Item 1. Business
General
First Health Group Corp., together with its subsidiaries hereinafter collectively referred to as the "Company" or "First Health", is a full- service national health benefits company. The Company specializes in serving large, national employers and payers with a single source for their group health programs -- providing comprehensive, cost-effective and innovative solutions for all the health benefits needs of their employees nationwide. Through its workers' compensation service line, the Company provides a full range of auto managed care and workers' compensation services for insurance carriers, state insurance funds, third party administrators and large, self-insured national employers. Through its First Health Services service line, the Company provides services to various state Medicaid and entitlement programs for claims administration, pharmacy benefit management programs and medical management and quality review services.
The Company, which is a Delaware corporation, was organized in 1982. The Company's principal executive offices are located at 3200 Highland Avenue, Downers Grove, Illinois 60515, and its telephone number is (630) 737-7900.
Recent Developments
On July 20, 1999, the Company announced that it had entered into a contract with CNA to provide PPO services to the Mail Handlers Benefit Plan (Mail Handlers), one of the largest federal employee health benefit plans with over 400,000 members and 1 million participants. When fully implemented, the contract will represent one of the Company's largest. The implementation of the contract took place over the latter half of 1999 and was fully implemented effective January 1, 2000.
Strategy
First Health assists its group clients through an integrated health plan offering that promotes the well-being and satisfaction of participants while positively impacting an organization's medical cost trends through:
* Single source accountability and availability;0 * 24-hours-a-day, 7 days-a-week availability to help participants with all benefits-related issues; * A broad national network of quality, cost-effective health care providers--wherever care is needed; * Non-network negotiations; * Clinical and case support programs and medical claims administration; * Pharmacy Benefit Management (PBM).
Its various medical review programs help First Health's clients manage the number of units of medical services (volume) while its PPO products help First Health's clients manage the cost of those units of service (price). Through its Bill Review capabilities, the Company provides workers' compensation bill review services nationally. These services are coupled with the Company's medical review programs and PPO networks in order to provide a comprehensive product offering in the workers' compensation arena where, in recent years, medical costs have been rising faster than in the group health arena. Through First Health Services, the Company provides claims administration, pharmacy benefits management and medical management and quality review services to public sector payors such as state Medicaid and state entitlement programs.
First Health seeks to develop clinical and care support programs designed to control the number of health care units, manage costly diseases and increase compliance with prescribed treatment. These programs include a full range of medical and mental health care and integrate PBM to manage the full range of benefits. First Health's management believes that the continuous offering of new and improved programs is important to the expansion of its business.
Through The First Health Network, First Health also offers its clients services designed to control the price of a health care unit of service. First Health specializes in the development of PPOs and the collection and analysis of health care cost data. First Health's capability to analyze health care cost data allows it to use a client's actual history of health care usage to structure networks of providers tailored to client needs.
The Company's acquisition of small indemnity insurance companies in 1996 and 1997 has enabled the Company to expand its product offering to leverage its managed care assets of The First Health Network and its clinical management services. The introduction of new products has allowed the Company to provide a national HMO-like product for self- insured ERISA plans and stop-loss insurance products.
Through the acquisition of First Health in July 1997, the Company believes it has rounded out the range of services necessary to offer a full spectrum of integrated health benefits products to clients and prospective clients such as PPO, risk and medical management services.
Health Care Reform, Expenditures and Managed Care
In recent years, political, economic and regulatory influences have subjected the health care industry to fundamental change and consolidation. Since 1993, the Clinton Administration has proposed various programs to reform the health care system and expressed its commitment to (I) increasing health care coverage for the uninsured, (II) controlling the continued escalation of health care expenditures, and (III) using health care reimbursement policy to help control the federal deficit and (IV) allowing insureds to sue their ERISA or HMO health plan. Even though Congress rejected the Clinton Administration's proposals, several potential approaches remain under consideration, including broad insurance reform proposals, tax incentives for individuals and the self-employed to purchase insurance, controls on the growth of Medicare and Medicaid spending, the creation of insurance purchasing groups for small businesses and individuals, and market-based changes to the health care delivery system. Proposals under consideration at the federal level also would provide incentives for the provision of cost-effective, quality health care through encouraging managed care systems. In addition, many states are considering various health care reform proposals. At both the federal and state level, there is growing interest in legislation to regulate how managed care companies interact with providers and health plan members. The Company anticipates that Congress and state legislatures will continue to review and assess alternative health care delivery systems and payment methodologies, and that the public debate of these issues will likely continue in the future. Although the Company believes it is well-positioned to respond to the stated concerns, the Company cannot predict what impact the proposed measures may have on its business. Concern about the proposed reform measures and their potential effect has been reflected in the volatility of the stock prices of companies in health care and related industries, including the Company.
The Company is monitoring developments concerning health care reform and preparing strategic responses to the different reform scenarios. In response to pending legislation and market pressures and in anticipation of future health care reform, the Company is broadening and diversifying its services so it will be less affected if health care reform proposals are enacted.
First Health offers numerous programs designed to help payers of health care control their medical costs. Unlike HMOs, PPO companies typically do not underwrite health insurance or assume related risks. Clinical management and PPO services have been offered on a commercially significant scale for the last ten years by firms which are engaged in providing these types of services. The industry is currently highly fragmented with numerous independent firms providing medical utilization review and PPO services, primarily on a regional or local level but the rate of consolidation is accelerating. In addition, a growing number of health insurance carriers, HMOs and third party administrators have established internal clinical management and PPO departments.
In workers' compensation, medical costs are rising at almost twice the rate of general medical inflation. Though such medical costs represent only about 5% of total health care expenditures, the increase in costs is significant for employers and insurance carriers and have risen more than 1000% since 1970. First Health and certain other cost management firms offer programs designed to control escalating medical expenses and indemnity payments for lost time, reduce litigation and allow injured employees to return to work as soon as possible. Many of the services used in group health are also applied to the workers' compensation market. PPOs are utilized to manage price. Clinical management services are targeted toward managing the number of units of service and the quality of that service, and helping the employee return to productive employment. In addition, bill review services are applied on a national basis in the nearly 40 states that have a medical fee schedule and in the remaining states which allow a usual and customary review. Additionally, at least 30 states have adopted legislation that enables workers' compensation managed care services, and legislation has been proposed in other states. The combination of these services offers workers' compensation insurance carriers and employers significant cost savings.
PPO Services - The First Health Network
Established in 1983, The First Health Network, previously known as The AFFORDABLE Medical Network, develops and manages payer-based PPO networks throughout the country that incorporate both group health and workers' compensation medical providers. This is the largest area of the Company's business. The networks consist of hospitals, physicians and other health care providers who offer their services to clients at negotiated rates in order to gain access to a growing national client base.
The Company's hospital network, as of March 2000, includes approximately 3,600 hospitals in 49 states, the District of Columbia and Puerto Rico. In each case, rates are individually negotiated for the full range of hospital services, including hospital inpatient and outpatient services. In addition, the Company has established an outpatient care network (OCN) comprising approximately 330,000 physicians, clinical laboratories, surgery centers, radiology facilities and other providers in 49 states, the District of Columbia and Puerto Rico.
