e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31, 2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-34435
EMDEON INC.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
(State or Other Jurisdiction
of
Incorporation or Organization)
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20-5799664
(I.R.S. Employer
Identification No.)
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3055 Lebanon Pike, Suite 1000
Nashville, TN
(Address of Principal
Executive Offices)
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37214
(Zip Code)
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(615) 932-3000
(Registrants telephone
number, including area code)
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Title of Each Class
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Name of Each Exchange on Which Registered
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Class A common stock, $0.00001 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405) is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller
reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant was $380,115,806. Market value
is determined by reference to the closing price on June 30,
2010 of the registrants Common Stock as reported by the
New York Stock Exchange. Class B common stock is not
publicly listed for trade on any exchange or market system;
however, Class B common stock can be exchanged for
Class A common stock on a
one-for-one
basis. Accordingly, the market value was calculated based on the
market price of Class A common stock. For purposes of the
foregoing calculation only, the registrant has assumed that all
officers and directors of the registrant are affiliates.
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Class
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Outstanding as of March 4, 2011
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Class A common stock, $0.00001 par value
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91,064,486
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Class B common stock, $0.00001 par value
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24,689,142
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DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Definitive Proxy Statement for
its 2011 Annual Meeting of Stockholders to be filed subsequently
with the Securities and Exchange Commission are incorporated by
reference into Part III hereof.
Emdeon
Inc.
Table of
Contents
FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
(Annual Report) contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. You should not place undue reliance on those
statements because they are subject to numerous uncertainties
and factors relating to our operations and business environment,
all of which are difficult to predict and many of which are
beyond our control. Forward-looking statements include
information concerning our possible or assumed future results of
operations, including descriptions of our business strategy.
These statements often include words such as may,
will, should, believe,
expect, anticipate, intend,
plan, estimate or similar expressions.
These statements are based upon assumptions that we have made in
light of our experience in the industry, as well as our
perceptions of historical trends, current conditions, expected
future developments and other factors that we believe are
appropriate under the circumstances. As you read this Annual
Report, you should understand that these statements are not
guarantees of performance or results. They involve known and
unknown risks, uncertainties and assumptions, including those
described under the heading Risk Factors in
Part I, Item 1A. and elsewhere in this Annual Report.
Although we believe that these forward-looking statements are
based upon reasonable assumptions, you should be aware that many
factors, including those described under the heading Risk
Factors in Part I, Item 1A. and elsewhere in
this Annual Report, could affect our actual financial results or
results of operations and could cause actual results to differ
materially from those in the forward-looking statements.
Our forward-looking statements made herein speak only as of the
date on which made. We expressly disclaim any intent, obligation
or undertaking to update or revise any forward-looking
statements made herein to reflect any change in our expectations
with regard thereto or any change in events, conditions or
circumstances on which any such statements are based. All
subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements
contained in this Annual Report.
Unless stated otherwise or the context otherwise requires,
references in this Annual Report to we,
us, our, Emdeon and the
Company refer to Emdeon Inc. and its subsidiaries.
1
PART I
Overview
We are a leading provider of revenue and payment cycle
management and clinical information exchange solutions
connecting payers, providers and patients in the
U.S. healthcare system. Our product and service offerings
integrate and automate key business and administrative functions
of our payer and provider customers throughout the patient
encounter, including pre-care patient eligibility and benefits
verification and enrollment, clinical information exchange
capabilities, claims management and adjudication, payment
integrity, payment distribution, payment posting and denial
management and patient billing and payment processing. Through
the use of our comprehensive suite of products and services, our
customers are able to improve efficiency, reduce costs, increase
cash flow and more efficiently manage the complex revenue and
payment cycle and clinical information exchange processes. Our
services are delivered primarily through recurring,
transaction-based processes that leverage our health information
network, the single largest financial and administrative
information exchange in the U.S. healthcare system. Our
health information network currently reaches approximately 1,200
payers, 500,000 providers, 5,000 hospitals, 81,000 dentists,
60,000 pharmacies and 150 labs.
