
shall not be obligated to, obtain the same, in which event the amount of the
premium paid shall be paid by Subtenant to Sublandlord upon demand. Subtenant
shall deliver certificates of insurance evidencing the maintenance of the
insurance coverages required hereby to Sublandlord and Landlord.
(2) Subtenant shall obtain and maintain throughout the Sublease Term
hazard insurance to fully insure its own personal property, including, but not
limited to, furniture, trade fixtures and equipment located on the Premises.
13. WAIVER OF CLAIMS. Sublandlord and Subtenant hereby mutually release
each other from any and all liabilities for any loss or damage caused to their
respective property by casualty, even if such casualty shall be brought about by
the fault or negligence of Sublandlord or Subtenant, respectively, or any
persons claiming under them, provided, however, that said waivers do not
adversely affect the insurance coverages required to be maintained under the
Master Lease or this Sublease or otherwise maintained by a Party and any
additional costs for insurance waivers shall be paid by the Party for whose
benefit said waiver is obtained.
<PAGE>
14. DEFAULT.
(1) It shall be a default on the part of Subtenant under this sublease
if Subtenant shall fail to make timely payment of Rent hereunder, or Subtenant
shall fail to fulfill any of its other obligations, covenants and agreements set
forth herein or under the Master Lease, and such failure shall continue uncured
for five (5) business days after written notice from Sublandlord to Subtenant,
provided however that in no event shall Sublandlord be required to provide such
notice or permit such cure period more than three times in any twelve (12) month
period. Upon the occurrence of an default, Sublandlord shall have all the rights
and remedies with respect to such default as are provided to Landlord under the
Master Lease for default by tenant thereunder. Sublandlord shall have the right,
but shall not be obligated, to cure any breach or default by Subtenant under
this Sublease or the Master Lease, and any and all costs incurred by Sublandlord
in connection with the curing of any such breach or default shall become due and
payable to Sublandlord within five (5) days after written demand to Subtenant
therefor.
(2) Upon default by Subtenant under this Sublease, Sublandlord shall be
entitled to pursue all rights and remedies at law or in equity provided and
Sublandlord's choice of any one right or remedy shall not be exclusive of the
exercise of any other right or remedy. If Sublandlord exercises any remedy for
default by Subtenant resulting in termination of Subtenant's right to possess
the Premises, Sublandlord shall have no obligation to mitigate damages or relet
the Premises or any part hereof for the account of Subtenant. Sublandlord shall
collect the rents from any such reletting and apply the same first to the
payment of its unreimbursed expenses of re-entry, repair and alterations and its
unreimbursed expenses of reletting and second to the payment of Rent and other
expenses, costs and charges herein provided to be paid by Subtenant, and any
excess, costs and charges herein provided to be paid by Subtenant, and any
excess or residue shall be paid to Sublandlord. No such repossession, repairs,
alterations, additions or reletting shall be construed as an eviction or ouster
of Subtenant or as an election on Sublandlord's part to terminate this Sublease,
unless a written notice of such intention is given to Subtenant, nor shall the
same operate to release Subtenant, in whole or in part, from any of Subtenant's
obligations hereunder, and Sublandlord, at any time and from time to time, may
sue and seek a judgment for any deficiencies from time to time remaining after
the application of the proceeds of any such reletting.
(3) The Confession of Judgment Provisions contained in the Master Lease
are hereby expressly made a part of this Sublease and applicable to Subtenant,
as follows:
<PAGE>
Upon termination of this Sublease by Sublandlord after default
by Subtenant, if Tenant shall fail to forthwith peaceably surrender
possession of the Premises to Sublandlord, any attorney may immediately
thereafter, as attorney for Subtenant, or for those claiming under
Subtenant, at the request of Sublandlord, confess judgment in ejectment
against Subtenant and all persons claiming under Subtenant, for the
recovery by Sublandlord of possession of the Premises and costs,
without any liability on the part of Sublandlord or the said attorney,
for which this shall be sufficient warrant, and, upon the confession of
such judgment or judgments, respectively, if Sublandlord so desires, a
writ of possession may issue forthwith without any prior writ or
proceeding whatsoever; and Subtenant, for Subtenant and those claiming
under Subtenant, hereby releases to Sublandlord all procedural errors
and defects whatsoever in entering such actions or judgments or causing
such writs of possession or concerning the same and hereby agrees that
a copy of this Sublease, with any modifications thereof, together with
any affidavit of Sublandlord or any agent of Sublandlord, averring a
breach of the terms and conditions thereof, may be filed in said
actions and that it shall not be necessary to file the original
sublease as a warrant of attorney, any law or rule of court to the
contrary notwithstanding. If, for any reason, after such confession of
judgment in ejectment has been commenced, the same shall be determined
and the possession of the Premises remain in or be restored to
Subtenant, Sublandlord shall have the right, in any subsequent default
or defaults resulting in termination of this Sublease as hereinbefore
provided, to further confess judgment in ejectment one or more times in
the manner and form hereinbefore set forth to recover possession of
said Premises for such subsequent default. No determination of this
Sublease, nor taking or recovering possession of the Premises, shall
deprive Sublandlord of any other remedy or action against Subtenant
herein provided or available at law for possession or, subject to the
liquidated damages provision of the Master Lease, for rent, damages,
costs or any other charges payable as rent nor shall the bringing of
any such action for rent, damages, costs or any other charges payable
as rent, or any distress or suit for rent, damages, costs or any other
charges payable as rent, prevent Sublandlord from proceeding to recover
possession as herein provided.
The right to enter any judgment for possession against
Subtenant herein granted may be exercised on behalf of any assignee of
the Sublandlord in his, her or their name and shall also be exercisable
as often as there is default on the part of the Subtenant and a
resultant termination of this Lease, not being exhausted by one or more
exercises thereof.
15. SURRENDER. Upon expiration of the Sublease Term, or if, at any time
prior to expiration of the Sublease Term, this Sublease shall be terminated as a
result of Subtenant's default hereunder or otherwise, Subtenant shall
immediately quit and surrender up to Sublandlord possession of the Premises, and
all of Sublandlord's furnishings and items or property therein, in a broom-clean
condition and in good order and repair, ordinary wear and tear excepted, and
Subtenant shall remove all of its personal property therefrom. If such removal
shall injure or damage the Premises, Subtenant, at its expense, agrees to make
repairs needed as a result of the installation and subsequent removal in good
and workmanlike fashion. All alterations, additions and improvements made by or
on behalf of Subtenant, and not otherwise removed by Subtenant, shall at
Sublandlord's election become Sublandlord's property without compensation,
allowance or credit to Subtenant.
16. NOTICES. Any notice required or permitted to be given by either
party to the other pursuant to this Sublease (a "Notice") shall be in writing,
addressed to the party at the following address(es):
If to Sublandlord:
Day & Zimmermann, Inc.
1818 Market Street
Philadelphia, PA 19103
Attn: Robert J. Fitzsimmons
Vice President X Purchasing
<PAGE>
With a copy to:
Mary P. Higgins, Esquire
Simon, Higgins & Moran P.C.
Suite 4900, 1650 Market Street
Philadelphia, PA 19103
If to Subtenant:
Thomas P. Clark
Chief Financial Officer
Health Risk Management, Inc.
10900 Hampshire Avenue South
Bloomington, MN 55438
Any such Notice so addressed shall be deemed to have been properly given only if
sent by personal delivery, receipted by the party to whom addressed, or
certified mail, return receipt requested, posted in a United States post office
station in the continental United States, postage prepaid, or by reputable
overnight delivery service. All such Notices shall be deemed to have been given
when delivered and receipted by the party to whom addressed, in the case of
personal delivery, or three (3) days after the day so mailed or one (1) day
after delivery to the overnight delivery service. Either party may, by notice as
aforesaid, designate a different address or addresses for Notices intended for
it.
17. CASUALTY: CONDEMNATION.
Subtenant's rights under this Sublease are subject in all respects to
the provisions of Article VII (Casualty) and Article XVII (Condemnation) of the
Master Lease, including without limitation Landlord's and Sublandlord's
respective rights to terminate the Master Lease as provided therein. Any
termination of the Master Lease pursuant to Article VII or Article XVII of the
Master Lease also shall result in a termination of this Sublease.
18. SECURITY SYSTEM; ACCESS CARDS.
Sublandlord has installed a card accessed security system in the
Demised Premises. Sublandlord will provide Subtenant access cards for
Subtenant's employees to access the Premises, and Subtenant shall pay the
reasonable charges established by Sublandlord from time to time for issuance of
such cards. The security system and access cards are being provided to Subtenant
merely as a convenience to Subtenant, and Sublandlord shall have no liability or
obligation with respect to security for persons or property within the Premises.
Subtenant has advised Sublandlord that Subtenant may install its own security
system ("Subtenant's Security System") in the Premises. The installation of
Subtenant's Security System shall be an alteration under and shall be subject to
the requirements of Section 10 above. Sublandlord shall not unreasonably
withhold consent to the installation of Subtenant's Security System.
19. LANDLORD'S CONSENT. This Sublease is contingent upon Landlord's
execution and delivery of the Consent to Sublease and Agreement in substantially
the form attached hereto as Exhibit C. In the event that Landlord does not
execute and deliver the Consent to Sublease and Agreement to Sublandlord on or
before February 19, 1999, then either party shall have the right to terminate
this Sublease by written notice to the other given on or before February 24,
1999.
20. EXPANSION OPTION. Subtenant shall have a one-time option (the
"Expansion Option"), as set forth below, to add additional space (the "Expansion
Space", as hereinafter described) on the nineteenth floor to the Premises,
subject to the following:
(1) If Subtenant desires to exercise this Expansion Option
Subtenant shall give written notice (the "Expansion Notice") to Sublandlord not
later four months in advance of the commencement date for the Expansion Space.
(2) At the time of exercise of the Expansion Option there shall
not be any outstanding default by Subtenant under this Sublease nor any event or
circumstances which with the passage of time or giving of notice would
constitute a default.
(3) The Expansion Space shall not include any space that has
been offered to Subtenant pursuant to Section 21 if Subtenant has declined to
exercise the ROFO Right with respect to that space. Subject to the foregoing,
Subtenant shall designate the Expansion Space that Subtenant desires in the
Expansion Notice.
(4) The Expansion Term shall commence on the date specified in
the Expansion Notice, which shall be not sooner than April 1, 2000 and not later
than April 1, 2002, and in any event not sooner that four months after delivery
of the Expansion Notice. The Expansion Term shall expire at the same time as the
Sublease Term.
(5) Sublandlord shall deliver the Expansion Space to Subtenant
broom-clean and in its as-is condition (i.e., as is at the time of exercise of
the Expansion Option) and shall have no obligation to make any improvements with
respect to the Expansion Space, except that prior to commencement of the
Expansion Term Sublandlord shall construct any necessary demising wall.
<PAGE>
(6) Additional space when added to the Premises under this
Section 20 shall become subject to all applicable provisions of this Sublease,
including, without limitation, the payment of Fixed Rent (calculated as set
forth below), and the payment of additional rent under Section 3(b), and such
space shall constitute part of the Premises and shall be subject, without
limitation, to the renewal options set forth in Section 22 of this Sublease.
Subtenant shall commence payment of Fixed Rent and additional rent with respect
to the Expansion Space immediately upon commencement of the Expansion Term.
Subtenant's proportionate share for purposes of Real Estate Taxes (pursuant to
Section 3(b)(i) above) shall be increased to equal a fraction, the numerator of
which shall equal the rentable square footage of the Premises (including the
Expansion Space) and the denominator of which shall equal 985,066. Subtenant's
Proportionate Share for Operating Expenses (pursuant to Section 3(b)(ii) above)
shall be increased to equal a fraction, the numerator of which shall equal the
rentable square footage of the Premises (including the Expansion Space) and the
denominator of which shall be 923,597.
(7) The annual Fixed Rent for the Expansion Space shall equal
the lesser of
(i) the product of the rentable square feet in the Expansion
Space multiplied by $18.70, or
(ii) the greater of (A) the product of the rentable square
feet in the Expansion Space multiplied by $17.00, or (B) the product of the
rentable square feet in the Expansion Space multiplied by the Fair Market Rental
Rate. The term "Fair Market Rental Rate" as used in this Sublease is defined to
mean the amount of rent expressed in dollars and cents per square foot of
rentable area on an annual basis which Landlord is then offering to prospective
tenants unrelated to Landlord for new leases for space in the Building
comparable to the Expansion Space.
(8) If the annual Fixed Rent is determined under the foregoing
clause (g)(i) or clause (g)(ii)(A), then the Base Year for the Expansion Space
shall be 1999. If the annual Fixed Rent is determined under the foregoing clause
(g)(ii)(B) (i.e., using the Fair Market Rental Rate), then the Base Year for the
Expansion Space shall be the Base Year then being offered by Landlord to
prospective tenants unrelated to landlord under new leases for space in the
Building comparable to the Expansion Space.
(9) Within fifteen (15) days following Subtenant's exercise of
the Expansion Option, Sublandlord and Subtenant shall execute an amendment to
this Sublease identifying the space which has been added and setting forth the
Fixed Rent and Subtenant's operating expense share and Subtenant's real estate
tax share, all as determined in accordance with the provisions of this Section
20.
21. RIGHT OF FIRST OFFER. (a) Throughout the term of this Sublease and
any exercised renewal hereof, prior to subleasing any space on the nineteenth
floor to any person or entity unrelated to Sublandlord, Sublandlord shall first
offer to lease such space ("First Offer Space") to Subtenant on the terms and
conditions set forth in this Section 21. Such offer shall be made by written
notice given by Sublandlord to Subtenant (the "First Offer Notice"), hereinafter
described. 1.
<PAGE>
(b) The First Offer Notice shall specify the following proposed
terms and conditions for Subtenant's Sublease of the First Offer Space:
(i) the Fixed Rent and any additional rent;
(iii) the location and rentable area of the
First Offer Space;
(iv) the commencement date for Subtenant's
sublease of the First Offer Space;
(v) the proposed sublease term for the First
Offer Space.
(c) Subtenant shall have the right (the "ROFO Right") to lease
all (but not less than all) of the First Offer Space upon the terms and
conditions set forth in Sublandlord's First Offer Notice and in this Section 21.
Subtenant shall exercise its ROFO Right by delivering written notice to
Sublandlord within fifteen (15) days after Subtenant's receipt of the First
Offer Notice (said fifteen (15) day period is referred to herein as the
"Election Period"). Subtenant's rights under this Section 21 are subject to the
condition that at the time of exercise of the ROFO Right there shall not be any
outstanding default by Subtenant under this Sublease nor any event or
circumstances which with the passage of time or giving of notice would
constitute a default.
(d) In the event Subtenant does not exercise the ROFO Right with
respect to such First Offer Space, Sublandlord may sublease all or substantially
all of such First Offer Space to any person or entity on substantially the same
terms and conditions as set forth in the First Offer Notice, and if Sublandlord
so subleases the space Subtenant shall have no right to exercise the Expansion
Option with respect to that space. In the event that Sublandlord does not
sublease the First Offer Space within one hundred eighty (180) days after the
end of Subtenant's Election Period (said 180 day period is referred to as the
"First Offer Period"), Sublandlord may not sublease such First Offer Space to
any person or entity unrelated to Sublandlord without again offering to sublease
such space to Subtenant in accordance with the terms of this Section 21.
(e) Except as otherwise provided herein, the following terms and
conditions shall apply to any First Offer Space as to which Subtenant has
exercised the ROFO Right (the "ROFO Space"):
(i) The ROFO Space shall become part of the
Premises, and, except as otherwise set forth in this Section
21(e), all of the terms and conditions applicable to the
Premises shall also apply to the ROFO Space (including without
limitation the renewal options set forth in Section 10).
(ii) The lease term shall commence as to the
ROFO Space (the "ROFO Space Commencement Date") on the date set
forth in the First Offer Notice.
<PAGE>
(iii) The Fixed Rent payable for the ROFO Space
and all other terms and conditions set forth in the First Offer
Notice shall apply to the ROFO Space. Subtenant shall also pay
the escalations as provided in Section 3(b) of this Sublease,
with a base year as shall be as set forth in the First Offer
Notice.
(iv) All ROFO Space shall be leased in its then
existing condition, "as is", except as otherwise provided in the
First Offer Notice.
(v) The term of this Sublease as to any ROFO
Space shall be as set forth in the First Offer Notice, and the
expiration of the term as to any ROFO Space may or may not be
co-terminous with the Term of this Sublease for the Premises, as
Sublandlord may elect. Whenever used in this lease the term
"Non-renewing ROFO Space" shall mean any ROFO Space the term of
which does not terminate at the end of the Term of this
Sublease.
Any ROFO Space other than Non-renewing ROFO Space shall be
subject to Subtenant's renewal options set forth in Section 22.
Non-renewing ROFO Space shall not be subject to Subtenant's
renewal options set forth in Section 22.
(f) The parties acknowledge that Sublandlord and its affiliates
shall have the right to use and occupy all available space on the 19th floor,
and in no event shall Subtenant's ROFO Right be triggered by any lease or
sublease or other occupancy agreement or arrangement whereby Sublandlord or any
affiliate of Sublandlord uses or occupies space on the 19th floor.
(g) Within fifteen (15) days following Subtenant's exercise of
any ROFO Right, Sublandlord and Subtenant shall execute an amendment to this
Lease identifying the space which has been added and setting forth the Fixed
Rent and Subtenant's operating expense share and Subtenant's real estate tax
share, all as determined in accordance with the provisions of this Section 21.
<PAGE>
22. RENEWAL OPTIONS. Subtenant shall have the options to elect two (2)
successive renewal terms of this Sublease, subject to the provisions of this
Section 22. The first renewal term shall commence on July 1, 2004 and shall
expire on June 30, 2006; the second renewal term shall commence on July 1, 2006
and shall expire on February 28, 2008. In order to exercise a renewal option,
Subtenant must, at least nine (9) months prior to the end of the term of this
Sublease (or the first renewal term, if applicable) give written notice to
Sublandlord stating that Subtenant exercises its renewal option. Subtenant's
renewal options under this Section 22 are subject to the conditions that this
Sublease must be in full force and effect and there shall be no default by
Subtenant at the time of Subtenant's exercise of an option hereunder. All of the
provisions of this Sublease (including without limitation all provisions
regarding payment of additional rent) (excluding the Expansion Option
provisions) shall be effective during each renewal term, except that (A) the
Fixed Rent for the each renewal term shall equal an amount equal to the product
of (i) Twenty Dollars ($20.00) and (ii) the number of rentable square feet in
the Premises, which shall include the space initially subleased to Subtenant
under this Sublease, and any Expansion Space subleased by Subtenant pursuant to
Section 20 above, and any ROFO Space, other than Non-renewing ROFO Space,
subleased by Subtenant pursuant to Section 21 above. The Base Year for real
estate taxes and operating expenses during any renewal term shall be 1999. If
Subtenant shall holdover in all or any part of the Premises after the expiration
of the term of this Sublease or any renewal term, Subtenant shall indemnify,
defend and hold Sublandlord harmless from and against any and all liability,
obligation, damages, claim or cause of action under the Master Lease resulting
from such holdover.
23. SUBTENANT'S SIGNAGE. Subtenant shall have the right to install (at
Subtenant's cost and expense) an identifying sign on the wall in the elevator
lobby on the 19th floor (the "Elevator Sign"), provided that Subtenant shall
have received Sublandlord's prior written approval of the design, dimensions,
materials and location of the Elevator Sign.
24. ROOF RIGHTS.
If Subtenant advises Sublandlord in writing that Subtenant desires to
be able to use a portion of the roof of the Building, Sublandlord will forward
Subtenant's request to Landlord. Any arrangement for Subtenant's use of a
portion of the roof must be by agreement directly between Landlord and
Subtenant, and in no event shall Sublandlord have any obligation or liability in
connection with the same, nor shall the same affect in any way Sublandlord's
rights under the Master Lease and this Sublease or Subtenant's obligations under
this Sublease.
25. MISCELLANEOUS.
(1) This Sublease constitutes the entire agreement of the
Parties relative to the subject matter hereof, and all prior negotiations,
conversations, representations, agreements and understandings are specifically
merged herein and superseded hereby. This Sublease may be modified only by a
written instrument executed by the Parties hereto. This Sublease is the result
of the prior negotiations, conversations, representations, agreements and
understandings of the Parties and is to be construed as the jointly prepared
product of the Parties. This Sublease may be signed in one or more counterparts,
each of which shall constitute an original but all of which together shall
constitute but one and the same document.
<PAGE>
(2) The terms and provisions of this Sublease shall inure to the
benefit of and be binding upon the Parties and their respective successors,
representatives and assigns (subject to the provisions of Section 4 hereof).
(3) In the event of a conflict between the terms of this
Sublease and the terms of the Master Lease as to and between the Parties hereto,
the terms of this Sublease shall govern.
(4) Time is of the essence of this Sublease.
(5) This Sublease shall be construed in accordance with and
governed by the laws of the Commonwealth of Pennsylvania.
(6) The paragraph headings used in this Sublease have been
inserted for convenience and reference only and should not be construed to limit
or restrict the terms and provisions, covenants and conditions hereof.
(7) If any term or provisions of this Sublease or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Sublease, or the application of
such term or provisions to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby and each
remaining term and provision of this Sublease shall be valid and be enforced to
the fullest extent permitted by law.
(8) Whenever any provision of this Sublease requires the consent
or approval of Sublandlord, Sublandlord shall not be deemed to unreasonably
withhold its consent or approval if the prior consent or approval of Landlord is
required under the Master Lease and Sublandlord is unable to obtain such consent
or approval of Landlord without the acceptance by Sublandlord of additional
liabilities or obligations or the payment of money by Sublandlord.
(9) Any and all indemnifications and obligations of Subtenant
and Sublandlord pursuant to this Sublease, including, but not limited to, those
described in Section 6 hereof, to the extent such obligations arise, commence,
are created or occur during the Sublease Term, shall survive the termination of
this Sublease.
(10) All payments of Rent and other amounts due under this
Sublease shall be made by Subtenant without offset or other deduction.
(11) Subtenant shall not, under any circumstances, have the
power to subject the Premises to any mechanics' or materialmen's liens or other
liens of any kind.