During the last 10 years, the Company incurred substantial expense in expanding its PPO networks. The expansion has occurred in the number of health care providers within existing areas and in the number of networks throughout the country. The Company has expanded the number of hospital networks not only in major metropolitan markets, but also in targeted secondary and tertiary markets; many of the hospital and OCN providers that have been added during the past few years have been in these areas. Management expects to continue to incur significant expenses to further expand its hospital and outpatient care networks, particularly in secondary and tertiary markets and believes that its investment in developing these markets significantly differentiates it from competitors.
The following table sets forth information with respect to the approximate number of participating providers in The First Health Network at the end of each of the past five years:
The First Health Network was developed in response to the needs of the Company's national client base. These clients provide the leverage necessary to enable First Health to negotiate favorable rates with providers throughout the country. The First Health client base includes a diverse group of health care payers, such as group health and workers' compensation insurance carriers, third party administrators, HMOs, self-insured employers, union trusts and government employee plans. The Company believes the amalgamated buying leverage of these clients provides it with strength in negotiating PPO contracts with current and prospective health care providers.
Compensation. As a fee for developing and managing its expansive PPO network, the Company generally charges a percentage of savings realized by its clients. The amount of this fee varies depending on a number of factors including number of enrollees, networks selected, length of contract and out-of-pocket benefit copayments and amount of savings realized by its clients.
The Company competes with national and local firms which develop PPOs and with major insurance carriers, third party administrators and utilization review firms which have implemented their own preferred provider network as well as with firms which specialize in the collection and analysis of health care cost data.
Approach to Network Development
The strategy of The First Health Network is to create a selective network of individual providers which will meet the medical, financial, geographic and quality needs of its clients and their beneficiaries. First Health contracts directly with each hospital and generally does not contract with groups of hospitals or provider networks established by other organizations. Management believes this provides the maximum control over the composition and rates in the network and ensures provider stability in The First Health Network. To further promote stability and savings in the network, when possible, First Health enters into multi-year agreements with its providers with nominal annual rate increases.
The selected providers benefit from their participation in The First Health Network through increased patient volume as patients are directed to them through health benefit plans maintained by First Health's clients and other channeling mechanisms, such as the Company's clinical and care services and electronic and internet provider directory applications.
The network consists of a full array of providers, including hospitals and outpatient providers (physicians, laboratories, radiological facilities, outpatient surgical centers, mental health providers, physical therapists, chiropractors, and other ancillary providers). By establishing contractual relationships with the complete range of providers, First Health is able to impact the vast majority of the client's health costs and to facilitate referrals within the network for all needed care.
The rate structure negotiated by First Health maximizes the savings for the client and gives incentives to providers to deliver cost effective care. Unlike many other PPOs which negotiate price discounts or separate rates for intensive care and other specialty units, First Health strives to negotiate a single all inclusive per diem for medical/surgical and intensive care unit days in hospitals. The majority of the Company's hospital PPO contracts are negotiated with an all-inclusive rate structure. The charges for hospital outpatient care are controlled as well through reimbursement caps. Fees for physicians and other outpatient providers are set by fee schedules established by First Health. The negotiated rates have resulted in typical savings of more than 40% on inpatient hospital costs and 20-30% for physician and outpatient costs.
After a network has been established, First Health provides ongoing consulting services to clients, re-negotiates contracts with providers and prepares annual evaluations which profile for its clients the effectiveness of the network. The networks are continuously undergoing refinements with active redevelopment activity to expand geographic coverage and to improve rate structure as care continues to shift to outpatient settings.
In order to promote an ongoing and long term positive business relationship with network providers, First Health has established an extensive provider relations program. Dedicated staff perform a variety of activities including responding to hospital claims inquiries, conducting site visits, preparing provider newsletters and participating in joint hospital/First Health functions which are intended to promote goodwill and increased utilization of network providers. The Company's retention rate for hospitals has been more than 99% and more than 97% for physicians and other outpatient providers.
PPO Quality Assessment
Quality assessment of network providers is a critical component in the selection and retention process. The Company has established an intensive program which evaluates each individual provider against standards set for various quality indicators. Provider evaluation occurs prior to the selection of the provider and continues while they are in the network.
Information Systems
Management of First Health believes its interactive, on-line computer-based information systems have been a major factor in its ability to provide clients with comprehensive cost effective healthcare information.
First Health utilizes a broad range of proprietary information systems applications to support its PPO business. Present information systems support management of all aspects of provider recruitment, including maintenance of a comprehensive data base of information about members utilization of PPO providers. Additional information systems are utilized to develop rate and fee objectives and strategies prior to initiating contract negotiations with providers. The Company has generally invested 10% to 12% of revenue in its information systems and anticipates continuing these investments in the future. Currently the Company has major upgrades underway in several areas with particular emphasis within its claims processing system. First Health also maintains a proprietary system to re-price health care claims to the contracted rate for its clients.
In addition, health care cost data analysis services are available to the Company's clients. These services provide clients with in-depth customized information concerning their health care cost and utilization experience. Using its internally developed proprietary software, the Company analyzes its clients' health care claims information and benefit plans in order to provide each client's specific health care cost profile and evaluate appropriate cost management programs. This software also allows the Company to simulate how changes in a benefit plan's structure will change the overall cost of a benefit program.
Internet Application
Internally developed Internet channeling tools are available for both group health and workers' compensation clients. Currently there are three channeling tools available: electronic directory, directory maker and worksite poster. Each tool contains the same information that is made available through First Health's toll-free telephonic provider directory -- data for hospital and outpatient care providers in The First HealthO Network. Provider information is updated on a weekly basis. First Health's Internet channeling tools are currently for business-to-business use and are password-protected.
Electronic Directory
Electronic directory is easy to use and allows clients, their employer groups or participants to search for a hospital, physician or clinic in The First HealthO Network. Electronic directory can search for a provider by zip code within a 5-mile default radius, county, city or provider name. It also provides a map with directions to the provider. Electronic directory requires only basic Internet access.
Directory Maker
Directory maker is designed to allow clients to create and print custom directories of The First HealthO Network providers at the client site. Directories can be created on an as-needed basis and will contain the most up-to-date information. By creating a directory profile, clients can pick specific cities, counties or even zip codes that will be included in a directory, as well as determine the way the data will be sorted. Directories are typically created in 24 hours or less. To use directory maker, clients need only Internet access, a JavaScripta and an enabled browser.
Worksite Poster Application (for workers' compensation use only)
The worksite poster application is designed to assist clients by producing posters that list hospitals, clinics/facilities and physicians closest to their site(s). Clients can search by zip code within a 5-mile radius default to find providers in The First HealthO Network. In addition, clients can specify physicians, clinics and hospitals or any combination of the three to print on a poster. This application requires basic Internet access.
