UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-13248
RIGHTCHOICE MANAGED CARE, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1674052
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1831 Chestnut Street, St. Louis, Missouri 63103-2275
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 923-4444
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
Title of each class Outstanding at April 30, 1999
Class A Common Stock, $0.01 par value 3,710,426 shares
Class B Common Stock, $0.01 par value 14,962,500 shares
RIGHTCHOICE MANAGED CARE, INC.
First Quarter 1999 Form 10-Q
Table of Contents
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998 4
Consolidated Statements of Changes in Shareholders' Equity
for the Three Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 35
ITEM 2. Changes in Securities 35
ITEM 3. Defaults Upon Senior Securities 35
ITEM 4. Submission of Matters to a Vote of Security Holders 35
ITEM 5. Other Information 35
ITEM 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 37
PART I.FINANCIAL INFORMATION
ITEM 1.Financial Statements
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
ASSETS March 31, 1999 December 31, 1998
(unaudited)
Current assets:
Cash and cash equivalents $ 29,457 $ 39,409
Investments available for sale 206,225 208,281
Receivables from members 72,615 68,024
Receivables from related parties 22,204 18,294
Deferred income taxes 5,968 4,798
Other assets 26,359 19,818
Total current assets 362,828 358,624
Property and equipment, net 57,468 58,234
Deferred income taxes 12,306 11,583
Investments in affiliates 5,835 5,729
Goodwill and intangible assets, net 73,596 74,508
Total assets $512,033 $508,678
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims payable $ 117,437 $ 109,986
Unearned premiums 57,033 56,407
Accounts payable and accrued expenses 60,507 64,754
Current portion of long-term debt 10,000 10,000
Payables to related parties 26,387 26,194
Reserve for loss contract 8,604 9,052
Obligations for employee benefits 2,994 2,954
Income taxes payable 11,148 10,485
Obligations under capital leases 3,635 4,254
Total current liabilities 297,745 294,086
Reserve for loss contract 5,444 7,259
Long-term debt 30,563 33,063
Obligations for employee benefits 24,665 24,338
Obligations under capital leases 4,955 4,058
Total liabilities 363,372 362,804
Shareholders' Equity:
Preferred Stock, $.01 par, 25,000,000
shares authorized, no shares issued
and outstanding
Common Stock:
Class A, $.01 par, 125,000,000
shares authorized, 3,737,500 shares
issued, 3,710,426 shares outstanding 37 37
Class B, convertible, $.01 par,
100,000,000 shares authorized,
14,962,500 shares issued and outstanding 150 150
Additional paid-in capital 132,635 132,635
Retained earnings 16,990 12,313
Treasury stock, 27,074 Class A shares,
at cost (383) (383)
Accumulated other comprehensive income (768) 1,122
Total shareholders' equity 148,661 145,874
Total liabilities and shareholders'
equity $512,033 $508,678
See accompanying Notes to Consolidated Financial Statements.
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except shares and per share data)
Three Months Ended
March 31,
1999 1998
Revenues:
Premium $179,218 $173,694
Fees and other income 20,795 18,158
Total revenues 200,013 191,852
Operating expenses:
Health care services 146,748 144,481
Commissions 7,909 7,737
General and administrative (excludes
depreciation and amortization and excludes
net intercompany charges of $3,040 and
$3,129, respectively, allocated to Blue Cross
and Blue Shield of Missouri) 36,560 36,280
Depreciation and amortization 4,194 4,603
Total operating expenses 195,411 193,101
Operating income (loss) 4,602 (1,249)
Investment income:
Interest and dividends 3,207 3,817
Realized gains, net 268 555
Total investment income, net 3,475 4,372
Other:
Interest expense (1,068) (1,150)
Other income, net 308 85
Total other, net (760) (1,065)
Income before provision for income taxes 7,317 2,058
Provision for income taxes 2,640 1,090
Net income $ 4,677 $ 968
Weighted average common shares outstanding 18,673,000 18,672,000
Basic and diluted earnings per share $ .25 $ .05
See accompanying Notes to Consolidated Financial Statements.
<TABLE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands, except shares)
<CAPTION> Accumulated
Additional Other
Common Stock Paid In Retained Treasury Comprehensive
Class A Class B Capital Earnings Stock Income Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 $37 $150 $132,640 $6,653 $(404) $1,789 $140,865
Comprehensive loss:
Net income 968 968
Change in unrealized appreciation on
available-for-sale securities, net of
income tax credit of $690 (1,252) (1,252)
Comprehensive loss (284)
Balance at March 31, 1998 37 150 132,640 7,621 (404) 537 140,581
Comprehensive income:
Net income 4,692 4,692
Change in unrealized
appreciation on available-
for-sale securities, net of
income tax provision of $543 955 955
Minimum pension liability
adjustment, net of income tax
credit of $199 (370) (370)
Comprehensive income 5,277
1,426 shares issued under the
company's stock option plan (5) 21 16
Balance at
December 31, 1998 37 150 132,635 12,313 (383) 1,122 145,874
Comprehensive income:
Net income 4,677 4,677
Change in unrealized
appreciation on available-
for-sale securities, net of
income tax credit of $1,068 (1,890) (1,890)
Comprehensive income 2,787
Balance at
March 31, 1999 $37 $150 $132,635 $16,990 $(383) $(768) $148,661
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<CAPTION>
For the three months ended
March 31,
1999 1998
<S> <C> <C>
Cash flows from operating
activities:
Net income $ 4,677 $ 968
Adjustments to reconcile net income to net cash used in
operating activities:
(Credit) provision for deferred income taxes (825) 1,018
Depreciation and amortization 4,194 4,603
Undistributed earnings of affiliates (106) (60)
Gain on sale of investments (268) (555)
Amortization of premiums and accretion of discounts, net 157 (12)
Gain on sale of property and equipment (231)
Increase in certain assets:
Receivables from members (4,591) (1,429)
Receivables from related parties (3,910) (14,162)
Other assets (6,355) (6,797)
Increase (decrease) in certain liabilities:
Medical claims payable 7,451 (1,150)
Unearned premiums 626 (2,539)
Accounts payable and accrued expenses (4,247) 2,466
Payables to related parties 193 18,116
Reserve for loss contract (2,263) (2,263)
Obligations for employee benefits 367 645
Income taxes payable 663 178
Net cash used in operating activities (4,468) (973)
Cash flows from investing activities:
Proceeds from matured investments:
Fixed maturities 1,700 3,325
Proceeds from investments sold:
Fixed maturities 67,560 59,845
Other 8 4,408
Investments purchased:
Fixed maturities (70,059) (66,523)
Other (247)
Proceeds from property and equipment sold 11 5
Property and equipment purchased (1,265) (2,594)
Net cash used in investing activities (2,045) (1,781)
Cash flows from financing activities:
Payments of long-term debt (2,500)
Payments of capital lease obligations (939) (1,411)
Net cash used in financing activities (3,439) (1,411)
Net decrease in cash and cash equivalents (9,952) (4,165)
Cash and cash equivalents at beginning of period 39,409 29,872
Cash and cash equivalents at end of period $ 29,457 $ 25,707
Supplemental Disclosure of Cash Information:
Interest paid $ 1,058 $ 1,165
Income taxes paid (refund received), net 2,802 (2,098)
Supplemental Schedule of Noncash Investing and
Financing Activities:
Equipment acquired through capital leases $ 3,098 $ 199
Disposal of equipment under capital leases 1,881
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
RightCHOICE Managed Care, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Financial Statement Presentation
The interim consolidated financial statements included herein have
been prepared by RightCHOICE Managed Care, Inc. (the company or
RightCHOICE) without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the SEC). Certain
information and footnote disclosures, normally included in the
financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted
pursuant to such SEC rules and regulations; however, the
management of the company believes that the disclosures herein are
adequate to make the information presented not misleading. In the
opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the consolidated
financial position of the company with respect to the interim
consolidated financial statements, and the consolidated results of
its operations and its cash flows for the interim periods then
ended, have been included. The results of operations for the
interim periods are not necessarily indicative of the results for
the full year.
2. Contingencies
OPM AUDIT
The company, through its subsidiary, HMO Missouri, Inc.
(BlueCHOICE), contracts with the Office of Personnel Management
(OPM) to provide or arrange health services to federal employees
under the Federal Employees Health Benefits Program (FEHBP).
FEHBP is the second largest customer group (after the Missouri
Consolidated Health Care Plan or MCHCP, discussed further herein)
of BlueCHOICE. OPM conducts periodic audits to, among other
things, verify that the premiums established under the OPM
contract were established in compliance with the community rating
and other requirements under the FEHBP.
On August 8, 1995, the company received a draft audit report from
the OPM regarding the audit, conducted in 1994, of the FEHBP
operations of BlueCHOICE for the years 1989 through 1994. The
audit dealt primarily with a comparison of premium rates charged
to the FEHBP to rates charged by BlueCHOICE to other similarly
sized groups. The OPM draft audit report indicates that
BlueCHOICE has a potential liability of $7.5 million to the FEHBP.
The company responded to the draft report in November of 1995
following an in-depth analysis of the issues. In 1998, BlueCHOICE
received correspondence from the U.S. Department of Justice
requesting a meeting with BlueCHOICE regarding in excess of $6.5
million in payments (alleged overcharges) received during the
reconciliation process for the years 1990 through 1994, plus
interest thereon. If it is found that BlueCHOICE knowingly
received overpayments, it could be subject to civil penalties of
up to ten thousand dollars per certified reconciliation statement,
treble damages for the amount of such overcharges and interest.
At this time, management is unable to determine the final dollar
amount which may be required to resolve the audit findings. There
can be no assurance that the resolution of these findings will not
have a material adverse effect on the company and the market for
its stock.
LITIGATION OF BLUE CROSS BLUE SHIELD OF MISSOURI WITH THE MISSOURI
ATTORNEY GENERAL AND DEPARTMENT OF INSURANCE AND RELATED ACTIONS,
SETTLEMENT EFFORTS AND PROPOSED REORGANIZATION
In August 1994, Blue Cross Blue Shield of Missouri (BCBSMo)
created a for-profit subsidiary, RightCHOICE Managed Care, Inc.
(the company). BCBSMo transferred, among other things, certain of
its assets to the company, and offered to the public 20 percent of
the common stock of the company (such events are referred to
collectively as the Reorganization and Public Offering). Although
the Director (the Director) of the Missouri Department of
Insurance (DOI) formally approved the Reorganization and Public
Offering on April 14, 1994, the Director and the DOI subsequently
claimed that the Reorganization and Public Offering violated state
laws and that BCBSMo was obligated to transfer all of its assets,
including all of the stock of the company, to the State of
Missouri or a charity designated by the State of Missouri. The
Director and the DOI threatened to bring legal action, seek a
receivership or terminate BCBSMo's insurance license unless BCBSMo
agreed to give up its assets.
BCBSMo's extensive efforts to resolve the dispute without
litigation were unsuccessful. On May 13, 1996, BCBSMo filed a
declaratory judgment action in the Circuit Court of Cole County
Missouri (the Circuit Court) against the Director, the DOI and the
Missouri Attorney General (the Missouri Attorney General was a
necessary party due to his sole authority to enforce nonprofit
corporation laws). This litigation is described more fully below
under "Litigation relating to the Reorganization and Public
Offering."
AGREEMENT FOR SETTLEMENT OF CERTAIN LITIGATION MATTERS AND
REORGANIZATION OF THE COMPANY
Status of Proposed Settlement Agreements
Following many developments in the litigation described below, on
April 22, 1998, the company, BCBSMo, the Missouri Attorney General
and the Director announced a conceptual framework to resolve all
outstanding litigation and regulatory issues among the parties.
The definitive settlement agreements were entered into on
September 20, 1998, and subsequently modified on March 12, 1999,
(as amended, the amended settlement agreements). The amended
settlement agreements would, if consummated, resolve all
outstanding litigation and regulatory issues between the company,
BCBSMo and their affiliates and the State of Missouri described
below and create a charitable independent health care foundation.