<PAGE>
(12) Subtenant represents and warrants to Sublandlord that no
person, company or partnership is entitled to any real estate commission,
finder's fees or the like arising out of this Sublease and based on any
agreement or understanding with Subtenant, except for Smith Mack & Company, Inc.
("Sublandlord's Broker") and Grubb & Ellis Company ("Subtenant's Broker")
(together, the "Brokers"). Subtenant hereby agrees to indemnify, defend and hold
Sublandlord harmless from any liability, cost and expense, including, but not
limited to, reasonable attorneys' fees, which may result from a breach of this
warranty by Subtenant. Sublandlord shall pay the commission to Sublandlord's
Broker pursuant to written agreement between Sublandlord and Sublandlord's
Broker, and Sublandlord's Broker shall pay the commission due to Subtenant's
Broker pursuant to written agreement between the Brokers.
(13) Within ten (10) days after Landlord or Sublandlord makes
such a request, Subtenant shall deliver a written estoppel certificate, to the
requesting party or its lender, it being intended that any such certificate
delivered pursuant hereto may be relied upon by any party which may acquire an
interest in the Premises.
(14) Subtenant agrees to permit Landlord and Sublandlord, and
their respective agents or other representatives, without abatement of Rent,
after reasonable prior notice (which shall mean at least 24 hours telephone
notice), provided notice will not be required in case of an emergency, to enter
into and upon the Premises at all reasonable times for the purpose of examining
the same, provided, however, that in no event shall Landlord or Sublandlord or
their agents or representatives unreasonably interfere with the conduct of
Subtenant's business at the Premises. Subtenant shall have the right to require
such inspectors to provide proper identification, and to have a representative
of Subtenant accompany the inspectors.
IN WITNESS WHEREOF, the parties have executed this Sublease as
of the date set forth above.
SUBLANDLORD: DAY & ZIMMERMANN, INC.
a Maryland corporation
By:
Robert J. Fitzsimmons, Vice President -- Purchasing
SUBTENANT: HEALTH RISK MANAGEMENT, INC.
By:
Name:
Office:
<PAGE>
LIST OF ALL EXHIBITS
Exhibit A -- List of Master Lease Documents
Exhibit B -- Floor Plan showing the Premises
Exhibit C -- Consent to Sublease
<PAGE>
EXHIBIT A
MASTER LEASE DOCUMENTS
Lease Agreement between Walter Associates and Day & Zimmermann,
Inc. ("Tenant"), dated December 18, 1975 (the "Original Lease") as amended by an
Amendment to Lease dated June 21, 1976, an agreement dated December 2, 1976, an
agreement dated February 27, 1981 and a Lease Amendment #1 dated as of February
27, 1981. for certain office space located in the building located at 1818
Market Street, Philadelphia (the "Building").
First Amendment to Lease between Tenant and Daon of
Pennsylvania, Inc. ("Daon") dated October 26, 1983.
The following amendments between Tenant and 1818 Market
Partnership:
two letter agreements dated October 30, 1984 and April 30, 1985,
respectively, extending the lease term (which letter agreements
have expired by their own terms), a Lease Amendment #2 dated
April 8, 1986, a Lease Amendment No. 3 dated April 16, 1987, a
Fourth Amendment to Lease dated as of June 1, 1987, a Fifth
Amendment to Lease dated as of October 1, 1987, a Sixth
Amendment to Lease dated as of May 21, 1990, and a Seventh
Amendment to Lease dated as of April 5, 1991 and an Eighth
Amendment to Lease dated October 25, 1991 (the "Eighth
Amendment") and two letter agreements dated November 18, 1991
and January 14, 1992, which letter agreements exercise various
options contained in the Eighth Amendment, a Ninth Amendment to
Lease dated May 1, 1992, a Tenth Amendment to Lease dated
December 29, 1994, three leases with respect to space in the
sub-basement level of the Building -- a lease agreement that
commenced as of November 22, 1977, for 473 square feet of
rentable area; a lease agreement dated December 2, 1976, for
4401 square feet of rentable area, and a lease agreement dated
June 15, 1992, for 538 square feet of rentable area -- and an
Eleventh Amendment to Lease dated January 27, 1995, a Twelfth
Amendment to Lease, dated September 19, 1995, a Thirteenth
Amendment to Lease dated November 21, 1995, a Fourteenth
Amendment to Lease, dated January 31, 1996, a Fifteenth
Amendment to Lease dated August 1, 1996, and a Sixteenth
Amendment to Lease, dated November 29, 1996.
<PAGE>
EXHIBIT B
[TO BE SUPPLIED BY 2/19/99
PER SECTION 11 OF SUBLEASE]
<PAGE>
EXHIBIT C
CONSENT TO SUBLEASE
<PAGE>
CONSENT TO SUBLEASE
AGREEMENT (this "Agreement") made as of the ____day of ___________,
199__, by and among 1818 MARKET-VEF II, LLC (hereinafter "Landlord"), DAY &
ZIMMERMANN, INC. (hereinafter "Tenant"), and HEALTH RISK MANAGEMENT, INC.
("Subtenant").
Background. Landlord and Tenant are parties to a certain Lease
Agreement, dated December 18, 1975, as amended by various amendments (as so
amended, the "Master Lease"), by which Tenant has leased certain space (the
"Premises") in the building (the "Building") located at 1818 Market Street,
Philadelphia, PA. Tenant and Subtenant have entered into a Sublease Agreement,
dated ______ ____, 1999 (the "Sublease"), by which Tenant has subleased to
Subtenant a portion of the Premises consisting of ________ r.s.f. on the 19th
floor of the Building (the "Sublet Space"). Tenant has requested that Landlord
approve the Sublease pursuant to Article XIV of the Master Lease.
NOW, THEREFORE, in exchange for good, valuable and sufficient
consideration received and intending to be legally bound hereby, Landlord,
Tenant and Subtenant mutually covenant and agree as follows:
A. CONSENT TO SUBLEASE. Landlord hereby consents to the
subletting of the Sublet Space by the Tenant to the Subtenant, pursuant to the
Sublease, a true, correct and complete copy of which is attached hereto, such
consent being subject to and conditioned upon the following terms and
conditions, to each of which Tenant and Subtenant expressly agree:
1. Nothing contained in this Agreement shall
(a) operate as (i) Landlord's consent to or approval or
ratification of any of the provisions of the Sublease or (ii) a representation
or warranty by Landlord, and Landlord shall not be bound or estopped in any way
by the provisions of the Sublease; or
(b) be construed to modify, waive or affect (i) any of the
provisions, covenants or conditions in the Master Lease, (ii) any of Tenant's
obligations under the Master Lease, or (iii) any rights or remedies of Landlord
under the Master Lease or otherwise or to enlarge or increase Landlord's
obligations or Tenant's rights under the Master Lease or otherwise; or
<PAGE>
(c) be construed to waive any present or future breach or
default on the part of Tenant under the Master Lease. In case of any conflict
between the provisions of this Agreement and the provisions of the Sublease, the
provisions of this Agreement shall prevail unaffected by the Sublease.
2. The Sublease shall be subject and subordinate at all times to
the Master Lease and all of its provisions, covenants and conditions. In case of
any conflict between the provisions of the Master Lease and the provisions of
the Sublease, the provisions of the Master Lease shall prevail unaffected by the
Sublease.
3. Landlord's consent to the Sublease as set forth in this
Agreement is not assignable.
4. Neither the Sublease nor this Agreement shall release or
discharge the Tenant from any liability under the Master Lease and Tenant shall
remain fully and primarily liable and responsible to Landlord for the full
performance and observance of all the provisions, covenants and conditions set
forth in the Master Lease on the part of Tenant to be performed and observed.
Any breach or violation of any provision of the Master Lease by Subtenant shall
be deemed to be and shall constitute a default by Tenant in fulfilling such
provision.
5. Landlord's consent to the Sublease as set forth in this
Agreement shall not be construed as a consent by Landlord to any further
subletting by either Tenant or Subtenant. The Sublease may not be amended,
assigned, renewed or extended, nor shall the Premises or Sublet Space, or any
part thereof, be further sublet without the prior written consent of Landlord in
each instance.
<PAGE>
6. Upon the expiration or any earlier termination of the term of
the Master Lease, or in case of the surrender of the Master Lease by Tenant to
Landlord, except as provided in the next succeeding sentence, the Sublease and
its term shall expire and come to an end as of the effective date of such
expiration, termination, or surrender, automatically and without notice, and
Subtenant shall vacate the Sublet Space on or before such date. If the Master
Lease shall expire or terminate during the term of the Sublease for any reason
other than condemnation or destruction by fire or other cause, or if Tenant
shall surrender the Master Lease to Landlord during the term of the Sublease,
Landlord, in its sole discretion, upon written notice given to Tenant and
Subtenant not more than thirty (30) days after the effective date of such
expiration, termination or surrender, without any additional or further
agreement of any kind on the part of Subtenant, may elect to continue the
Sublease with the same force and effect as if Landlord as lessor and Subtenant
as lessee had entered into a lease as of such effective date for a term equal to
the then unexpired term of the Sublease and containing the same terms and
conditions as those contained in the Sublease, whereupon Subtenant shall attorn
to Landlord, and Landlord and Subtenant shall have the same rights, obligations
and remedies thereunder as were had by Tenant and Subtenant thereunder prior to
such effective date, respectively, except that in no event shall Landlord be (1)
liable for any act or omission by Tenant, or (2) subject to any offset or
defenses which Subtenant had or might have against Tenant, or (3) bound by any
rent or additional rent or other payment paid by Subtenant to Tenant in advance,
or (4) bound by any amendment to the Sublease not consented to in writing by
Landlord.
7. Both Tenant and Subtenant shall be and continue to be liable
for all bills rendered by Landlord for charges incurred by or imposed upon
Subtenant for services rendered and materials supplied to the Sublet Space. If a
separate submeter shall be installed to measure electric current furnished to
the Sublet Space, then payment for the current so furnished shall be made by
Subtenant directly to Landlord as and when billed and the furnishing of such
current shall be in accordance with and subject to all of the applicable terms,
covenants and conditions of the Master Lease.
8. Any notice or communication which any party hereto may desire
or be required to give to any other party under or with respect to this
Agreement shall be given by prepaid certified mail or reputable overnight
courier (such as Federal Express) addressed to such other party, at the
following addresses:
If to Landlord:
1818 Market-VEF II, LLC
c/o Lend Lease Real Estate Investments, Inc.
Mellon Bank Center
Suite 4200
1735 Market Street
Philadelphia, Pennsylvania 19103
If to Tenant:
Day & Zimmermann, Inc.
1818 Market Street
Philadelphia, PA 19103
Attn: Robert J. Fitzsimmons
Vice President -- Purchasing
With a copy to:
Mary P. Higgins, Esquire
Simon, Higgins & Moran P.C.
Suite 4900, 1650 Market Street
Philadelphia, PA 19103
<PAGE>
If to Subtenant:
Thomas P. Clark
Chief Financial Officer
Health Risk Management, Inc.
10900 Hampshire Avenue South
Bloomington, MN 55438
or at such other address as the party intended to receive such notice may have
designated by notice given in accordance with the provisions of this Article 8.
Any such notice or communication shall be deemed to have been given two business
days after the date same shall be mailed, or one business day after the same
shall have been deposited with the overnight courier, and may be given on behalf
of a party by such party's counsel.
9. This Agreement shall be construed in accordance with the laws
of the Commonwealth of Pennsylvania, contains the entire Agreement of the
parties hereto with respect to the subject matter hereof and may not be changed
or terminated orally or by course of conduct. This Agreement may be signed in
one or more counterparts.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
SUBLANDLORD:
DAY & ZIMMERMANN, INC.
a Maryland corporation
By:
Robert J. Fitzsimmons, Vice President -- Purchasing
SUBTENANT:
HEALTH RISK MANAGEMENT, INC.
By:
Name:
Office:
<PAGE>
LANDLORD:
1818 MARKET - VEF II, LLC,
a Georgia liability company
By: Value Enhancement Fund II, LLC, a Georgia
limited liability company, its manager
By: Lend Lease Real Estate Investments, Inc., its
manager
By:
Name:
Title:
<PAGE>
AMENDMENT TO SUBLEASE AGREEMENT
THIS AMENDMENT (the "Amendment") is made this 6th day of April, 1999,
between DAY & ZIMMERMANN, INC., a Maryland corporation (the "Sublandlord"), and
HEALTH RISK MANAGEMENT, INC., a Minnesota corporation (the "Subtenant").
W I T N E S S E T H
Sublandlord and Subtenant are party to a certain Sublease Agreement,
dated February 10, 1999, wherein Sublandlord has subleased to Subtenant and
Subtenant has subleased from Sublandlord certain premises in the building (the
"Building") located at 1818 Market Street, Philadelphia, PA (the "Sublease").
Capitalized terms used in this Amendment not defined in herein shall have the
same meaning in this Amendment as they do in the Sublease.
Subtenant has requested that Sublandlord agree to increase the amount
of space that has been subleased to Subtenant pursuant to the Sublease, and
Sublandlord is willing to do so upon the terms and conditions set forth in this
Amendment.
In addition, Sublandlord has measured the sublet space and the parties
hereto desire to enter this Amendment in accordance with Section 2 of the
Sublease.
NOW, THEREFORE, in consideration of the foregoing, the payment of Ten
Dollars ($10.00) by Subtenant to Sublandlord, the covenants and agreements
hereinafter set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the Parties hereby agree that the Sublease is amended as follows:
1. PREMISES. The term "Premises" is amended to mean the space located
on the 19th floor of the Building as shown on Exhibit A attached hereto.
Sublandlord and Subtenant agree that the rentable square footage of the Premises
is 28,034.
2. FIXED RENT. The Annual Fixed Rent is agreed to equal FOUR HUNDRED
SEVENTY-SIX THOUSAND FIVE HUNDRED SEVENTY-EIGHT DOLLARS ($476,578). Monthly
installments of annual Fixed Rent shall equal Thirty-Nine Thousand Seven Hundred
Fourteen Dollars and Eighty-Four Cents ($39,714.84). The total amount of
Subtenant's credit against Fixed Rent pursuant to Section 3(a)(iii) of the
Sublease shall equal Four Hundred Twenty-Seven Thousand Five Hundred Eighteen
Dollars and Fifty Cents ($427,518.50).
3. SUBTENANT'S PROPORTIONATE SHARES. Subtenant's proportionate share
for Real Estate Taxes shall equal 2.85 percent. Subtenant's Proportionate Share
for Operating Expenses shall equal 3.04 percent.
<PAGE>
4. MISCELLANEOUS.
(1) The Sublease remains in full force and effect as amended by
this Amendment. This Amendment and the Sublease constitute the entire agreement
of the Parties relative to the subject matter hereof, and all prior
negotiations, conversations, representations, agreements and understandings are
specifically merged herein and superseded hereby. The Sublease and this
Amendment may be modified only by a written instrument executed by the Parties
hereto. This Amendment is the result of the prior negotiations, conversations,
representations, agreements and understandings of the Parties and is to be
construed as the jointly prepared product of the Parties. This Amendment may be
signed in one or more counterparts, each of which shall constitute an original
but all of which together shall constitute but one and the same document.
Whenever the word Sublease appears in this Amendment or in the Sublease, it
shall mean the Sublease as amended by this Amendment.
(2) The Confession of Judgment Provisions contained in the
Master Lease and incorporated in the Sublease are hereby expressly made a part
of this Amendment and applicable to Subtenant and this Amendment, as follows:
Upon termination of this Sublease (which shall for all
purposes mean the Sublease as amended by this Amendment) by Sublandlord
after default by Subtenant, if Subtenant shall fail to forthwith
peaceably surrender possession of the Premises to Sublandlord, any
attorney may immediately thereafter, as attorney for Subtenant, or for
those claiming under Subtenant, at the request of Sublandlord, confess
judgment in ejectment against Subtenant and all persons claiming under
Subtenant, for the recovery by Sublandlord of possession of the
Premises and costs, without any liability on the part of Sublandlord or
the said attorney, for which this shall be sufficient warrant, and,
upon the confession of such judgment or judgments, respectively, if
Sublandlord so desires, a writ of possession may issue forthwith
without any prior writ or proceeding whatsoever; and Subtenant, for
Subtenant and those claiming under Subtenant, hereby releases to
Sublandlord all procedural errors and defects whatsoever in entering
such actions or judgments or causing such writs of possession or
concerning the same and hereby agrees that a copy of this Sublease,
with any modifications thereof, together with any affidavit of
Sublandlord or any agent of Sublandlord, averring a breach of the terms
and conditions thereof, may be filed in said actions and that it shall
not be necessary to file the original Sublease as a warrant of
attorney, any law or rule of court to the contrary notwithstanding. If,
for any reason, after such confession of judgment in ejectment has been
commenced, the same shall be determined and the possession of the
Premises remain in or be restored to Subtenant, Sublandlord shall have
the right, in any subsequent default or defaults resulting in
termination of this Sublease as hereinbefore provided, to further
confess judgment in ejectment one or more times in the manner and form
hereinbefore set forth to recover possession of said Premises for such
subsequent default. No determination of this Sublease, nor taking or
recovering possession of the Premises, shall deprive Sublandlord of any
other remedy or action against Subtenant herein provided or available
at law for possession or, subject to the liquidated damages provision
of the Master Lease, for rent, damages, costs or any other charges
payable as rent nor shall the bringing of any such action for rent,
damages, costs or any other charges payable as rent, or any distress or
suit for rent, damages, costs or any other charges payable as rent,
prevent Sublandlord from proceeding to recover possession as herein
provided.
<PAGE>
The right to enter any judgment for possession against
Subtenant herein granted may be exercised on behalf of any assignee of
the Sublandlord in his, her or their name and shall also be exercisable
as often as there is default on the part of the Subtenant and a
resultant termination of this Lease, not being exhausted by one or more
exercises thereof.
(3) Subtenant represents and warrants to Sublandlord that no
person, company or partnership is entitled to any real estate commission,
finder's fees or the like arising out of this Amendment and based on any
agreement or understanding with Subtenant, except for Smith Mack & Company, Inc.
("Sublandlord's Broker") and Grubb & Ellis Company ("Subtenant's Broker")
(together, the "Brokers"). Subtenant hereby agrees to indemnify, defend and hold
Sublandlord harmless from any liability, cost and expense, including, but not
limited to, reasonable attorneys' fees, which may result from a breach of this
warranty by Subtenant. Sublandlord shall pay the commission to Sublandlord's
Broker pursuant to written agreement between Sublandlord and Sublandlord's
Broker, and Sublandlord's Broker shall pay the commission due to Subtenant's
Broker pursuant to written agreement between the Brokers.
(d) This Amendment is contingent upon Landlord's execution and
delivery of the Consent to Amendment in substantially the form attached hereto
as Exhibit B. In the event that Landlord does not execute and deliver the
Consent to Amendment on or before April 16, 1999, then either Party shall have
the right to terminate this Amendment (but not the Sublease, which shall remain
in full force and effect and unamended by this Amendment) by written notice to
the other given on or before April 20, 1999.
IN WITNESS WHEREOF, the parties have executed this Sublease as
of the date set forth above.
SUBLANDLORD: DAY & ZIMMERMANN, INC.
a Maryland corporation
By:_______________________________
Robert J. Fitzsimmons, Vice President -- Purchasing
SUBTENANT: HEALTH RISK MANAGEMENT, INC.
By:
Name:
Office:
<PAGE>
LIST OF ALL EXHIBITS TO AMENDMENT
Exhibit A Floor Plan showing the Premises
Exhibit B Consent to Amendment
<PAGE>
EXHIBIT A
<PAGE>
EXHIBIT B
CONSENT TO AMENDMENT
<PAGE>
CONSENT TO AMENDMENT
AGREEMENT (this "Agreement") made as of the ____day of April, 1999, by
and among 1818 MARKET-VEF II, LLC (hereinafter "Landlord"), DAY & ZIMMERMANN,
INC. (hereinafter "Tenant"), and HEALTH RISK MANAGEMENT, INC. ("Subtenant").
Background. Landlord, Tenant and Subtenant are parties to a certain
Consent to Sublease, dated February 10, 1999. Capitalized terms used in this
Consent to Amendment but not defined herein shall have the same meaning as in
the Consent to Sublease. Landlord and Tenant have entered into an Amendment to
Sublease, dated April ___, 1999, a true and correct copy of which is attached
hereto (the "Amendment"). The Amendment, among other things, increases the
Sublet Space to 28,034 rentable square feet located on the 19th floor of the
Building. Tenant has requested that Landlord approve the Amendment pursuant to
Article XIV of the Master Lease and Section A(5) of the Consent to Sublease.
NOW, THEREFORE, in exchange for good, valuable and sufficient
consideration received and intending to be legally bound hereby, Landlord,
Tenant and Subtenant mutually covenant and agree as follows:
1. The Consent to Sublease is hereby amended as follows:
(a) All references to the Sublease shall mean the Sublease as
amended by the Amendment.
(b) All references to the Sublet Space shall mean the 28,034
r.s.f on the 19th floor of the Building as identified on Exhibit A to the
Amendment.
2. The Consent to Sublease remains in full force and effect as
amendment by this Consent to Amendment. This Consent to Amendment shall be
construed in accordance with the laws of the Commonwealth of Pennsylvania, and
with the Consent to Sublease contains the entire Agreement of the parties hereto
with respect to the subject matter hereof and may not be changed or terminated
orally or by course of conduct. This Consent to Amendment may be signed in one
or more counterparts.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
TENANT:
DAY & ZIMMERMANN, INC.
a Maryland corporation
By:
Robert J. Fitzsimmons, Vice President -- Purchasing
SUBTENANT:
HEALTH RISK MANAGEMENT, INC.
By:
Name:
Office:
LANDLORD:
1818 MARKET - VEF II, LLC,
a Georgia liability company
By: Value Enhancement Fund II, LLC, a Georgia
limited liability company, its manager
By: Lend Lease Real Estate Investments, Inc.,
its manager
By:
Name:
Title:
AMENDED AND RESTATED
HEALTHCHOICES SOUTHEAST PHYSICAL HEALTH AGREEMENT
BETWEEN
COMMONWEALTH OF PENNSYLVANIA
AND
OXFORD HEALTH PLANS (PA), INC.