Additional Internet Services
Client and Member Site
In addition, First Health intends to offer a member services Internet application to assist participants in utilizing our services. Currently in a pilot phase, the application will allow members to:
* Access general information about First Health; * Print commonly used health benefits forms, including claims forms; * Locate a provider in The First HealthO Network; * Obtain answers to frequently asked questions about The First HealthO Network; * Send First Health an e-mail with health plan questions.
We are evaluating additional services for this site, with the intent of having them available in the year 2000, including:
* Electronic EOBs; * Claims status (i.e. status of a particular claim, claims history of an individual, date of service, benefit category, etc.); * Language choice; * Enrollment/eligibility; * ID cards; * Client Reports; and * Survey tool for customer satisfaction.
Provider Site
We currently offer providers in The First HealthO Network access to a provider Internet site. This site allows providers access to a complete client listing along with a payor list. This site is being further developed in 2000. At that time, we plan to expand the provider Internet site to include the following:
* Payer information (eligibility); * Claims status; * Referral directory; * Precertification; * Provider demographics; * Clients' Summary Plan Documents; * Electronic payment/EOBs; * Information about First Health; and * Survey tool for provider satisfaction.
Claims Administration Capabilities
The Company provides "one-stop shopping" for employers offering indemnity, PPO and point of service plans through its core competency of claims administration and customer service. The Company provides clients with an integrated package of health care benefits administration including:
* availability 24 hours, seven days a week * medical, disability, dental and vision claims processing * prescription drug plan administration and network management * managed care administration
Additionally, they can utilize, if they so desire:
* COBRA administration * Flexible Spending Account administration * stop-loss brokerage * data analysis
The Company's claims administration product is a sophisticated, technologically advanced claims processing, tracking and reporting system. A majority of this processing is performed by the Company's fully integrated and proprietary system ("First Claim"). The system was developed completely in-house by First Health through its acquisition in July, 1997 and is owned entirely by the Company. The system supports a broad range of benefit programs, including medical care, prescription drugs, FLEX accounts, vision care and dental care. Additionally, in order to further enhance the Company's claims processing capabilities, the Company is in the process of expanding its offering by adding new and advanced features including imaging and artificial intelligence. The Company currently estimates that these development efforts will significantly enhance and improve upon the capabilities of First Claim. Such modifications are expected to be ongoing over the next two years or so.
The system helps clients increase the cost effectiveness of their benefit plans by offering such features as on-line reporting capability, Electronic Data Interchange ("EDI"), rapid and responsive customer service, automatic tracking of annual, lifetime, per-case, and floating maximums, and full integration with all other First Health departments and services. This integration benefits clients since the Company can analyze claims data as well as clinical management, pharmacy and network usage data. This analysis enables the Company to provide comprehensive management reports that can impact medical costs. In addition, because First Health's claims system is an on-line, "real time," interactive system, clients can expect member issues to be minimized because claims can be paid promptly and accurately.
This single-vendor environment is a benefit for participants as well. They have just one number to call for all health care benefit information. The round-the-clock, toll-free number they call to locate a network provider or to obtain general health information is the same number they call with claims and eligibility inquiries. Additionally, First Health's claims process can be virtually paperless for the participant, especially when a network provider is used - which is a critical step to enhancing participant satisfaction. This system automatically calculates benefits and issues checks, letters, and explanation of benefits (EOBs) to plan participants and providers.
The system incorporates advanced technologies available, including:
* Online reporting and data retrieval capabilities After a claim is entered into the system, it verifies eligibility, applies appropriate deductibles, adjudicates the claims against predetermined negotiated or usual and customer guidelines, matches precertification, searches for previous history of coordination of benefits, and presents final adjudication information to the benefit examiner for his or her approval. Once the benefit examiner has reviewed and approved the information on the screen, the system generates a check and explanation of benefits that evening, which are mailed the next day.
* Electronic Data Interchange (EDI) First Health contracts with several commercial claims clearinghouses to gather EDI claims from providers. Providers transmit claims to one of these clearinghouses. The clearinghouses then batch claims destined for First Health and forwards them to the Company each day. Performing these functions electronically enhances efficiency and accuracy.
* Tracking of annual, lifetime and floating maximums When a new client is loaded onto the system, the Company will transfer claims history from the previous administrator. The system tracks benefit maximums on-line for every participant. When an individual has reached a specified maximum, the system will automatically reduce the benefit payment as specified in each client's plan document.
* Responsive and comprehensive customer service capabilities Integration of First Health's managed care and claims systems enable the participant to access all health benefits information including claims history, eligibility, deductibles and maximum accumulations, as well as Explanation of Benefit (EOB) information through a single, round-the-clock, toll-free number.
These advanced technologies enable First Health's system to support a broad range of benefit programs, including medical, dental and vision care, Medicare, prescription drugs, Consolidated Omnibus Budget Reconciliation Act (COBRA), Health Insurance Portability and Accountability Act (HIPAA), long- and short-term disability, and flexible spending accounts.
Clinical Management Services
First Health provides centralized clinical and care programs (utilization review, medical case management and disease management services) from its headquarters in Downers Grove, Illinois, and Scottsdale, Arizona, through an internal staff consisting primarily of allied health professionals, licensed practical and registered nurses and physicians. First Health also has a nationwide network of consulting physicians in various specialties. The Company's clinical and care services are coupled with the Company's PPO and claims processing services to provide an integrated service offering.
First Health's clinical and care programs advise their participants and dependents of review requirements. A participant, or his or her attending physician, utilizes the program by calling one of First Health's toll-free numbers prior to the proposed hospitalization or outpatient service or within two business days of an emergency admission or outpatient service. From these calls, First Health's clinical management staff gathers the demographic and medical information necessary to enable it to perform a review and enters this information into First Health's proprietary review system. Based on this information, and using First Health's clinically valid and proprietary review criteria, First Health determines whether it can recommend certification for the proposed hospitalization or outpatient service as medically necessary under the participant's health care plan.
Upon completion of the review, First Health notifies the participant, the attending physician and other affected providers of the outcome of the review. First Health also notifies its client as to whether the proposed hospitalization and length of stay or outpatient service can be certified as medically necessary and appropriate under the terms of the client's benefit plan. It also uses the review outcome to pay claims in accordance with the client's benefit plan. First Health does not practice medicine and its services are advisory in nature. All decisions regarding the patient's medical treatment are made by the patient and the patient's attending physician, not by First Health. Participants can call First Health on a toll-free line if they have questions regarding its services. Clients and their claim administrators also can obtain additional information from the Client Services staff.
The following is a summary of the Company's current principal programs.
Case Management. First Health reduces a client's hospitalization costs by identifying (for the purposes of benefit plan coverage only) hospital admissions and lengths of stay which are medically unnecessary or excessive compared to established national criteria. Additionally, First Health remains actively involved during the hospitalization in reviewing and monitoring the patient's length of stay. This same process is applied to workers' compensation admissions.