The amended settlement agreements include a number of significant
conditions and contingencies, including approval by the Circuit
Court. During an informal status hearing of the Circuit Court on
March 15, 1999, Judge Thomas J. Brown, III stated on the record
that he has continued concerns about the amended settlement
agreements. In response to those comments, on March 19, 1999,
BCBSMo petitioned the Missouri Supreme Court to enter an Order of
Prohibition directed to Judge Brown to limit his actions in the
litigation to the consideration of the Joint Motion By All Parties
and the Amici Curiae to Approve Settlement Agreement while the
case is on appeal to the Missouri Supreme Court. The Missouri
Attorney General filed a similar motion to stay seeking to limit
the actions of the Circuit Court. On March 24, 1999, the Missouri
Supreme Court declined the request of BCBSMo to grant a writ of
prohibition, and declined the request of the Missouri Attorney
General. The litigation, which remains on appeal to the Missouri
Supreme Court, was unaffected by the March 24, 1999, denial. The
litigation between the company and its affiliates and the State of
Missouri is described below. See "Litigation relating to the
Reorganization and Public Offering."
The principal terms of the amended settlement agreements include
the following:
* BCBSMo would, through a series of transactions, (i) transfer its
insurance-related assets, contracts and agreements and related
liabilities to a wholly owned subsidiary of the company; (ii)
convert to a for-profit corporation; (iii) reincorporate in
Delaware; and (iv) merge with the company. The outstanding common
stock of the resulting entity (referred to as new RightCHOICE)
would be owned approximately 20 percent by the company's current
public shareholders and approximately 80 percent by a charitable
foundation (which equals the current aggregate ownership interests
of the public shareholders and BCBSMo, respectively, in the equity
of the company).
* BCBSMo would pay approximately $12.75 million to the charitable
independent health care foundation (in addition to $175,000 paid
by RightCHOICE).
* The charitable independent health care foundation would be
required to liquidate its shares of new RightCHOICE stock over a
prescribed period of time not to exceed seven years under a
divestiture plan. The proceeds would be used for health care
purposes. The charitable independent health care foundation would
be required to reduce its ownership of new RightCHOICE stock to
less than 50 percent of the total outstanding stock of new
RightCHOICE within three years of the closing of the
reorganization, subject to possible extension, and to less than 20
percent of the total outstanding stock of new RightCHOICE within
five years of the closing of the reorganization, subject to
possible extension. The proceeds would be used for health care
purposes. All but up to 5 percent of the shares of new
RightCHOICE stock owned by the charitable independent health care
foundation would be subject to a voting trust that would, with
certain exceptions, effectively vest voting control of such shares
of new RightCHOICE stock owned by the charitable independent
health care foundation in the board of directors of new
RightCHOICE.
* The charter documents of new RightCHOICE would include the "basic
protections" required of all for-profit licensees by the Blue
Cross and Blue Shield Association (BCBSA) to insure independence
from the direction, control and influence of the charitable
foundation or any other shareholder. The "basic protections"
would include limitations on the amount of new RightCHOICE stock
that may be owned by certain categories of shareholders -- (i) no
"institutional" shareholder may own 10 percent or more of the
voting power of new RightCHOICE, (ii) no "non-institutional"
shareholder may own 5 percent or more of the voting power of new
RightCHOICE, and (iii) no shareholder may own 20 percent or more
of the equity of new RightCHOICE (with certain exceptions in the
case of the charitable independent health care foundation as
described above). Any shares owned by a shareholder in excess of
the applicable ownership limits could be redistributed by new
RightCHOICE.
The transactions contemplated by the amended settlement agreements
are subject to a number of significant conditions and
contingencies, including approval by the Circuit Court, various
regulators and the shareholders of the company, the receipt of
rulings from the IRS or tax opinions regarding the tax-free nature
of the transactions, and the satisfactory resolution of certain
other litigation involving the company and BCBSMo (including the
Sarkis Litigation described below, which was dismissed by the St.
Louis Circuit Court on November 4, 1998, but is on appeal). See
"Litigation relating to the Reorganization and Public Offering"
below. The amended settlement agreements provide that the company
and BCBSMo, together with the DOI and the Missouri Attorney
General, shall move in an appropriate court proceeding for
approval of the amended settlement agreements and the proposed
reorganization described therein. See "Litigation relating to the
Reorganization and Public Offering" below.
The summary of the amended settlement agreements is qualified in
its entirety by reference to the settlement agreements and the
amended settlement agreement and the related exhibits, which are
included as exhibits to the company's Current Reports on Form 8-K
filed with the SEC on September 23, 1998 and March 15, 1999,
respectively.
Appointment of Special Master
On April 22, 1998, the company, BCBSMo, the Missouri Attorney
General and the Director announced the conceptual framework for
the proposed settlement. Following that announcement, Judge Brown
of the Circuit Court indicated that he had substantial
reservations about the settlement as proposed in the conceptual
framework and that any final settlement would be scrutinized very
carefully.
On September 20, 1998, the settlement agreements were executed,
and courtesy copies were provided to the Circuit Court. BCBSMo
and the company together with the DOI and Missouri Attorney
General had intended to file a motion with the Circuit Court
seeking approval of the settlement agreements and the proposed
reorganization described therein, following the remand of the
litigation to the Circuit Court.
Notwithstanding the fact that the litigation had not yet been
remanded to the Circuit Court, on October 29, 1998, the Circuit
Court "acting on its own motion" issued an Order (the October 29
Order) in the litigation. The October 29 Order provided for,
among other things, the appointment of Robert G. Russell as
receiver/custodian pendente lite to, among other things, take
exclusive possession and control of all of the issued and
outstanding shares of the company's common stock owned by BCBSMo.
The October 29 Order cited concerns by the Circuit Court about the
fairness of the transactions set forth in the settlement
agreements, alleged conflicts of interest and the need for an
independent examination of the proposed settlement and related
issues. The October 29 Order also approved the engagement of
legal counsel and an investment banker to advise the
receiver/custodian. Had the October 29 Order not been void "from
the beginning" as described below, a number of significant and
adverse consequences would have resulted, including the automatic
termination of the company's Blue Cross and Blue Shield licenses
and a resultant event of default under the company's Credit
Agreement. A copy of the October 29 Order is attached as an
exhibit to the company's Current Report on Form 8-K filed with the
SEC on November 2, 1998.
On November 2, 1998, BCBSMo filed a motion to vacate the October
29 Order and supporting memorandum. BCBSMo alleged therein that
(i) the Circuit Court lacked jurisdiction to issue the October 29
Order because the case was still pending before the Missouri
Supreme Court; (ii) the Circuit Court issued the order without
notice and an opportunity to be heard; (iii) there were no exigent
circumstances that would warrant the appointment of a receiver
without due process; and (iv) the appointment of the receiver had
the effect of frustrating the purpose for which the receiver was
to be appointed, namely, the preservation of the nonprofit assets
of BCBSMo. Copies of the motion and memorandum are attached as
exhibits to the company's Current Report on Form 8-K filed with
the SEC on November 6, 1998.
On November 2, 1998, BCBSA filed a complaint against the company,
its subsidiaries and BCBSMo in the United States District Court
for the Northern District of Illinois alleging that the
appointment of the receiver/custodian pendente lite caused the
automatic termination of the licenses to use the Blue Cross and
Blue Shield service marks. The complaint alleged service mark
infringement and breach of license agreements as a result of the
company's continued use of the Blue Cross and Blue Shield service
marks following the issuance of the October 29 Order. The BCBSA
later dismissed its complaint (as described below under "Status of
Blue Cross and Blue Shield trademark licenses").
On November 4, 1998, the Circuit Court issued an Order (the
November 4 Order) vacating the October 29 Order and declaring it
to be void ab initio (or "from the beginning"). The Circuit
Court, in issuing the November 4 Order, acknowledged that the
significant and adverse consequences that could have resulted from
the October 29 Order were unintended. On November 4, 1998, the
Circuit Court also issued an Order (the November 4 Special Master
Order) appointing Robert G. Russell as special master for the
purpose of collecting and analyzing information related to the
proposed settlement. The November 4 Special Master Order also
approved the engagement of legal counsel and such financial
advisors as are approved by the court to advise the special
master. The effect of the November 4 Order was to void the
October 29 Order as if it never existed. The special master, at
that time, had expressed his interest in ensuring that the company
would continue its business in the normal course during his
review. Copies of the November 4 Order and the November 4 Special
Master Order are attached as exhibits to the company's Current
Report on Form 8-K filed with the SEC on November 6, 1998.
On November 6, 1998, the Circuit Court entered an Order of
Reference (the November 6 Order), among other things, directing
the special master to collect and analyze information as to the
options and alternatives available to the Circuit Court for
disposition of the remaining issues in the litigation, including,
but not limited to, an examination of the settlement agreements.
The special master was also directed to address several concerns
of the Circuit Court that were originally outlined in the October
29 Order. The special master was further directed to investigate
issues concerning the Blue Cross and Blue Shield licenses and
trademarks and the company's Credit Agreement. A copy of the
November 6 Order is attached as an exhibit to the company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
On November 19, 1998, the Blue Cross and Blue Shield license
agreements were reinstated with addenda that provided, among other
things, that the licenses would terminate on March 11, 1999,
unless extended by the Board of Directors of the BCBSA. On March
11, 1999, the BCBSA Board of Directors extended the licenses until
June 17, 1999. See "Status of Blue Cross and Blue Shield
trademark licenses" below.
As part of his investigation, the special master conducted a
series of public hearings on December 4, December 16, and December
22, 1998, and on February 4, 1999, where evidence related to the
proposed settlement and other subjects was presented. At the
public hearing on December 16, representatives of Blue Cross Blue
Shield of Kansas City presented an "alternative" to the proposed
settlement agreement by suggesting that the Kansas City plan would
acquire the assets of BCBSMo, including the stock it holds in the
company. The Kansas City plan's proposal provided for a purchase
price of $13.50 per share for the shares of the company held by
the public and $15.25 per share for the other shares held by
BCBSMo. The proposal included a number of conditions, such as a
financing contingency and an obligation that all litigation of
BCBSMo be resolved. This proposal was not made directly to the
company or BCBSMo.
Following the completion of the hearings and other investigation,
on February 10, 1999, the special master issued his 47-page report
(the report of the special master) which recommended that the
proposed settlement agreement "not be approved in its present
form" and that the Circuit Court "withhold a ruling on the
settlement agreement to give the parties and the amici curiae an
opportunity to meet and confer, and engage in a good faith effort
to address" concerns that were noted in the report of the special
master. While the special master stated that "there are many
things to commend the Settlement Agreement for the Court's
approval," he indicated he had concerns with its terms that
prevented him from recommending approval. Among the concerns he
identified in his report were:
* Whether the charitable independent health care foundation that
would be created if the settlement were implemented would
receive full value of the present assets of BCBSMo;
* Whether a contemplated method of divestiture of the new
RightCHOICE shares to be held by the charitable independent
health care foundation -- sale of the shares over time pursuant
to a Voting Trust and Divestiture Agreement and Registration
Rights Agreement -- would yield full value for the shares;
* Whether the proposed provisions for governance of the charitable
independent health care foundation were reasonable; and
* Whether the provisions for the purposes of the charitable
independent health care foundation were justified.
Following the report of the special master, the parties and the
amici curiae discussed the concerns noted therein. On March 12,
1999, the company, BCBSMo, the Missouri Attorney General, and the
DOI entered into an Amendment to Settlement Agreement (the
amendment). The parties to the settlement agreements, together
with certain consumer groups that had participated in the public
hearings, filed with the Circuit Court a joint motion seeking
approval of the amended settlement agreements.
On March 12, 1999, the parties also filed with the Circuit Court
their respective objections and comments to the report of the
special master. In its objections, BCBSMo asserted that the
special master made certain erroneous factual and unjustified
legal conclusions in the report and requested the Circuit Court to
approve the amended settlement agreements.