We deliver our solutions and operate our business in three
business segments: (i) payer services, which provides
services to commercial insurance companies, third party
administrators and governmental payers; (ii) provider
services, which provides services to hospitals, physicians,
dentists and other healthcare providers, such as labs and home
healthcare providers; and (iii) pharmacy services, which
provides services to pharmacies, pharmacy benefit management
companies and other payers. Through our payer services segment,
we provide payment cycle solutions, both directly and through
our network of companies, or channel partners, with which we
have contracted to market and sell certain of our products and
services, including healthcare information system vendors, such
as physician and dental practice management system, hospital
information system and electronic medical record vendors, that
help simplify the administration of healthcare related to
insurance eligibility and benefit verification, claims filing,
payment integrity and claims and payment distribution.
Additionally, we provide consulting services through our payer
services segment. Through our provider services segment, we
provide revenue cycle management solutions, patient billing and
payment services, government program eligibility and enrollment
services and clinical information exchange capabilities, both
directly and through our channel partners, that simplify
providers revenue cycle and workflow, reduce related costs
and improve cash flow. Through our pharmacy services segment, we
provide electronic prescribing services and other electronic
solutions to pharmacies, pharmacy benefit management companies
and government agencies related to prescription benefit claim
filing, adjudication and management.
In 2010, we processed a total of approximately 5.8 billion
healthcare-related transactions, including approximately one out
of every two commercial healthcare claims delivered
electronically in the United States. We have developed our
network of payers and providers over 25 years and connect
to virtually all private and government payers, claim-submitting
providers and pharmacies. Our network and related products and
services are designed to integrate with our customers
existing technology infrastructures and administrative workflow
and typically require minimal capital expenditure on the part of
the customer, while generating significant savings and operating
efficiencies.
Organizational
Structure and Corporate History
The Company is a Delaware corporation. Our predecessors have
been in the healthcare information solutions business for over
25 years. We have grown both organically and through
targeted acquisitions in order to offer the full range of
products and services required to automate the patient encounter
process.
A brief history of our organizational structure is as follows:
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Prior to November 2006, the group of companies that comprised
Emdeon Business Services, or EBS, was owned by HLTH Corporation,
currently known as WebMD Health Corp., or WebMD. EBS
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2
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Master LLC, or EBS Master, was formed by WebMD to act as a
holding company for EBS. EBS Master, through its 100% owned
subsidiary, Emdeon Business Services LLC, or EBS LLC, owns EBS.
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In September 2006, we were formed by General Atlantic LLC, or
General Atlantic, as a Delaware limited liability company for
the purpose of making an investment in EBS Master. In November
2006, we acquired a 52% interest in EBS Master from WebMD (the
2006 Transaction). WebMD retained a 48% interest in
EBS Master upon closing of the 2006 Transaction.
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In February 2008, WebMD sold its remaining 48% interest in EBS
Master (the 2008 Transaction) to affiliates of
General Atlantic and Hellman & Friedman LLC, or
H&F. As a result, following the 2008 Transaction, EBS
Master was owned by affiliates of General Atlantic, who we
sometimes refer to herein as the General Atlantic
Equityholders, and by affiliates of H&F, who we
sometimes refer to herein as the H&F
Equityholders. The General Atlantic Equityholders and
H&F Equityholders are sometimes collectively referred to
herein as the Principal Equityholders. Together, our
Principal Equityholders currently control approximately 72% of
the combined voting power of our Class A common stock and
Class B common stock.
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In anticipation of our initial public offering, or IPO, we
converted into a Delaware corporation, changed our name to
Emdeon Inc. and completed a corporate restructuring
(collectively, the reorganization transactions).
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In August 2009, we completed the IPO of our Class A common
stock and began trading on the New York Stock Exchange, or NYSE,
under the symbol EM.
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A brief description of businesses we have acquired since
January 1, 2010 is as follows:
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In January 2010, we acquired FutureVision Investment Group,
L.L.C., or FVTech, a provider of outsourced services
specializing in electronic data conversion and information
management solutions. This acquisition allowed us to
electronically process virtually all patient and third party
healthcare payments regardless of the format in which payments
are submitted by combining FVTechs document conversion
technology with our broad connectivity network and revenue cycle
management solutions.
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In March 2010, we acquired Healthcare Technology Management
Services, Inc., or HTMS, a management consulting company focused
primarily on the healthcare payer market. This acquisition
allowed us to assist payers in evaluating their existing
technology strategies and systems in order to help our customers
implement effective solutions by combining HTMS consulting
services with our infrastructure, payer relationships and
distribution network.