The program is also designed to provide clients with a careful review of all cases which involve complex high cost or chronic diseases, conditions or catastrophic illnesses. Through periodic reviews, First Health's nurse case managers and physicians identify potentially large claim cases. These services consist primarily of conferring with the attending physician and other providers to identify cost-effective treatment alternatives. Such alternatives may include moving a patient from an acute care hospital to less expensive settings -- often the home -- as soon as the patient's physician determines that it is safe and medically feasible. If such a move requires a home nursing service or medical equipment, First Health serves as a referral for alternative available services, provides recommendations regarding continued usage of these services and negotiates discounts with the providers where network providers are not appropriate or not available. In all cases, the decision to proceed with the course of treatment initially prescribed by the attending physician or a more cost- efficient alternative identified by First Health is made by the patient and his physician. Clients which select stand-alone case management independently identify those cases which involve potentially high cost diseases, conditions or procedures and refer such cases to First Health to identify cost-effective treatment alternatives.
The Care Support Program is a patient-focused program that enables us to identify high-risk members who account for the majority of health care dollar expenditures. The Care Support Program is a comprehensive approach which starts with predictive modeling of a client's specific population. The program is centered around the member to include highly-personalized patient education and support initiatives, network channeling, medication support and other activities aimed at increasing patient compliance, as well as inpatient monitoring, discharge planning, and intensive case management. This approach allows for coordination of information for members with a series of needs which may overlap among many diseases.
The medical management process for Workers' Compensation monitors an injured worker's care and identifies opportunities for cost-effective alternative care and treatment with the goal of returning the worker to the client's work force or to reach Maximum Medical Improvement (MMI), as soon as medically feasible. The case manager is responsible for the overall coordination of the many comprehensive services that may be needed, such as review of rehabilitation and chiropractic care, home health services and others, with a constant focus on the injured worker's ability to return to productivity.
PPO Redirection and Telephonic Provider Directory. The Company will attempt to redirect the patient to a PPO hospital or outpatient provider located near the patient. Additionally, the clients' participants can access the website or call the Company's telephonic provider directory line to determine whether a network provider of their choosing within a reasonable proximity to their residence or place of work. By utilizing a PPO network hospital or outpatient provider, the payer and the patient will achieve savings from what the billed charges would otherwise be.
24/7 Health Information Line. This is a 24-hour-a-day, 7-day-a-week service that ties together the full range of First Health's programs by providing participants with a single source for guidance through the health care delivery system. The services of this program include:
* Helping members obtain answers to general medical questions; * Assisting members to make informed health care decisions; * Locating appropriate network providers; * Facilitating communication between providers and members; * Identifying patient situations that may be appropriate for referral to clinical management services; * Initiating pre-certification for medical and mental health care; * Answering claims questions and inquiries; and * Answering pharmacy program questions or referrals.
This service is offered to clients who participate in the full range of network and clinical management programs.
Physician Resources
First Health believes that its in-house physician staff is an invaluable resource in its clinical and care programs and in developing clinical policy and guidelines. The staff includes approximately 25 experienced board certified physicians in such specialties as family practice, internal medicine, cardiology, gynecology, urology, orthopedics, psychiatry, pediatrics, and surgery as well as other doctoral level practitioners such as clinical psychology and chiropractic medicine. In addition, First Health has a nationwide network of consulting physicians in the significant specialties. This physician staff is crucial to the development and maintenance of up-to- date clinically valid review criteria and protocols and the network quality assessment efforts.
Benefit Plan Recommendations
Clients can take various steps in benefit plan design that will help accomplish the goal of managing long-term health care costs. The client's ability to accomplish this goal through First Health is contingent on:
* Reasonable incentives or disincentives for plan participants to comply with the notification procedures and clinical management recommendations of First Health. Because early notification is essential to effective case management, these incentives help ensure not only cost effectiveness but quality outcomes.
* An effective benefit differential between in-network and out-of- network services of at least 10% for inpatient and outpatient services, to include annual stop-loss provisions sufficiently large so as to reinforce copayment/coinsurance differentials.
* Coverage for travel and organ-donor costs for services at network transplant providers, and coverage of well-baby care for participation in the maternity screening services.
* Distribution to all plan participants of a First Health identification card, including the toll-free health information line, prior to the implementation date. Because the toll-free number is such an integral part of the program, the more familiar the participant is with the number, the more likely he or she is to use it -- and the sooner the client will begin realizing cost savings.
* A program of effective communication to plan participants about First Health programs at least semi-annually. Well-planned, timely communication increases participant satisfaction and compliance significantly.
Workers' Compensation Services
Bill Review System. The Company provides comprehensive workers' compensation medical bill review services through a sophisticated computer system that enforces administration policies, applies state- specific workers' compensation fee schedules, checks for billing infractions and applies provider contract rates. Since all of these functions are consolidated and automated, they reduce paperwork and costs associated with claims processing and are highly cost effective for larger workers' compensation entities who generally process in excess of 500,000 bills annually. The Company currently is in the process of developing a system for organizations that process less than 500,000 bills annually. It is estimated that it will be implemented in mid to late 2000. Since these system capabilities are integrated with its medical management and PPO services, the Company believes it offers one of the most comprehensive workers' compensation medical cost management programs in the industry. This workers' compensation program was introduced in California in 1986.
Marketing. First Health markets the workers' compensation programs to insurance carriers, third party administrators, state workers' compensation funds, and self-insured, self-administered companies. The Company's payer clients include at least some offices of six of the ten largest workers' compensation insurers and the largest industrial company in the world. Worksite posters, provider directories (either paper or electronic) and other materials provided by its payer clients encourage injured employees to utilize First Health's provider network.
Bill Review. Services offered by the Company include a computer assisted review of medical provider billings to ensure accuracy and adherence to established rates and billing rules. In 40 states, including California, Texas, Arizona, Michigan, Ohio and Florida, a schedule of presumed maximum fees has been established for workers' compensation medical claims. The review process identifies and corrects inappropriate bill practices and applies state fee schedules. Provider network discounts are applied as well during the review. Additionally, through the system, the Company is able to go beyond "traditional" bill review services to provide enhanced systems savings by reorganizing non-related services, upcoding and unbundling of charges and other features. Finally, bill review data is integrated with medical management and quality assessment activities.
The Company has an agreement with Electronic Data Systems Corporation ("EDS") which enables it to utilize EDS' extensive data processing and communications networks. EDS modified its comprehensive bill review and audit processing system to handle workers' compensation claims and integrated the system with First Health's medical management programs.
Bill review decreases workers' compensation payers' administrative costs because First Health maintains virtually all aspects of the program.
First Health offers two variations of the bill review program:
* Systems Lease: The systems technology is brought to the client's office where their staff performs bill review. * Service Bureau: Bills are sent to First Health's processing centers and First Health keys the bills and performs bill review.
Compensation. The Company generally receives an agreed upon percentage of total savings generated for clients through bill review plus a per-bill fee, including provider network discounts, adjustments to applicable billing rules and regulations and utilization reviews. Savings are generally calculated as the difference between the amount medical providers bill the payer clients and the amount First Health recommends for payment.