At an informal hearing on March 15, 1999, Judge Brown expressed
continued concern about the amended settlement agreements. In
response, BCBSMo and the Missouri Attorney General separately
petitioned the Missouri Supreme Court to enter an order and stay,
respectively, limiting the actions of the Circuit Court to the
consideration of the amended settlement agreements. On March 24,
1999, the counsel to the special master, on behalf of the Circuit
Court, responded to the applications of BCBSMo and the Missouri
Attorney General to the Missouri Supreme Court requesting
additional time to respond more fully to the application and
indicating that the requested writ was not necessary or
appropriate. On March 24, 1999, the Missouri Supreme Court
declined the request of Blue Cross and Blue Shield of Missouri and
the motion of the Missouri Attorney General.
There can be no assurance that the transactions contemplated by
the amended settlement agreements will receive the necessary court
approval, that all conditions and contingencies included in the
amended settlement agreements will be satisfied, or that the
transactions set forth in the amended settlement agreements will
be effected. The failure to consummate the transactions
contemplated by the amended settlement agreements could have a
material adverse effect on the company and the market for its
stock.
The summary of the Circuit Court's Orders set forth herein is
qualified in its entirety by reference to the Orders, which are
included as exhibits to the company's Current Report on Form 8-K
filed with the SEC on November 2, 1998, and November 6, 1998, and
the company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
The litigation described below under the captions "Litigation
relating to the Reorganization and Public Offering," "Litigation
relating to corporate status of BCBSMo" and "Litigation relating
to the Market Conduct Study and Copayment Calculations" would be
settled in the event that the transactions contemplated by the
amended settlement agreements are consummated. There can be no
assurance, however, that such transactions will be consummated.
Failure to do so or to otherwise resolve the litigation described
below in a manner satisfactory to the company could have a
material adverse effect on the company and the market for its
stock.
Litigation relating to the Reorganization and Public Offering
As described above, in August 1994, BCBSMo effectuated the
Reorganization and Public Offering. Although the Director
formally approved the Reorganization and Public Offering on April
14, 1994, the Director and the DOI subsequently claimed that the
Reorganization and Public Offering violated Missouri state laws
and that BCBSMo was obligated to transfer all of its assets,
including all of the stock of the company, to the State of
Missouri or a charity designated by the State of Missouri. The
Director and the DOI threatened to bring legal action, seek a
receivership, or terminate BCBSMo's insurance license unless
BCBSMo surrendered its assets.
BCBSMo's extensive efforts to resolve the dispute without
litigation were unsuccessful. On May 13, 1996, BCBSMo filed a
declaratory judgment action in the Circuit Court against the
Director, the DOI and the Missouri Attorney General (the Missouri
Attorney General was a necessary party due to his sole authority
to enforce nonprofit corporation laws). The action sought a
declaratory judgment that BCBSMo followed all applicable laws and
regulations in the Reorganization and Public Offering resulting in
the creation of the company. It also sought a permanent
injunction forbidding the DOI from refusing to renew BCBSMo's
license or taking other administrative action against BCBSMo to
pressure it into paying a "toll charge" or "charitable asset
assessment" or any other fee as a result of the Reorganization and
Public Offering.
On June 13, 1996, the Director and the DOI filed an answer and
counterclaims. The answer set forth several affirmative defenses,
including alleged fraud and negligent misrepresentation with
respect to the application filed by BCBSMo seeking approval of the
Reorganization and Public Offering. The counterclaims alleged
violations of certain health services corporation and nonprofit
corporation statutes. The Director's and the DOI's counterclaims
sought, among other things: (i) permanent injunctions against
BCBSMo; (ii) imposition of a trust on BCBSMo's assets for public
benefit purposes; (iii) return of profits from Medigap policies
reinsured with a subsidiary; and (iv) an accounting of all assets
transferred by BCBSMo.
On June 20, 1996, the Missouri Attorney General filed an answer
and counterclaim alleging that the Reorganization and Public
Offering, and its continued operations through the company and its
subsidiaries, exceeded BCBSMo's statutory purposes. The Missouri
Attorney General requested a declaration that BCBSMo exceeded its
lawful authority and sought such relief as the Circuit Court would
determine to be appropriate under the circumstances based on a
statute that authorizes judicial dissolution or less drastic
alternative relief in the Circuit Court's discretion.
On September 9, 1996, the Circuit Court granted BCBSMo's motion
for summary judgment against the Director and the DOI, rejected
all of the Director's and the DOI's affirmative defenses
(including allegations of fraud), issued a permanent injunction
against the Director and the DOI and declared that: (i) under
Missouri law the Director and the DOI had no authority to demand
that BCBSMo make a payment as a result of the Reorganization and
Public Offering; (ii) under Missouri law the Director and the DOI
had no jurisdiction to take any action, the practical effect of
which would be to amend, modify or reverse the Director's April
14, 1994, final administrative approval of the Reorganization and
Public Offering; (iii) under Missouri law, the Director and the
DOI had no jurisdiction to take any administrative action,
including but not limited to, revoking, suspending or refusing to
renew BCBSMo's Certificate of Authority based in any way on the
Reorganization and Public Offering or BCBSMo's refusal to make
payment as the Director and the DOI had demanded; and (iv) (A)
BCBSMo was a mutual benefit type of nonprofit corporation rather
than a public benefit type of nonprofit corporation; (B) the
Reorganization and Public Offering were authorized under all laws
applicable to nonprofit health services corporations; and (C)
BCBSMo did not owe the State or any person or entity a "toll
charge," "charitable asset settlement" or any other payment as a
result of the Reorganization and Public Offering (the September 9
Order). On December 30, 1996, the Circuit Court issued orders
(described more fully below) modifying the findings and
declarations set forth in (iv) above, on the grounds that it was
legally unnecessary to resolve such issues because the Circuit
Court had already ruled against the Director and the DOI for other
reasons.
The September 9 Order permanently enjoined the Director and the
DOI from, among other things, (i) revoking, suspending or refusing
to renew BCBSMo's insurance license based in any part upon the
Reorganization and Public Offering; (ii) commencing a valuation of
BCBSMo's assets and demanding a payment as a result of the
Reorganization and Public Offering; (iii) commencing any
administrative hearing or making any administrative determination
based in any part upon the Reorganization and Public Offering;
(iv) instituting any seizure, receivership, conservatorship or
similar action or proceeding against BCBSMo based in any part upon
the Reorganization and Public Offering; and (v) taking any other
action, however denominated, against BCBSMo based in any part upon
the Reorganization and Public Offering. Although the injunctive
relief described above remains in place, the Circuit Court's
December 30 Orders (described below) clarify that the injunction
does not prohibit the Director and the DOI from asserting that the
post-Reorganization and Public Offering operations of BCBSMo may
violate the health services corporation laws (even though such
operations may have been affected by the Reorganization and Public
Offering).
On August 28, 1996, the Director and the DOI filed an amended
answer asserting a new counterclaim that the Reorganization and
Public Offering were not reasonably designed to serve any of
BCBSMo's purposes as a health services corporation and sought a
declaration that BCBSMo had exceeded or abused the authority
conferred upon it by law. Under this counterclaim, the Director
and the DOI sought an order to rehabilitate BCBSMo or, in the
alternative, injunctive relief.
On October 18, 1996, the Missouri Attorney General filed a motion
for leave to file an amended counterclaim against BCBSMo that
sought a declaration that BCBSMo was a public benefit corporation,
not a mutual benefit corporation, and requested an order that
BCBSMo amend its Articles of Incorporation accordingly. The
Circuit Court granted the Missouri Attorney General's motion for
leave to file the amended counterclaim, which remains pending.
On December 30, 1996, the Circuit Court issued five orders (the
December 30 Orders): (i) denying BCBSMo's motion for summary
judgment against the Missouri Attorney General; (ii) granting the
Missouri Attorney General's motion for partial summary judgment
against BCBSMo; (iii) denying BCBSMo's supplemental motion for
summary judgment against the Director and the DOI on their amended
counterclaim; (iv) granting the Director's and the DOI's motion
for summary judgment against BCBSMo on their amended counterclaim;
and (v) modifying, in part, the Circuit Court's previous September
9 Order. The December 30 Orders declared that (i) BCBSMo had
continued to exceed or abuse its statutorily permissible purposes
and the authority conferred on it by law; and (ii) BCBSMo is
subject to judicial dissolution proceedings, but that prior to
ordering dissolution, the Circuit Court is required to consider
whether there are alternatives to dissolution and whether
dissolution is in the public interest or is the best way of
protecting the interests of its members.
The Circuit Court also (i) certified the December 30 Orders and
the September 9 Order, as modified, for immediate appeal; (ii)
held in abeyance further proceedings on the Missouri Attorney
General's counterclaim pending appeal; and (iii) stayed the legal
effect of the order granting the Director and the DOI summary
judgment pending the filing of an appeal bond (which BCBSMo
promptly filed).
On August 4, 1998, the Missouri Court of Appeals entered its
opinion affirming the judgments entered December 30, 1996.
On September 20, 1998, the company and certain of its affiliates
entered into various settlement agreements with the Missouri
Attorney General and certain state agencies, including the DOI.
The settlement agreements, as amended, are described above under
"Status of Proposed Settlement Agreements." If consummated, the
amended settlement agreements would resolve the outstanding
litigation and regulatory disputes between the company and its
affiliates and the State of Missouri, including the litigation
related to the Reorganization and Public Offering, and create a
charitable independent health care foundation.
On November 4, 1998, the Circuit Court appointed the special
master. Matters with respect to the special master are described
above under "Appointment of Special Master."
On November 24, 1998, the Supreme Court of Missouri granted the
motion of BCBSMo to accept transfer of the litigation related to
the Reorganization and Public Offering and, as a result of this
action, the opinion of the Missouri Court of Appeals dated August
4, 1998, (referred to above) has been vacated. The Missouri
Supreme Court will decide the appeals as if they were original
appeals in that Court.
The Supreme Court of Missouri subsequently stayed the briefing
schedule in the proceedings before it in order to permit the
proceedings in the Circuit Court concerning review of the
settlement agreements to go forward.
During an informal status hearing of the Circuit Court on March
15, 1999, Judge Brown stated on the record that he has continued
concerns about the amended settlement agreements. In response to
those comments, on March 19, 1999, BCBSMo petitioned the Missouri
Supreme Court to enter an Order of Prohibition directed to Judge
Brown to limit his actions in the litigation to the consideration
of the amended settlement agreements while the case is on appeal
to the Missouri Supreme Court. The Missouri Attorney General
filed a similar motion to stay seeking to limit the actions of the
Circuit Court. On March 24, 1999, the Missouri Supreme Court
declined the request of BCBSMo to grant a writ of prohibition, and
the request of the Missouri Attorney General. The litigation,
which is on appeal to the Missouri Supreme Court, was unaffected
by the March 24, 1999 denial.
Subscriber class action litigation
On March 15, 1996, a suit (the Sarkis Litigation) was filed in the
Circuit Court of the City of St. Louis, Missouri (the St. Louis
Circuit Court), by Anthony J. Sarkis, Sr. and James Hacking
individually and on behalf of a purported class of (i) subscribers
in individual or group health plans insured or administered by
BCBSMo or the company, and (ii) all persons and/or entities who
benefited from BCBSMo's tax-exempt status (the Sarkis plaintiffs).
The petition named the company, BCBSMo, HealthLink, Inc.
(HealthLink, a subsidiary of the company), and certain officers of
the company as defendants. The named plaintiffs later abandoned
their claim to represent all persons or entities that benefited
from BCBSMo's tax-exempt status.
The Sarkis plaintiffs' claims relate to an alleged conversion of
BCBSMo from a not-for-profit entity to a for-profit entity and
payment of excessive compensation to management. The petition
further alleges that certain amendments to BCBSMo's Articles of
Incorporation were improper. The petition also alleges the
purchase of HealthLink was at an excessive price and that
HealthLink operates under contracts providing for illegal
discounts by health care providers. The Sarkis plaintiffs sought
restitution, compensatory damages and punitive damages in
unspecified amounts, as well as injunctive and other equitable
relief.