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In June 2010, we acquired Chapin Revenue Cycle Management, LLC,
or Chapin, a technology-enabled provider of accounts receivable
denial and recovery services. By leveraging Chapins
contract management systems, this acquisition enhanced our
ability to assist providers identify and prevent underpayments,
appeal denials and resubmit claims in a timely manner to help
ensure that providers collect appropriate payments for services
rendered.
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In October 2010, we acquired Chamberlin Edmonds &
Associates, Inc., or CEA, a technology-enabled provider of
government program eligibility and enrollment services to
uninsured and underinsured populations to assist our provider
customers in lowering their incidence of uncompensated care and
bad-debt expense and increasing overall cash flow.
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Our
Industry
Payer
and Provider Landscape
Healthcare expenditures are a significant component of the
U.S. economy, representing $2.5 trillion in 2009, or 17.6%
of gross domestic product, or GDP, and are expected to grow at
6.1% per year to $4.4 trillion, or 20% of GDP, in 2018. We
believe the cost of healthcare administration in the
U.S. was approximately $360 billion in 2008, or 17% of
total healthcare expenditures, and that $150 billion of
these costs were spent by payers and providers on billing and
insurance administration-related activities. We believe the
increased
3
need to slow the rise in healthcare expenditures, particularly
during the recent period of U.S. economic weakness,
increased financial pressures on payers and providers and public
policy initiatives to reduce healthcare administrative
inefficiencies should accelerate adoption of our solutions.
Healthcare is generally provided through a fragmented industry
of providers that have, in many cases, historically
under-invested in administrative and clinical information
systems. Within this universe of providers, there are currently
over 5,700 hospitals and over 560,000 office-based doctors.
Approximately 73% of the office-based doctors are in small
physician practices consisting of six or fewer physicians and
have fewer resources to devote to administrative and financial
matters compared to larger practices. In addition, providers can
maintain relationships with 50 or more individual payers, many
of which have customized claim requirements and reimbursement
procedures. The administrative portion of healthcare costs for
providers is expected to continue to expand due in part to the
increasing complexity in the reimbursement process and the
greater administrative burden being placed on providers for
reporting and documentation relating to the care they provide.
These complexities and other factors are compounded by the fact
that many providers lack the technological infrastructure and
human resources to bill, collect and obtain full reimbursement
for their services, and instead rely on inefficient,
labor-intensive processes to perform these functions. These
manual and paper-based processes are more prone to human error
and administrative inefficiencies, often resulting in increased
costs and uncompensated care. As a result, we believe payers and
providers will continue to seek solutions that automate and
simplify the administrative and clinical processes of
healthcare. We benefit from this trend given our suite of
administrative and clinical information exchange product and
service offerings.
Payers are continually exploring new ways to increase
administrative efficiencies to drive greater profitability and
mitigate the impact of decelerating premium increases, increased
governmental requirements and mandated cuts in federal funding
to programs such as Medicare Advantage. Payment for healthcare
services generally occurs through complex and frequently
changing reimbursement mechanisms involving multiple parties.
The proliferation of private-payer benefit plan designs and
government mandates, such as the Health Insurance Portability
and Accountability Act of 1996, or HIPAA, format and data
content standards continues to increase the complexity of the
reimbursement process. For example, preferred provider
organizations, or PPOs, health maintenance organizations, point
of service plans and high-deductible health plans, or HDHPs, now
cover virtually all of employer-sponsored health insurance
beneficiaries and are more complex than traditional indemnity
plans, which covered 73% of healthcare beneficiaries in 1988. In
addition, industry estimates indicate that between
$68 billion and $226 billion in healthcare costs are
attributable to fraud, waste and abuse each year. Despite
significant consolidation among private payers in recent years,
claims systems have often not been sufficiently integrated,
resulting in persistently high costs associated with
administering these plans.
Government payers continue to introduce more complex rules to
align payments with the appropriate care provided, including the
expansion of Medicare diagnosis-related group codes and the
implementation of the Recovery Audit Contractor program, both of
which have increased administrative burdens on providers by
requiring more detailed classification of patients and care
provided in order to receive and retain associated Medicare
reimbursement. Further, because we believe there is an
increasing number of drug prescriptions authorized by providers
and an industry-wide shortage of pharmacists, we believe
pharmacists must increasingly be able to efficiently process
transactions in order to maximize their productivity and better
control prescription drug costs. Most payers, providers and many
independent pharmacies are not equipped to handle this increased
complexity and the associated administrative challenges alone.