<PAGE>
TABLE OF CONTENTS
SECTION 1: INCORPORATION OF DOCUMENTS 2
1.1 Operative Documents 2
SECTION 2: DEFINITIONS 2
A. Emergency Medical Conditions 3
B. Emergency Services 3
C. Medical Necessity 3
D. Affiliate 4
E. Health Care Professional 4
F. Third Party Liability 4
SECTION 3: RELATIONSHIP OF PARTIES 4
3.1 Basic Relationship 4
3.2 Nature of Contract 5
SECTION 4: APPLICABLE LAWS AND REGULATIONS 5
4.1 Certification and Licensing 5
4.2 Specific to MA Program 5
4.3 General Laws and Regulations 6
4.4 Limitation on the Department's Obligations 6
4.5 Acceptance of Commonwealth Capitation Payments 6
SECTION 5: REPRESENTATIONS AND WARRANTIES OF THE CONTRACTOR 7
5.1 Accuracy of Proposal 7
5.2 Disclosure of Interests 7
5.3 Disclosure of Change in Circumstances 7
SECTION 6: ACCESS STANDARDS 8
6.1 Readiness Review 8
6.2 Compliance with Access Standards 8
A. Mandatory Compliance 8
B. The Access Standards 9
SECTION 7: OBLIGATIONS OF THE CONTRACTOR 15
7.1 Program Standards 15
A. General 16
B. Licensure 16
C. PH-MCO Administration 16
D. Member Enrollment and Disenrollment 16
E. Member Services 21
F. In-Plan Services 23
G. Differently Accessed Services 29
H. Organ Transplants 30
I. Coordination with Out-of-Plan Services 30
J. Provider Networks 31
K. Service Accessibility Standards 32
L. Provider Enrollment 32
M. Provider Agreements 32
N. Provider Services 34
O. Quality Management and Utilization Management Program 35
P. Operational Data Reporting 36
Q. Payments To and From the Contractor 36
R. PH-MCO Fiscal Standards 36
S. Contracts and Subcontracts 36
T. Records Retention 36
U. Fraud and Abuse 37
V. Department Access and Availability 37
W. Physician Incentive Arrangements 37
X. Pharmacy Requirements 38
7.2 Special Needs Unit 38
A. Establishment of Special Needs Unit 38
B. Special Needs Coordinator 39
C. Responsibilities of Special Needs Staff 39
D. Contractor's Additional Obligations 40
SECTION 8: FISCAL RELATIONSHIP 40
8.1 Payments for In-Plan Services 40
A. Capitation Payments 40
B. HIV-AIDS Risk Pool 41
C. Maternity Care Payments 42
D. Rate Adjustments for Second and Subsequent Agreement
Years 42
E. Program Changes 43
F. Financial Responsibility for Dual Eligibles 43
8.2 Payments by the Contractor to Providers 44
A. Definitions 44
B. Timeliness Standards 44
C. Accuracy Standards 46
D. Quarterly Claims Analysis and Report 46
E. Monthly Claims Processing and Payment Report 49
F. Sanctions 50
8.3 Member Cost Sharing and Third Party Liability 51
A. General 51
B. Third Party Liability (TPL) 51
C. Requests for Additional Data 54
D. Third Party Resource Identification 54
E. Accessibility to TPL Data 55
F. Estate Recovery 55
8.4 Risk Moderation 55
A. Reinsurance 55
B. Surety Bonds 57
8.5 Restitution 57
8.6 Payments to FQHCs and Rural Health Centers (RHCs) 57
8.7 Payments to Out-of-Network Providers that are
Located Outside the Commonwealth of Pennsylvania 57
SECTION 9: DURATION OF AGREEMENT AND RENEWAL 58
9.1 Initial Term 58
9.2 Renewal 58
SECTION 10: TERMINATION AND DEFAULT 58
10.1 Termination by the Department 58
A. Termination for Convenience Upon Notice 58
B. Termination for Cause 58
C. Termination Due to Unavailability of Funds/Approvals 59
10.2 Termination by the Contractor 59
10.3 Responsibilities of the Contractor Upon Termination 59
A. Continuing Obligations 59
B. Notice to Members 60
SECTION 11: RECORDS 60
11.1 Financial Records Retention 60
11.2 Operational Data Reports 61
11.3 Medical Records Retention 61
11.4 Review of Records 61
SECTION 12: SUBCONTRACTUAL RELATIONSHIPS 61
12.1 Ability to Subcontract 61
12.2 Compliance with Program Standards 61
12.3 Consistency with Policy Statements 63
12.4 Compliance with Rule on Physician Incentive Arrangements 63
SECTION 13: QUALITY MANAGEMENT AND UTILIZATION MANAGEMENT 64
SECTION 14: COMPLAINT, GRIEVANCE AND APPEAL 64
14.1 Member Complaint, Grievance and Appeal System 64
14.2 Clinical Sentinel 65
14.3 Provider Appeal Procedure 65
SECTION 15: CONFIDENTIALITY 65
SECTION 16: INDEMNIFICATION AND INSURANCE 66
16.1 Indemnification 66
16.2 Insurance 67
SECTION 17: REPORTS 67
17.1 General Obligations 67
17.2 GA Data Reporting 67
17.3 Financial Reporting Requirements 68
17.4 EPSDT Reports 68
17.5 Encounter Data Reports 68
A. Data Format 68
B. Timing of Data Submittal 69
C. Data Completeness 69
D. MA Consumers Medical Information 69
E. Financial Penalties 69
F. Data Validation 70
17.6 Sanctions 70
SECTION 18: DISPUTES 71
SECTION 19: FORCE MAJEURE 72
SECTION 20: GENERAL 72
20.1 Suspension From Other Programs 72
20.2 Rights of the Department and the Contractor 73
20.3 Waiver 73
20.4 Invalid Provisions 73
20.5 Governing Law 73
20.6 Notice 73
20.7 Counterparts 74
20.8 Headings 74
20.9 Assignment 74
20.10 No Third Party Beneficiaries 75
20.11 Entire Agreement: Modification 75
Appendix 1 RFP
Appendix 2 PROPOSAL
Exhibit A General Terms and Conditions
Exhibit B Capitated Rates - Year 3
Exhibit C Recipient Coverage Policy Document
Exhibit D AIDS Protocol
Exhibit E HealthChoices PH-MCO Marketing Guidelines
Exhibit F Denial Notice
Exhibit G Prior Authorization Guidelines
Exhibit H Family Planning Services Procedures
Exhibit I Quality Management/Utilization Management Program (QM/UMP)
Exhibit J Special Needs Unit (SNU)
Exhibit K HIV-AIDS Risk Pool
Exhibit L Encounter and Subcapitation Data Penalty Occurrences
Exhibit M HC-SE Covered Services/Non-Covered Services
Addendum A HCFA Requirements
<PAGE>
HEALTHCHOICES SOUTHEAST PHYSICAL HEALTH AGREEMENT
THIS RESTATED AND AMENDED AGREEMENT (the "Restated Agreement"), made as
of the 1st day of January, 1999, by and between the Commonwealth of
Pennsylvania, acting through its Department of Public Welfare (the
"Department"), and Oxford Health Plans (PA), Inc., a Pennsylvania corporation
with its principal place of business at The Curtis Center, 601 Walnut Street,
Suite 900, Independence Square West, Philadelphia, Pennsylvania 19106 (the
"Contractor"), and Oxford Health Plans (PA), Inc., a Delaware corporation with
its principal place of business at The Curtis Center, 601 Walnut Street, Suite
900, Independence Square West, Philadelphia, Pennsylvania 19106 ("the
Guarantor").
W I T N E S S E T H:
WHEREAS, the Pennsylvania Medical Assistance Program ("MA Program") is
organized under Title XIX of the Social Security Act (42 U.S.C.A. 1396 et seq.)
and under the Pennsylvania Public Welfare Code, Act of June 13, 1967, P.L. 31,
as amended, (62 P.S. Section 101 et seq.) to provide payment for medical
services to persons eligible for medical assistance; and
WHEREAS, Section 443.5 of the Public Welfare Code ( 62 P.S. 443.5)
authorizes the Department to provide prepaid capitation payments for services
provided under Contracts with Health Maintenance Organizations; and
WHEREAS, the Health Care Financing Administration ("HCFA") approved the
Department's waiver request under Section 1915(b) of the Social Security Act to
implement a mandatory managed care program, under the name HealthChoices
Southeast (the "HC-SE Program"), for MA consumers in Bucks, Chester, Delaware,
Montgomery and Philadelphia Counties (the "HC-SE Counties"); and
WHEREAS, the Department issued Request for Proposal Number 5-96 (the
"RFP") containing the participation requirements and the terms and conditions of
the HC-SE Physical Health Program and soliciting proposals from Physical Health
Managed Care Organizations (PH-MCOs) to participate in the program (including
all technical amendments, appendices and exhibits attached thereto.); and
WHEREAS, the Contractor submitted a proposal in response to the RFP and
such Proposal was selected by the Department as responsive to the requirements
of the RFP. (The proposal submitted by the Contractor, including all appendices
and exhibits attached thereto, will be referred to as the "Proposal").
WHEREAS, the Department and the Contractor executed an Agreement
effective January 1997; and
WHEREAS, the Department and the Contractor desire to amend and restate
the Agreement.
<PAGE>
NOW, THEREFORE, the parties intending to be legally bound hereby agree
as follows:
SECTION 1: INCORPORATION OF DOCUMENTS
1.1 Operative Documents
The RFP, a copy of which is attached hereto as Appendix 1, and the
Proposal, a copy of which is attached hereto as Appendix 2, are
incorporated herein and are made a part of this Agreement. With regard
to the governance of such documents, it is agreed that:
A. In the event that any of the terms of this Agreement conflict
with, are inconsistent with, or are in addition to the terms
of the RFP, the terms of this Agreement will govern;
B. In the event that any of the terms of this Agreement conflict
with, are inconsistent with, or are in addition to the terms
of the Proposal, the terms of this Agreement will govern;
C. In the event that any of the terms of the RFP conflict with,
are inconsistent with, or are in addition to the terms of the
Proposal, the terms of the RFP will govern; and
D. It is agreed that the general terms and conditions which
constitute Appendix A of the RFP will not be applicable and
that they have been replaced and are superseded by the general
terms and conditions that are attached hereto as Exhibit A
(the "General Terms and Conditions"). In the event that any of
the General Terms and Conditions conflict with terms that are
in the text of the RFP the text of the General Terms and
Conditions will govern.
<PAGE>
SECTION 2: DEFINITIONS
The definitions set forth or referred to in the RFP will apply to the
corresponding words and phrases in this Agreement, unless otherwise
specified or unless the context clearly requires a different meaning.
The specific definitions in the RFP will govern, unless such
definitions are amended or revised by this Section. With regard to the
revision of specific definitions in the RFP, it is agreed that:
A. Emergency Medical Condition. A medical condition evidenced by
acute symptoms of sufficient severity (including severe pain)
such that a prudent layperson, who possesses an average
knowledge of health and medicine, could reasonably expect the
absence of immediate medical attention to result in:
(1) placing the health of the individual (or with respect
to a pregnant women, the health of the woman and her
unborn child) in serious jeopardy;
(2) serious impairment to bodily functions, or
(3) serious dysfunction of any bodily organ or part.
B. Emergency Services. Covered inpatient and outpatient services
that:
(1) are furnished by a provider that is qualified to
furnish such service under Title XIX, and
(2) are needed to evaluate or stabilize an emergency
medical condition.
C. Medical Necessity. Determinations of medical necessity for
covered care and services, whether made on a prior
authorization, concurrent review or post-utilization basis,
shall be in writing and be compensable under MA. The PH-MCO
shall base its determination on medical information provided
by the member, the member's family/caretaker and the PCP, as
well as any other providers, programs and agencies that have
evaluated the member. Medical necessity determinations must be
made by qualified and trained providers. Satisfaction of any
one of the following standards will result in authorization of
the service:
(1) The service or benefit will, or is reasonably
expected to, prevent the onset of an illness,
condition or disability.
(2) The service or benefit will, or is reasonably
expected to, reduce or ameliorate the physical,
mental or developmental effects of an illness,
condition, injury or disability.
<PAGE>
(3) The service or benefit will assist the member to
achieve or maintain maximum functional capacity in
performing daily activities, taking into account both
the functional capacity of the member and those
functional capacities that are appropriate for
members of the same age.
D. Affiliate. Any individual, corporation, partnership, joint
venture, trust, unincorporated organization or association, or
other similar organization (hereinafter "Person"),
controlling, controlled by or under common control with
Contractor or its parent(s), whether such common control be
direct or indirect. Without limitation, all officers, or
Persons, holding five (5%) percent or more of the outstanding
ownership interests of Contractor or its parent(s), directors
and subsidiaries of Contractor or parent(s) will be presumed
to be affiliates for purposes of this Agreement. For purposes
of this definition, "control" means the possession, directly
or indirectly, of the power (whether or not exercised) to
direct or cause the direction of the management or policies of
a Person, whether through the ownership of voting securities,
other ownership interests, or by contract or otherwise,
including but not limited to the power to elect a majority of
the directors of a corporation or trustees of a trust, as the
case may be.
E. Health Care Professional. Physician or other health care
professional if coverage for the professional's services are
provided under the contract for the services of the
professional. Such term includes, but is not limited to:
podiatrist, optometrist, chiropractor, psychologist, dentist,
physician assistant, physical or occupational therapist and
therapy assistant, speech-language pathologist, audiologist,
registered or licensed practical nurse (including nurse
practitioner, clinical nurse specialist, certified registered
nurse anesthetist and certified nurse-midwife), licensed
certified social worker, registered respiratory therapist and
certified respiratory therapy technician.
F. Third Party Liability (TPL). The financial responsibility for
all or part of a member's health care expenses of an
individual entity or program (e.g., Medicare) other than the
PH-MCO.
SECTION 3: RELATIONSHIP OF PARTIES
3.1 Basic Relationship
The relationship between the Department and the Contractor is that of
independent contracting parties. The Contractor, its employees,
servants, agents, and representatives will not be considered and will
not hold themselves out as the employees, servants, agents or
representatives of the Department or the Commonwealth of Pennsylvania.
The Contractor, its employees, servants, agents and representatives do
not have the authority to bind the Department or the Commonwealth of
<PAGE>
Pennsylvania and they will not make any claim or demand for any right
or privilege applicable to an officer or employee of the Department or
the Commonwealth of Pennsylvania. In furtherance of the foregoing, the
Contractor acknowledges that no workers' compensation or unemployment
insurance coverage will be provided by the Department to the
Contractor's employees, servants, agents and representatives. The
Contractor will be responsible for maintaining for its employees, and
for requiring of its agents and representatives, malpractice, workers'
compensation and unemployment compensation insurance in such amounts as
required by law.
The Contractor acknowledges and agrees that it will have full
responsibility for all taxes and withholdings of all of its employees.
In the event that any employee or representative of the Contractor is
deemed an employee of the Department by any taxing authority or other
governmental agency, the Contractor agrees to indemnify the Department
for any taxes, penalties or interest imposed upon the Department by
such taxing authority or other governmental agency.
3.2 Nature of Contract
Pursuant to this Agreement, the Contractor will arrange for the
provision of medical and related services to MA recipients through
qualified health care providers in accordance with the terms and
conditions of the RFP and the Proposal. In administering the
HealthChoices Program, the Contractor will comply fully with the terms
and conditions set forth in the RFP, including but not limited to the
operational and financial standards as set forth on pages 17-104 of the
RFP (the "Program Standards").
SECTION 4: APPLICABLE LAWS AND REGULATIONS
4.1 Certification and Licensing
During the term of this Agreement, the Contractor will require that
each of the health care professionals with which it contracts complies
with all certification and licensing laws and regulations applicable to
the profession. The Contractor also will require that such health care
professionals perform services consistent with the customary standard
of practice and ethics in the profession and must enroll in the MA
Program. The Contractor agrees not to employ or engage the services of
any provider or practitioner who is ineligible to participate in the MA
Program.
4.2 Specific to MA Program
The Contractor agrees to participate in the MA Program and to arrange
for the provision of those medical and related services essential to
the medical care of those individuals being served, and to comply with
<PAGE>
all federal and Pennsylvania laws generally and specifically governing
participation in the MA Program. The Contractor agrees that all
services provided hereunder will be provided in the manner prescribed
by 42 U.S.C.A., Subsection 300e(b), and warrants that the organization
and operation of the Contractor is in compliance with 42 U.S.C.A.,
Subsection 300e(c). The Contractor agrees to comply with all applicable
rules, regulations, and Bulletins promulgated under such laws
including, but not limited to, 42 U.S.C.A., Subsection 300e, 1396 et
seq.; the Act of June 13, 1967, P.L. 31, No. 21, as amended (62 P.S.,
Subsection 101 et. seq.); Parts 431 through 481 of Title 42 and Parts
74, 80, and 84 of Title 45 of the Code of Federal Regulations, and the
Department of Public Welfare regulations.
4.3 General Laws and Regulations
The Contractor will comply with Titles VI and VII of the Civil Rights
Act of 1964 (42 U.S.C. Section 2000d et seq. and 2000e et seq.);
Section 504 of the Rehabilitation Act of 1973 (29 U.S.C.A. Section 701
et seq.); the Age Discrimination Act of 1975 (42 U.S.C.A. Section 6101
et seq.); the Americans with Disabilities Act (ADA) (42 U.S.C.A.
Section 12101 et seq.); and the Pennsylvania Human Relations Act of
1955 (71 P.S. Section 941 et seq.), as amended.
The Contractor also will comply with the Commonwealth's Contract
Compliance Regulations which are set forth at 16 Pa. Code 49.101, and
on file with the Contractor.
The Contractor also will comply with all applicable laws, regulations,
and policies of the Pennsylvania Department of Health and the
Pennsylvania Insurance Department.
4.4 Limitation on the Department's Obligations
The obligations of the Department under this Agreement are limited and
subject to the availability of funds appropriated by the General
Assembly of the Commonwealth of Pennsylvania, and certified by the
Comptroller of the Department.
4.5 Acceptance of Commonwealth Capitation Payments
The Contractor is prohibited from holding the member liable for the
following:
A. Debts of the Contractor in the event of the Contractor's
insolvency.
<PAGE>
B. Services provided to the member in the event of the Contractor
failing to receive payment from the Department for such
services.
C. Services provided to the member in the event of a health care
provider with a contractual, referral or other arrangement
with the Contractor failing to receive payment from the
Department or the Contractor for such services.
D. For payments to a provider that furnishes covered services
under a contractual, referral or other arrangement with the
Contractor in excess of the amount that would be owed by the
member if the Contractor had directly provided the services.
SECTION 5: REPRESENTATIONS AND WARRANTIES OF THE CONTRACTOR
5.1 Accuracy of Proposal
The Contractor represents and warrants that the representations made to
the Department in the Proposal are true and correct. The Contractor
further represents and warrants that all of the information submitted
to the Department in or with the Proposal is accurate and complete in
all material respects. The Contractor agrees that such representations
will be continuing ones, and that it is the Contractor's obligation to
notify the Department within ten (10) business days, of any material
fact, event, or condition which arises or is discovered subsequent to
the date of the Contractor's submission of the Proposal, which affects
the truth, accuracy, or completeness of such representations.
5.2 Disclosure of Interests
The Contractor will disclose to the Department, in writing, the name of
any person or entity having a direct or indirect ownership or control
interest of 5% or more in the Contractor. The Contractor will inform
the Department, in writing, of any change in or addition to the
ownership or control of the Contractor. Such disclosure will be made
within thirty (30) days of any change or addition. The Contractor
acknowledges and agrees that any failure to comply with this provision
in any material respect, or making of any misrepresentation which would
cause the Contractor's application to be precluded from participation
in the MA Program, will entitle the Department to recover all payments
made to the Contractor subsequent to the date of the misrepresentation.
5.3 Disclosure of Change in Circumstances
The Contractor agrees to report to the Department, as well as the
Departments of Health and Insurance, within ten (10) business days of
the Contractor's notice of same, any change in circumstances that may
<PAGE>
have a material adverse affect upon Contractor's or Contractor's
parent(s)' financial or operational conditions. Such reporting will be
triggered by and include, by way of example and without limitation, the
following events, any of which will be presumed to be material and
adverse:
A. Suspension or debarment of Contractor, Contractor's parent(s),
or any affiliate or related party of either, by any state or
the federal government;
B. The Contractor may not knowingly have a person act as a
director, officer, partner or person with beneficial ownership
of more than five percent (5%) of the Contractor's equity who
has been debarred from participating in procurement activities
under federal regulations.
C. Notice of suspension or debarment or notice of an intent to
suspend/debar issued by any state or the federal government to
Contractor, Contractor's parent(s), or any affiliate or
related party of either; and
D. Any new or previously undisclosed lawsuits or investigations
by any federal or state agency involving Contractor,
Contractor's parent(s), or any affiliate or related party of
either, which would have a material impact upon the
Contractor's financial condition or ability to perform under
this Agreement.
SECTION 6: ACCESS STANDARDS.
6.1 Readiness Review
On or after October 1, 1996, the Department will conduct an on-site
review of the Contractor ("Readiness Review") in order to assess the
Contractor's compliance with those Program Standards (as defined in the
RFP) which are critical to the Contractor's participation in the
HealthChoices Program (the "Access Standards"). The Department will
have the sole discretion in the development and implementation of the
Readiness Review procedures. In the event the Department determines
that the Contractor has not met the requirements of the Readiness
Review on or before November 15, 1996, enrollment into the Contractor's
plan may not be permitted, and this Agreement may be terminated at the
discretion of the Department.
6.2 Compliance With Access Standards
A. Mandatory Compliance.
The Contractor acknowledges and agrees that compliance with
the Access Standards in accordance with Section 6.2B below, is
a prerequisite to its participation in the HC-SE Program. If
the Contractor fails to meet any of the Access Standards to
<PAGE>
the complete satisfaction of the Department by the dates
indicated below or by the dates otherwise specified by the
Department, the Department may terminate this Agreement in
accordance with Section 10.1B hereof upon notice to the
Contractor or may impose sanctions as outlined in Section 17.6
of this Agreement.
B. The Access Standards
The Access Standards are as follows:
(1) Certificates of Authority
The Contractor will have received and provided to the
Department a Certificate of Authority verifying that
the Contractor is licensed to operate in each of the
HC-SE Counties. The Contractor will maintain such
Certificate of Authority throughout the Term of this
Agreement.