On November 4, 1998, the St. Louis Circuit Court issued its
judgment and order granting the motion of the defendants to
dismiss the action for lack of standing and entering judgment in
favor of the defendants. The Sarkis plaintiffs appealed the St.
Louis Circuit Court's order.
The Sarkis plaintiffs have also filed a motion to intervene in the
actions described above under "Litigation relating to the
Reorganization and Public Offering" and below under "Litigation
relating to corporate status of BCBSMo."
The obligations of the parties to consummate the transactions
contemplated by the amended settlement agreements are conditioned
upon, among other things, satisfactory final resolution of the
Sarkis Litigation.
Litigation relating to corporate status of BCBSMo
On November 3, 1997, BCBSMo filed an action in the Circuit Court
against the Missouri Attorney General seeking declarations that
(1) BCBSMo is a mutual benefit type of nonprofit corporation under
Chapter 355 of the Missouri Revised Statutes; and (2) BCBSMo does
not hold its assets in constructive, charitable, or other trust
for the benefit of the public generally, but rather holds its
assets for the benefit of its subscribers. The action was filed
in response to continued public and private statements by the
Missouri Attorney General, the DOI and others that BCBSMo was a
public benefit type of nonprofit corporation that held its assets
for the benefit of the public generally. The Missouri Attorney
General has filed an answer and counterclaim seeking a declaration
that BCBSMo is a public benefit type of nonprofit corporation.
On June 10, 1998, Anthony Sarkis and James Hacking (plaintiffs in
the Sarkis Litigation described above under "Subscriber class
action litigation") moved to intervene in this action as
plaintiffs. Sarkis and Hacking are or have been subscribers of
BCBSMo. They sought to intervene, contending that the present
parties to the action would not adequately represent their
interests in the resolution of the question whether BCBSMo is a
public benefit or a mutual benefit corporation. Thereafter,
BCBSMo moved to file an amended petition adding Sarkis, Hacking
and the Director of the DOI as parties to the action. For its
relief, BCBSMo sought a declaration of its status as a public
benefit or mutual benefit corporation. The Circuit Court granted
BCBSMo's motion to file the amended petition on August 17, 1998.
On September 16, 1998, Sarkis and Hacking filed an application for
change of judge under Missouri civil court procedure. They
contended that they were entitled as of right to disqualify Judge
Brown from further proceedings in the action. The Attorney
General resisted this application. On October 15, 1998, Judge
Brown denied the motion to disqualify himself. He directed the
parties to prepare a discovery schedule that would have had this
lawsuit prepared for trial by December 21, 1998, which was
subsequently extended.
On November 5, 1998, Sarkis and Hacking filed an application with
the Missouri Court of Appeals seeking to prohibit Judge Brown from
proceeding further in the case. The Missouri Court of Appeals
denied that application. Sarkis and Hacking then applied to the
Supreme Court of Missouri, which also denied their application.
This litigation remains pending before Judge Brown and discovery
is underway.
If BCBSMo is declared to be a mutual benefit type of nonprofit
corporation that does not hold its assets for the benefit of the
public generally, BCBSMo would be required to exercise its
ownership interest in the company consistent with the best
interests of BCBSMo's subscribers, subject to any final rulings
made in the litigation described elsewhere herein. If BCBSMo is
declared to be a public benefit type of nonprofit corporation or
if it is declared that BCBSMo holds assets for the benefit of the
public generally, BCBSMo would be required to exercise its
ownership interest in the company consistent with the best
interests of the public at large. In either event, BCBSMo could
be dissolved, or required to dispose of some or all of the
company's shares of Class B Common Stock at times and in
quantities that could be detrimental to the market for the
company's stock. Also, either the DOI or the Missouri Attorney
General could take actions against BCBSMo based upon such
declarations (such as seeking the appointment of a receiver to
safeguard assets, which, like dissolution, could result in the
termination of the company's licenses to use the Blue Cross and
Blue Shield trade names and service marks and trigger a
termination fee and a notice to members thereunder) which, if
successful, could have a material adverse effect upon the company
and the market for its stock. See "Status of Blue Cross and Blue
Shield trademark licenses."
Litigation relating to the Market Conduct Study and Copayment
Calculations
In April 1996, the DOI issued a market conduct report to the
company. The report cited the company and BCBSMo for not
complying with certain insurance statutes and regulations,
including those that relate to the Small Employer Health Insurance
Availability Act, coordination of benefits and copayment
calculations. The company responded to the report in May 1996.
The company and the DOI have had discussions relating to the
issues contained in the report from May 1996 to February 1998. On
February 11, 1998, the DOI filed a Notice of Institution of Case
requesting the Director to issue a cease and desist order, an
order requiring the payment of a monetary penalty, an order to
cease marketing and/or an order suspending or revoking the
certificate of authority of the company and BCBSMo. The company
has alleged in the action described above under "Litigation
relating to the Reorganization and Public Offering" that the
market conduct study was not conducted for legitimate purposes of
regulatory oversight but rather as a pretext to either revoke or
refuse to renew BCBSMo's license to operate as a health services
corporation and thus to improperly pressure and coerce BCBSMo in
connection with the litigation described above under "Litigation
relating to the Reorganization and Public Offering." The DOI has
stated that the company should refund excess premium payments to
the small groups, pay additional refunds to members for copayment
calculations made prior to January 1996, and take certain actions
relating to coordination of benefits. The issue relating to the
manner in which the company calculated copayment amounts prior to
January 1996 was the subject of a class action suit, titled Kelly
v. Blue Cross and Blue Shield of Missouri, and subsequent
settlement. BCBSMo settled the case in 1995 and paid the majority
of the total settlement amount of $5 million. The company
believes it has resolved this issue through the court-approved
class action settlement and intends to vigorously defend this
action if required. The DOI has issued a stay of the market
conduct proceeding pending approval of the amended settlement
agreements described above.
On February 9, 1998, the Missouri Attorney General filed suit
against the company, BCBSMo, BlueCHOICE, Healthy Alliance Life
Insurance Company (HALIC, a subsidiary of the company), and
Preferred Health Plans of Missouri, Inc. (a subsidiary of the
company) in the Circuit Court seeking injunctive relief,
compensatory damages and civil penalties under Missouri's
Merchandising Practices Act for the way in which the company
disclosed and marketed copayment amounts prior to January 1996.
The factual allegations in the Missouri Attorney General's suit
are the same as the copayment issues in the DOI Market Conduct
Study Action and the same issue that was the subject of a court-
approved class action suit settlement in the Kelly v. Blue Cross
and Blue Shield of Missouri case. The company discontinued the
copayment practices in January 1996. The company believes it has
already paid the restitution damages requested in the settlement
of the class action suit. BCBSMo and the company believe the
claims are without merit and intend to vigorously defend the
action if required. This action was dismissed by the Missouri
Attorney General without prejudice pending the approval of the
amended settlement agreements described above.
Status of Blue Cross and Blue Shield trademark licenses
On March 11, 1999, the Board of Directors of the BCBSA unanimously
voted to extend the company's licenses to use the Blue Cross and
Blue Shield service marks until June 17, 1999 (the date of the
next scheduled meeting of the Board of Directors of BCBSA). At a
meeting held on November 19, 1998, the Board of Directors of BCBSA
had approved the reinstatement, effective as of October 29, 1998,
of the licenses to use the Blue Cross and Blue Shield service
marks, granted to the company, BCBSMo, and two wholly owned
subsidiaries of the company, HALIC and BlueCHOICE (the licensed
affiliates). The approval clarified the rights of the company and
its licensed affiliates to continue uninterrupted the use of the
service marks following actions taken by the BCBSA which resulted
from the October 29 Order.
The October 29 Order (as described above under "Appointment of
Special Master") provided for the appointment of Robert G. Russell
as receiver/custodian pendente lite to, among other things, take
exclusive possession and control of all of the issued and
outstanding shares of the company's Class B Common Stock, all of
which is owned by BCBSMo. On November 2, 1998, the BCBSA notified
the company and its licensed affiliates that their licenses to use
the Blue Cross and Blue Shield service marks had terminated
automatically pursuant to their terms on October 29, 1998, as a
result of the October 29 Order, and filed a Complaint against the
company and its licensed affiliates alleging inter alia service
mark infringement and breach of license agreements as a result of
the continued use of the service marks following the issuance of
the October 29 Order (the BCBSA Complaint). On November 4, 1998,
after BCBSMo filed a motion to vacate the October 29 Order and
supporting memorandum, the Circuit Court issued the November 4
Order and the November 4 Special Master Order. The November 4
Order set aside the October 29 Order and declared it to be void ab
initio, or "void from the beginning." The November 4 Special
Master Order appointed Robert G. Russell as special master for
the purpose of collecting and analyzing information related to the
proposed settlement of the litigation described above. On
November 6, 1998, the Court issued an Order of Reference for the
special master. As a result of the November 4 Order, the BCBSA
agreed to dismiss the BCBSA Complaint.
Each of the reinstated license agreements approved by the BCBSA on
November 19, 1998 included an addendum that provided, among other
things, that the licenses granted under such license agreements
would be reviewed by the BCBSA at the next regularly scheduled
meeting of the BCBSA Board of Directors (originally, March 11,
1999, and pursuant to an extension, June 17, 1999). If on or
before such date, the BCBSA did not extend the termination dates
for the license agreements until the next regularly scheduled
meeting of the BCBSA Board of Directors after such date, or
otherwise modify the addenda, the license agreements would have
terminated. This "board-to-board" extension of the license
agreements has been adopted in conjunction with the issuance of
reinstated licenses granted to other BCBSA licensees following a
license termination. There can be no assurances that the BCBSA
will take the necessary and appropriate action to extend the
license agreements beyond June 17, 1999, or any time thereafter.
The licenses of the company and its licensed affiliates, and the
addenda thereto effective as of October 29, 1998, are attached as
Exhibits 10.6.5 - 10.13.4 to the company's Current Report on Form
8-K filed with the SEC on November 24, 1998.
The licenses (which include the primary licenses granted to BCBSMo
and the controlled affiliate licenses to the company, HALIC and
BlueCHOICE) give these companies the right to use the Blue Cross
and Blue Shield names, trademarks and service marks in connection
with health insurance products marketed and sold in BCBSMo's
licensed operating area (consisting of 85 counties in eastern and
central Missouri). The licenses require BCBSMo, the company and
the licensed affiliates to pay license fees to BCBSA for the use
of the trademarks.
In January 1997, interim and temporary licenses were granted to
BCBSMo and its affiliates after notification by the BCBSA that the
prior licenses had automatically terminated in connection with the
litigation relating to the Reorganization and Public Offering
described above under "Litigation relating to the Reorganization
and Public Offering" (the Litigation). The interim and temporary
licenses were later replaced by reinstated full licenses granted
in March 1998.
Each of the licenses provides that it automatically terminates if,
among other things: (i) the DOI or another regulatory agency
assumes control of the licensee or delinquency proceedings are
instituted; (ii) a trustee, interim trustee, receiver or other
custodian for any of BCBSMo's or the BCBSA's property or business
is appointed, or (iii) an action is instituted by any governmental
entity or officer against the licensee seeking dissolution or
liquidation of its assets or seeking the appointment of a trustee,
interim trustee, receiver or custodian for any of its property or
business, which is consented or acquiesced to by the licensee or
is not dismissed within 130 days of the licensee being served with
the pleading or document commencing the action, provided that if
the action is stayed or its prosecution enjoined, the 130-day
period is tolled for the duration of the stay or injunction, and
provided further that the BCBSA's Board of Directors may toll or
extend the 130-day period at any time prior to its expiration.