Increases in patient financial responsibility for healthcare
expenses have put additional pressure on providers to collect
payments at the patient point of care since more than half of
every one percent increase in patient self-pay becomes bad debt.
Several market trends have contributed to this growing bad debt
problem, including the shift towards HDHP and consumer-oriented
plans (which grew to 10.0 million in January 2010, up from
8.0 million in January 2009, 6.1 million in January
2008, 4.5 million in January 2007 and 3.2 million in
January 2006), higher deductibles and co-payments for privately
insured individuals and the increasing ranks of the uninsured
(50.7 million or 16.7% of the U.S. population in
2009). We believe the breadth of our network, coupled with our
solutions, positions us to help providers estimate financial
liability and significantly improve collection at the point of
care.
4
The
Revenue and Payment Cycle
The healthcare revenue and payment cycle consists of all the
processes and efforts that providers undertake to ensure they
are compensated properly by payers and patients for the medical
services rendered to patients. For payers, the payment cycle
includes all the processes necessary to facilitate provider
compensation and use of medical services by members. These
processes begin with the collection of relevant eligibility,
financial and demographic information about the patient and
co-pay amounts before care is provided and end with the
collection of payment from payers and patients. Providers are
required to send invoices, or claims, to a large number of
different payers, including government agencies, managed care
companies and private individuals in order to be reimbursed for
the care they provide.
We believe payers and providers spend approximately
$150 billion annually on these revenue and payment cycle
activities. Major steps in this process include:
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Pre-Care/Medical Treatment: The provider
verifies insurance benefits available to the patient, ensures
treatment will adhere to medical necessity guidelines and
confirms patient personal financial and demographic information.
For certain uninsured or underinsured populations, providers
also may assist their patients enroll in government, charity and
community benefit programs for which they may be eligible.
Furthermore, in order to receive reimbursement for the care they
provide, providers are often required by payers to obtain
pre-authorizations before patient procedures or in advance of
referring patients to specialists for care. Co-pay and other
self-pay amounts are also collected. The provider then treats
the patient and documents procedures conducted and resources
used.
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Claim Management/Adjudication: The provider
prepares and submits paper or electronic claims to a payer for
services rendered directly or through a clearinghouse, such as
ours. Before submission, claims are validated for payer-specific
rules and corrected as necessary. The payer verifies accuracy,
completeness and appropriateness of the claim and calculates
payment based on the patients health plan design, out of
pocket payments relative to established deductibles and the
existing contract between the payer and provider.
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Payment Distribution: The payer sends a
payment and a payment explanation (i.e., remittance advice) to
the provider and sends an explanation of benefits, or EOB, to
the patient.
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Payment Posting/Denial Management: The
provider posts payments internally, reconciles payments with
accounts receivable and submits any claims to secondary insurers
if secondary coverage exists. The provider is responsible for
evaluating denial/underpayment of a claim and re-submitting it
to the payer if appropriate.
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Patient Billing and Payment: The provider
sends a bill to the patient for any remaining balance and posts
payments received.
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Recent
Industry Trends
We believe recent federal initiatives to control the rising cost
of healthcare through the elimination of administrative and
clinical inefficiencies will increase payer and provider
adoption of healthcare information systems and electronic
transactions. For example, in July 2008, Congress passed
legislation providing financial incentives to Medicare providers
using electronic prescribing. In addition, the American Recovery
and Reinvestment Act of 2009, or ARRA, included at least
$20 billion in federal subsidies to incentivize the
implementation and meaningful use of electronic health records.
Meaningful Use criterion under the Health
Information Technology for Economic and Clinical Health, or
HITECH, provisions of ARRA requires providers to successfully
capture and exchange electronic clinical healthcare information,
such as electronic prescriptions and lab orders, to receive
incentive payments from Medicare and Medicaid. The goal of these
initiatives is, in part, to establish the capability to
electronically move clinical information among disparate
healthcare information systems to help improve patient outcomes.
Some industry reports estimate that the federal government will
spend more than $35 billion on promoting healthcare
information technology through ARRA over the next decade. In
addition, the integration of electronic health records with
computerized physician order entry applications, such as
electronic prescribing, may also promote greater utilization of
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electronic transactions. We believe that increasing provider
adoption of electronic prescribing has contributed to making it
one of the fastest growing transaction types in our business.