(2) Provider Networks
The Contractor must establish and maintain an
adequate provider network, approved by the
Department, to serve all of the eligible HC-SE
populations in geographically accessible locations
within the service area for the HC-SE populations to
be served. This provider network must be in place
prior to October 1, 1996. The Contractor must ensure
that its provider network is adequate to provide its
MA enrollees with access to quality patient care
through participating health care professionals,
consistent with the time and distance requirements
set forth in the RFP and in this Agreement.
The Contractor must make all reasonable efforts to
honor a member's choice of provider among in-network
providers. as long as:
(a) The Contractor's contract with the
in-network provider covers the services
required by the member; and
(b) The Contractor has not determined that the
member's choice is clinically inappropriate.
The Contractor must provide the Department adequate
assurances that the Contractor, with respect to the
service area, has the capacity to serve the expected
enrollment in the service by providing assurances
<PAGE>
that the Contractor offers the full scope of covered
services as set forth in the RFP and access to
preventive and primary care services and maintain a
sufficient number, mix and geographic distribution of
providers and services in accordance with the
standards set forth in the RFP.
All providers operating within the Contractor's
provider network who provide services to MA consumers
must be enrolled in the Commonwealth's MA Program and
possess an active Medical Assistance Identification
(MAID) number.
The Contractor must include in all agreements with
PCPs who serve members under the age of twenty-one
(21) a requirement that the PCP is responsible for
conducting all EPSDT screens for individuals on their
panel under the age of twenty-one (21). Should the
PCP be unable to conduct the necessary EPSDT screens,
the PCP is responsible for arranging to have the
necessary EPSDT screens conducted by another network
provider and ensure that all relevant medical
information, including the results of the EPSDT
screens, are incorporated into the member's PCP
medical record.
The Contractor will include in all contracts with
PCPs who serve members under the age of twenty-one
(21) the requirement that PCPs report encounter data
associated with EPSDT screens, using a format
approved by the Department, to the Contractor within
ninety (90) days from the date of service.
The Contractor must include in all capitated provider
agreements a clause which stipulates that should the
provider terminate its agreement with the Contractor,
for any reason, that the provider provide services to
the contracted members up to the end of the month in
which the effective date of termination falls.
(3) Compliance with Particular Criteria
In connection with establishing and maintaining a
Provider Network acceptable to the Department
pursuant to Section 6.2B(2) above, the Contractor
must demonstrate compliance with the following
criteria:
<PAGE>
For (a) through (d) below, the Contractor must make a
reasonable effort to schedule the required
appointments. Such an effort will be deemed to be
reasonable if it includes three (3) attempts to
contact the member. Such attempts may include, but
not be limited to: written attempts, telephone calls
and home visits. At least one (1) such attempt must
be written. The Contractor must document all
attempts.
(a) EPSDT screens for any new enrollee under the
age of twenty-one (21) must be scheduled
within forty-five (45) days from the
effective date of enrollment unless the
child is already under the care of a PCP and
the child is current with screens and
immunizations.
(b) An appointment with a PCP/Specialist must be
scheduled within seven (7) days from the
effective date of enrollment for any person
known to the Contractor to be HIV positive
(e.g. self-identification), unless the
enrollee is already in active care with a
PCP/Specialist.
(c) Scheduling of an appointment with a
PCP/Specialist within forty-five (45) days
of enrollment for any member who is an SSI
or SSI-related consumer unless the enrollee
is already in active care with a
PCP/Specialist.
(d) Should the Independent Enrollment Assistance
Program (IEAP) Contractor notify the PH-MCO
that a new enrollee is pregnant, the
Contractor must contact the member within
five (5) days of the effective date of
enrollment to assist the woman in obtaining
an appointment with an OB/GYN.
(e) The Contractor must ensure the provision of
services to persons who have special health
needs or who face access barriers to health
care. If the Contractor does not have at
least two (2) specialists or subspecialists
qualified to meet the particular needs of
the individuals, then the Contractor must
pay for the service out-of-network. The
Contractor must develop a system to
<PAGE>
determine prior authorization for
out-of-network services, including
provisions for informing the consumer of how
to request this authorization for
out-of-network services. For children with
special health needs, the Contractor must
offer at least two (2) pediatric specialists
or pediatric sub-specialists. The Contractor
is required to report to the Department any
instances when a consumer goes out
of-network to receive these services.
(f) The Contractor must ensure a choice of at
least two (2) PCPs located within the travel
time limits (30 minutes urban, 60 minutes
rural).
(g) The Contractor must ensure an adequate
number of pediatricians to permit all
patients wishing a pediatrician as a PCP to
have one for the child(ren) within the
travel time limits (30 minutes urban, 60
minutes rural).
(h) The Contractor must ensure a choice of at
least two (2) pharmacies (excluding
mail-order entities) within the travel time
limits (30 minutes urban, 60 minutes rural).
(i) The Contractor must ensure a choice of at
least two (2) hospitals within the network,
at least one (1) of which must be within the
travel limits (30 minutes urban, 60 minutes
rural).
(j) The Contractor must ensure at least one (1)
home health agency within the network,
providing the Contractor can demonstrate to
the Department that access is ensured.
(k) The Contractor must ensure at least one (1)
DME supplier within the network providing
the Contractor can demonstrate to the
Department that access is ensured.
(l) The Contractor must ensure a choice of at
least two (2) rehabilitation facilities
within the network, at least one (1) of
which must be located within the project
area.
(m) The Contractor must ensure a choice of at
least two (2) nursing facilities within the
network, at least one (1) of which must be
located within the project area.
(n) The Contractor must ensure a choice of at
least two (2) general practice dentists
within the network with experience in
treating individuals under age twenty-one
(21) and adults with special needs, at least
one (1) of which must be located within the
project area.
<PAGE>
(o) The Contractor will demonstrate its ability
to offer its members freedom of choice in
selecting a PCP. At a minimum, the
Contractor will have or provide one (1)
full-time equivalent (FTE) PCP who serves no
more than one thousand (1,000) MA consumers
(cumulative across all HC-SE PH-MCO plans)
and PCP sites which serve no more than five
thousand (5,000) MA consumers (cumulative
across all HC-SE PH-MCO plans). The
Department will develop a system to notify
the Contractor of a provider reaching
maximum panel limits. The number of members
assigned to a PCP will be decreased by the
Contractor if necessary to maintain the
appointment availability standards. The
Contractor and the Department will work
together to avoid the PCP having a caseload
or medical practice composed predominantly
of HC-SE members. In addition, the
Contractor must organize its PCP sites so as
to ensure continuity of care to members and
must identify a "lead physician" within the
site for each member. The Contractor may
apply to the Department for a waiver of
these requirements on a site specific basis.
The Department may waive these requirements
for good cause demonstrated by the
Contractor.
(p) The Contractor will demonstrate its ability
to provide adequate access to physician
specialists for PCP referrals, and will
employ or contract with adult and pediatric
specialists in sufficient numbers to ensure
that specialty services can be made
available in a timely, and geographically,
and physically accessible manner,
particularly for those members in special
needs populations, and to give enrollees a
choice of at least two (2) appropriate
specialists.
(q) The Contractor must demonstrate its attempts
to contract in good faith with a sufficient
number of Federally Qualified Health Centers
(FQHCs) to ensure access to FQHC services,
provided FQHC services are available, within
a travel time of thirty (30) minutes (urban)
and sixty (60) minutes (rural). If the
Contractor's primary care network includes
FQHCs, these sites may be designated as PCP
sites.
(r) The Contractor must demonstrate its ability
to make available to every member an
appropriate PCP whose office is located
within a travel time no greater than thirty
(30) minutes (urban) and sixty (60) minutes
(rural). This travel time is measured via
public transportation. The same standards of
availability will also pertain to primary
care dental providers.
<PAGE>
(s) The Contractor must provide the Department
with its protocol for ensuring that the
average office waiting time will be twenty
(20) minutes or up to one (1) hour when the
physician encounters an unanticipated urgent
visit or is treating a patient with a
difficult medical need. The Contractor must
also provide the Department with its
protocol for educational outreach efforts
through which enrollees and providers will
be informed of scheduling time frames.
(t) The Contractor must comply with the
provisions of the Act 112 of 1996 (H.B.
1415, P.N. 3853, signed July 11, 1996), The
Balanced Budget Reconciliation Act of 1997,
and the Quality Health Care Accountability
and Protection Provisions, Article XXI, Act
68 of 1998 (P.L., 464, No. 68) effective
January 1, 1999 amending the Act of May 17,
1921 (P.L. 682, No. 284.) pertaining to
coverage and payment of medically necessary
emergency services. The definition of such
services is set forth herein at Section 2.A.
(u) Effective January 1, 1999, the Contractor
must inspect the office of any primary care
practitioner (PCP) or dentist who seeks to
participate in the Contractor's Provider
Network (excluding offices located in
hospitals) to determine whether the office
is architecturally accessible to persons
with mobility impairments. Architectural
accessibility means compliance with ADA
accessibility guidelines with reference to
parking (if any), path of travel to an
entrance, and the entrance to both the
building and the office of the provider, if
different from the building entrance. If the
office or facility is not accessible, the
PCP or dentist may not participate in the
Contractor's Provider Network until the
barrier has been removed and the office or
facility is accessible to persons with
mobility impairments or the provider
presents proof of an exemption under Title
III of the ADA.
With respect to PCPs and dentists
participating in Contractor's Provider
Network prior to January 1, 1999, the
Department will notify the Contractor of the
office of any PCP or dentist that the
Department has determined is not
architecturally accessible to persons with
<PAGE>
mobility impairments. Such provider will
have ninety (90) days from the date of
notification that a barrier exists to remove
the barrier unless the Department expressly
agrees to extend the time for compliance. If
the PCP or dentist fails to remove the
barrier, the Contractor will initiate
appropriate action to promptly terminate the
provider's participation in the Contractor's
Network unless notified by the Department
that termination is not necessary.
(4) Contractor's Corrective Action
The Contractor will take all necessary steps to
resolve, in a timely manner, its failure to comply
with the Access Standards outlined herein as
identified by the Department. Prior to a termination
action or other sanction by the Department, the
Contractor will be given the opportunity to institute
a corrective action plan. The Contractor will submit
a corrective action plan to the Department for
approval within thirty (30) days of notification of
such failure to comply, unless circumstances warrant
and the Department demands a shorter response time.
The Department's approval of the Contractor's
corrective action plan will not be unreasonably
withheld. The Department will make its best effort to
respond to the Contractor within thirty (30) days
from the submission date of the corrective action
plan. Should the Department determine the need to
extend the thirty (30) day response limit, the
Department will notify the Contractor in writing
prior to the end of the thirty (30) day time period.
If the Department rejects the corrective action plan,
the Contractor will be notified of the deficiencies
of the corrective action plan. In such event, the
Contractor will submit a revised corrective action
plan within fifteen (15) days of notification. If the
Department does not receive an acceptable corrective
action plan, the Department may impose sanctions
against the Contractor, in accordance with Section
17.6. Failure to implement the corrective action plan
may result in the application of a sanction as
provided in this Agreement against the Contractor.
SECTION 7: OBLIGATIONS OF THE CONTRACTOR
7.1 Program Standards
The Contractor agrees to fully comply with the terms and conditions set
forth in the RFP, including but not limited to the terms and conditions
contained in the Program Standards, which are fully set forth on pages
17 through 104 of the RFP. Subsections A through X below provide a
listing of the categories of the Program Standards and, where
indicated, additional requirements with which the Contractor must
comply.
<PAGE>
The requirements listed below are in addition to those set forth in the
RFP.
A. General
If a child in substitute care is determined eligible for MA
outside the five (5) county HC-SE Project area and placed in
substitute care inside the five (5) county HC-SE project area
s/he will be covered under the HealthChoices Program. This
requirement will become effective as follows:
(1) From HC-SW Zone to HC-SE Zone - January 1, 1999
(2) From HC-SE Zone to HC-SW Zone - July 1, 1999
(3) From FFS county to HC-SE Zone - September 1, 1999
B. Licensure
The Contractor agrees to comply with the Program Standards
regarding licensure which are set forth in the RFP. It is
specifically acknowledged and agreed that the Contractor must
possess and maintain a current Health Maintenance Organization
license acceptable to the Department throughout the Term of
this Agreement.
C. PH-MCO Administration
The Contractor agrees to comply with the Program Standards
regarding PH-MCO Administration which are set forth in the
RFP. In addition, it is agreed that the Department must
approve the location of the Contractor's administrative
offices. Once approved, the Contractor will not relocate such
administrative offices without the Department's prior written
consent, which consent will not be unreasonably withheld.
The Contractor must submit for approval by the Department its
organizational structure listing the function of each
executive as well as administrative staff member. Staff
positions outlined in HealthChoices RFP #5-96 must be filled
in accordance with the Department's timetables. The
HealthChoices Program Manager must be accessible to the
Department and may not be reassigned without prior approval by
the Department, which approval will not be unreasonably
withheld.
D. Member Enrollment and Disenrollment
(1) The Department will conduct enrollment prior to the
January 1, 1997 implementation date. Pre-enrollment
activities will commence in September 1996.
<PAGE>
Enrollment will be conducted for the Phase I
population commencing October 15, 1996. The
Department will also conduct enrollment prior to the
second phase-in period. Enrollment for the Phase II
population will commence in April 1997.
(2) The Contractor agrees to comply with the Program
Standards regarding Member Enrollment and
Disenrollment which are set forth in the RFP.
(3) The Contractor is prohibited from restricting its
members from changing PH-MCOs for any reason. The MA
consumer has the right to initiate a change in
PH-MCOs at any time.
(4) It is specifically acknowledged and agreed that the
Contractor will be required to develop marketing
materials such as pamphlets and brochures which can
be used by the Enrollment Specialists to assist MA
consumers in choosing a PH-MCO and PCP. These
materials must be developed in the form and context
stipulated by the Department. The Department must
approve of such materials in writing prior to their
use. The Department's review will be conducted within
thirty (30) days, and approval will not be
unreasonably withheld. The Contractor is required to
print and provide to the IEAP Contractor an adequate
supply of previously approved materials within five
(5) business days from a request of the IEAP
Contractor.
The Contractor is prohibited from distributing
directly or through any agent or independent
contractor, marketing materials without prior written
approval of the Department. In addition, the
Contractor must comply with the following marketing
guidelines and/or restrictions.
(a) The Contractor may not seek to influence an
individual's enrollment with the PH-MCO in
conjunction with the sale of any other
insurance.
(b) The Contractor must comply with the
enrollment procedures established by the
Department in order to ensure that, before
the individual is enrolled with the PH-MCO,
the individual is provided accurate oral and
written information sufficient to make an
informed decision on whether to enroll.
(c) The Contractor will not directly or
indirectly conduct door-to-door, telephone
or other cold-call marketing activities.
(5) The Contractor must comply with the following
principles for all PH-MCO marketing activities:
<PAGE>
(a) The PH-MCO may use but not be limited to,
commonly accepted media methods to advertise
and market. These include television, radio,
billboard and printed media. Such
advertising cannot be within sight of or in
the general vicinity of any CAO or other
eligibility or enrollment office. All such
advertising and marketing is subject to
advance written approval by the Department.
(b) The PH-MCO may participate in or sponsor
health fairs or community events. The
Department reserves the right to set limits
on donations and/or payments made to
non-profit groups in connection with health
fairs or community events. Such payments are
subject to financial audit by the
Department.
(c) Items of little or no intrinsic value (i.e.,
trinkets with promotional PH-MCO logos), may
be offered at health fairs or other approved
community events. Such items must be made
available to the general public, not to
exceed $1.00 in retail value and must not be
connected in any way to PH-MCO enrollment
activity. All such items are subject to
advance written approval by the Department.
(d) PH-MCOs will be permitted to offer members
health-related benefits in excess of those
required by the Department, and are
permitted to feature such increased benefits
in approved marketing materials. All such
expanded benefits are subject to advance
written approval by the Department. These
must be benefits that are generally
considered to have a direct relationship to
the maintenance or enhancement of a member's
-- health status. Examples of potentially
approvable benefits include various seminars
and educational programs promoting healthy
living or illness prevention, memberships in
health clubs and/or facilities promoting
physical fitness and expanded eyeglass or
eye care benefits. These benefits must be
generally available to all PH-MCO members
and must be made available at all
appropriate PH-MCO network providers. Such
benefits cannot be tied to specific member
performance. However, the Department may
<PAGE>
grant exceptions in areas where it believes
that such tie-ins will produce significant
health improvements for members.
(e) PH-MCOs will not be permitted to offer
member coupons for products of value.
(f) Unless approved by the Department, PH-MCOs
will not be permitted to directly provide
products of value unless they are health
related and are prescribed by a licensed
provider.
(g) The Department reserves the right to review
any and all marketing activities, including,
materials prepared by the PH-MCO for use by
the Enrollment Specialists and advertising
materials and procedures used by the PH-MCO
for its personnel. In addition to any other
sanctions and/or penalties, the Department
may choose to impose monetary or restricted
enrollment penalties should the PH-MCO be
found to be using marketing materials or
engaging in marketing practices which have
not received advance written approval from
the Department as applicable. The Department
reserves the right to suspend all marketing
activities and the completion of
applications for new enrollees. Such
suspensions may be imposed for a period of
sixty (60) days from notification by the
Department to the PH-MCO citing the
violation.
(h) The Contractor is prohibited from
distributing, directly or through any agent
or independent contractor, marketing
materials that contain false or materially
misleading information.
(i) The PH-MCO must comply with marketing
guidelines outlined in Exhibit E.
(6) The Contractor must provide the IEAP Contractor with
a supply of hardcopy provider directories. The
directories must include all providers in the
Contractor's network, including, but not limited to:
PCPs, hospitals, specialists, providers of ancillary
services, nursing facilities, etc. The Contractor
must provide the IEAP Contractor with an adequate
supply of hardcopy provider directories (including
updates) on a continual basis. Hardcopy provider
directories must be updated quarterly.
The Contractor must provide the IEAP Contractor with
automated provider directories. The directories must
include all providers in the Contractor's network,
including, but not limited to: PCPs, hospitals,
<PAGE>
specialists, providers of ancillary services, nursing
facilities, etc. Updates to the automated provider
directory must be provided monthly to the IEAP
Contractor. Updated directories will be provided
either by reprinting or by written addendums at the
discretion of the plan.
In addition to the requirements listed in the RFP for
provider directories, directories must include
identification of sites which are wheelchair
accessible.
(7) The Contractor must comply with all appointment
standards outlined in the RFP, including but not
limited to those set forth on Page 27. The Contractor
agrees to require the PCP/Specialist to conduct
affirmative outreach whenever an enrollee misses an
appointment in accordance with the RFP and to
document the same.
(8) Should the Contractor permit selection of a PCP Group
and the member has selected a PCP Group with an open
panel in the Contractor's network which has been duly
communicated to the Contractor through the Enrollment
Specialists, the Contractor must ensure that upon
commencement of the PH-MCO coverage, the member's
selection is honored. This PCP site selection must be
solely at the request of the member. Should the
member, at any time after the effective date of
enrollment into the Contractor's plan request that an
individual PCP be assigned, the Contractor must honor
that request. In addition, at no time is the
Contractor permitted to assign a PCP site to a member
if the member has not selected a PCP or a PCP site at
the time of enrollment.
If the member has not selected a PCP or a PCP site
through the Independent Enrollment Specialist, the
Contractor is required to comply with the timeframes
specified in the HC-SE RFP to ensure that a PCP, not
a PCP site, is assigned to the member. This
requirement does not relieve the Contractor from
complying with the credentialing/recredentialing and
provider profile requirements outlined in the HC-SE
RFP for all providers within the Contractor's
provider network.
<PAGE>
(9) The Contractor must provide a file, via the
Department's Pennsylvania Open Systems Network
(POSNet), to the Department's EVS contractor of PCP
assignments for all its members. This file must be
provided at least weekly. The PCP assignment
information must be consistent with all requirements
specified by the Department.
(10) When any member is disenrolled from the PH-MCO
because of admission to or length of stay in a
facility, or because of placement in substitute care
outside the HC-SE project area for up to six months
from the initial date of disenrollment, the PH-MCO
from which the member has been disenrolled, remains
responsible for participating in discharge/transition
planning, and will be assumed to be the MA consumer's
plan upon discharge or upon returning to the HC-SE
project area, unless and until the MA consumer
chooses a different PH-MCO. If the MA consumer
chooses a different plan, that plan must participate
in discharge/transition planning upon notification
that the MA consumer will be enrolled in that PH-MCO.
E. Member Services
The Contractor agrees to comply with the Program Standards
regarding Member Services which are set forth in the RFP.
(1) All information given to members and potential
members must be easily understood and must comply
with all requirements outlined in the RFP.
Informational material distributed to HealthChoices
members, including but not limited to provider
directories and member handbooks, will be available,
upon request, in Braille, large print, and audio tape
and will be provided in the format requested by the
person with a visual impairment. The information
contained in the provider directories may cover only
those zip codes or other geographic locations that
the person with a visual impairment requests. The
Contractor will pay particular attention for the
provision of the following items:
(a) Identity, location, qualifications and
availability of health care providers within
the organization.
(b) Members' rights and responsibilities.
(c) Grievance and appeal procedures.
(d) Information on services covered directly or
through referral and prior authorization.
<PAGE>
(2) The Contractor must include in its PCP provider
contracts language which requires PCPs to contact new
members identified in the quarterly encounter lists
who have not had an encounter during the first six
months of enrollment or who have not complied with
the scheduling requirements outlined in the RFP. The
PCP also must be required to contact members
identified in the quarterly encounter lists as not
complying with EPSDT periodicity and immunization
schedules for children. The primary care sites must
be required to identify to the Contractor any such
members who have not come into compliance with the
EPSDT periodicity and immunization schedules within
one (1) month of such notification to the site by the
Contractor. The primary care site must also be
required to document the reasons for noncompliance,
and to document its efforts to bring the member's
care into compliance with the standards.