Each trademark license also provides that it may be terminated by
BCBSA if, among other things, the licensee fails to meet certain
quality control standards or minimum capital or liquidity
requirements. Pursuant to the Addendum, which became part of the
reinstated license agreements following the November 19, 1998
BCBSA Board meeting, an automatic termination will also occur (i)
if the BCBSA Board does not take action to extend the licenses on
or before June 17, 1999, the date of the next regularly scheduled
BCBSA Board meeting, and (ii) upon any judicial act that (a)
provides for or approves a transaction pursuant to which a person,
entity or group other than the licensees of BCBSA, acquires the
ability to select the majority of the members of the Board of
Directors of BCBSMo, the company or certain of its affiliates or
otherwise gains control of BCBSMo, the company or such affiliates,
or (b) changes the composition of, or the voting rights of the
members of the Board of Directors of BCBSMo, the company or such
affiliates. The foregoing provision does not apply to a
settlement or resolution of the Litigation that complies with all
BCBSA rules, regulations and standards and is approved by or
conditioned on the approval of the BCBSA. In addition, the
licenses may be terminated if BCBSMo, the company, or certain
subsidiaries of the company are unable to achieve certain
financial benchmarks as required by the BCBSA.
The affiliate licenses are derivative of the primary licenses and
automatically terminate if the primary licenses terminate.
According to their terms, if a license is terminated, BCBSMo, the
company and its controlled affiliates are jointly liable to BCBSA
for payment of a termination fee in an amount equal to $25 times
the number of licensed enrollees of the terminated entity and its
licensed controlled affiliates, and must give written notice of
such termination to their enrollees. The termination fee is
reduced in accordance with a formula set forth in the primary
licenses if another plan is licensed by BCBSA in BCBSMo's
exclusive service area. In connection with the reinstatement
described above, the BCBSA waived the application of these
provisions to the alleged automatic termination resulting from the
entry of the October 29 Order.
In March 1998, BCBSMo and BCBSA agreed that the primary licenses
were reinstated as if a suit seeking dissolution had been served
on BCBSMo but the 130-day period for automatic termination
described above was tolled. The tolling was to continue for as
long as the stay entered in the Litigation remained in full force
and effect. Under the Addendum that became part of the reinstated
license agreements at the November 19, 1998 BCBSA Board meeting,
the automatic termination provision relating to the stay would no
longer be controlling; rather, the licenses are on a "board-to-
board" basis, which means that on or before the next regularly
scheduled meeting of the BCBSA Board (expected to be held on June
17, 1999) the Board must take action to extend the licenses or
else the licenses will automatically terminate on June 17, 1999.
There can be no assurances that the BCBSA Board will take the
action necessary to extend the licenses on or before the June 17,
1999 meeting as part of the "board-to-board" review.
The company believes that the exclusive right to use the Blue
Cross and Blue Shield trademarks provides it and its controlled
affiliates with a significant marketing advantage in BCBSMo's
licensed operating area, the loss of which would have a material
adverse effect on the company and the market for its stock. In
addition, the loss of the licenses would be an event of default
under the company's Credit Agreement which, if not waived or
otherwise addressed, could result in a material adverse effect on
the company and the market for its stock.
In connection with the amended settlement agreements described
above under "Status of Proposed Settlement Agreements," BCBSMo and
the company have filed a request with the BCBSA to transfer its
primary license to new RightCHOICE as part of the transactions
contemplated by the amended settlement agreements. The BCBSA has
conditionally approved the transfer as proposed. There can be no
assurance that the transactions contemplated by the amended
settlement agreements will receive the necessary court approval as
an acceptable alternative to dissolution of BCBSMo, that all
conditions and contingencies included in the amended settlement
agreements will be satisfied, or that the transactions set forth
in the amended settlement agreements will be effected. The
failure to consummate the transactions contemplated by the amended
settlement agreements could have a material adverse effect on the
company and the market for its stock.
Other contingencies
In addition to the matters described above, from time to time in
the ordinary course of business, the company and certain of its
subsidiaries are parties to various legal proceedings, many of
which involve claims for non-covered services. The company, like
health insurers and HMOs generally, provides health insurance
coverage for health care services rendered in conformity with its
health plan design of benefits. The company is, in its ordinary
course of business, subject to the claims of its members arising
from health plan benefit coverage issues for certain services.
The loss of even one such claim, if it results in a significant
punitive damage award, could have a material adverse effect on the
company.
In addition, the risk of potential liability under punitive damage
theories may significantly increase the difficulty of obtaining
reasonable settlements for coverage-related claims. However, the
financial and operational impact that such evolving theories of
recovery will have on the managed care industry generally, or the
company in particular, is presently unknown.
3. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB)
released Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. Earlier application of SFAS No.
133 is encouraged but should not be applied retroactively to
financial statements of prior periods. The company believes that
the adoption of SFAS No. 133 will not have a material impact on
the company's financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee
(AcSEC) issued Statement of Position (SOP) 98-1, "Accounting for
Computer Software Developed For or Obtained For Internal Use,"
which is effective for fiscal years beginning after December 15,
1998. The SOP requires preliminary stage project costs to be
expensed as incurred. Once a project is in the application
development stage, the SOP requires all external direct costs for
materials and services and payroll and related fringe benefit
costs to be capitalized, and subsequently amortized over the
estimated useful life of the project. The company believes that
the adoption of SOP 98-1 will not have a material impact on the
company's financial position or results of operations.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs
of Start-up Activities," which is effective for fiscal years
beginning after December 15, 1998. The SOP requires that certain
costs of start-up activities, including organization costs, should
be expensed as incurred. The company has adopted SOP 98-5 in the
first quarter of 1999 and this adoption did not have a material
impact on the company's financial position or results of
operations.
4. Provision for Income Taxes
The company's effective income tax rates of 36.1 percent and 53.0
percent for the first quarters of 1999 and 1998, respectively,
presented in the Consolidated Statements of Income were affected
by non-deductible goodwill amortization. In addition, during the
first quarter of 1999, the company reversed its deferred tax asset
valuation allowance of $112,000. Based upon all the available
evidence, management believes that it is more likely than not that
the company will realize all of its deferred tax assets, and
accordingly, no valuation allowance has been provided against such
assets as of March 31, 1999. In addition, in the first quarter of
1999, the company's state income tax provision was favorably
impacted due to a change in the filing status for the State of
Missouri.
5. Earnings Per Share
Basic earnings per share are computed by dividing net income by
the weighted average number of common and common equivalent shares
outstanding during the year. Diluted earnings per share are
calculated by dividing net income by the number of weighted
average shares outstanding plus additional shares representing
stock distributable under stock-based compensation plans using the
treasury stock method. For the first quarter of 1999 and 1998,
there were 62,653 and 55, respectively, of dilutive potential
common shares that were added to the weighted average number of
shares outstanding in order to compute diluted earnings per share.
6. Comprehensive Income
The components of other comprehensive income for the three month
periods ended March 31, 1999 and 1998 are as follows:
1999 1998
(in thousands)
Unrealized holding losses arising
during period, net of taxes $(1,723) $ (891)
Less: reclassification adjustment for
gains included in net income, net of taxes (167) (361)
Net unrealized losses on securities $(1,890) $(1,252)
7. Segment information
The company operates in two segments which it defines as
underwritten and self-funded. The company's underwritten segment
includes a comprehensive array of products including PPO, POS,
HMO, Medicare supplement, managed indemnity and specialty managed
care coverages. The company's self-funded segment includes TPA
and ASO services for self-insured organizations. All of the
company's revenues, both underwritten premiums and self-funded
fees and other income, are derived from domestic (United States)
sources and no single customer accounts for more than 10 percent
of total revenues.
Operating income for the company's underwritten segment is
determined by deducting from premium revenue the health care
service costs, commissions, and general and administrative
expenses, as well as any non-recurring charges, that are
attributable to that segment's operations. Operating income for
the self-funded segment is determined by deducting from fees and
other income the commissions, general and administrative expenses
and non-recurring charges attributable to the segment. Expenses
not directly traceable to an industry segment are allocated on a
consistent and reasonable basis utilizing membership, groups,
claims, and other key drivers. Corporate identifiable assets by
segment include only receivables from members since the company
does not produce more detailed information by segment internally.
Intersegment revenues are not material. Financial information by
segment is as follows (in thousands):
Quarter ended March 31, 1999 Underwritten Self-funded Consolidated
Revenues $179,218 $ 20,795 $200,013
Operating (loss) income (2,185) 6,787 4,602
Depreciation and amortization expense 2,871 1,323 4,194
Identifiable assets 48,552 24,063 72,615
Quarter ended March 31, 1998 Underwritten Self-funded Consolidated
Revenues $173,708 $ 18,144 $191,852
Operating (loss) income (6,544) 5,295 (1,249)
Depreciation and amortization expense 3,294 1,309 4,603
Identifiable assets 43,491 17,957 61,448
8. Change in estimate
Based upon management's periodic review of the useful lives of its
various assets, the company's estimate of the useful life of
various modules of its capitalized software changed from 5 years
to 7 years. Consequently, effective with the beginning of 1999,
the company utilized these new estimated lives for amortizing the
applicable capitalized software assets. Management believes that
this change will more appropriately match the amortization expense
of the software with the periods in which the software is
utilized. This change in estimate on an after-tax basis resulted
in an increase to the company's net income for the first quarter
of 1999 of approximately $0.6 million, or $0.03 per share.
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS
REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS,
FINANCIAL CONDITION OR BUSINESS COULD DIFFER MATERIALLY FROM ITS
HISTORICAL RESULTS, FINANCIAL CONDITION OR BUSINESS, OR THE
RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS
CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT
MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
BUSINESS."
The following table sets forth premium revenue by product group
for the three month periods ended March 31, 1999 and 1998
(unaudited):
Three Months Ended
March 31,
Product Group 1999 1998
(in thousands)
PPO:
Alliance PPO $ 50,156 $ 47,990
AllianceChoice POS 40,118 36,112
HMO (includes other POS) 53,502 52,325
Medicare supplement 23,588 24,193
Managed indemnity 951 2,368
Other specialty services 10,903 10,706
Total premium revenue 179,218 173,694
ASO/Self-funded and other income 20,795 18,158
Total revenues $200,013 $191,852
The following table sets forth selected operating ratios. The
medical loss ratio is shown as a percentage of health care
services expense over premium revenue. All other ratios are shown
as a percentage of premium revenue and fees and other income
combined:
Three Months Ended
March 31,
1999 1998
Operating revenues:
Premium revenue 89.6% 90.5%
Fees and other income 10.4% 9.5%
100.0% 100.0%
Operating expenses:
Medical loss ratio 81.9% 83.2%
Commission expense 4.0% 4.0%
General and administrative expense
(includes depreciation and amortization) 20.4% 21.3%
Adjusted general and administrative expense
(excludes depreciation and amortization) 18.3% 18.9%
Membership
The following table sets forth membership data and the
percent change in membership:
March 31,
Product Group 1999 1998 %
Underwritten:
PPO:
Alliance PPO 143,196 147,400 (2.9)%
AllianceChoice POS 124,746 132,800 (6.1)
HMO:
Commercial (includes other POS) 126,187 132,599 (4.8)
BlueCHOICE Senior 5,283 5,707 (7.4)
Medicare supplement 56,436 60,537 (6.8)
Managed indemnity 2,078 6,181 (66.4)
457,926 485,224 (5.6)
Self-funded:
PPO 45,951 46,451 (1.1)
HMO 7,519 13,622 (44.8)
ASO (includes HealthLink):
Workers' Compensation 457,000 366,532 24.7
Other ASO* 1,171,898 1,085,962 7.9
Total Membership 2,140,294 1,997,791 7.1%
* does not include 430,551 and 478,902 as of March 31, 1999 and
March 31, 1998, respectively, relating to additional third-party
administrator members that are part of The EPOCH Group, L.C.
(Epoch), a joint venture with Blue Cross and Blue Shield of Kansas
City formed in December 1995.
Comparison of Results for First Quarter 1999 to First Quarter 1998
Revenues
Premium revenue increased 3.2 percent in the first quarter of 1999
in comparison to the first quarter of 1998. As described below,
components of premium revenue were affected by shifts in product
mix, rate increases, and other factors, and as a result, such
changes may not be indicative of future periods. The company will
continue to strive to establish its commercial premium rates based
on anticipated health care costs. Depending on the level of
future competition, customer acceptance of the company's premium
increases, future health care cost trends or other factors, there
can be no assurance that the company will be able to price its
products consistent with health care cost trends.