Customers and Marketing
First Health primarily markets its services to national multi-sited direct accounts, including self-insured employers, government employee groups and multi-employer trusts. In addition, First Health markets its services to and through group health and workers' compensation insurance carriers. The following are representative customers of First Health:
Agilent Technology, Inc. Liberty Mutual Insurance Company American International Group McDonald's Corporation Boilermakers National Health and NALCO Chemical Company Welfare Fund National Association of Letter CNA Carriers ConAgra, Inc. The Pillsbury Company Crawford and Company State Farm Mutual Automobile Delphi Automotive Systems Insurance Company Eaton Corporation Tandy Corporation General Motors Corporation Texas Instruments Employees' Hartford Financial Services, Inc. Health Benefits Trust Hewlett-Packard Company The RETA Trust Kemper National Services The Sherwin-Williams Company Travelers Property Casualty
The Company presently has approximately 50 group health and workers' compensation insurance carrier clients. Typically, First Health enters into a master service agreement with an insurance carrier under which First Health agrees to provide its cost management services to health care plans maintained by the carrier's policyholders. First Health's services are offered not only to new policyholders, but also to existing policyholders at the time their policies are renewed. The insurance carrier's sales and marketing staff ordinarily has the responsibility for offering First Health's services to its policyholders, thus relieving the Company of a significant marketing expense.
First Health typically enters into standardized service contracts with its direct accounts and master service agreements with its insurance carrier and third party administrator clients. These contracts and agreements have automatically renewable successive terms of between one and three years, and are generally terminable upon one to six months' notice prior to their expiration. These contracts are generally non-exclusive and permit the client to provide medical review services on an in-house basis; however, these contracts are generally exclusive as to the client's ability to use other PPO firms during their term.
Risk Products and Insurance Company Acquisitions
The Company's experience with its HMO-like health plans for self- funded ERISA did not prove to be as commercially accepted in 1998 and 1999 as the Company anticipated; thus, it was significantly scaled back for 2000. As an extension of the Company's cost management services, in February 1996 the Company acquired American Life and Health Insurance Company and a subsidiary insurance company (collectively "American"). American is a small medical indemnity insurer with licenses in 26 states and approximately $8 million in annual premiums. In September 1997, the Company acquired Loyalty Life Insurance Company ("Loyalty"), a 49-state insurance shell.
The Company acquired American and Loyalty in order to obtain the infrastructure and licenses to enable the Company to leverage its managed care assets into various products for multi-sited employers.
The Company's product promotes the continuity of care through a single point of entry into the health care delivery system. By calling, employees can obtain information on all aspects of their health benefit program. This includes information ranging from preventive care and claims status, to inquiries regarding network providers and benefit plan coverage.
The program integrates the Company's PPO network of providers, The First Health Network, with clinical management programs and claims administration. Access to First Health's national network of providers, including specialty and sub-specialty care such as transplant, gives unparalleled provider coverage not only locally but throughout the country.
Claims administration is provided through the Company's internal capabilities, which have been developed since the time of the American acquisition, and is integrated throughout the entire process so as to take advantage of the potential synergies and competencies.
For a single guaranteed cost, the Company's clients can be assured of a comprehensive health care benefit plan that ensures the earliest possible impact on patient care which provides a higher quality of employee healthcare at a lesser cost.
Stop-Loss Insurance
The Company's stop-loss insurance capabilities through its wholly- owned insurance companies allow another dimension to First Health's ability to serve as an integrated single source for managed care needs. Because First Health's stop-loss rates are based on the savings and value generated through the Company's various services, First Health is able to offer competitive rates and policies. The Company can offer multiple-year rate guarantees that include fixed-percent increases and that are based upon loss results. Stop-loss policies are written through the Company's wholly-owned insurance subsidiaries. Policies can be written for either specific or aggregate stop-loss insurance. This is the primary insurance product the Company is emphasizing in its sales efforts currently.
First Health Services Overview
First Health Services ("Services") provides value-added automation, administration, payment, and health care management services for public sector clients. Services provides: 1) Pharmacy Benefit Management, which manages pharmacy benefit plans for managed care organizations, HMOs, Insurers, Specialty & Elderly Rx programs, Medicaid programs, state-funded specialty programs, and self-funded employers; 2) First Mental Health, which provides psychiatric utilization review, long-term care review and quality of care evaluation services for state government clients; and 3) Fiscal Agent, which administers state Medicaid health plans and other state funded health care programs.
First Health has been able to leverage its Medicaid fiscal agent expertise, its base of experience in the public sector and its client relationships with over 20 state governments, to provide new products and services as the public sector health programs (including Medicare and Medicaid) move toward managed care.
Pharmacy Benefit Management (PBM)
Services' PBM service line is one of the largest PBMs in the country. Services' PBM business provides a full range of services, including: pharmacy point-of-sale ("POS") eligibility verification and claims processing; provider network development and management; disease state management programs; prospective and retrospective drug utilization reviews ("DUR"); provider profiling; formulary development; manufacturers' rebate administration; and RxPert, a proprietary database and decision support system for pharmacy utilization monitoring and plan management.
PBM services are increasingly required by both public and private third-party payers as prescription drug expenses grow. Services' PBM program is one of the few large-scale participants in the market not aligned with or controlled by a drug manufacturer. Management believes that Services' role as an objective provider is a distinct competitive advantage in the growing sectors of managed care organizations and state government plans, where clinical autonomy is often a requirement. Furthermore, Services is the national leader with substantial experience managing pharmacy plans for Medicaid and elderly populations. This clinical and management expertise gives Services a competitive advantage in the rapidly growing market of managed care organizations serving capitated public sector lives (Medicare and Medicaid).
Services also offers Disease Management Programs ("DMP") to assist physicians and network pharmacies in the treatment of prevalent, high- cost disease states. This program provides physicians with diagnosis, treatment, and formulary guidelines which have been developed by nationally recognized clinicians and medical academicians. Services' DMP focuses on that percentage of patients who experience preventable therapeutic problems (i.e., non-compliance, inappropriate therapy, adverse drug reactions, etc.). The program includes prior authorization initiatives, prospective DUR, retrospective DUR, and educational intervention initiatives (concurrent DUR).
First Mental Health
First Mental Health provides an array of quality evaluation and utilization review services to Medicaid programs, state mental health agencies, HMOs, managed care organizations, and other health care programs desiring to improve quality of care, contain costs, ensure appropriate care, and measure outcomes. Products include: 1) External Quality Reviews; 2) Utilization Review; and 3) Long Term Care Reviews.
The External Quality Review encompasses the entire medical delivery mechanism, not just the mental health portion. There is a new market rapidly developing as various states implement this type of program to move Medicaid recipients into Managed Care Organizations.
First Mental Health provides Utilization Review Services for a variety of behavioral health programs, including Medicaid Under 21 acute psychiatric treatment, adult and geriatric acute psychiatric treatment, residential services, and other alternative services. First Mental Health also provides on-site quality reviews and inspection of care for community mental health centers, residential treatment centers and inpatient psychiatric programs. As state Medicaid programs and state departments of mental health spend increasing proportions of public funds on the treatment of mental and substance abuse illnesses, the need for utilization review services is increasing. Some states are moving toward capitated contracts with private sector firms to help manage this problem; however, many states are opting to contract for utilization review services to ensure appropriate mental health care while containing costs.