(3) At the time of enrollment, the MA consumer has the
option subject to the PH-MCOs confidentiality
obligations and applicable law to designate a single
additional addressee (i.e., family member, case
manager, close friend, etc.) to receive duplicate
copies of written communications from the PH-MCO
providing notice of a change in the member's health
care benefits, notice of the termination of the
member's PCP from the provider network, and denial of
services notices. Original copies of such written
communications should still be forwarded to the
member. This additional addressee will be identified
on the IEAP Contractor's weekly enrollment file
forwarded to the PH-MCO or may be identified by the
member directly to the PH-MCO. The Contractor will
develop plans to process such requests and for
getting the necessary releases signed by the member
to ensure that the member's right regarding
confidentiality are maintained.
The additional addressee requirement will be implemented in
phases beginning with members identified as children in
substitute care. The Department will work in conjunction with
the Contractor to develop a mutually agreed upon process,
appropriate release forms and the effective date of
implementation. However, this requirement will not be
implemented until April 1, 1999. The Department reserves the
right to include population groups (i.e. elderly, people with
mental retardation, etc) prior to the end of the third
contract year should all issues surrounding the inclusion of
this requirement be resolved.
<PAGE>
F. In-Plan Services
The Contractor agrees to comply with the Program Standards
regarding In-Plan Services which are set forth in the RFP and
Exhibit M.
(1) In-plan services will be provided in a manner in the
amount, duration and scope set forth in the MA FFS
Program and may be based on the MA consumer's benefit
package, unless otherwise specified by the
Department. If new services or eligible consumers are
added to the Pennsylvania MA Program, or if covered
services or eligible consumers are expanded or
eliminated, implementation by the Contractor will be
on the same day as the Department's unless the
Contractor is notified by the Department of an
alternative implementation date. When new services
are added, the Department will conduct an actuarial
analysis including appropriate input by the
Contractor to determine if there is a need for a rate
change and if necessary, adjust the rates to
appropriately reflect the addition of the new
services. The Contractor is not responsible to
provide any services as set forth in the Behavioral
Health RFP # 3-96 and/or in the contracts between the
Department and the Behavioral Health Managed Care
Organizations (BH-MCOs).
(2) The Contractor is required to provide emergency
services without regard to prior authorization or the
emergency care provider's contractual relationship
with the Contractor.
(3) If the Contractor wishes to require prior
authorization of any services which are not required
to be prior authorized under the MA FFS Program, they
must establish and maintain written policies and
procedures which must have advance written approval
by the Department. In addition, the list and scope of
services to be prior authorized must have advance
written approval by the Department as outlined in the
prior authorization guidelines in Exhibit G.
The Department will make its best efforts to review
and provide feedback to the Contractor (e.g., written
approval, request for corrective action plan, denial,
etc.) within sixty (60) days from the date the
Department receives the request for review by the
Contractor. For minor updates to existing approved
prior authorization plans, the Department will make
its best efforts to review within forty-five (45)
days from the date the Department receives the
request for review by the Contractor.
<PAGE>
The Contractor may require prior authorization as a
condition of coverage or payment for an outpatient
prescription drug provided that if a member's
prescription is denied, the member must be provided
with at least a seventy-two (72) hour supply of the
medication and must receive a written denial within
twenty-four (24) hours from the time that the
prescription was presented to the pharmacist. In the
event that the Contractor cannot provide a written
denial within twenty-four (24) hours, the Contractor
must have procedures in place so as to permit the
member to receive a supply of the medication such
that the supply will not be exhausted prior to
receipt of the denial notice. The requirement that
the member be given at least a seventy-two (72) hour
supply of the medication does not apply when a
pharmacist determines that the taking of the
medication prescribed, along with other medication
that the member may be taking is medically
contraindicated. In such event, the Contractor and/or
its sub-contractor must make good faith efforts to
contact the member's PCP. In such instances, however,
the requirement that a written denial be received by
the member within twenty-four (24) hours still
applies.
(4) The Contractor is required to process each request
for benefits and ensure that the member is notified
of the decision within two (2) business days of
receiving the request. If the member does not receive
written notification of a decision on a request for a
covered service or item within twenty-one (21) days
of the date the Contractor received the request, the
service or item is automatically approved. To satisfy
the twenty-one (21) day time period, the Contractor
must mail to the member, the member's PCP, and the
prescribing provider a notice of partial approval or
denial of the request on or before the eighteenth
(18th) day from the date the request is received. If
the notice is not mailed by the eighteenth (18th) day
after the request is received, the request is
automatically authorized (i.e., deemed approved). If
additional information is needed to review the
request, the Contractor must request such information
from the appropriate provider within forty-eight (48)
hours of receiving the request for benefits. If the
Contractor requests additional information, the
request may be pended for a reasonable time period,
not to exceed two (2) business days after the
additional information is received, in accordance
with guidelines established by the Department.
<PAGE>
(5) Emergency Room (ER) Services
The Contractor agrees to comply with the program
standards regarding Emergency Room (ER) Services
which are set forth in the RFP. In addition:
Emergency providers may initiate the necessary
intervention to stabilize an emergency medical
condition of the patient without seeking or receiving
prospective authorization by the PH-MCO.
The Contractor will be responsible for all ER
services including those categorized as mental health
or drug and alcohol. Exception: ER evaluations for
voluntary and involuntary commitments pursuant to the
1976 Mental Health Procedures Act will be the
responsibility of the BH-MCO.
The Contractor will request PCPs to report all
contact with members in which the member or a member
representative called the PCP from an ER requesting
authorization for an urgent or non emergency service.
For each such request, the PCP must report whether
the visit was approved or denied.
The Contractor will analyze this information and use
it for quality improvement purposes. The Department
will have access to individual and aggregate data
collected. This should be a quarterly report with an
annual aggregate report.
The Contractor is required to process requests for
out-of-network emergency treatment services even if
the out-of-network provider has not notified the
Contractor within twenty-four (24) hours of providing
the service if the out-of-network provider can
document that circumstances prevented timely
notification.
The parties agree that the provision at Part II.F.2.C
(Emergency Room Services) of the RFP will not govern
payment by the Contractor for emergency room services
provided by non-participating providers. The
Contractor will pay for such services at rates
consistent with applicable law.
(6) Post-stabilization Services
The Contractor must cover post-stabilization
services.
Post stabilization services are defined as services
subsequent to an emergency that a treating physician
views as medically necessary after an emergency
medical condition has been stabilized. They are not
<PAGE>
emergency services which the Contractor is obligated
to cover in-or-out of network according to the
prudent layperson standard. Rather, they are
non-emergency services that the Contractor could
choose not to cover out-of-network except in the
circumstances described below. The intent of this
regulation is to promote efficient and timely
coordination of appropriate care of the member after
the member's condition has been determined to be
stable.
(a) The Contractor must cover post-stabilization
services without requiring authorization,
and regardless of whether the member obtains
the services within or outside the
Contractor's provider network if any of the
following situations exist.
(i) The post-stabilization services
were pre-approved by the
Contractor.
(ii) The post-stabilization services
were not pre-approved by the
Contractor because the Contractor
did not respond to the provider's
request for these
post-stabilization services within
one (1) hour of the request.
(iii) The post-stabilization services
were not pre-approved by the
Contractor because the Contractor
could not be reached by the
provider to request pre-approval
for these post-stabilization
services.
(7) The Contractor must comply with all requirements
regarding EPSDT services as set forth in the RFP.
(a) The Contractor must require that PCPs who
provide care to members under the age of
twenty-one (21) perform and report all EPSDT
screens on the form approved by the
Department, including appropriate
immunizations and blood lead levels for
children. Childhood lead poisoning
prevention services must be provided in
accordance with the Department's EPSDT
program requirements and the Centers for
Disease Control and Prevention (CDC)
guidelines entitled "Preventing Lead
Poisoning in Young Children".
<PAGE>
(b) Diagnosis and Treatment
The Contractor will require the following:
(i) Following an EPSDT developmental
screen, if the screening provider
suspects developmental delay, s/he
is required to refer the child
through CONNECT, 1-800-692-7288,
for an appropriate eligibility
determination for early
intervention services providing the
child is age appropriate consistent
with the Early Intervention
Program.
(ii) With respect to SSI and SSI-related
members under the age of twenty-one
(21), at the first appointment
following enrollment, the PCP must
make an initial assessment of the
health needs of the child over an
appropriate period (not to exceed
one [1] year), including the
child's need for primary and
specialty care. The results of that
assessment will be discussed with
the family or custodial agency
(and, if appropriate, the child)
and shall be listed in the child's
medical records. As part of the
initial assessment, the PCP will
make a recommendation regarding
whether case management services
should be provided to the child.
The Contractor shall determine the
medically appropriate level of case
management services to be provided
which includes required
notification should the Contractor
determine that the PCP's
recommendation not be approved.
(c) Tracking
(i) In addition to the requirements for
tracking set forth in the RFP, the
Contractor's system for tracking
must include:
a) EPSDT screen and reporting of
all screening results
b) Referral of members under the
age of twenty-one (21) with
elevated blood levels through
CONNECT
<PAGE>
(d) Follow-up and Outreach
(i) The Contractor's process for
reminders, follow-ups and outreach
to members must include: a process
for outreach and follow-up with
County Children and Youth Agencies
and Juvenile Probation Offices to
assure that they are notified of
all members under the age of
twenty-one (21) who are under their
supervision and who are due to
receive EPSDT screens and follow-up
treatment.
(ii) The Contractor will be required to
develop master lists of all
enrolled children who are coded as
such on the monthly membership
files. The Contractor must assign
specific staff to monitor the
services provided to these children
and to ensure that they receive
comprehensive EPSDT screens and
follow-up services. The assigned
staff must contact the relevant
agencies with custody of these
members or with jurisdiction over
them (e.g., County Children and
Youth Agency, Juvenile Probation
Office) when a particular child has
yet to receive an EPSDT screen or
is not current with their EPSDT
screen and/or immunizations and to
ensure that an appointment for such
service is scheduled.
(iii) The Contractor must submit, reports
providing all data regarding
children in substitute care (e.g.,
the number of children enrolled in
substitute care who have received
comprehensive EPSDT screens, the
number who have received blood
level assessments, etc.).
(e) Interagency Teams for EPSDT Services for
Children
The Contractor must appoint a representative
who will ensure coordination with other
health, education and human services systems
in the development of a comprehensive
individual family services plan, for members
under the age of twenty-one (21) identified
with special needs. The Contractor will only
be required to participate in interagency
teams if the Contractor receives
notification of the interagency meeting and
the interagency plan contains physical
health elements (i.e. educational,
behavioral health, etc.)
<PAGE>
If the Contractor's participation is
required, the Contractor must ensure:
(i) The objective that children have
access to adequate pediatric care.
(ii) Continuity of care with the service
plan developed in coordination with
the interagency team, including the
child (when appropriate), the
adolescent and family members.
(iii) Development of adequate specialty
provider networks.
(iv) Integration of covered services
with ineligible services.
(v) Prevention against duplication of
services.
(vi) Contractor representative
participation with the interagency
teams.
(vii) Adherence to state and federal
laws, regulations and court
requirements relating to
individuals with special needs.
(viii) Cooperation of the Contractor's
provider networks.
(ix) Applicable training for PCPs and
providers including the
identification of the Contractor's
contact persons.
G. Differently Accessed Services
The Contractor agrees to comply with the Program Standards
regarding Differently Accessed Services which are set forth in
the RFP.
The Contractor must authorize additional OB/GYN services
beyond the first prenatal care visit, at the member's request,
and without requiring a separate visit to a PCP. These
additional OB/GYN services apply only to the delivery of
pre-natal care related services.
The Contractor must permit a woman to self-refer for an annual
well-woman gynecological visit to an appropriate in-plan
specialist, such as an OB/GYN or nurse midwife. This visit
includes all appropriate primary and preventive gynecological
care, including a pap smear, which are currently covered under
the MA FFS Program.
The referral authorization process shall not apply to the
delivery of family planning services which may be
self-referred. The right of the member to choose a provider
for family planning services shall not be restricted. Members
<PAGE>
may access these family planning services and the Contractor
must pay for the services out-of-plan. These services include,
at a minimum, the following:
(1) Health education and counseling necessary to make an
informed choice and understand contraceptive methods.
(2) Family Planning Clinic Comprehensive Visit.
(3) Family Planning Clinic Problem Visit.
(4) Family Planning Routine Revisit.
(5) Related laboratory tests.
(6) Sexually Transmitted Disease (STD) screening.
(7) Screening, testing and counseling of at risk
individuals for HIV and referral for treatment.
(8) Basic contraceptive supplies such as oral birth
control pills, diaphragms, foams, creams, jellies,
condoms (male and female), Norplant, injectibles, and
intrauterine devices.
(9) Pregnancy testing and counseling.
(10) Family Planning Genetic Risk Assessment.
Procedures related to the above are outlined in Exhibit H.
H. Organ Transplants
The Contractor is responsible to pay for transplants to the
extent that the MA FFS Program pays for such transplants. When
medically necessary, the following transplants will be the
responsibility of the PH-MCO: Kidney (cadaver and living
related donor), cornea, heart, heart/lung, single lung, double
lung, liver (cadaver and living related donor), bone marrow,
stem cell, pancreas and liver-bowel transplants.
I. Coordination with Out-of-Plan Services
(1) The Contractor agrees to comply with the Program
Standards regarding Coordination with Out-of-Plan
Services which are set forth in the RFP, including
those pertaining to Behavioral Health.
<PAGE>
(2) All pharmacy services are the payment responsibility
of the member's PH-MCO. The only exception is that
the BH-MCO is responsible for the payment of
methadone and LAAM. All prescribed medications are to
be dispensed through the Contractor's network
pharmacies. This includes drugs prescribed by both
the PH-MCO and the BH-MCO providers. The Department
will issue a list of BH-MCO providers to the
Contractor prior to the start of the third Agreement
Year. Should the Contractor receive a request to
dispense medication from a behavioral health provider
not listed on the BH-MCO provider file, the
Contractor should work through the appropriate BH-MCO
to get the provider identified. The Contractor is
prohibited from denying prescribed medications solely
in cases where the BH-MCO provider is not clearly
identified on the BH-MCO provider file.
(3) The Department will continue to offer out-of-plan
benefits which will be reimbursed on a FFS basis or
through the BH-MCO. Community service providers will
continue to offer out-of-plan services established
through other delivery systems that are not the
responsibility of the MA Program or the Contractor.
In these instances, the Contractor is responsible to
coordinate the comprehensive in-plan package of
services with services provided out-of-plan by
providers.
(4) The Contractor must enter into written agreements
with all school districts, Childhood Lead Poisoning
Prevention Projects (CLPPPs), County Children and
Youth Agencies and Juvenile Probation Offices, and
the BH-MCOs. The Department strongly encourages the
PH-MCO to make a good faith effort to enter into
written agreements with other public, governmental,
county and community-based service providers.
Should the Contractor be unable to enter into written
agreements with any or all of the entities required
under this Agreement, the Contractor must submit
written justification to the Department.
Justification must include all steps taken by the
Contractor to attempt to secure these written
agreements. The Department will then determine
whether or not the Contractor will be granted a
waiver to section 7.1.I. (4).
J. Provider Networks
The Contractor agrees to comply with the Program Standards
regarding Provider Networks which are set forth in the RFP.
<PAGE>
The Contractor must maintain an adequate provider network,
approved by the Department, to serve all of the eligible
HealthChoices populations in geographically accessible
locations within the service area for the HealthChoices
populations to be served. This provider network must be in
place prior to October 1, 1996. The Contractor must ensure
that its provider network is adequate to provide its MA
enrollees with access to quality patient care through
participating professionals, in a timely manner, and without
undue travel time or distances, as more specifically outlined
in the RFP.
The Contractor is prohibited from using or reimbursing
providers for any item or service if the provider has been
excluded from participation under Titles; V, XVIII, or XIX.
K. Service Accessibility Standards
The Contractor agrees to comply with the Program Standards
regarding Service Accessibility Standards which are set forth
in the RFP.
L. Provider Enrollment
The Contractor agrees to comply with the Program Standards
regarding Provider Enrollment Standards which are set forth in
the RFP.
The Contractor must enroll a sufficient number of providers
qualified to conduct the specialty evaluations necessary in
conducting alleged physical and/or sexual abuse
investigations.
The Department strongly encourages the use of providers
currently contracting with the County Children and Youth
Agencies who have experience with the foster care population
and who have been providing services to children and youth MA
consumers for many years.
M. Provider Agreements
The Contractor will be required to have written provider
agreements with a sufficient number of providers to ensure
member access to all medically necessary services covered by
the HC-SE Program.
The Contractor's provider agreements must include the
following provisions:
(1) The Contractor shall not exclude or terminate a
provider from participation in the Contractor's
provider network due to the fact that the provider
has a practice that includes a substantial number of
patients with expensive medical conditions.
<PAGE>
(2) The Contractor shall not exclude a provider from the
Contractor's provider network because the provider
advocated on behalf of a member in a utilization
management appeal or another dispute with the
Contractor over appropriate medical care.
(3) Provider agreements will carry notification of the
prohibition and sanctions for submission of false
claims and statements.
(4) The definition of Medical Necessity as outlined in
Section 2 of this Agreement.
(5) The Contractor cannot prohibit or restrict a health
care professional from advising a member of their
health care status, care or treatment, regardless of
their benefit coverage, if it is within the scope of
their practice.
(6) A clause which specifies that the agreement will not
be construed as requiring the Contractor to provide,
reimburse for, or provide coverage of, a counseling
or referral service if the provider objects to the
provision of such services on moral or religious
grounds.
(7) A requirement securing cooperation with the QM/UMP
standards outlined in Exhibit I.
(8) A requirement for cooperation for the submission of
all encounter data for all services provided within
the timeframes required in Section 17.5 of this
Agreement no matter whether reimbursement for these
services is made by the Contractor either directly or
indirectly through capitation.
(9) A continuation of benefits provision which states
that the provider agrees that in the event of the
Contractor's insolvency or other cessation of
operations, the provider will continue to provide
benefits to the Contractor's members through the
period for which the premium has been paid, including
members in an inpatient setting.
The Contractor must make all necessary revisions to its
provider agreements to be in compliance with the requirements
set forth in Section 7.1.M. of this Agreement. Revisions may
be completed as provider agreements become due for renewal
provided that all provider agreements are amended within one
(1) year of execution of this Agreement with the exception of
the encounter data requirements which must be amended
immediately, if necessary, to ensure that all providers are
submitting encounter data to the Contractor within the
timeframes specified in Section 17.5 of this Agreement.
<PAGE>
N. Provider Services
The Contractor agrees to comply with the Program Standards
regarding Provider Services which are set forth in the RFP.
The Contractor must have written plans which outline plans to
educate and train providers. This training plan may be done in
conjunction with the Special Needs Unit training requirements
and shall include special needs consumers, advocates and
family members in developing the design and implementation of
the training plan.
The Contractor must submit plans for measuring training
outcomes including the tracking of training schedules and
provider attendance.
(1) At a minimum, the provider training must be conducted
for PCPs and shall include the following areas:
(a) EPSDT training (for any PCPs who serve
members under age twenty-one (21)
(b) Identification and appropriate referral for
mental health, drug and alcohol and
substance abuse
(c) Sensitivity training on diverse and special
needs populations
(d) Cultural competence
(e) Treating special needs populations
(f) Administrative processes which include, but
are not limited to,: coordination of
benefits, dual eligibles, and encounter
reporting
(2) The Contractor shall also at a minimum, be required
to train its primary care dentists in the following
areas:
(a) Sensitivity training on diversity and
special needs populations
(b) Cultural competence
(c) Treating special needs populations
<PAGE>
The Contractor will be permitted to submit an alternate
provider training and education plan should the Contractor
wish to combine its activities with other PH-MCOs operating in
the HC-SE zone or wish to develop and implement new and
innovative methods for provider training and education.
However, this alternative plan must have prior written
approval by the Department. Should an alternative plan be
approved by the Department, the Contractor must have the
ability to track and report on the components included in the
Contractor's alternative provider training and education plan.
O. Quality Management and Utilization Management Program
The Contractor agrees to comply with the Program Standards
regarding Quality Management and Utilization Management which
are outlined in Exhibit I.
The Contractor must provide to the Department its written
procedures governing quality management and utilization
management.
The Department will recoup from the PH-MCO any and all
payments made to any provider for who the Contractor fails to
ensure satisfaction of enrollment and credentialing criteria
and provision of services in a manner consistent with the
provider's licensure, where such failure is the result of
negligence on the part of the Contractor. In addition, the
PH-MCO must notify its PCPs and all subcontractors of the
prohibitions and sanctions for the submission of false claims
and statements.
Any economic profiles used by the PH-MCOs to credential
providers should be adjusted to adequately account for factors
that influence cost and utilization independent of the
provider's clinical management, including member age, member
sex, provider case-mix and member severity. The PH-MCO must
report any economic profile that it utilizes in its
credentialing process and the methodology that it uses to
adjust the profile to account for non-clinical management
factors at the time and in the manner requested by the
Department.
In the event that a PH-MCO renders an adverse credentialing
decision, the PH-MCO must provide the affected provider with a
written notice of the decision. The notice should include a
clear and complete explanation of the rationale and factual
basis for the determination. The notice shall include any
economic profiles used as a basis for the decision and explain
the methodology for adjusting profiles for non-clinical
management factors. All credentialing decisions made by the
PH-MCO are final and may not be appealed to the Department.
<PAGE>
The PH-MCO must ensure access of the member to his/her medical
record at no charge and upon request. The member's medical
records are the property of the provider who generates the
record.
P. Operational Data Reporting
The Contractor agrees to comply with the Program Standards
regarding Operational Data Reporting which are set forth in
the RFP. The Department will exercise its best efforts to
provide to the Contractor thirty (30) days advance notice to
comment on any new data reporting requirements with respect to
the availability and collection of data.
The Contractor must ensure that all data systems used in
support of the PH-MCO's program are millennium compliant by
November 30, 1999.
The Contractor must submit reports based on HEDIS 3.0 (or most
current version) measures. The Contractor is not responsible
for reporting on those HEDIS 3.0 measures related to
behavioral health issues.
Q. Payments to and from the Contractor
The Contractor agrees to comply with the Program Standards
regarding Payments to and from the Contractor which are set
forth in the RFP.
R. PH-MCO Fiscal Standards.
The Contractor agrees to comply with the Program Standards
regarding PH-MCO Fiscal Standards which are set forth in the
RFP.