PPO revenues increased $6.2 million - - $10.5 million due to a
12.2 percent increase in net premium rates partially offset by a
$4.3 million decrease resulting from a 4.3 percent decrease in
member months. Net rates increased due in part to the company's
targeted general group renewal rate increases averaging 7 percent
to 18 percent during enrollment periods in the last three quarters
of 1998 and the first quarter of 1999. Alliance PPO membership
decreased by 4,204 members from March 31, 1998 to March 31, 1999
while AllianceChoice POS membership decreased by 8,054 over the
same time period. Net membership decreases are due primarily to
the company's aforementioned pricing strategy during 1999. The
company also began offering PPO products in Illinois at the end of
the first quarter of 1997. Included in the Alliance PPO member
count are 8,500 PPO Illinois members as of March 31, 1999, an
increase of 5,200 from March 31, 1998.
HMO premium revenue increased $1.2 million or 2.2 percent - - $5.1
million due to a 12.3 percent increase in net premium rates
partially offset by a $3.9 million decrease resulting from an 8.9
percent decrease in member months. Net premium rates increased in
part due to the company's targeted general rate increases
averaging 7 percent to 18 percent during enrollment periods in the
last three quarters of 1998 and the first quarter of 1999. Actual
net rate increases are affected by the status of a large group
(the Missouri Consolidated Health Care Plan or MCHCP), comprised
of 39,200 members as of March 31, 1999, with which the company has
limited ability to increase premium rates. Membership in MCHCP
increased by 9,900 from March 31, 1998 to March 31, 1999. The
company's HMO membership in non-MCHCP products decreased over the
same time period by 16,700 members, or 15.3 percent. Membership
decreases in non-MCHCP products were driven primarily by the
company's aforementioned pricing strategy during the last three
quarters of 1998 and the first quarter of 1999.
Premium revenue from Medicare supplement decreased by $0.6 million
in the first quarter of 1999. Member months decreased by 6.7
percent partially offset by a 4.5 percent increase in net premium
rates. Membership in the company's Medicare supplement products
has decreased in part due to subscribers opting for Medicare-risk
programs, similar to the company's BlueCHOICE Senior product, in
which medical benefits are at least as comprehensive as Medicare
benefits for persons eligible to receive Medicare (parts A and B)
at no additional cost to the member.
Managed indemnity premium revenue decreased by $1.4 million due to
a 64.9 percent decline in member months in keeping with the
company's strategy to move toward more highly managed care
products. With the exception of a short-term medical product, the
company no longer sells managed indemnity coverage, but continues
to renew coverage for those members who are enrolled in these
managed indemnity programs.
Revenue from other specialty services increased $0.2 million or
1.8 percent - $1.5 million due to a 14.0 percent increase in net
premium rates partially offset by a $1.3 million decrease
resulting from a 10.7 percent decrease in member months.
Membership in the company's specialty products has decreased as a
result of the decreases in the company's underwritten medical
products. The large rate increases relate to the company's drug
products, including AllianceRx, and correspond to the high levels
of prescription utilization and trends that the company, as well
as the industry as a whole, have experienced in recent years.
Fees and other income from administrative services only/self-
funded and network services increased by $2.6 million. This
increase is primarily due to increased 1999 revenues from
HealthLink, Inc. (HealthLink), the company's network rental and
managed care service subsidiary, of $3.6 million. HealthLink's
revenues increased due to a 15.1 percent increase in members from
March 31, 1998 to March 31, 1999. HealthLink's increases to fees
and other income were partially offset by decreases to revenue
caused by the loss of approximately 23,500 members in the
company's other self-funded business (excluding the membership in
the company's Epoch joint venture), a substantial portion of which
enrolled in the HealthLink network.
Operating Expenses
The overall medical loss ratio decreased from 83.2 percent in the
first quarter of 1998 to 81.9 percent in the first quarter of
1999. The overall medical loss ratio has decreased due to the
company's pricing strategy, which the company expects will result
in an increase in the 1999 premium per member per month of
approximately 9 percent to 10 percent as compared to 1998. In
addition, the company anticipates that the 1999 net medical cost
increase per member per month will be approximately 7 percent to 9
percent. For the first quarter of 1999, the premium per member
per month increased by 10.7 percent and the net medical cost per
member per month increased by 8.9 percent compared to the first
quarter of 1998.
The company continues its efforts to modify its pharmacy benefits
management program and recontract with physicians and ancillary
service providers. The drug cost trend was approximately ten to
twenty percent in the first quarter of 1999, driven by a
combination of factors, including introduction of new drug
therapies; physicians' use of newer, more expensive drugs; and
physicians' decreased use of generic drugs in favor of specific
drugs promoted by pharmaceutical companies. The company is
continuing its effective strategy for controlling drug costs by
utilizing a three-tier drug benefit design that allows members to
make choices among generic, formulary, or other brand name drugs,
albeit at different member copayment levels. Approximately 45
percent of the company's underwritten members with a drug benefit
were enrolled in the three-tiered pharmacy benefit programs as of
March 31, 1999. In the first quarter of 1999, the company has
recognized a 23 percent savings on the three-tier program as
compared to the two-tier drug program. Physician education,
utilization and prescribing pattern analysis will be increased
through an on-site nurse reviewer and expanded physician profiling
services through the company's new pharmacy benefit contract which
runs through 2002. The company will also continue its hospital,
physician and service recontracting strategy, using the more
detailed data and analysis available through the company's
information and operating strategy (IOS). There can be no
assurance that the company's initiatives to control future
increases in medical cost trends to improve the medical loss ratio
will be effective.
Commission expense increased by $0.2 million or 2.2 percent in the
first quarter of 1999 as compared to the first quarter of 1998;
however, the commission expense ratio remained unchanged at 4.0
percent for the first quarters of 1999 and 1998.
General and administrative expenses (excluding depreciation and
amortization) increased by $0.3 million, or 0.8 percent in the
first quarter of 1999 as compared to the first quarter of 1998.
This increase is partially due to a $2.0 million increase in
HealthLink expenses offset in part by the company's general and
administrative cost control efforts.
Depreciation and amortization expenses decreased by $0.4 million
in the first quarter of 1999 as compared to the first quarter of
1998. Amortization expenses for completed components of the
company's information and operations strategy (IOS) project
decreased by $0.2 million in the first quarter of 1999 as compared
to the first quarter of 1998 due in part to the company's change
in the estimated useful life of the capitalized software costs
from five to seven years. See Note 8 of the Notes to Consolidated
Financial Statements of Item I, which description is incorporated
herein by reference. Also, see "Outlook - Information Strategies"
for more information related to this project.
Operating Income
Operating income increased by $5.9 million in the first quarter of
1999 in comparison to the first quarter of 1998.
Net Investment Income
The first quarter 1999 net investment income of $3.5 million
represents a $0.9 million decrease over the first quarter of 1998,
inclusive of a $0.3 million decrease in net realized gains. The
remaining $0.6 million decrease is due to a $12.6 million
reduction in investments available for sale as of March 31, 1999
as compared to March 31, 1998, as well as lower investment yields
due to lower market interest rates in the first quarter of 1999 as
compared to the first quarter of 1998.
Provision for Income Taxes
The company's effective income tax provision rate was 36.1 percent
and 53.0 percent for the first quarters of 1999 and 1998,
respectively. The company's effective income tax rates for 1999
and 1998 were affected by non-deductible goodwill amortization.
In the first quarter of 1999, the company reversed its deferred
tax asset valuation allowance of $0.1 million. In addition, in
the first quarter of 1999, the company's state income tax
provision was favorably impacted due to a change in the filing
status for the State of Missouri.
Net Income
The company's net income of $4.7 million, or $0.25 per share, for
the first quarter of 1999 represents an increase of $3.7 million
compared to first quarter 1998 net income of $1.0 million, or
$0.05 per share.
Liquidity and Capital Resources
The company's working capital as of March 31, 1999 was $65.1
million, an increase of $0.5 million from December 31, 1998. The
increase is partially attributable to the $4.7 million of net
income for the first quarter of 1999. In addition, the company
capitalized $1.3 million of costs for property and equipment
purchases, $0.9 million of which relates to capitalized IOS
development costs. The company's unrealized net appreciation of
investments available for sale decreased by $1.9 million in the
first quarter of 1999.
Net cash used in operations totaled $4.5 million for the three
months ended March 31, 1999. The company's net income was $4.7
million which included (on a before-tax basis) $0.3 million of
realized gains from the sale of investments and $4.2 million of
depreciation and amortization expenses. In addition, receivables
from members, accounts payable and accrued expenses, other assets,
medical claims payable, and net intercompany payables were
affected by the timing of operating cash payments and receipts,
intercompany tax settlements, as well as changes in membership and
utilization and claims payment trends. Receivables from members
increased by $4.6 million in part due to an increase of $1.9
million related to HealthLink receivables as well as due to rate
increases related to the company's underwritten products.
Accounts payable and accrued expenses decreased by $4.2 million
due in large part to annual broker bonuses that are paid in the
first quarter of each year as well as payments made to company
employees pursuant to its annual incentive programs. Other assets
increased in part due to first quarter prepayments for annual
service contracts that are expensed over the remaining annual
term as well as the timing of receipts for certain claims
reimbursements. Medical claims payable increased by $7.5 million due in
part to an increase in claims that were processed but unpaid as of
March 31, 1999 due to the timing of weekly claim check processing.
Net intercompany payables decreased by $3.7 million due to the
timing of operating cash receipts and payments and intercompany
tax settlements, among other things.
On August 29, 1997, the company reported the commencement of the
litigation with MCHCP and estimated losses (giving effect to all
possible renewal terms of the MCHCP contract without requested
rate increases) in the range of $30 million to $40 million. In
the third quarter of 1997, the company took a pre-tax charge of
$29.5 million, which was based on actuarial estimates, including
projected limited rate increases, and projected enrollment and
medical cost trends accounted for through the year 2000 in
accordance with generally accepted accounting principles. The
company was advised by the Missouri Department of Insurance (DOI)
in March 1998, that the entire amount of the reserve for the MCHCP
contract recorded by the company for projected losses under the
contract through the year 2000, must, for statutory accounting
purposes, be recorded by the company's subsidiary, HMO Missouri,
Inc. (BlueCHOICE), on its statutory filings with the DOI. With
the prior regulatory approval of the DOI, BlueCHOICE issued
surplus notes to the company in the amount of $29 million to
ensure the statutory solvency of BlueCHOICE. While management of
the company believes the current provision for losses is adequate,
if the actual public entity membership in MCHCP grows at a rate in
excess of the rate used in the actuarial estimates, or if the
projected limited rate increases and medical cost trends should
differ materially from those assumed in the actuarial estimates,
then the amount of the reserve recorded to date could be
insufficient to cover all future losses which may be associated
with the MCHCP contract, and such losses could have a material
adverse effect on the company and the market for its stock. In
the first quarter of 1999, the company completed a reinsurance
arrangement between its subsidiaries, Healthy Alliance Life
Insurance Company (HALIC) and BlueCHOICE, whereby HALIC will
reinsure MCHCP losses that exceed certain thresholds over the
remaining term of the current MCHCP contract. The company
anticipates that this arrangement will assist in mitigating the
risk that additional surplus notes or other funding will need to
be provided to the company's BlueCHOICE subsidiary.
RECENT DEVELOPMENTS
Information and operations strategy
In 1995, the company implemented a comprehensive information and
operations strategy (IOS) to assist the company in implementing
its managed care strategy of delivering the most cost efficient
medical care consistent with quality outcomes. The company
believes that controlling medical costs in the future will be
highly dependent on readily accessing both member and provider
medical information at a detail level which provides real-time
analytical support. The company receives capital expenditure
authorizations from the Board of Directors to expend funds for the
project subject to periodic review by an ad-hoc committee of the
board. In the first three months of 1999, the company incurred
capitalized expenditures of $0.9 million on this project.