Under the Long Term Care Review program, First Mental Health provides level-of-care determinations as well as preadmission screenings and annual resident reviews ("PASARRs") to determine the need for specialized services for mental illness, mental retardation or related conditions.
Fiscal Agent
Services' Fiscal Agent service line provides customers with full fiscal agent operations and systems maintenance and enhancement. Under this product line, Services provides eligibility verification and ID card issuance, health care claims receipt, resolution, processing and payment, provider relations, third party liability processing, financial reconciliation functions and client reporting. Customers of Services include state Medicaid agencies, state departments of human services, departments of health and managed care organizations serving Medicaid populations. Fiscal Agent administrative services may also be procured to support other government programs, such as state employee benefit plans, early intervention programs, or other health care initiatives. Typically, Fiscal Agent systems are modified to meet specific states' program policy and administration requirements, and services are offered for all claim types.
Services is one of four major competitors in the Medicaid fiscal agent field. Services has developed and operates a HCFA-approved information system for each of these contracts. These systems are utilized to process and adjudicate eligibility, health care claims and encounters, pay providers under a full range of reimbursement methods and to generate reports for use in managing the program.
Services management believes there are significant future opportunities in this market and has been recently awarded significant additional business from the Commonwealth of Virginia. In addition, there are several benefits that Services receives from operating the Fiscal Agent business: 1) the contracts are profitable, with very little new capital investment in the business required; 2) the expertise, capabilities and systems developed from these contracts have provided a platform for expansion into other products, services and customer segments; and 3) customer relationships with the states have proven valuable to First Health Services in developing other business in PBM and First Mental Health.
Other Services
First Health National Transplant Program. As medical technology advances, new and more complicated procedures, such as transplants, have evolved. In an attempt to assist the Company's clients in meeting these technological advances and their related costs, First Health has developed The National Transplant Program.
This program has been designed to facilitate the cost-effective use of high quality transplant services through an integrated system whereby case management staff assists in the coordination of the process from the determination of the need for a transplant through follow up care for one year after the transplant is performed.
The goals of The National Transplant Program include:
* Enhancing quality of care and favorable outcomes through case management and direction of patients to a selected number of transplant programs that meet stringent quality and performance standards; * Reducing health care costs by contracting a cost-effective package rate with high quality transplant centers that have a proven performance record of desirable outcomes; * Improving predictability of transplant costs by establishing fixed fees that share risk with the providers and spread payment out over a one-year period.
Transplants included in the program include: heart, lung, heart/lung, liver, kidney, kidney/pancreas and bone marrow (both allogenic and autologous).
Year 2000 Matters
See Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1999 Annual Report to Stockholders. Such information is incorporated herein by reference.
Competition
First Health competes in a highly fragmented market with national and local firms specializing in utilization review and PPO cost management services and with major insurance carriers and third party administrators which have implemented their own internal cost management services. In addition, other health care programs, such as HMOs, compete for the enrollment of benefit plan participants. First Health is subject to intense competition in each market segment in which it competes. Many of First Health's competitors are significantly larger and have greater financial and marketing resources than First Health.
First Health competes on the basis of the quality and cost- effectiveness of its programs, its proprietary computer-based integrated information system and its emphasis on commitment to service and high degree of physician involvement. Due to the quality of the services offered, First Health tends to charge more for its services than many of its competitors.
The insurer market for workers' compensation programs is somewhat concentrated with the top ten insurers controlling over 50% of the insured market. The loss or addition of any one of these insurers could have a material impact on revenues. First Health currently has as clients at least some offices of six of the top ten insurers. While experience differs with various clients, obtaining a new client requires extended discussions and significant time.
Over the last few years, the Company believes a major competitive threat has arisen as a result of the so-called "Silent" Preferred Provider Organizations (PPO) or non-directed networks. In this situation, medical reimbursement payers lay claim to PPO discounts without providing any patient channeling mechanisms. These "networks" use the camouflage of directed networks to secure rewards of managed care discounts from medical providers without the responsibilities. These organizations betray the trust of providers who offer preferred rates to networks anticipating active patient directing programs, thus undercutting the integrity of managed care business relationships, threatening the viability of legitimate networks, such as the Company's, and jeopardizing provider finances.
Since managed care is fundamentally a bargain between a managed care organization and a medical provider in which the managed care organization channels patients to the provider in exchange for favorable price consideration and the adherence to managed care guidelines, the "silent" PPO networks can and do undermine that bargain. To the extent that providers are defrauded in that price for volume trade-off, the ability of legitimate managed care companies to obtain appropriate priced considerations will be diminished.
Employees
As of December 31, 1999, First Health had approximately 3,600 employees, including approximately 1,450 employees involved in claims processing and related activities; 630 employees in information systems; 500 employees in various clinical management and quality assessment activities; 350 employees in PPO development and operations, 220 employees in sales and marketing; 200 involved in member and client service activities and the remainder involved with accounting, legal, human resources, facilities, and other administrative, support and executive functions. First Health also has a nationwide network of conferring physicians in various specialties, most of whom are compensated on an hourly or per visit basis when requested by First Health to render consulting services. None of the Company's employees are presently covered by a collective bargaining agreement. The Company considers its relations with its employees to be good.
Government Regulations and Risk Management
The Company believes that its methods of operation are in material compliance with all applicable laws, including statutes and regulations relating to PPO and clinical management operations.
Item 2.
Item 2. Properties
First Health owns four office buildings consisting of an aggregate of approximately 465,000 square feet of space. The Company's headquarters are located in Downers Grove, Illinois and the other three are located in West Sacramento, California; Houston, Texas and Scottsdale, Arizona. Additionally, the Company leases significant office space in the Salt Lake City, Utah; Milwaukee, Wisconsin; Richmond, Virginia; Pittsburgh, Pennsylvania; Boise, Idaho; and the Los Angeles, California area. The Company also has numerous smaller leased facilities throughout the nation.
All of the Company's buildings and equipment are being utilized, have been maintained adequately and are in good operating condition. These assets, together with planned capital expenditures, are expected to meet the Company's operating needs in the foreseeable future.
Item 3.
Item 3. Legal Proceedings
First Health is subject to various legal proceedings arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these pending suits will not have a material adverse effect on the business or financial condition of First Health. See Notes to Consolidated Financial Statements in the Company's 1999 Annual Reports to Stockholders, incorporated herein by reference, for further information.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during the fourth quarter of the year ended December 31, 1999.
James C. Smith has served as President and Chief Executive Officer and director of First Health since January, 1984.
Daniel Brunner, a director of the Company, has been Executive Vice President, Government Affairs since January 1994. Prior to that, he was Corporate Operating Officer in charge of government affairs since February 1992. Mr. Brunner has served as President of AFFORDABLE since April 1983.
Mary Anne Carpenter has held various senior management positions in the Company since joining the Company in 1983. In June 1997, Ms. Carpenter was promoted to Executive Vice President, Service Products. Prior to that, from March 1994 to May 1997, she was Executive Vice President, Clinical Operations and Claims Repricing. Prior to joining the Company, Ms. Carpenter held various positions in the health care industry.