S. Contracts and Subcontracts
The Contractor agrees to comply with the Program Standards
regarding Contracts and Subcontracts which are set forth in
the RFP.
T. Records Retention
The Contractor agrees to comply with the Program Standards
regarding Record Retention which are set forth in the RFP.
Upon thirty (30) days advance notice from the Department, the
Contractor must provide copies of all records to the
Department at the Contractor's site. This thirty (30) day
notice will not apply to records requested by the state or
federal government for purposes of fiscal audits or fraud
and/or abuse.
<PAGE>
U. Fraud and Abuse
The Contractor agrees to comply with the Program Standards
regarding Fraud and Abuse which are set forth in the RFP. The
Contractor must submit to the Department reports and immediate
notification in cases where the Contractor terminates a
provider agreement or employee from employment due to fraud
and abuse issues. In addition, the Contractor must submit to
the Department quarterly and annual statistical and narrative
reports which relate to its fraud and abuse detection and
sanctioning activities, as well as an annual update in the
aggregate.
The Department reserves the right to impose sanctions in cases
where there is suspected fraud or abuse by the Contractor,
including its corporate officers and employees or its
subcontractors including providers and members which violate
one or more of the terms of the RFP, contract, or the
requirements of state or federal regulations.
The Contractor agrees to ensure that all of the health care
providers and others with whom it subcontracts agree to comply
with the Program Standards regarding Fraud and Abuse.
V. Department Access and Availability
The Contractor agrees to comply with the Program Standards
regarding Department Access and Availability which are set
forth in the RFP.
W. Physician Incentive Arrangements
The Contractor must comply with 42 CFR 417.479(a), which
states that no specific payment can be made directly or
indirectly under a physician incentive plan to a physician or
physician group as an inducement to reduce or limit medically
necessary services furnished to an individual member.
The Contractor must disclose to the Department the information
on physician incentive plans listed in 42 CFR 417.479(h)(l)
and 417.479(i) at the times indicated at 42 CFR 434.70(a)(3),
in order to determine whether the incentive plan(s) meet the
requirements of 42 CFR 417.479(d)-(g). To the extent required
by HCFA, the Contractor must provide the capitation data
required under paragraph (h) (l) (vi) for the previous
calendar year to the Department by April 1 of each year. The
Contractor will provide the information on its physician
incentive plans listed in 42 CFR 417.479(h)(3) to any MA
consumer, upon receipt of a written request.
<PAGE>
X. Pharmacy Requirements
(1) Pharmacy Benefit Manager (PBM)
The Contractor may use a PBM to process prescription
claims only if the proposed PBM subcontract has
received advance written approval by the Department.
The Contractor will indicate the intent to use a PBM,
identify the proposed PBM subcontract and the
ownership of the proposed PBM subcontractor. If the
PBM is owned wholly or in part by a retail pharmacy
provider, chain drug store or pharmaceutical
manufacturer, the Contractor will submit a written
description of the assurances and procedures that
will be put in place by the proposed PBM subcontract,
such as an independent audit, to assure
confidentiality of proprietary information. These
assurances and procedures must be submitted and
receive advance written approval by the Department
prior to initiating the PBM subcontract.
7.2 Special Needs Unit (SNU)
A. Establishment of Special Needs Unit
(1) The Contractor must demonstrate that it has
established a distinct Special Needs Unit. As set
forth in the RFP, the Contractor will develop, train,
and maintain a "special" dedicated unit within its
organizational structure to deal with issues relating
to MA members with special needs ("Special Needs
Unit"). The purpose of the Special Needs Unit is to
ensure that each member with special needs receives
access to PCPs and specialists trained and skilled in
the special needs of the member; information about
the access to a specialist as appropriate;
information about and access to all covered services
appropriate to the member's condition or
circumstance, including pharmaceuticals and durable
medical equipment (DME); and access to needed
community services. In addition, if the Contractor
fulfills its obligation under this Agreement to
provide case management services to members under the
age of twenty-one (21) through the Special Needs
Unit, the Contractor must assure that the Special
Needs Unit assists individuals in gaining access to
necessary medical, social, education, and other
services in accordance with Medical Assistance
Bulletin #1239-94-01.
<PAGE>
(2) The Contractor agrees to comply with the Department's
requirements and determination of whether a member
will be classified as having a special health need,
which determination will be based on criteria set
forth in Exhibit J .
(3) The Contractor must assure that outpatient case
management for services for members under age
twenty-one (21) will not be provided through any
individual employed by the Contractor or through a
subcontractor of the Contractor if the individual's
responsibilities include outpatient utilization
review or otherwise include reviews of requests for
authorization of outpatient benefits.
B. Special Needs Coordinator
The Contractor will employ a full-time Special Needs Unit
Coordinator whose qualifications must include, among other
things, experience with special needs populations similar to
those served by Medicaid. The Special Needs Unit Coordinator
must be accountable to the Contractor's Medical Director and
be responsible for the management and supervision of the
Special Needs Unit and Special Needs Unit staff. The
Contractor agrees to notify the Department within thirty (30)
days of a change in the Special Needs Coordinator.
C. Responsibilities of Special Needs Staff
(1) The Contractor agrees that the staff members which it
employs within the Special Needs Unit will assist
consumers in accessing services and benefits and will
act as liaisons with various government offices,
providers, public entities, and county entities which
will include, but will not be limited to: County
Office of Drug and Alcohol Programs; Office of Drug
and Alcohol Programs; the Office of Children, Youth
and Families; County Children and Youth Agencies;
Office of Mental Retardation; County Mental
Retardation Agencies; Intermediate Care Facility
Providers; Office of Mental Health and Substance
Abuse Services; County Mental Health Agencies; PA.
Department of Health's Community Health Departments;
County and Municipal Health Departments; Special Kids
Network and Regional Offices; Childhood Lead
Poisoning Prevention Projects; School Districts and
Intermediate Units; School Based Health Centers;
Juvenile Detention Centers; Juvenile Probation
Offices; Criminal Justice; Area Agency on Aging
(AAA); Community Service Organizations; Organizations
providing services to individuals with HIV/AIDS;
Public Health Entities; Consumer Advocacy Groups; WIC
Agencies; Public Housing Authorities; Head Start
Agencies; and Family Centers.
<PAGE>
(2) The staff members of this unit will work in close
collaboration with the Special Needs Units operated
by the Department and the IEAP Contractor.
(3) In addition, the Contractor will demonstrate to the
Department that its Special Needs Unit staff is
qualified to perform the functions outlined in
Exhibit J.
D. Contractor's Additional Obligations
(1) The Contractor will work with State Health
Department's State and District Office
Epidemiologists in partnership with the designated
county/municipal health department staffs to ensure
that reportable conditions are appropriately reported
in accordance with Department regulations, pursuant
to Chapter 27, of the Disease Prevention and Control
Law. The Contractor will designate a single contact
person to facilitate the implementation of this
requirement.
(2) The Contractor will cooperate with the Department's
independent external quality review organization.
SECTION 8: FISCAL RELATIONSHIP
8.1 Payments For In-Plan Services
The obligation of the Department to make payments will be limited to
capitation payments, maternity care payments, and any other payments
provided by this Agreement. Effective January 1, 1999, the Contractor
will no longer be responsible for the payment of Environmental Lead
Investigations.
A. Capitation Payments
(1) The Contractor will receive capitated payments for
in-plan services (as defined in the RFP) at the rates
set forth in Exhibit B, which is attached hereto and
made a part hereof.
(2) The Department will make a pre-paid
Per-Member-Per-Month (PMPM) capitation payment,
referenced in 8.1A(1) above, for each member whose
enrollment on the first day of the month is indicated
on the Department's Client Information System (CIS)
on the first day of the month. This date may be
subject to change. The Department will give prior
notice to the Contractor of a date change, if
practical. If the Contractor is responsible to
provide benefits to an enrolled consumer who does not
appear on CIS on the first day of the month, the
Department will initiate a capitation payment on the
first day of the first subsequent month on which said
enrollment appears on CIS.
<PAGE>
(3) The Department will make each monthly capitation
payment by the fifteenth of the month. The Department
will seek to make arrangements for payment by wire
transfer or electronic funds transfer. If such
arrangements are not in place, payment will be made
by U.S. Mail.
(4) The Department will not make a capitation payment for
a recipient month if it notifies the Contractor
before the first of the month that the consumer's MA
eligibility or PH-MCO enrollment ends prior to the
first of the month. The capitation payments for
members whose enrollment is effective any time after
the first day of the month will be prorated. These
payments will be initiated on the first day of the
first subsequent month on which the enrollments
appear on CIS, and payments will be made in
accordance with Section 8.1A(3) above.
(5) Exhibit B provides for rates for SSI consumers who
have Medicare Part A benefits that are distinct from
rates for SSI consumers who do not have Medicare Part
A benefits. If the Department's TPL file is updated
to indicate Medicare Part A coverage within four (4)
months prior to the current month for a consumer at
an SSI Without Medicare rate, the Department will
adjust the payment to reflect the rating group
appropriate to the consumer, provided the TPL file
indicates Part A coverage as of the first day of
coverage by the Contractor for this consumer during
the program month for which payment was made. If the
Department's TPL file is updated to adjust or delete
indication of Medicare Part A coverage within four
(4) months of a payment to the Contractor for a
consumer at an SSI with Medicare or Healthy Horizons
rate, the Department will adjust the payment to
reflect the rating group appropriate to the consumer,
provided the TPL file does not indicate Part A
coverage as of the first day of coverage by the
Contractor for this consumer during the program month
for which payment was made. The Department will
provide information to the Contractor on this type of
payment adjustment on an electronic file. The
Contractor will utilize this information to adjust
its payments to providers and instruct its providers
to bill Medicare.
<PAGE>
B. HIV-AIDS Risk Pool
The Department will withhold the portion of each capitation
payment that is designated as a Risk Pool Allocation Amount on
Exhibit B. Funds so withheld will be allocated to an HIV-AIDS
Risk Pool and distributed to PH-MCOs in accordance with
Exhibit K. (Exhibit K replaces Exhibit D effective January 1,
1999.) The Department will issue, in writing, to the
Contractor any drugs or therapies identified as treatment for
HIV/AIDS after the execution of this Agreement.
C. Maternity Care Payments
(1) For each birth or other second or third trimester
pregnancy outcome other than elective abortion, the
Department will make a one-time Maternity Care
Payment to the PH-MCO who the mother is enrolled with
on the date of birth or other pregnancy outcome;
however, if the mother is admitted to a hospital and
a change in the PH-MCO coverage occurs during the
hospital admission, the PH-MCO responsible for the
hospital stay at the time of birth or other pregnancy
outcome will receive the Maternity Care Payment. The
amount of the Maternity Care Payment is shown on
Exhibit B. The payment is a global fee to cover all
maternity expenses, including prenatal care, delivery
fees and post-partum care for the mother and all
services mandated by Act 85 of 1996 ("The Health
Security Act").
(2) The Contractor must invoice the Department to receive
Maternity Care Payments, consistent with
specifications determined by the Department. The
Department will authorize payment to the Contractor
within thirty (30) days of receipt of an acceptable
invoice.
D. Rate Adjustments for Second and Subsequent Agreement Years
(1) For the second Agreement year, the Department will,
if necessary, adjust capitation rates, in an
actuarially sound manner, to reflect either or both
of the following:
(a) Inflation Adjustments: to reflect changes in
medical costs.
(b) Programmatic Adjustments: to reflect any
changes that affect the Contractor's
delivery or coverage of benefits.
(c) In the event that no adjustments are made
pursuant to 8.1D(1)(a) or (b), the rates
applicable to the previous year will apply.
<PAGE>
(2) For the third year of this Agreement, capitation
rates will be renegotiated within actuarially sound
rate ranges, prior to the start of the third
Agreement year. If no agreement is reached by the
start of the third Agreement year, rates applicable
to the previous year continue to apply, unless and
until rates have been negotiated.
(3) If the Department exercises its option to renew this
Agreement pursuant to Section 9.2, rate negotiations
will commence promptly after notice of same.
E. Program Changes
(1) Amendments, revisions, or additions to the State Plan
or to state or federal regulations, laws, guidelines,
or policies will, insofar as they affect the scope or
nature of benefits available to eligible persons,
amend the Contractor's obligations as specified
herein and in the RFP, unless the Department notifies
the Contractor otherwise. The Department will inform
the Contractor of any changes, amendments, revisions,
or additions to the State Plan or changes in the
Department's regulations, guidelines, or policies in
a timely manner.
(2) The Department will provide a category of drug known
as Protease Inhibitors through the FFS Program to
HealthChoices members. The Department may elect to
include these drugs in the HealthChoices Program
effective with a subsequent agreement year and to
adjust capitation rates as provided in this
Agreement.
(3) The Department will make a mid-year adjustment to the
rates in an actuarially sound manner, if necessary,
to reflect a material and demonstrated impact on the
delivery of care caused by a program change set forth
in Section 8.1D(1) above.
F. Financial Responsibility for Dual Eligibles
(1) For Medicare services that are covered by the
Contractor or the MA FFS Program, the Contractor must
pay cost-sharing amounts up to the Contractor's FFS
or contracted rate, or if there is not a Contractor
FFS or contracted rate, then the MA FFS rate would
apply.
(2) For Medicare services that are not covered by either
the Contractor or the MA FFS Program, the Contractor
must pay cost-sharing to the extent that the payment
made under Medicare for the service and the payment
made by the Contractor equal, at a minimum, eighty
percent (80%) of the Medicare approved amount. The
Contractor is not responsible to make any coinsurance
or deductible payment to a provider with whom it has
an agreement to make capitated payments.
<PAGE>
(3) The Contractor and its subcontractors and providers
are prohibited from balance billing members for
Medicare deductibles or coinsurance. The Contractor
must ensure that a member who is eligible for both
Medicaid and Medicare benefits have the right to
access a Medicare product or service from the
Medicare provider of their choice. The Contractor is
responsible to pay any Medicare coinsurance and
deductible amount as described in Section 8.1F(1) and
(2) whether or not the Medicare provider is included
in the Contractor's provider network and whether or
not the Medicare provider has complied with the
authorization requirements of the Contractor.
8.2 Payments by the Contractor to Providers
A. Definitions
(1) Claim - A bill for services that is assigned a unique
identifier (i.e. claim reference number). A claim
does not include an encounter form for which no
payment is made or only a nominal payment is made.
(2) Clean Claim - A claim that can be processed without
obtaining additional information from the provider of
the service or from a third party. A clean claim
includes a claim with errors originating in the
Contractor's claims system. Claims under
investigation for fraud or abuse, or under review for
medical necessity are not clean claims.
(3) Claim Adjustment - Any re-opened, previously
adjudicated claim that is assigned a new unique
identifier.
(4) Rejected Claim - A non-HealthChoices claim or a
non-claim that has erroneously been assigned a unique
identifier and is removed from the claims processing
system prior to adjudication.
(5) Adjudicated Claim - A claim that has been processed
to payment or denial.
<PAGE>
B. Timeliness Standards
The Contractor shall make timely payments to its providers. In
addition to any standards included in the Contractor's
provider agreements or subcontracts, the Contractor will
adjudicate fee-for-service claims consistent with the
requirements below. Capitation claims are excluded from these
standards.
Adjudication timeliness standards follow for each of four
categories of claims:
(1) Physician claims
(a) 90.0% of clean claims must be adjudicated within
30 days.
(b) 100% of clean claims must be adjudicated within
45 days.
(c) 100% of all claims must be adjudicated within
90 days.
(2) Claims received from a hospital for inpatient
admissions ("Inpatient")
(a) 90.0% of clean claims must be adjudicated within
30 days.
(b) 100% of clean claims must be adjudicated within
45 days.
(c) 100% of all claims must be adjudicated within 90
days.
(3) Drug claims
(a) 90.0% of clean claims must be adjudicated
within 30 days.
(b) 100% of clean claims must be adjudicated within
45 days.
(c) 100% of all claims must be adjudicated within
90 days.
(4) All claims not included in a category above ("Other")
(a) 90.0% of clean claims must be adjudicated within
30 days.
(b) 100% of clean claims must be adjudicated within
45 days.
(c) 100% of all claims must be adjudicated within 90
days.
The adjudication timeliness standards do not apply to claims
submitted by providers under investigation for fraud or abuse
from the date of service to the date of adjudication of the
claims. Providers can be under investigation by a governmental
agency or the Contractor; however, if under investigation by
the Contractor, the Department must have prior notification of
the investigation.
Every claim entered into the Contractor's computer information
system that is not a rejected claim must be adjudicated. The
Contractor must maintain an electronic file of rejected
claims, inclusive of a reason or reason code for rejection.
The amount of time required to adjudicate a paid claim is
computed by comparing the date the claim was received with the
date the check was created or the transmission date of an
electronic payment. The amount of time required to adjudicate
a denied claim is computed by comparing the date the claim was
received with the date the denial notice was created or the
transmission date of an electronic denial notice. If
<PAGE>
responsibility to receive claims is subcontracted, the date of
receipt by the subcontractor determines the date of receipt
applicable to these requirements.
The Contractor must identify on every claim processed the date
the claim was received. This date must be carried on claims
records in the claims processing computer system. Each
hard-copy claim received by the Contractor must be date
stamped with the date of receipt no later than the first work
day after the date of receipt.
If the Contractor subcontracts responsibility to process
claims, the requirements apply collectively to all claims
within each category. Example: The Contractor processes
"Other" claims, except that a subcontractor processes dental
claims. The requirements apply to all ""Other" claims
including dental claims.
C. Accuracy Standards
A claim is adjudicated accurately if payment or denial
properly reflects all criteria below:
(1) Verification that the recipient was eligible to
receive benefits on the date of service, and that the
provider was authorized to furnish the service at the
time the service was furnished.
(2) Verification that the claim does not duplicate or
conflict with one previously approved, or currently
being reviewed.
(3) Payment amount consistent with the MCO's provider
agreement or subcontract.
(4) All resource information supplied to the Contractor
by the Department, a provider, the client, or any
other source, is appropriately used to determine
availability of another resource to pay the claim.
(5) Adjudication is consistent with the MCO's policies
and procedures.
The Contractor will accurately adjudicate at least 95.0% of
claims within each category.
<PAGE>
D. Quarterly Claims Analysis and Report
After each quarter has ended, the Contractor must analyze
samples of claims and provide a timely claims processing
report to DPW. The Contractor will select a sample of each of
the four categories of claims adjudicated during the previous
quarter. The sample will be determined by a computer program
effectively designed to create a random, representative set of
claims within each of the four claims types. Not later than
one work day after the Contractor determines the claim
reference numbers of the claims in the quarterly sample, the
Contractor will provide the list of claim reference numbers to
the Department.
The sample size must meet the following criteria: It must have
a Confidence Level of 98% with an Expected Error Rate of +/-4%
and a Precision Level of 3%. This sampling criteria is to be
applied to each strata or claim type (physician, inpatient,
drug, and other). Each clean claim sample will consist of the
clean claims within the corresponding full sample.
Defined below are the terms to be utilized in selecting the
above mentioned samples.
(1) Attribute Sampling - Attribute Sampling is used to
reach a conclusion about a population in terms of
rate of occurrence.
(2) Confidence Level - Confidence Level represents the
degree of reliability that can be placed on the
sample.
(3) Expected Error Rate - Expected Error Rate is an
estimation of the errors within the sample.
(4) Precision - The difference between the Expected and
Tolerable Error Rates, which is the range within
which the true answer most likely falls.
The Contractor will determine whether each claim in each
sample is a "clean" claim.
The Contractor will determine the number of days required to
adjudicate each claim in the sample. Utilizing this
information, the contractor will determine, for each of the
four categories of claims, the percentage of clean claims
adjudicated within 30 days; the percentage of clean claims
adjudicated within 45 days; and, the percentage of all claims
adjudicated within 90 days.
The Contractor will determine whether each claim was
adjudicated consistent with accuracy standards specified above
in Section 8.2.C. This requirement applies only to January
March and July - September quarters. The Contractor will
define a standard set of tests to be used for this purpose.
The Contractor will provide the tests it proposes to use for
this purpose to the Department for prior approval.
<PAGE>
The Contractor will provide DPW with a report that provides
information on each of the four samples. This report is due on
the last day of the second month after the end of the quarter.
(Example: The report for April - June is due August 31.) This
report will identify each claim in the sample. This report
will provide the following information on each claim.
o Was the claim classified as "clean?"
o Was the claim paid or denied?
o Date of receipt
o Date of adjudication
o Number of elapsed days from date of receipt to date of
adjudication
o Was the claim adjudicated accurately? Include the following
information:
o The conclusion for each contract accuracy standard listed
above in Section C.a. through C.e.
o Results of each standard accuracy test, referenced in the
paragraph above.
The report will include computation of the timeliness sanction
and the accuracy sanction (as discussed in Section F below)
that applies to each claims category, if any.
The Department will provide a standard report format for use
by the Contractor.
The Contractor will maintain a log of steps taken each quarter
to fulfill requirements of this section. The log will include
the name of the person who took the action, what action was
taken, signature or initials of the person who completed the
step, and the date the action was completed. A copy of that
log will be provided to the Department, simultaneous with
submission of the quarterly report.
The Department reserves the right to create its own sample for
the purpose of this section, if it determines that the
Contractor's sample was not selected consistent with all
requirements. The Department reserves the right to rework a
sample at any time to determine the accuracy of the
Contractor's analysis and report, including the sanction
computation, to accept or reject a report submitted by the
Contractor, and to substitute a report and sanction
computations prepared by the Department if those submitted by
the Contractor are found to be unacceptable.
<PAGE>
The Contractor will maintain records necessary for the
Department to review the accuracy of each quarterly report
required by this section.
E. Monthly Claims Processing and Payment Report
The Contractor shall provide the Department with a monthly
report using a report format specified by DPW. This report
will provide summary information of each of the four (4)
claims types:
(1) Physician;
(2) Claims received from a hospital for inpatient
admissions;
(3) Drug; and
(4) All claims not included in a category above.
This reporting requirement applies to claims processed by the
Contractor or a subcontractor, for medical services. If claims
are processed by one or more subcontractors, provide a
separate report that includes information distinct to each
entity that processes claims.
Each report is due on the fifth calendar day of the second
subsequent month.