Cumulatively, since 1995, the company has incurred capitalized
expenditures of $48.4 million. The company anticipates that it
will expend approximately $8 million to $9 million for capitalized
costs associated with the IOS project in 1999 and subsequent years
to complete the project. While management believes that the IOS
project will initially be dilutive to earnings per share, it is
believed that opportunities exist for significant medical and
administrative savings, which are expected to provide a payback
and contribute to earnings per share over the long term.
Year 2000 issue
The company has a program to evaluate its major systems, processes
and equipment to minimize the possibility of a material disruption
to its business due to Year 2000 problems (e.g. the difficulties
of certain computers, computer programs and other equipment to
distinguish between the year 1900 and the year 2000). The program
was initiated in 1996 and includes an inventory of software,
hardware and related infrastructure components; assessments and
decisions to retire, replace or remediate these elements as well
as to establish how critical they are to continued operations; a
strategy to conduct integrated testing of critical applications
and technology infrastructure; and the development of contingency
plans.
The inventory and assessment phases of the Year 2000 program are
substantially complete and include information technology such as
application software on various platforms (mainframe, midrange and
personal computer), system software and data/voice communication
networks; as well as facility equipment such as elevators,
security and building control systems. Although the company is
increasing its use of client server applications, the majority of
its application and system software uses a mainframe platform with
COBOL programming. The company believes that at March 31, 1999,
approximately 95 percent of these COBOL programs were Year 2000
ready. The remainder of the COBOL programs are expected to be
year 2000 ready by September 30, 1999 rather than March 31, 1999,
as previously reported, which reflects a decision by management to
remediate an additional limited amount of code relating to runout
in the conversion to client server-based managed care software for
HMO products. Resources had been reserved for this work and
therefore the company does not anticipate conflicting resource
demands. The balance of the company's other material system
modifications is expected to be completed by September 30, 1999,
with substantially all of these modifications currently under way.
The company's plan for completion of this project is partially
dependent upon the work of third parties. The company has limited
internal exposure to equipment with embedded technology and
expects any significant affected equipment to be ready before
January 1, 2000.
Integrated testing of purchased or internally developed
applications, hardware, operating systems and other support
software began in the fourth quarter of 1998. This integrated
testing (including the leap year test) includes advancing the
hardware dates forward to several key dates in the year 2000.
Testing of this nature is expected to continue through September
1999. In order to decrease the corporation's risk, the company
expects to restrict the amount of software and hardware changes
implemented in the fourth quarter of 1999. For any changes
required during that period, the company will continue to conduct
Year 2000 integrated testing.
The total cost associated with the modifications required to
become Year 2000 ready is estimated to be approximately $12
million to $13 million. The company is expensing all costs
associated with these changes as they are incurred. From 1996
through March 31, 1999, the company has cumulatively expensed $9.1
million on this project, with $1.7 million expensed in the first
quarter of 1999. These costs are being funded internally through
operating cash flows or investment sales and represent less than
10 percent of the company's information technology budget over the
life of the Year 2000 program.
In addition to internal Year 2000 implementation activities, some
of the company's computer systems and business operations are
provided by outside suppliers. As part of the program, the
company is asking for the readiness status of its critical
vendors, providers and suppliers. There can be no assurance that
there will not be a material adverse effect on the company if
critical vendors, suppliers and providers, such as major health
care providers, third parties performing delegated services or
utility companies do not convert their systems in a timely manner
and in a way that is compatible with the company's systems.
The company's operations would be significantly impacted by
incomplete or untimely resolution of Year 2000 issues, whether
caused by internal or external action. The company uses automated
systems to process claims, prepare invoices, collect and remit
payments, maintain membership data, perform utilization management
and many other processes. In the worst case, the company's
inability to perform these basic operating activities in an
accurate and timely manner would have a material adverse effect on
the company's revenues, liquidity and results of operations,
although the company is unable to estimate the total financial
impact.
The company is currently preparing its contingency plan in the
event that full Year 2000 readiness for critical business
functions is not achieved. The company expects to have the plan
substantially defined on or before the end of the second quarter
of 1999. However, there can be no assurance that the company or
any third party upon which the company depends will be able to
achieve Year 2000 readiness or will have sufficient contingency
plans, which could have a material adverse effect on the company
and the market for its stock.
The projected cost of the Year 2000 program and the expected
completion dates are based on management's best estimates and may
be updated as additional information becomes available. These
estimates were derived using numerous assumptions of future
events, including the availability of certain resources and other
factors. There can be no guarantee these estimates will be
achieved, and actual results could differ materially from expected
results.
Recently issued accounting standards
See the description under the same caption in Note 3 of the Notes
to Consolidated Financial Statements of Item I, which description
is incorporated herein by reference.
Operating outlook
The following statements are based on short-term expectations.
The statements are forward-looking and actual results may differ
materially. Reference is made to the information set forth under
the caption "Factors that May Affect Future Results of Operations,
Financial Condition or Business" that follows.
The company's performance targets for 1999 include: average
premium revenue growth per member per month in the 9 percent to 10
percent range, reflecting price increases in the high teens to low
twenties (in percentages) for some categories of members,
consistent with market trends; maintaining the medical loss ratio
in the low to mid eighties (in percentages), with an anticipated
net medical cost increase per member per month of approximately 7
percent to 9 percent, inclusive of pharmacy benefits, medical
services, and the cost of government-mandated benefits; continued
control of core overhead expenses, with amortization expense for
corporate initiatives, Year 2000 programming expenses and other
initiatives contributing to a general and administrative expense
ratio in the low twenties (in percentages).
The company's ability to deliver these performance targets is
dependent on, among other things, achieving targeted sales to new
members and retention rates at higher prices, and realizing
projected medical and overhead cost savings.
Contingencies
See the description under the same caption in Note 2 of the Notes
to Consolidated Financial Statements of Item I, which description
is incorporated herein by reference.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL
CONDITION OR BUSINESS
The statements included in this Quarterly Report regarding future
financial performance and results and the other statements herein
that are not historical facts are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Such statements may include, but are not
limited to, projections of earnings, revenues, income or loss,
capital expenditures, plans for future operations and financing
needs, matters relating to the proposed settlement agreements, as
amended, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified.
Future events and actual results, performance and achievements
could differ materially from those set forth in, contemplated by
or underlying the forward-looking statements. Factors that could
cause actual results to differ materially (the Cautionary
Statements) include, but are not limited to, those set forth
below. Should one or more of the risks or uncertainties set forth
below materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those
indicated. Undue reliance should not be placed on the Cautionary
Statements, which speak only as of the date of this Quarterly
Report. The company undertakes no obligation to release publicly
any revisions to the forward-looking statements after the date of
this Quarterly Report to reflect events or circumstances after the
date of this Quarterly Report or to reflect the occurrence of
unanticipated events.
Contingencies
Reference is made to the information detailed in Note 2 entitled,
"Contingencies" of Part I, Item 1, under the captions: OPM audit;
Litigation of Blue Cross and Blue Shield of Missouri with the
Missouri Attorney General and Department of Insurance and Related
Actions, Settlement Efforts and Proposed Reorganization; and
Agreement for settlement of certain litigation matters and
reorganization of the company. The following factors should be
read in conjunction with such information, which is incorporated
by reference in its entirety in the following sections.
OPM audit
At this time, management is unable to determine the final dollar
amount that may be required to resolve the Office of Personnel
Management (OPM) audit findings. There can be no assurance that
the resolution of these findings will not have a material adverse
effect on the company and the market for its stock. The OPM audit
relates to the company's BlueCHOICE subsidiary and any additional
funding to BlueCHOICE as a result of audit findings associated
with the OPM audit, or otherwise, may require approval under the
company's Credit Agreement, and there can be no assurance that
such approvals could be obtained. See "Credit Agreement
Restrictions" below.
Agreement for settlement of certain litigation matters and
reorganization of the company
On September 20, 1998, the company and certain of its affiliates
entered into various settlement agreements with certain state
agencies, including the Missouri Attorney General and the DOI,
which, if consummated, would resolve the outstanding litigation
and regulatory disputes between the company and its affiliates and
the State of Missouri, and create a charitable independent health
care foundation. On March 12, 1999, the company, BCBSMo, the
Missouri Attorney General and the DOI entered into an Amendment to
Settlement Agreement (the amendment) in response to the report of
the special master, described below. On March 15, 1999, Judge
Thomas J. Brown III of the Circuit Court of Cole County Missouri
(the Circuit Court) stated on the record during an informal status
hearing that he has continued concerns about the settlement
agreements, as amended. The amended settlement agreements are
described further in Note 2, "Contingencies - Agreement for
settlement of certain litigation matters and reorganization of the
company," of Part I, Item 1, and such description is incorporated
by reference in its entirety in this section. On November 4,
1998, the Circuit Court appointed a special master for the purpose
of, among other things, collecting and analyzing information
related to the proposed settlement. On February 10, 1999, the
special master recommended that the proposed settlement agreement
"not be approved in its present form" and recommended that the
Circuit Court "withhold a ruling on the settlement agreement to
give the parties and the amici curiae consumer groups an
opportunity to meet and confer, and engage in a good faith effort
to address" concerns that were noted by the special master in his
report. The parties and the amici curiae conferred about the
concerns noted by the special master in his report and entered
into the amended settlement agreement as a result of such
discussions. There can be no assurance that the transactions
contemplated by the amended settlement agreements will receive the
necessary court approval as an acceptable alternative to
dissolution of BCBSMo, that all conditions and contingencies
included in the amended settlement agreements will be satisfied,
or that the transactions set forth in the amended settlement
agreements will be effected. The failure to consummate the
transactions contemplated by the amended settlement agreements
could have a material adverse effect on the company and the market
for its stock.
The transactions contemplated by the amended settlement
agreements, described elsewhere herein, include the resolution and
dismissal of all of the current litigation with the DOI and the
Missouri Attorney General described elsewhere herein. If BCBSMo,
the company, the DOI, and the Missouri Attorney General do not
resolve these matters as provided in the amended settlement
agreements, or if, in the alternative, BCBSMo or the company does
not prevail in all of these matters in the ongoing litigation, it
is possible that BCBSMo could be dissolved, the license of BCBSMo
and the company to use the Blue Cross and Blue Shield trade names
and marks could be terminated, an event of default could occur
under the company's Credit Agreement, BCBSMo could be required to
dispose of some or all of the company's shares of Class B Common
Stock at times and in quantities that could be detrimental to the
market for the company's stock, and other actions could be taken
by BCBSMo, the Missouri Attorney General, the DOI, the BCBSA or
others, all of which could have a material adverse impact on the
company and the market for its stock.
Subscriber class action litigation
On March 15, 1996, a class action suit was filed against the
company, BCBSMo, HealthLink, and certain officers of the company.
On November 4, 1998, the St. Louis Circuit Court issued its
judgment and order granting the motion of the defendants to
dismiss the action for lack of standing and entering judgment in
favor of the defendants. The plaintiffs' counsel appealed the St.
Louis Circuit Court's order. The obligations of the parties to
consummate the transactions contemplated by the settlement
agreements, as amended, described above under "Agreement for
settlement of certain litigation matters and reorganization of the
company" are conditioned upon, among other things, the
satisfactory final resolution of this litigation.
Status of Blue Cross and Blue Shield Trademark Licenses
If BCBSMo's and the company's litigation with the DOI and the
Missouri Attorney General is not satisfactorily resolved, then the
company's licenses to use the Blue Cross and Blue Shield names and
marks may be terminated. In addition, the licenses may be
terminated if BCBSMo, the company, or certain subsidiaries of the
company are unable to achieve certain financial benchmarks as
required by the BCBSA. The loss of such licenses and the
obligation of the company to pay a $25 per enrollee termination
fee and provide notice of termination to enrollees and the
resultant event of default under the company's Credit Agreement
could have a material adverse effect on the company and the market
for its stock.