A. Lee Dickerson joined First Health in 1988 as Regional Director, Hospital Contracting. Mr. Dickerson was promoted into his current position in November 1995. Previously he held various senior level positions in the Company's Provider Networks area. Mr. Dickerson has over 20 years experience in the health care industry.
Patrick G. Dills joined First Health in 1988 as Senior National Director, Sales and Marketing. Mr. Dills was promoted to Executive Vice President, Managed Care Sales in January 1994 and to Executive Vice President, Sales in 1998. Prior to joining First Health, Mr. Dills held various senior sales positions at M&M/Mars, and various divisions of Mars, Inc. for the prior six years.
Ronald H. Galowich has served as Secretary of the Company since 1983, General Counsel from 1983 to March 1997, Executive Vice President of the Company from 1983 to May 1994 and Chairman of the Board of Madison Group Holdings, Inc., a multi-purpose business and investment company, since 1990.
Lottie A. Kurcz joined First Health in 1986 as Manager of National Accounts. Since joining First Health, Ms. Kurcz has held various senior sales and marketing positions. Ms. Kurcz was promoted in 1998 to Senior Vice President, Strategic Business Development. Prior to her promotion, Ms. Kurcz was Senior Vice President, Risk Products. Prior to joining First Health, Ms. Kurcz held various senior positions in private industry.
Jerry L. Seiler joined the Company in May 1989 as Accounting Manager and was promoted to Corporate Controller in 1990 and has served in that capacity since.
Susan T. Smith has served as General Counsel of the Company since March 1997. She was Associate General Counsel from September 1994 and joined the Company in July 1992. Prior to joining First Health, Ms. Smith was a partner at Pryor, Carney and Johnson, a large Denver law firm where she headed the firm's healthcare law practice.
Joseph E. Whitters joined the Company as Controller in October 1986 and has served as its Vice President, Finance since August 1987 and its Chief Financial Officer since March 1988.
Edward L. Wristen joined First Health in November 1990 as Director of Strategic Planning and was promoted to Vice President, Managed Outpatient Care Programs, in April 1991. In February 1992, he became Executive Vice President and Corporate Operating Officer in charge of Provider Networks. In January 1995, Mr. Wristen became Executive Vice President, Risk Products. In September 1998, Mr. Wristen became Chief Operating Officer. Prior to joining First Health, Mr. Wristen was President of Parkside Data Services, a subsidiary of Parkside Health Management Corporation, a firm engaged in data and analytic services, from March 1989 to November 1990. From February 1987 to February 1989 Mr. Wristen was Chief Operating Officer and Executive Vice President of Addiction Recovery Corporation, a regional chain of chemical dependency hospitals. Mr. Wristen has over 18 years experience in the health care industry.
The Company's officers serve at the discretion of the Board of Directors.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has been quoted on the Nasdaq National Market under the symbol "FHCC" since the Company's corporate name change on January 1, 1998 and prior to that was quoted under the symbol "HCCC". Information concerning the range of high and low sales prices of the Company's Common Stock on the Nasdaq National Market and the approximate number of holders of record of the Common Stock is set forth under "Common Stock" in the Company's 1999 Annual Report to Stockholders. Information concerning the Company's dividend policy is set forth under "Dividend Policy" in the Company's 1999 Annual Report to Stockholders. All such information is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data.
Selected financial data of the Company for each of its last five fiscal years is set forth under "Selected Financial Data" in the Company's 1999 Annual Report to Stockholders. Such information is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
The information required by this item is set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1999 Annual Report to Stockholders and is incorporated herein by reference.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
The disclosures about Market Risk required by this item are contained in the Company's 1999 Annual Report on page 29 and are incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this item are contained in the Company's 1999 Annual Report to Stockholders on the pages indicated below and are incorporated herein by reference.
Financial Statements: Page No. --------------------- -------- Report of Independent Auditors 31
Consolidated Balance Sheets as of December 31, 1998 and 1999 32
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999 33
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1997, 1998 and 1999 33
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999 34-35
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1998 and 1999 36-37
Notes to Consolidated Financial Statements 38-45
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Certain information regarding the Company's executive officers is set forth under the caption "Executive Officers of the Company" in Part I. Other information regarding the Company's executive officers, as well as certain information regarding First Health's directors, will be included in the Proxy Statement for the Company's Annual meeting of Stockholders to be held on May 16, 2000 (the "Proxy Statement"), and such information is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation.
The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference. However, neither the Report of the Compensation Committee of the Board of Directors on Executive Compensation nor the Performance Graph contained in the Proxy Statement is incorporated by reference herein, in any of the Company's previous filings under either the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or in any of the Company's future filings.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) The Index to Financial Statements is set forth on pages 25 and 26 of this report.
(2) Financial Statements Schedules: Schedule II - Valuation and Qualifying Accounts and Reserves. Schedule IV - Reinsurance
(3) Exhibits
(b) Report on Form 8-K:
The Company did not file a current report on Form 8-K during the fourth quarter of fiscal 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST HEALTH GROUP CORP.
By: /s/ James C. Smith ------------------------- James C. Smith, President and Chief Executive Officer
Date: March 23, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 27, 2000:
Signature Title --------------------- ---------------------------- /s/Thomas J. Pritzker * Chairman of the Board Thomas J. Pritzker
/s/James C. Smith * President, Chief Executive James C. Smith Officer, Director (Principal Executive)
/s/Joseph E. Whitters Chief Financial Officer Joseph E. Whitters (Principal Financial Officer)
/s/Jerry L. Seiler Controller Jerry L. Seiler (Principal Accounting Officer)
/s/Ronald H. Galowich * Secretary Ronald H. Galowich Director
/s/Michael J. Boskin * Director Michael J. Boskin
/s/Burton W. Kanter * Director Burton W. Kanter
/s/David Simon * Director David Simon
/s/Daniel Brunner * Executive Vice President, Daniel Brunner Government Affairs, Director
/s/Robert S. Colman * Director Robert S. Colman
/s/Harold S. Handelsman * Director Harold S. Handelsman
/s/Don Logan * Director Don Logan
* By: /s/ Joseph E. Whitters Joseph E. Whitters, Attorney in Fact
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders First Health Group Corp. Downers Grove, IL 60515
We have audited the consolidated financial statements of First Health Group Corp as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999 and have issued our report thereon, dated February 18, 2000; such consolidated financial statements and report are included in your 1999 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of First Health Group Corp. listed in Item 14. These consolidated financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based upon our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois February 18, 2000
INDEX TO EXHIBITS
Exhibit No. Description ------------------------------------------------------------------------ 2.1. Omitted
3.1. Restated Certificate of Incorporation of the Company. {3.1} (1)
3.2. Amendment to Restated Certificate of Incorporation of the Company. {3.2} (9)
3.3. Restated Certificate of Designation of Preferences, Rights and Limitations. {3.2} (1)
3.4. Amended and Restated By-Laws of the Company. {3.3} (1)
3.5. Amendment, dated as of May 20, 1987, to Amended and Restated By-Laws of the Company {3.4} (2)
3.6. Amendment to Amended and Restated By-Laws of the Company.{3.5} (6)
3.7. Amendment to Amended and Restated By-Laws of the Company.{3.6} (6)
4. Specimen of Stock Certificate for Common Stock. {4} (2)
9. Omitted
9.1. Omitted
9.2. Omitted
10.1 - 10.24. Omitted
10.25. Form of Consulting Physician Agreement, {10.20} (2)
10.26. Form of Consulting Specialist Agreement. {10.21} (2)
10.27-10.53. Omitted
10.54. Form of Indemnification Agreement entered dated June 19, 1989 between OUCH and executive officers and directors of OUCH (Incorporated by reference to Exhibit B of definitive proxy materials filed by OUCH with the SEC on April 7, 1989) {10.54} (11)
Exhibit No. Description ------------------------------------------------------------------------ 10.55-10.68. Omitted
10.69. Second Restatement of the HealthCare COMPARE Corp. Retirement Savings Plan. {10.69} (14)
10.70. HealthCare COMPARE Corp. Director's Option Plan dated May 23, 1991. {10.70} (14)
10.71. HealthCare COMPARE Corp. Stock Option Plan (for employees of OUCH). {10.71} (14)
10.72. - 10.75. Omitted
10.76. Employment Agreement dated as of July 1, 1993 by and between COMPARE and Daniel S. Brunner. {10.76} (15)
10.77.- 10.89. Omitted
10.90. Retainer Agreement dated January 1, 1994 between HealthCare COMPARE Corp. and Ronald H. Galowich. {10.90}
10.91-10.93. Omitted.