Each report will separately provide the following information
for each of the four claims types:
a) Number of claims on hand at the beginning of the month.
b) Number of claims received during the month.
c) Number of claims paid during the month.
d) Number of claims denied during the month.
e) Number of claims on hand at the end of the month.
f) Claim reference number and the date of receipt of the
oldest claim not adjudicated at the end of the month.
Each report will provide the following information, without
regard to claims type:
a) Capitation payment check mailing dates, with dollars
paid on each date.
<PAGE>
b) Claims payment check mailing dates, with dollars paid
on each date, and the date or dates the checks were
created. (An electronic transfer of funds to a
provider is to be counted as a "check mailing date".)
c) Remittance advice mailing dates, with the date or
dates the remittance advices were created.
The Department will provide a standard report format for use
by the Contractor.
F. Sanctions
Failure to submit a timely quarterly claims processing report
consistent with contract requirements will result in a
monetary sanction equal to $150 per day for the first ten (10)
calendar days from the date that the report is due and $1,000
per day for each calendar day thereafter.
A monetary sanction may be applied for failure to meet any
timeliness standard that applies to each of the four (4)
claims categories. No credit will be given if a standard is
exceeded. The monetary sanction will be 0.0035417, multiplied
by the number of percentage points by which a standard is
missed, divided by 100, multiplied by the dollars paid for all
claims in this category during the quarter, multiplied by 5.
(0.0035417 is equivalent to one half of one month's interest
at 8.5%). Eight (8) digits to the right of the decimal point
will be used at each step.
Example: In a contract quarter, the PH-MCO paid 78.2% of clean
inpatient claims in 30 days. The PH-MCO paid 94.3% of clean
inpatient claims in 45 days. The PH-MCO paid 99.3% of all
inpatient claims in 90 days. The Contractor paid $20,000,000
in inpatient claims during the quarter.
0.0035417
Multiplied by 0.182 = ((11.8 + 5.7 + 0.7) divided by 100)
Multiplied by $20,000,000
Multiplied by 5
Equals $64,458.94
In the above example, the sanction applicable to inpatient
claims for the quarter would be $64,458.94
A monetary sanction will be applied for failure to meet the
accuracy standard that applies to each of the four (4) claims
categories. No credit will be given if a standard is exceeded.
<PAGE>
Compliance percentages will be rounded to one tenth of a
percentage point. The penalty will be the number of percentage
points by which a percentage criterion is missed, multiplied
by the dollars paid for all claims in this category during the
quarter, multiplied by 0.0005.
Example: In a contract quarter, 94.0% of physician claims are
accurately adjudicated. The Contractor paid $5,000,000 in
physician claims during the quarter.
95.0 - 94.0 = 1.0
1.0 x $5,000,000 x 0.0005 = $2,500.
8.3 Member Cost Sharing and Third Party Liability
A. General
The Contractor will comply with the procedures implemented by
the Department with regard to Member Cost Sharing and Third
Party Liability as set forth in Section II.P of the RFP. The
Contractor will also comply with the following revisions to
current Third Party Liability language in the RFP.
B. Third Party Liability (TPL)
Under Section 1902(a)(25) of the Social Security Act, the
Department is required to take all reasonable measures to
identify legally liable third parties and treat verified TPL
as a resource of the MA consumer. The Department's TPL Section
is responsible to ensure that the Commonwealth is the payor of
last resort when third party resources are available to cover
the costs of medical services provided to MA consumers. When
the Department becomes aware of these resources prior to
paying for medical services, it will generally avoid payment
by rejecting a provider's claim and directing the provider to
bill the appropriate insurance carrier. When the Department
becomes aware of payments made on behalf of consumers who have
valid third party resources, the Department will pursue
post-payment recovery from liable parties. Under this
Agreement, the responsibilities of the Department will be
allocated between the parties.
(1) Cost Avoidance Activities
(a) The Contractor will have primary
responsibility for cost avoidance through
the Coordination Of Benefits (COB) relative
to federal and private health insurance-type
resources including, but not limited, to
Medicare, private health insurance,
Employees Retirement Income Security Act of
1974 (ERISA) plans, and workers
compensation. The Contractor will attempt to
avoid initial payment of claims, whenever
<PAGE>
possible, where federal or private health
insurance-type resources are applicable or
the probable liability of another type of
resource is established. All cost- avoided
funds must be reported to the Commonwealth
via encounter data submissions. The use of
the COB flag, Medicare fields, and the Other
Insurance Paid (OIP) field will indicate
that TPL has been pursued and the amount
which has been cost-avoided. The Contractor
will not be held responsible for any TPL
errors in the Department's Eligibility
Verification System (EVS) or the
Department's TPL file.
(b) The Contractor agrees to pay, and to require
that its subcontractors pay, all clean
claims for prenatal or preventive pediatric
care (including EPSDT services to children),
and services to children having medical
coverage under a Title IV-D child support
order to the extent the Contractor is
notified by the Department of such support
orders or to the extent the Contractor
becomes aware of such orders, and then seek
reimbursement from liable third parties. The
Contractor recognizes that cost avoidance of
these claims is prohibited with the
exception of hospital delivery claims which
may be cost-avoided.
(c) The Contractor may not deny or delay
approval of otherwise covered treatment or
services based upon third party liability
considerations. The Contractor may neither
unreasonably delay payment nor deny payment
of claims unless the probable existence of
third party liability is established at the
time the claim is filed.
(2) Post-Payment Recoveries
(a) Post-payment recoveries are categorized by
(a) health-related insurance resources and
(b) other resources. Health-related
insurance coverage are ERISA health benefit
plans, Blue Cross/Blue Shield subscriber
contracts, Medicare, private health
insurance, workers compensation, and health
insurance contracts. The term "other
resources" means all other resources and
includes, but are not limited to, recoveries
from personal injury claims, liability
insurance, first-party automobile medical
insurance, accident-indemnity insurance, and
the assigned claims plan.
<PAGE>
(b) The Department's TPL Section retains the
sole and exclusive right to pursue, collect,
and retain all "other resources" as defined
in paragraph B.(1). Any correspondence or
inquiry forwarded to the Contractor (by an
attorney, provider of service, insurance
carrier, etc.) relating to a personal injury
accident or trauma-related medical service,
or which in any way indicates that there is,
or may be, legal involvement regarding the
consumer and the services which were
provided, must be immediately -- forwarded
to the Department's TPL Section. Those funds
recovered by the Commonwealth under the
scope of these "other resources" will be
retained by the Commonwealth.
Due to potential time constraints involving
cases subject to litigation, the Department
must ensure that it identifies these cases
and establishes its claim before a
settlement has been negotiated. Should the
Department fail to identify and establish a
claim prior to settlement due to the
Contractor's untimely submission of notice
of legal involvement where the Contractor
has received such notice, the amount of the
Department's actual loss of recovery will be
assessed against the Contractor. The
Department's actual loss of recovery will
not include the attorney's fees or other
costs which would not have been retained by
the Department.
(c) The Contractor has the sole and exclusive
right to pursue, collect and retain all
health-related insurance resources for a
period of nine (9) months from the date of
service or six (6) months after the date of
payment, whichever is later. The
Department's TPL Section may pursue,
collect, and retain recoveries of all
health-related insurance cases which are
outstanding after the earlier of nine (9)
months from the date of service or six (6)
months after the date of payment. However,
in those cases subject to this paragraph
where payment is being pursued by the
Contractor but, for whatever reason, has not
been collected by the earlier of nine (9)
months from the date of service or six (6)
months after the date of payment, the
Contractor will notify the Department if
action to recover has been initiated by the
Contractor. In such cases, the Contractor
will retain exclusive responsibility for the
cases while they are being actively pursued.
<PAGE>
Should the Department lose recovery rights
to any claim due to late or untimely filing
of a claim with the liable third party, and
the untimeliness in billing that specific
claim is directly related to untimely
submission of encounter data or additional
records under special request, the amount of
the unrecoverable claim will be assessed
against the Contractor.
(d) As part of its responsibilities under
paragraph (2), the Contractor is encouraged
to pursue, collect, and retain recoveries of
health-related insurance resources where the
liable party has improperly denied payment
based upon either lack of medical necessity
or lack of coverage. The Contractor is
encouraged to develop and implement
cost-effective procedures to identify and
pursue cases which are susceptible to
collection through either legal action or
traditional subrogation and collection
procedures.
C. Requests for Additional Data
The Contractor must provide, at the Department's request, such
information not included in the encounter data submissions
that may be necessary for the administration of TPL activity.
The Contractor will use its best efforts to provide this
information within fifteen (15) calendar days of the
Department's request at no expense to the Department. Such
information may include, but is not limited to, individual
medical records for the express purpose of determining TPL for
the services rendered. Confidentiality of the information will
be maintained as required by federal and state regulations.
D. Third Party Resource Identification
Third party resources identified by the Contractor, which do
not appear on the Department's TPL database, must be supplied
to the Department's TPL Section by the Contractor on a monthly
basis. The method of reporting will be electronic submission
or hardcopy document, whichever is deemed most convenient and
efficient by the Contractor for its individual use. For
electronic submissions the Contractor must follow the required
report format, data elements, and tape specifications supplied
by the Department. For hardcopy submissions, the Contractor
must use an exact replica of the TPL resource referral form
supplied by the Department. As the office responsible for the
maintenance and quality assurance of the records stored on the
TPL database, the Department's TPL Section will use these
submissions for subsequent updates to the system.
<PAGE>
E. Accessibility to TPL Data
The Department will provide the Contractor with accessibility
to data maintained on the TPL file.
F. Estate Recovery
The Estate Recovery Program (Act 49) requires the Department
to recover MA costs paid on behalf of certain deceased
individuals. Individuals age fifty-five (55) and older who
were receiving MA benefits for any of the following services
are affected:
(1) Public or private nursing facility services;
(2) Residential care at home or in a community setting;
or
(3) Any hospital care and prescription drug services
provided while receiving nursing facility services or
residential care at home or in a community setting.
The applicable MA costs are recovered from the assets of the
individual's probate estate. The Department's TPL Program is
solely responsible for administering the Estate Recovery
Program.
8.4 Risk Moderation
A. Reinsurance
(1) The Contractor must have a risk protection
arrangement during the term of this Agreement. This
risk protection arrangement must include reinsurance
that covers, at a minimum, 80% of inpatient costs
incurred by one (1) member in one (1) year in excess
of $150,000. The Department may alter or waive the
reinsurance requirement if the Contractor proposes an
alternative risk protection arrangement that the
Department determines is acceptable.
The Contractor may not change or discontinue the
reinsurance arrangement without prior approval from
the Department, which approval will not be
unreasonably withheld. The Contractor must notify the
Department thirty (30) days prior to any change in
the reinsurance arrangement. The Department reserves
the right to review such risk protection arrangements
and require changes based on the Department's
reasonable assessment of the Contractor's overall
financial condition.
<PAGE>
The Department may require the Contractor to comply
with a lower reinsurance threshold requirement of
$75,000 if any of the following criteria is met:
(a) The Contractor has been operational
(providing medical benefits to any type of
consumer) for less than 3 (three) years; or,
(b) The Contractor's SAP basis equity is less
than five percent (5%) of Medical Assistance
premiums earned during the most recent
calendar year for which the due date has
passed for submission of the unaudited
annual reports filed by the Contractor with
the Department of Insurance; or,
(c) The Contractor did not earn cumulative net
surplus over the previous three (3) years.
(2) Insolvency Protection
The Contractor warrants and represents that it meets,
and shall continue to meet during the term of the
Agreement, the equity requirements set forth in
Section II.P.(6) of the RFP. The Contractor agrees
that it will comply with all financial requirements
included in the RFP in addition to those of the
Pennsylvania Departments of Health and Insurance. The
Department reserves the right to review such equity
and financial requirements and require changes based
on the Department's reasonable assessment of the
Contractor's overall financial condition.
(3) Secondary Liability
The Contractor must submit an acceptable plan to
provide for payment to providers by a secondary
liable party after a default in payment to a provider
resulting from bankruptcy or insolvency. The
secondary liability must insure payment for all
services performed by providers through the last day
for which the Department paid a capitation premium to
the Contractor. The requirements may be met by
submission of one (1) or more of the following
arrangements:
(a) Insolvency insurance.
<PAGE>
(b) An irrevocable, unconditional, and
automatically renewable letter of credit for
the benefit of the Department which is in
place for the entire term of the contract.
(c) A guarantee from an entity acceptable to the
Department, with sufficient financial
strength and creditworthiness to assume the
payment obligations of the Contractor in the
event of a default in payment resulting from
bankruptcy or insolvency.
(d) Other arrangements satisfactory to the
Department, that are sufficient to insure
payment to providers in the event of a
default in payment resulting from bankruptcy
or insolvency.
The Department must approve all arrangements for
secondary liability. Such approval will include
approval of the financial strength of the secondary
liable parties and approval of all legal forms for
secondary liability.
B. Surety Bonds
Should HCFA issue any requirements regarding surety bonds
pursuant to Section 1861(o) (7) of the Act, the Contractor
will be required to comply on the effective date determined by
HCFA.
8.5 Restitution
The Contractor will make full and prompt restitution to the Department
for any payments received in excess of amounts due to the Contractor
under this Agreement whether such overpayment is discovered by the
Contractor or by the Department.
8.6 Payments to FQHCs and Rural Health Centers (RHCs)
The Contractor agrees to negotiate and pay rates to FQHCs and RHCs
comparable to other providers who provide comparable services in the
Contractor's provider network.
8.7 Payments to Out-of-Network Providers that are Located Outside the
Commonwealth of Pennsylvania
The Contractor is authorized to pay an out-of-network provider located
outside the Commonwealth of Pennsylvania, the MA FFS reimbursement
amount for the applicable service rendered.
<PAGE>
SECTION 9: DURATION OF AGREEMENT AND RENEWAL
9.1 Initial Term
This Agreement shall be effective upon execution by the parties. This
Agreement shall have an initial term of three (3) years commencing on
January 1, 1997 (the "Initial Term"), unless sooner terminated in
accordance with Section 10 hereof; provided that no court order,
administrative decision, or action by any other instrumentality of the
United States Government or the Commonwealth of Pennsylvania is
outstanding which prevents implementation of the Agreement.
9.2 Renewal
The Department shall have the option to renew the Agreement for two (2)
additional one (1) year periods after the expiration of the Initial
Term. The Department shall give written notice to the Contractor ninety
(90) days prior to the expiration of the Initial Term or any renewal
term as to whether it wishes to renew the Agreement.
SECTION 10: TERMINATION AND DEFAULT
10.1 Termination by the Department
This Agreement may be terminated by the Department upon the happening
of any of the following events and upon compliance with the notice
provisions set forth below:
A. Termination for Convenience Upon Notice
The Department may terminate this Agreement at any time for
convenience upon giving one hundred twenty (120) days prior
written notice to the Contractor. The effective date of the
termination will be the last day of the month in which the
120th day falls.
B. Termination for Cause
The Department may terminate this Agreement for cause upon
forty-five (45) days written notice, which notice shall set
forth the grounds for termination. "Cause" shall mean the
following for the purposes of this Agreement:
(1) The Contractor defaults in the performance of any
material duties or obligations hereunder or is in
material breach of any provision of this Agreement;
or
<PAGE>
(2) The Contractor commits an act of theft or fraud
against the Department, any state agency or the
Federal Government; or
(3) An adverse material change in circumstances as
described in Section 5.3 above.
C. Termination Due to Unavailability of Funds/Approvals
The Department may terminate this Agreement immediately upon
the happening of any of the following events:
(1) Notification by the United States Department of
Health and Human Services of the withdrawal of
Federal Financial Participation in all or part of the
cost hereof for covered services/contracts; or
(2) Notification that there will be an unavailability of
funds available for the HC-SE Program; or
(3) Notification that the federal approvals necessary to
operate the HC-SE Program will not be retained; or
(4) Notification by the Pennsylvania Insurance Department
or Health Department that the authority under which
the Contractor operates is subject to suspension or
revocation proceedings or sanctions, has been
suspended, limited or curtailed to any extent, or has
been revoked, or has expired and will not be renewed;
or
(5) Failure of the Contractor to satisfy the Readiness
Review Requirements as set forth in Section 6.1
above.
10.2 Termination by the Contractor
The Contractor may terminate this Agreement at any time upon giving one
hundred twenty (120) days prior written notice to the Department. The
effective date of the termination will be the last day of the month in
which the 120th day falls.
10.3 Responsibilities of the Contractor Upon Termination
A. Continuing Obligations
Termination of this Agreement will not discharge the
obligations of the Contractor with respect to services or
items furnished prior to termination, including retention of
records and verification of overpayments or underpayments.
Termination will not discharge the Department's payment
obligations to the Contractor or the Contractor's payment
obligations to its subcontractors.
<PAGE>
B. Notice to Members
In the event that this Agreement is terminated pursuant to
Sections 10.1 or 10.2 above, the Contractor will notify all
members of such termination at least forty-five (45) days in
advance of the effective date of termination, if practical.
The Contractor will be responsible for coordinating the
continuation of care for members who are undergoing treatment
for an acute condition.
SECTION 11: RECORDS
11.1 Financial Records Retention
A. The Contractor will maintain and will cause its subcontractors
to maintain all books, records, and other evidence pertaining
to revenues, expenditures, and other financial activity
pursuant to this Agreement in accordance with the standards
and procedures specified in Section II.S. of the RFP.
B. The Contractor agrees further to submit to the Department or
to the Secretary of Health and Human Services or their
designees, within thirty-five (35) days of request,
information related to the Contractor's business transactions
which are related to the provision of services for the HC-SE
Program pursuant to this Agreement which will include full and
complete information regarding:
(1) The Contractor's ownership of any subcontractor with
whom the Contractor has had business transactions
totaling more than $25,000 during the 12-month period
ending on the date of the request; and
(2) Any significant business transactions between the
Contractor and any wholly-owned supplier or between
the Contractor and any subcontractor during the
5-year period ending on the date of the request.
C. The Contractor agrees to include the requirements set forth at
Section 11.1.A. and B. in all contracts and agreements it
enters with subcontractors under the HC-SE Program, and to
ensure that all persons and/or entities with whom it so
contracts agree to comply with said provisions.
<PAGE>
11.2 Operational Data Reports
The Contractor will maintain and shall cause its subcontractors to
maintain all source records for data reports in accordance with the
procedures specified in Section II.S. of the RFP.
11.3 Medical Records Retention
The Contractor will maintain and will cause its subcontractors to
maintain all medical records in accordance with the procedures outlined
in Section II.S. of the RFP.
11.4 Review of Records
A. The Contractor will make all records relating to the HC-SE
Program, including but not limited to, the records referenced
in this Section, available for audit, review, or evaluation by
the Department, its designated representatives or federal
agencies. Such records will be made available during normal
business hours at a location specified by the Department.
B. In the event that the Department, its designated
representatives, or federal agencies request access to records
after the expiration or termination of this Agreement or at
such time that the records no longer are required by the terms
of this Agreement to be maintained at the Contractor's
location, the Contractor, at its own expense, shall send
copies of the requested records to the requesting entity
within fifteen (15) days of such request.
SECTION 12: SUBCONTRACTUAL RELATIONSHIPS
12.1 Ability to Subcontract
In fulfilling its obligations hereunder, the Contractor will have the
right to utilize the services of persons or entities by means of
subcontractual relationships. The Contractor acknowledges and agrees
that the execution of subcontracts will not diminish or alter the
Contractor's responsibilities under this Agreement.
12.2 Compliance with Program Standards
As part of its contracting or subcontracting, with the exception of
Provider agreements which are outlined in Section 7.1.M., the
Contractor agrees that it will strictly comply with the procedures set
forth in Section II.R of the RFP (including Appendices U-W of the RFP).
<PAGE>
The written information which must be provided to the Department prior
to the awarding of any contract or subcontract must provide disclosure
of ownership interests of five percent (5%) or more in any entity or
subcontractor.
All contracts and subcontracts must be in writing and must contain all
items set forth in the RFP.
The Contractor will require its subcontractors to provide written
notification of a denial, partial approval, reduction, or termination
of service or coverage, or a change in the level of care, using the
standard form notice outlined in Exhibit F.
In addition, all contracts or subcontracts which provide medical
services to the Contractor's members must include the following
provisions:
(1) A requirement for cooperation for the submission of all
encounter data for all services provided within the timeframes
required in Section 17.5 of this Agreement no matter whether
reimbursement for these services is made by the Contractor
either directly or indirectly through capitation.
(2) Language which ensures compliance with all applicable federal
and state laws.
(3) Language which prohibits gag clauses which would limit the
subcontractor from disclosure of medically necessary or
appropriate health care information or alternative therapies
to members, other health care professionals, or to the
Department.
(4) A requirement which ensures that the Department has ready
access to any and all documents and records of transactions
pertaining to the provision of services to MA consumers.
(5) The definition of Medical Necessity as outlined in Section 2
of this Agreement.
(6) The Contractor must ensure, if applicable, that its
subcontracts adhere to the standards for network composition
and adequacy.
(7) Should the Contractor use a subcontracted utilization review
entity, the Contractor must ensure its subcontractors process
each request for benefits and inform the member of the
decision within two (2) business days of receiving the
request. If the member does not receive written notification
of a decision on a request for a covered service or item
within twenty-one (21) days of the date the Contractor
received the request, the service or item is automatically
approved. To satisfy the twenty-one (21) day time period, the
Contractor must mail to the member, the member's PCP, and the
<PAGE>
prescribing provider a notice of partial approval or denial of
the request on or before the eighteenth (18th) day from the
date the request is received. If the notice is not mailed by
the eighteenth (18th) day after the request is received, the
request is automatically authorized (i.e., deemed approved).
If additional information is needed to review the request, the
Contractor must request such information from the appropriate
provider within forty-eight hours of receiving the request for
benefits. If the Contractor requests additional information,
the request may be pended for a reasonable time period, not to
exceed two (2) business days after the additional information
is received, in accordance with guidelines established by the
Department.
(8) Should the Contractor subcontract with an entity to provide
any information systems services, the subcontract must include
provisions for a transition plan in the event that the
Contractor terminates the subcontract or enters into a
subcontract with a different entity. This transition plan must
include information on how the data will be converted and made
available to the new subcontractor. The data must include all
historical claims and service data.