Credit Agreement Restrictions
The company's revolving Credit Agreement with its existing lenders
contains certain restrictions on the company and its subsidiaries,
including requirements as to the maintenance of net worth and
certain financial ratios, restrictions on payment of cash
dividends or purchases of stock, restrictions on acquisitions,
dispositions and mergers, restrictions on additional indebtedness
and liens, limitations on indebtedness of the company's
subsidiaries, maintenance of the licenses to use Blue Cross and
Blue Shield names and marks and certain other matters. There can
be no assurance that the company will be able to achieve and
maintain compliance with the prescribed financial ratio tests or
other requirements of the revolving Credit Agreement. The failure
to obtain any waivers or amendments that might be needed in the
future to remain in compliance with such requirements could, among
other things, reduce the company's ability to respond to adverse
industry conditions and could have a material adverse effect on
the company's operations, financial condition or business. As
described under the caption in Note 2 entitled "Contingencies -
Agreement for settlement of certain litigation matters and
reorganization of the company - Status of Blue Cross and Blue
Shield Trademark Licenses" of Part I, Item 1, the loss of the
licenses would result in an event of default under the Credit
Agreement.
MCHCP issues
The Missouri Consolidated Health Care Plan (MCHCP), which is a
Missouri public agency that purchases health care coverage for
employees of the State of Missouri and of selected public entities
that have been admitted into the MCHCP, is currently the largest
customer group served by BlueCHOICE, a subsidiary of the company.
The company will be held contractually bound to serve the MCHCP
members if the contract is extended at the option of the MCHCP
through the year 2000 at rates contracted for in 1995, with annual
rate increases, if any, which are far less than necessary to
permit the company to recover its costs in serving those members.
In the third quarter of 1997, the company took a pre-tax charge of
$29.5 million, which was based upon actuarial estimates, including
projected limited rate increases, and projected enrollment and
medical cost trends accounted for through the year 2000 in
accordance with generally accepted accounting principles.
Management of the company reviews the adequacy of this reserve on
an ongoing basis. If the actual number of the company's members
through MCHCP grows at a rate in excess of the rate used in the
company's actuarial estimates (whether due to the increase
generally in MCHCP members, decrease in the number of MCHCP
contractors or otherwise), or if the projected limited rate
increases and medical cost trends should differ materially from
those assumed in the company's actuarial estimates, then the
amount of the reserve recorded to date could be insufficient to
cover all future losses that may be associated with the MCHCP
contract, and such losses could have a material adverse effect on
the company and the market for its stock.
In addition, the company's revolving Credit Agreement (described
above) provides that the company's subsidiaries, including
BlueCHOICE, may not issue surplus notes to the company in an
aggregate principal amount in excess of $40 million. As the
aggregate principal amount of surplus notes issued by such
subsidiaries to the company currently approximates $40 million,
any additional funding required by any subsidiaries of the
company, including BlueCHOICE, as a result of additional losses or
reserves associated with the MCHCP contract, or otherwise, must,
absent approval of the lenders under the Credit Agreement, be
funded from sources other than surplus notes. No assurances can
be given that such approval would be granted or that additional
sources of funding could be obtained. See "Credit Agreement
Restrictions" above. In the first quarter of 1999, the company
completed a reinsurance arrangement between its subsidiaries,
HALIC and BlueCHOICE, whereby HALIC will reinsure MCHCP losses
that exceed certain thresholds over the remaining term of the
current MCHCP contract. The company anticipates that this
arrangement will assist in mitigating the risk that additional
surplus notes or other funding will need to be provided to the
company's BlueCHOICE subsidiary.
Government Regulations and Health Care Reform
The company operates its managed health care business principally
through wholly owned subsidiaries whose business is subject to
extensive federal, state and local laws and regulations. There
can be no assurance that the company will be able to obtain or
maintain required governmental approvals or licenses or that any
current or proposed federal and state legislation or other
regulatory reform that increase the regulatory requirements
imposed on the company and its subsidiaries, will not have a
material adverse effect on the company's business or results of
operations in the future.
Competition and Consolidation
The health care industry is highly competitive. The company has
numerous competitors in its PPO, POS and HMO operations, many of
which have substantially greater financial and other resources
than the company. Because the company's existing business
operations (excluding its HealthLink subsidiary) are primarily
confined to markets within or contiguous to the state of Missouri,
the company currently is unable to subsidize losses in these
markets with profits from other markets. The company believes
that certain larger, national competitors are able to subsidize
losses in the Missouri market with profits from other markets in
which they operate and may pursue such a strategy in the company's
markets in an effort to increase their market share. Health care
providers are consolidating into larger health care delivery
enterprises and their increased bargaining power may lead to a
reduction in the gross margins of the company's products and
services. The company also faces competition in its markets from
a trend among some health care providers to combine and form their
own networks in order to contract directly with employer groups
and other prospective customers for the delivery of health care
services.
Escalating Health Care Costs
The company's profitability depends in large part on predicting
and effectively managing medical costs under its managed care
plans. A variety of external factors affecting the delivery and
cost of health care, including increased costs and utilization of
high-technology diagnostic testing and treatments, the increasing
cost and utilization of prescription medications, the rising costs
of malpractice insurance, efforts in the medical community to
avoid malpractice claims, higher operating costs of hospitals and
physicians, the aging of the population and other demographic
characteristics, changes in federal and state health care
regulations, and major epidemics may adversely affect the
company's ability to predict and control health care costs and
claims. Other relevant factors affecting the company's ability to
control health care costs include higher outpatient and drug
utilization, medical and drug cost trends, and growth of business
in regions with less cost-efficient networks.
Dependence on Sales to Individuals
Sales of the company's health care benefit products to individuals
comprise a substantial portion of the company's business. The
medical loss ratio attributable to some components of the
company's individual business is significantly lower than that of
the company's insured group business. As a result, individual
business accounts for a proportionately greater percent of the
company's operating income. The company's overall margins would
be adversely impacted by a reduction in the relative percent of
its business represented by certain individual products or by an
increase in the medical loss ratio for individuals enrolled in
those products. The company believes that the success of the
individual business is more dependent than that of its group
business on the management of health care costs through product
design, pricing decisions and the application of appropriate
underwriting standards. There can be no assurance that the
profitability of this business will be sustained or that the
company will not experience unanticipated increases in claims.
Potential Nonrenewal of Subscriber and Provider Agreements
The company's profitability is dependent upon its ability to
obtain and maintain contracts with employee groups and individual
consumers that generally are renewable annually. The company's
profitability is also dependent, in large part, on its ability to
contract on favorable terms with hospitals, physicians and other
health care providers. There can be no assurance that the
employee groups, individual consumers, subscribers or providers
will renew their contracts or enter into new contracts with the
company or, in the case of provider contracts, will not seek terms
that are less profitable to the company in connection with any
such renewal.
Control by BCBSMo
BCBSMo has voting control on all stockholder actions, including
the sale or merger of the company, a sale of substantially all of
its assets and the election of all of the company's directors.
BCBSMo may have interests with respect to its ownership of the
company that diverge from those of the company's public
shareholders. There can be no assurance that the company will not
be adversely impacted by the control that BCBSMo has with respect
to matters affecting the company.
Dependence on Key Management
The company depends to a significant extent on key management
members. There can be no assurance that the loss of current key
management would not result in a material adverse effect on the
company's results of operations, financial condition or business.
Variability of Operating Results and Stock Price
The company's results of operations could be adversely affected by
the timing of new product and service introductions, competitive
pricing pressures, contract renegotiations with customers and
providers, fluctuations in the medical loss ratio (due to changes
in utilization, timing of submission of claims presented for
payment in the period and the unpredictability of unusually large
claims), increases in commission expense and general and
administrative expenses, changes in interest rates, acquisitions,
governmental and regulatory actions, overall market conditions,
and other factors. The company's stock price may experience
significant price and volume fluctuations in response to these and
other internal and external factors that cause variations in its
results of operations and in the volatility of the stock markets
generally.
Year 2000 Issue
Reference is made to the information included under the caption
"Recent Developments - Year 2000 issue," of Part I, Item 2, which
information is incorporated by reference in its entirety in this
section. There can be no assurance that the company or any third
party upon which the company depends will be able to achieve Year
2000 readiness or will have sufficient contingency plans, which
could have a material adverse effect on the company and the market
for its stock.
Additional Factors
Additional risks and uncertainties that may affect future results
of operations, financial condition or business of the company
include, but are not limited to: demand for and market acceptance
of the company's products and services; the effect of economic and
industry conditions on prices for the company's products and
services and its cost structure; the ability to develop and
deliver new products and services and adapt existing products and
services to meet customer needs and expectations; the ability to
keep pace with technological change, including developing and
implementing technological advances timely and cost effectively in
order to lower its cost structure, to provide better service and
remain competitive; adverse publicity, or negative reports by
brokerage firms, industry and financial analysts regarding the
company, its parent or BCBSA or their products or services that
may have the effect of reducing the reputation, goodwill or
customer demand for, or confidence in, the company's products or
services; the ability to attract and retain capital for growth and
operations on competitive terms; the financial and operational
impact that evolving theories of recovery, including punitive
damage theories, related to coverage reimbursement decisions for
various treatments, may have on the managed care industry
generally, or the company in particular; and changes in accounting
policies and practices.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Note 2, "Contingencies" of Part I, Item 1, contains a description
of various pending and threatened claims involving the company and
its affiliates, including a description of the subscriber class
action lawsuit filed on March 15, 1996, litigation with the
Missouri Department of Insurance (DOI), the Director of the DOI,
and the Missouri Attorney General, and other legal proceedings,
which descriptions are incorporated by reference herein. Also,
see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors that May Affect Future Results
of Operations, Financial Condition or Business."
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Exhibit
The following exhibits are submitted herewith:
27 Financial Data Schedule (Electronic Filing Only).
b) Reports on Form 8-K:
The company filed a report with the SEC on Form 8-K on February
12, 1999, relating to the special master's report.
The company filed a report with the SEC on Form 8-K on March 15,
1999, relating to the Amendment to the Settlement Agreement and
the Joint Motion By All Parties and the Amici Curiae to Approve
Settlement Agreement.
The company filed a report with the SEC on Form 8-K on March 17,
1999, relating to public statements of Judge Thomas J. Brown III
expressing continued concerns with the settlement agreements, as
amended.
The company filed a report with the SEC on Form 8-K on March 23,
1999, relating to the filing by Blue Cross and Blue Shield of
Missouri (BCBSMo), parent company of the Registrant, of its
petition to the Missouri Supreme Court to enter an Order of
Prohibition directed to Cole County Circuit Judge Thomas J. Brown
III to limit his actions relating to the litigation involving
BCBSMo and the State of Missouri solely to considering the Joint
Motion by All Parties and the Amici Curiae to Approve Settlement
Agreement while the case is on appeal to the Missouri Supreme
Court.
The company filed a report with the SEC on Form 8-K on March 30,
1999, relating to the Missouri Supreme Court's denial of BCBSMo's
request to limit the Cole County Circuit Court, pending resolution
of the appeal of the case before the Missouri Supreme Court.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
RIGHTCHOICE MANAGED CARE, INC.
Registrant
Date: May 17, 1999 By: [s] JOHN A. O'ROURKE
John A. O'Rourke
President and Chief Executive Officer
Date: May 17, 1999 By: [s] SANDRA VAN TREASE
Sandra Van Trease
Chief Financial Officer,
Senior Executive Vice President and
Chief Operating Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the financial
statements in the RightCHOICE Managed Care, Inc. Form 10-Q for the quarterly
period ended March 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 29,457
<SECURITIES> 206,225
<RECEIVABLES> 72,615
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 362,828
<PP&E> 116,125
<DEPRECIATION> 58,657
<TOTAL-ASSETS> 512,033
<CURRENT-LIABILITIES> 297,745
<BONDS> 49,153
0
0
<COMMON> 187
<OTHER-SE> 148,474
<TOTAL-LIABILITY-AND-EQUITY> 512,033
<SALES> 0
<TOTAL-REVENUES> 200,013
<CGS> 0
<TOTAL-COSTS> 195,411
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,068
<INCOME-PRETAX> 7,317
<INCOME-TAX> 2,640
<INCOME-CONTINUING> 4,677
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,677
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