10.94. HealthCare COMPARE Corp. 1995 Employee Stock Option Plan. (4.1) {18}
10.95. Omitted
10.96. Option Agreement dated as of January 1, 1997 by and between The Company and James C. Smith. {10.96} (20)
10.97. Option Agreement dated as of January 1, 1997 by and between The Company and James C. Smith. {10.97} (20)
10.98. Option Agreement dated as of January 1, 1997 by and between The Company and James C. Smith. {10.98} (20)
10.99. Agreement dated as of September 1, 1995 between HealthCare COMPARE Corp. and Electronic Data Systems. {10.99} (20)
10.100. - 10.105 Omitted.
Exhibit No. Description ------------------------------------------------------------------------
10.106. Employment Agreement dated April 29, 1997 between HealthCare COMPARE Corp. and Patrick G. Dills. {10.106} (22)
10.107. Omitted.
10.108. Stock Purchase Agreement among HealthCare COMPARE Corp., First Financial Management Corporation and First Data Corporation dated as of May 22, 1997, incorporated by reference from the Company's Second Quarter 1997 Form 10-Q dated August 13, 1997. {10.108} (22)
10.109. Amended and Restated Credit Agreement dated as of October 22, 1997 by and among HealthCare COMPARE Corp. as borrowers; LaSalle National Bank as administrative agent, issuing bank and lender; First Chicago Capital Markets, Inc., as syndication agent; and the other financial institutions party hereto as lenders. {10.109} (22)
10.110. First Amendment to Amended and Restated Credit Agreement dated as of October 22, 1997, by and among First Health Group Corp. (f/k/a HealthCare COMPARE Corp.), as Borrower, LaSalle National Bank, as Administrative Agent, and the other parties thereto (the "Amendment") . {10.110} (25)
10.111. 1998 Stock Option Plan {4} (23)
10.112. 1998 Directors Stock Option Plan {4} (24)
10.113. Employment Agreement dated May 18, 1999 between First Health Group Corp. and James C. Smith.
10.114. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Ed Wristen.
10.115. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Mary Anne Carpenter.
10.116. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Lottie Kurcz.
10.117. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Susan T. Smith.
10.118. Employment Agreement dated May 1, 1999 between First Health Group Corp. and A. Lee Dickerson.
10.119. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Jerry L. Seiler.
Exhibit No. Description ------------------------------------------------------------------------ 10.120. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Joseph E. Whitters.
10.121. Employment Agreement dated May 1, 1999 between First Health Group Corp. and Patrick G. Dills.
11. Computation of Basic and Diluted Earnings Per Share.
13. 1999 Annual Report to Stockholders.
21. Subsidiaries of the Company.
23. Consent of Deloitte & Touche LLP
24. Powers of Attorney
Exhibit No. Description ------------------------------------------------------------------------ 27. Financial data schedules of the Company.
{ } Exhibits so marked have been previously filed with the Securities and Exchange Commission as exhibits to the filings shown below under the exhibit number indicated following the respective document description and are incorporated herein by reference.
(1) Registration Statement on Form S-1 ("Registration Statement"), as filed with the Securities and Exchange Commission on April 17, 1987.
(2) Amendment No. 2 to Registration Statement, as filed with the Securities and Exchange Commission on May 22, 1987.
(3) Amendment No. 3 to Registration Statement, as filed with the Securities and Exchange Commission on May 29, 1987.
(4) Annual Report on Form 10-K for the fiscal year ended August 31, 1987, as filed with the Securities and Exchange Commission on November 27, 1987.
(5) Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on January 12, 1988.
(6) Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on July 12, 1988.
(7) Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on January 18, 1989.
(8) Annual Report on Form 10-K for the year ended August 31, 1989, as filed with the Securities and Exchange Commission on November 28, 1989.
(9) Annual Report on Form 10-K for the year ended December 31, 1990, as filed with the Securities and Exchange Commission on March 30, 1991.
(10) Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on November 1, 1991.
(11) Registration Statement of Form S-4, as filed with the Securities and Exchange Commission on January 27, 1992.
(12) Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on March 4, 1992.
(13) Annual Report on Form 10-K for the year ended December 31, 1991 as filed with the Securities and Exchange Commission on March 27, 1992.
Exhibit No. Description ------------------------------------------------------------------------ (14) Annual Report on Form 10-K for the year ended December 31, 1992 as filed with the Securities and Exchange Commission on March 26, 1993.
(15) Annual Report on Form 10-K for the year ended December 31, 1993 as filed with the Securities and Exchange Commission on March 25, 1994.
(16) Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on December 27, 1994.
(17) Annual Report on Form 10-K for the year ended December 31, 1994 as filed with the Securities and Exchange Commission on March 24, 1995.
(18) Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on September 20, 1995.
(19) Annual Report on Form 10-K for the year ended December 31, 1995 as filed with the Securities and Exchange Commission on March 27, 1996.
(20) Annual Report on Form 10-K for the year ended December 31, 1996 as filed with the Securities and Exchange Commission on March 27, 1997.
(21) Registration Statement on Form S-8 as filed with the Securities Exchange Commission on July 23, 1997.
(22) Annual Report on Form 10K for the year ended December 31, 1997 and filed with the Securities and Exchange Commission on March 25, 1998.
(23) Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on December 15, 1998.
(24) Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on December 15, 1998.
(25) Annual Report on Form 10K for the year ended December 31, 1998 and filed with the Securities and Exchange Commission on March 29, 1999.