The Contractor must make all necessary revisions to its contracts and
subcontracts to be in compliance with the requirements set forth in
Section 12.2 of this Agreement. Revisions may be completed as contracts
and subcontracts become due for renewal provided that all contracts and
subcontracts are amended within one (1) year of execution of this
Agreement with the exception of the encounter data requirements, which
must be amended immediately, if necessary, to ensure that all
subcontractors are submitting encounter data to the Contractor within
the timeframes specified in Section 17.5 of this Agreement.
12.3 Consistency with Policy Statements
The Contractor agrees that its contracts with all providers will be
consistent, as may be applicable, with the policy statements governing
HMO Contracting with Integrated Delivery Systems issued by the
Pennsylvania Department of Health on April 6, 1996 and those issued by
the Pennsylvania Department of Insurance on April 6, 1996. (26 Pa.
Bulletin 1629, et seq. (04/06/96)).
12.4 Compliance with Rule on Physician Incentive Arrangements
The Contractor agrees that its contracts with all providers will be in
compliance with the Final Rule regarding Physician Incentive
Arrangements which was issued by HCFA on March 27, 1996. (61 Fed.Reg.
13430 (03/27/96)), and as amended from time to time.
<PAGE>
SECTION 13: QUALITY MANAGEMENT AND UTILIZATION MANAGEMENT PROGRAM
13.1 The Contractor agrees to fully comply with the Department's and Quality
Management and Utilization Management Program standards as set forth in
Exhibit I.
13.2 The Contractor must provide to the Department its written policies and
procedures governing quality management and utilization management.
13.3 The Contractor must have formal contracts or employment arrangements in
place for physician reviewers. The Contractor is required to obtain the
signature of a licensed physician on any letter of medical necessity.
13.4 The Contractor will cooperate fully with any external evaluations and
assessments of its performance under this Agreement authorized by the
Department. Independent assessments will include, but not be limited
to, any independent evaluation required or allowed by federal or state
statute or regulations by the Department. The Contractor will also
cooperate fully with all external medical audit reviews which assess
the Contractor's quality of care.
13.5 The Contractor will not discriminate with respect to participation,
reimbursement or indemnification to any provider who is acting within
the scope of the provider's license or certification under applicable
state law solely on the basis of such license or certification. This
will not be construed to prohibit the Contractor from including
providers only to the extent necessary to meet the needs of the
organization's enrollees or from establishing any measure designed to
maintain quality and control costs consistent with the responsibilities
of the organization.
13.6 In accordance with the Balanced Budget Reconciliation Act of 1997,
Section 4707, the Contractor must verify , as part of its
credentialing/recredentialing process, that each physician in its
provider network has a Unique Physician Identifier Number (UPIN)
assigned by the system established under Section 1173(b) of the Social
Security Act.
SECTION 14: COMPLAINT, GRIEVANCE AND APPEAL
14.1 Member Complaint, Grievance, and Appeal System
A. The Contractor will develop, implement, and maintain a
complaint and grievance system which provides for informal
settlement of members' complaints and grievances at the lowest
administrative level and a process for appeal. The
Contractor's policies and procedures must meet the
requirements established by the Department and the provisions
of Article XXI of Act 68 of 1998 (P.L. 446, No. 68) relating
to Quality Health Care Accountability and Protection, amending
the Act of May 17, 1921 (P.L. 682, No. 284).
<PAGE>
B. The Contractor will cause each of its subcontractors to comply
with the Member Complaint Grievance, and Appeal System. This
includes reporting requirements established by the Contractor
and which has received advance written approval by the
Department.
C. The Contractor must provide to the Department its written
procedures governing complaint, grievance and appeals. The
standard notices required and outlined in Exhibit F of this
agreement must be used in the Contractor's complaint,
grievance and appeal process and must be in accessible formats
for individuals with vision impairments. In addition, the
notices must be available for persons who do not speak English
or have low literacy levels. The Contractor must abide by the
final decision of the Department of Insurance where a member
has sought an external appeal of a complaint. The Contractor
must abide by the final decision of the Department of Health
and the Department of Public Welfare where a member has sought
an external appeal of a grievance.
14.2 Clinical Sentinel
The Contractor agrees to cooperate with the functions of the
Department's Clinical Sentinel which is to address clinical and medical
issues raised by MA consumers and should not include issues unrelated
to the coverage of medical services under the HealthChoices Program.
14.3 Provider Appeal Procedures
The Contractor will develop, implement, and maintain a provider
complaint and appeals system which provides for informal settlement of
providers' complaints at the lowest level and a formal process for
appeal ("Provider Complaint and Appeal System"). The development and
implementation of the Provider Complaint and Appeal System will be in
complete accordance with Section II.N. of the RFP. The Contractor will
be required to report their provider appeal data and utilization
management outcomes to the Department utilizing the standardized report
form specified by the Department.
SECTION 15: CONFIDENTIALITY
15.1 The Contractor will comply with all applicable federal and state laws
regarding the confidentiality of medical records. The Contractor will
also cause each of its subcontractors to comply with all applicable
federal and state laws regarding the confidentiality of medical
records. The Contractor will comply with Standard XVIII of Exhibit I
regarding maintaining confidentiality of data.
<PAGE>
15.2 The Contractor will be liable for any state or federal fines, financial
penalties, or damages levied upon the Department for a breach of
confidentiality due to the negligent or intentional conduct of the
Contractor in relation to the Contractor's systems, staff, or other
area of responsibility.
15.3 The Contractor agrees to return all data and material obtained in
connection with this Agreement and the implementation thereof,
including confidential data and material, at the Department's request.
No material can be used by the Contractor for any purpose after the
expiration or termination of this Agreement. The Contractor also agrees
to transfer all such information to a subsequent contractor at the
direction of the Department.
15.4 The Contractor considers its financial reports and information,
marketing plans, provider rates, trade secrets, information or
materials relating to the Contractor's software, databases or
technology, and information or materials licensed from, or otherwise
subject to contractual nondisclosure rights of third parties, which
would be harmful to the Contractor's competitive position to be
confidential information. This information will not be disclosed by the
Department to other parties except as required by law or except as may
be determined by the Department to be related to the administration and
operation of the HealthChoices Program.
SECTION 16: INDEMNIFICATION AND INSURANCE
16.1 Indemnification
A. The Contractor will indemnify and hold the Department and the
Commonwealth of Pennsylvania, their respective employees,
agents, and representatives free and harmless against any and
all liabilities, losses, settlements, claims, demands, and
expenses of any kind (including but not limited to attorneys'
fees) which may result or arise out of any dispute of any kind
by and between the Contractor and its subcontractors with
members, agents, clients, or - any defamation, malpractice,
fraud, negligence, or intentional misconduct caused or alleged
to have been caused by the Contractor or its agents,
subcontractors, employees, or representatives in the
performance or omission of any act or responsibility assumed
by the Contractor pursuant to this Agreement.
B. The Contractor will indemnify and hold harmless the Department
and the Commonwealth of Pennsylvania from any audit
disallowance imposed by the federal government resulting from
the Contractor's failure to follow state or federal rules,
regulations, or procedures unless prior authorization was
given by the Department. The Department will provide timely
notice of any disallowance to the Contractor and allow the
Contractor an opportunity to participate in the disallowance
appeal process and any subsequent judicial review to the
extent permitted by law. Any payment required under this
provision will be due from the Contractor upon notice from the
Department. The indemnification provision hereunder will not
<PAGE>
extend to disallowances which result from a determination by
the federal government that the terms of this Agreement are
not in accordance with federal law. The obligations under this
paragraph will survive any termination or cancellation of this
Agreement.
16.2 Insurance
The Contractor will maintain for itself, each of its employees, agents,
and representatives, general liability and all other types of insurance
in such amounts as reasonably required by the Department and all
applicable laws. In addition, the Contractor will require that each of
the health care professionals with which the Contractor contracts
maintains professional malpractice and all other types of insurance in
such amounts as required by all applicable laws. The Contractor will
provide to the Department, upon the Department's request, certificates
evidencing such insurance coverage.
SECTION 17: REPORTS
17.1 General Obligations
The Contractor will furnish the Department with such reports as may be
requested by the Department in writing in the manner, form, and time
periods specified by the Department. Where appropriate and for good
cause shown, the Department may provide the Contractor a reasonable
extension of time in which to comply with said reporting requirements.
17.2 GA Data Reporting
General Assistance (GA) data reporting will be in the format prescribed
by the Department and must be submitted to the Department
electronically each month. The GA file will include data on claims paid
by the Contractor during the month for admissions to acute care
hospitals and rehabilitation hospitals. The file must include all
applicable payments made for services provided to state-only GA
consumers, including services paid for by a subcontractor or via a
subcapitation arrangement. If the Contractor pays for applicable
services via a subcapitation arrangement, it must submit its plan for
such arrangement to the Department sixty (60) calendar days before the
due date of the file that will contain subcapitation data.
<PAGE>
17.3 Financial Reporting Requirements
The Contractor will furnish all financial reports in the time and
manner prescribed by the Department. Financial reports will be
submitted on the Financial Reporting Requirement Form which will be
issued to the Contractor by the Department. The end-of-year quarterly
financial reports will be due to the Department by March 10 of the
following year.
17.4 EPSDT Reports
The Contractor must submit EPSDT reports in the time and manner
prescribed by the Department. The Contractor will be responsible for
maintaining appropriate systems and mechanisms to obtain all necessary
data from its health care providers to ensure its ability to comply
with the EPSDT reporting requirements. The failure of a health care
provider to provide the Contractor with necessary EPSDT data will not
excuse the Contractor's compliance with this requirement.
17.5 Encounter Data Reports
The Contractor must submit a separate record, or "pseudo claim", each
time a member has an encounter with a provider. The PH-MCO must submit
a separate subcapitation record for each advance payment made to a
contractor responsible for all or part of a member's medical care. If
the payment is a capitation payment, a separate record is required to
report the amount paid on behalf of each member. The Contractor will be
responsible for maintaining appropriate systems and mechanisms to
obtain all necessary data from its health care providers to ensure its
ability to comply with the encounter data reporting requirements. The
failure of a health care provider to provide the Contractor with
necessary encounter data will not excuse the Contractor's compliance
with this requirement.
All providers operating within the Contractor's provider network who
provide services to MA consumers must be enrolled in the Department's
MA Program and possess an active Medical Assistance Identification
(MAID) number. This identification number must be used when submitting
required encounter data.
A. Data Format
The PH-MCO must submit encounter and subcapitation data
electronically over POSNet using file transfer protocol. The
PH-MCO must conform to the requirements specified in the
Requirements and Specifications Manual for Encounter Data. The
Department may limit each PH-MCO to one (1) encounter data
file and one (1) subcapitation data file per week.
<PAGE>
B. Timing of Data Submittal
Encounter data must be submitted by providers to the PH-MCO
within one hundred eighty (180) days after the date of
service. The PH-MCO must submit correct encounter data to the
Department within one hundred (100) days (this number includes
ten [10] days for Department processing of data in the case of
resubmission) after the PH-MCO's payment/adjudication date for
the encounter. Time required for the PH-MCO to receive from
the Department, correct, and resubmit encounters rejected by
the Department is included in the one hundred (100) days.
Should the Department fail to complete its processing of the
data within the ten (10) day period allotted, the Contractor
shall receive an extension to the one hundred (100) day
submission period for the same number of days by which the
Department exceeds its ten (10) day processing period.
Correct subcapitation data must be submitted to the Department
within thirty (30) days after the end of the month of the
subcapitation payment data.
C. Data Completeness
The Department expects to use Encounter and Subcapitation Data
to monitor access to care, quality of care, set future
capitation premium rates, and for other reasons. This will
require complete and accurate data. The Department is
anticipating receiving one hundred percent (100%) of actual
member encounters.
D. MA Consumers Medical Information
The PH-MCO must provide an MA consumer's medical records to
the Department within fifteen (15) days of the Department's
request.
E. Financial Penalties
The PH-MCO is required to provide complete, accurate, and
timely encounter data to the Department, and to maintain
complete medical records. The Department may withhold
capitation premiums as reimbursement for financial penalties
assessed. Financial penalties will be calculated monthly.
Assessment of financial penalties is based on the
identification of penalty occurrences. Encounter Data Penalty
occurrences/ assessments of financial penalties are outlined
in Exhibit L.
<PAGE>
F. Data Validation
The PH-MCO must agree to assist the Department in its
validation of utilization data by making available medical
records and a sample of its claims data. The validation may be
completed by Department staff and independent, external review
organizations.
17.6 Sanctions
A. The Department may impose sanctions for non-compliance with
any requirements under this Agreement. The sanctions which can
be imposed will depend on the nature and severity of the
breach, which the Department, in its reasonable discretion,
will determine, as follows:
(1) Imposing civil monetary penalties of a minimum of
$1,000.00 per day for non-compliance up to the
maximum limits as described in the Balanced Budget
Reconciliation Act of 1997, amending Section 1932(e)
of the Social Security Act;
(2) Requiring the submission of a corrective action plan;
(3) Limiting enrollment of new MA consumers;
(4) Suspension of payments;
(5) Temporary management subject to applicable federal or
state regulations; or
(6) Termination of the Agreement.
B. In any case where this Agreement provides for a specific
sanction for a defined infraction, the Department will first
apply the specific sanction provided for the non-compliance
before applying any of the general sanctions set forth in
Section 17.6A. Specific sanctions contained in this Agreement
include the following:
(1) Claims Processing: Sanctions related to claims
processing are provided in Section 8.2.
(2) Report, Audit or File: If the Contractor fails to
provide any report, audit, or file that is specified
by this Agreement by the applicable due date, or if
the Contractor provides any report, audit, or file
specified by this Agreement that does not meet
established criteria, a subsequent payment to the
Contractor may be reduced by the Department. The
reduction will equal the number of days that elapse
<PAGE>
between the fifth calendar day after the due date and
the day that the Department receives a report, audit,
or file that meets established criteria, multiplied
by the average Per-Member-Per-Month capitation rate
that applies to the first month of this Agreement. No
reduction for lateness will be made if a report,
audit, or file is received within five (5) calendar
days after the due date. If the Contractor provides a
report, audit, or file on or before the due date or
within five (5) days after the due date, and if the
Department notifies the Contractor after the 15th
calendar day after the due date that the report,
audit, or file does not meet established criteria, no
reduction in payment will apply to the 16th day after
the due date through the date that the Department
notifies the Contractor. A penalty may not be applied
under this section if a penalty is applied for the
same deficiency under the first paragraph of this
Section 17.6.
(3) Encounter Data Reporting: The penalty for late
reporting of encounter data is set forth in Section
17.5 and Exhibit L.
(4) Marketing: The sanctions for engaging in unapproved
marketing practices are set forth in Section
7.1.D.(5) of this Agreement.
(5) Access Standard: The sanction for non-compliance with
the access standard is set forth in Section 6.2.B(4)
of this Agreement.
C. Nonduplication of Financial Penalties
If the Department assesses a financial penalty pursuant to one
of the provisions of Section 17.6.B, it will not impose a
financial sanction pursuant to Section 17.6.A.(1) with respect
to the same infraction.
SECTION 18: DISPUTES
18.1 In the event that a dispute arises between the parties relating to any
matter regarding this Agreement, the Contractor will send written
notice to the Contracting Officer for this Agreement, who will make a
determination in writing of his/her interpretation and will send the
same to the Contractor. That interpretation will be final, conclusive,
and binding on the Contractor, and unreviewable in all respects unless
the Contractor, within twenty (20) days of its receipt of said
interpretation, delivers a written appeal to the Secretary of Public
Welfare. The decision of the Secretary will be final, conclusive, and
binding, and the Contractor will thereafter, with good faith and
diligence render such performance in compliance with the Secretary's
determination; subject to the provisions of ss.18.2 below. Notice of
initial level dispute will be sent to:
<PAGE>
Ms. Christine M. Bowser
Director, Bureau of Managed Care Operations
Room A-111, DPW Complex 2, Building #33
P.O. Box 2675
Harrisburg, Pennsylvania 17105-2675
18.2 All claims against the Department relating to any matter regarding this
Agreement may be filed by the Contractor in the Board of Claims (under
the Act of May 20, 1937, PL. 728, as amended by Act of October 5, 1978,
P.L. 1104), but only after first complying with Section 18.1 above.
Resolution of disputes under the provision must occur prior to any
final payment of a disputed amount to the Contractor.
SECTION 19: FORCE MAJEURE
In the event of a major disaster or epidemic as declared by the
Governor of the Commonwealth of Pennsylvania or an act of any military
or civil authority, outage of communications, power or other utility,
the Contractor will cause its employees and all providers with whom it
subcontracts to render all services provided for in the RFP and herein
as is practical within the limits of providers' facilities and
available staff. The Contractor, however, will not be liable nor deemed
to be in default for any provider's failure to provide services or for
any delay in the provision of services when such a failure or delay is
the direct or proximate result of the depletion of staff or facilities
by the major disaster or epidemic, or act of any military or civil
authority, outage of communications, power, or other utility; provided,
however, in the event that the provision of services is substantially
interrupted, the Department will have the right to terminate this
Agreement upon ten (10) days written notice to the Contractor.
SECTION 20: GENERAL
20.1 Suspension From Other Programs
In the event that the Contractor learns that a health care professional
with whom the Contractor contracts is suspended or terminated from
participation in the Medical Assistance Program of another state or
from the Medicare Program, the Contractor will promptly notify the
Department, in writing, of such suspension or termination.
No payment will be due or retained by the Contractor for any services
rendered by a health care professional during the period the Contractor
knew or should have known such professional was suspended or terminated
from the Medical Assistance Program of this or another state, or the
Medicare Program.
<PAGE>
20.2 Rights of the Department and the Contractor
The rights and remedies of the Department provided herein will not be
exclusive and are in addition to any rights and remedies provided by
law.
Except as otherwise stated in Section 18, the rights and remedies of
the Contractor provided herein will not be exclusive and are in
addition to any rights and remedies provided by law.
20.3 Waiver
No waiver by either party of a breach or default of this Agreement will
be considered as a waiver of any other or subsequent breach or default.
20.4 Invalid Provisions
Any provision of this Agreement which is in violation of any state or
federal law or regulation will be deemed amended to conform with such
law or regulation, pursuant to the terms of this Agreement, except that
if such change would materially and substantially alter the obligations
of the parties under this Agreement, any such provision will be
renegotiated by the parties. The invalidity or nonenforceability of any
terms or provisions hereof will in no way affect the validity or
enforceability of any other terms or provisions hereof.
20.5 Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Pennsylvania.
20.6 Notice
Any notice, request, demand, or other communication required or
permitted hereunder, with the exception of initial level disputes
submitted to the Contracting Officer pursuant to Section 18.1 above,
will be given in writing by certified mail, communication charges
prepaid, to the party to be notified. All communications will be deemed
given and received upon delivery or attempted delivery to the address
specified herein, as from time to time amended. The addresses for the
parties for the purposes of such communication are:
<PAGE>
To the Department:
The Department of Public Welfare
Office of Medical Assistance Programs
Bureau of Managed Care Operations
Room A-111, Cherry Wood Building
Harrisburg State Hospital
Harrisburg, Pennsylvania 17110
With a Copy to:
The Department of Public Welfare
Office of Legal Counsel
305 Health and Welfare Building
Harrisburg, Pennsylvania 17120
Attention: Chief Counsel
To the Contractor:
Mr. Kevin Hill, CEO
Oxford Health Plan (PA), Inc.
The Curtis Center
601 Walnut Street, Suite 900
Independence Square West
Philadelphia, Pennsylvania 19106
20.7 Counterparts
This Agreement may be executed in counterparts, each of which will be
deemed an original for all purposes, and all of which, when taken
together will constitute but one and the same instrument.
20.8 Headings
The section headings used herein are for reference and convenience
only, and will not enter into the interpretation of this Agreement.
20.9 Assignment
Neither this Agreement nor any of the parties' rights hereunder will be
assignable by either party hereto without the prior written consent of
the other party hereto, which consent will not be unreasonably
withheld.
<PAGE>
20.10 No Third Party Beneficiaries
This Agreement does not, nor is it intended to, create any rights,
benefits, or interest to any third party, person, or organization.
20.11 Entire Agreement: Modification
This Agreement constitutes the entire understanding of the parties
hereto and supersedes any and all written or oral agreements,
representations, or understandings. No modifications, discharges,
amendments, or alterations will be effective unless evidenced by an
instrument in writing signed by both parties. Furthermore, neither this
Agreement nor any modifications, discharges, amendments, or alterations
thereof will be considered executed by or binding upon the Department
or the Commonwealth of Pennsylvania unless and until signed by a duly
authorized officer of the Department or Commonwealth of Pennsylvania.
EXHIBIT 21
LIST OF SUBSIDIARIES
OF
HEALTH RISK MANAGEMENT, INC.
Health Resource Management Ltd., an Alberta corporation
HRM Claim Management, Inc., a Minnesota corporation
Institute for Healthcare Quality, Inc., a Minnesota corporation
Health Benefit Reinsurance, Inc., a Michigan corporation
Pennsylvania HRM, Inc., a Pennsylvania corporation
HRM Health Plans (PA), Inc., a Pennsylvania Corporation
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-38623) pertaining to the Health Risk Management, Inc. Non-Incentive
Stock Option Plan, the Registration Statement (Form S-8 No. 33-38624) pertaining
to the Health Risk Management, Inc. 1990 Stock Option Plan, and in the
Registration Statements (Form S-8 No. 33-60390 and Form S-8 No. 333-34497)
pertaining to the Health Risk Management, Inc. 1992 Long-Term Incentive Plan of
our report dated August 27, 1999 with respect to the consolidated financial
statements and schedule of Health Risk Management, Inc. included in this Annual
Report (Form 10-K) for the year ended June 30, 1999.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
September 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
financial statements from the Registrant's Form 10-K for the year ended
June 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
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<PERIOD-END> JUN-30-1999
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<CURRENT-LIABILITIES> 45,217
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0
0
<COMMON> 46
<OTHER-SE> 34,350
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<SALES> 163,039
<TOTAL-REVENUES> 163,039
<CGS> 0
<TOTAL-COSTS> 146,013
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<INTEREST-EXPENSE> 974
<INCOME-PRETAX> 653
<INCOME-TAX> 282
<INCOME-CONTINUING> 371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 371
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