Currently, we believe only approximately 18% of all
prescriptions are transmitted electronically. Moreover, we
believe our historical claims data, combined with our healthcare
fraud, waste and abuse management services, positions us to
benefit from government proposals to promote cost effective
healthcare and reduce fraud, waste and abuse and our
customers initiatives designed to promote the detection
and prevention of improper or fraudulent healthcare payments.
Reducing administrative costs continues to garner significant
public policy attention. A key component of recent healthcare
reform initiatives includes a focus on reducing inefficiency and
increasing quality of care. For example, the Patient Protection
and Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act of 2010 (collectively,
PPACA), requires the adoption of additional
standardized electronic transactions and provides for the
creation of operating rules to promote uniformity in the
implementation of each standardized electronic transaction.
PPACA also contains a number of provisions intended to further
link Medicare and Medicaid program payments to quality and
efficiency. In late 2008, we launched the U.S. Healthcare
Efficiency
Indextm,
or the Index, an industry-wide transparency and efficiency
initiative that identifies and tracks the transition of specific
transactions from
manual-to-electronic-based
formats in order to raise awareness of cost saving opportunities
and the immediate benefits of adopting standard electronic
transactions. Based on the Index, we estimate that the
transition to electronic medical claims and payment-related
transactions could produce over $30 billion annually in
administrative cost savings.
6
Our
Market Opportunity and Solutions
Opportunities exist to increase efficiencies and cash flow
throughout many steps of the healthcare revenue and payment
cycle. The breadth of our revenue and payment cycle network and
solutions is illustrated in the chart below:
Products
and Services
Our business operations are organized into three reportable
segments: payer services, provider services and pharmacy
services. The selected financial information for each operating
segment is provided in Note 23
7
in the accompanying Notes to Consolidated Financial Statements
contained in Part II, Item 8 of this Annual Report. A
description of our payer, provider and pharmacy solutions
follows:
Payer
Products and Services
Pre-Care
and Claim Management
Our pre-care solutions interface directly with the payers
own systems allowing providers to process insurance eligibility
and benefits verification tasks prior to the delivery of care
without the need for live payer/provider interaction. Our claim
submission solutions include electronic data interchange, or
EDI, and
paper-to-EDI
conversion of insurance claims through high-volume imaging,
batch and real-time healthcare transaction information exchanges
and intelligent routing between payers and our other business
partners. We also perform payer-specific edits of claims for
proper format, including standards in accordance with HIPAA,
before submission to minimize manual processes associated with
pending claims. Our healthcare fraud, waste and abuse management
services combine sophisticated data analytics solutions and
technology with an experienced team of investigators to help
identify potential financial risks earlier in the revenue and
payment cycle and prevent payment of fraudulent and improper
claims, creating efficiencies and cost savings for payers and
providers.
Payment
Distribution
Our payment and remittance distribution solutions facilitate the
paper and electronic distribution of payments and payment
related information by payers to providers, including EOBs to
patients. Because of the breadth and scale of our connectivity
to both payers and providers, our payer customers can realize
significant print and operational cost savings through the use
of either electronic payment and remittance products or our
high-volume co-operative print and mail solutions to
reduce postage and material costs. In addition, we offer
electronic solutions that integrate with our print and mail
platform to drive the conversion to electronic payment and
remittance. We expect to see further transition from paper based
processes to electronic processes over time because of the
substantial cost savings available to payers by adopting
electronic payment, remittance advice and EOB distribution.
Consulting
Services
Our consulting services solutions assist our healthcare clients
analyze, develop and implement technology strategies designed to
ensure alignment with healthcare trends and overall business
goals. Our consultants bring extensive health industry knowledge
with practical experience that can help solve many industry
challenges, such as limited time and resources, disparate and
out-of-date
systems, antiquated processes and diverse perspectives, to
assist our clients with analysis, selection, procurement and
implementation services in deploying information technology
solutions quickly and cost-effectively.
Provider
Products and Services
Pre-Care/Medical
Treatment
Our patient eligibility and verification solutions, including
automated referral approval applications, assist our provider
customers in determining a patients current health
benefits levels and also integrating other information to help
determine a patients ability to pay, as well as the
likelihood of public assistance and charity care reimbursement.
These solutions help to mitigate a providers exposure to
bad debt expense by providing clarity into a patients
insurance coverage, ultimate
out-of-pocket
responsibility and ability to pay.
We also help providers save time and money by offering
technology enabled government program eligibility and enrollment
services to uninsured and underinsured populations to assist our
provider customers in lowering their incidence of uncompensated
care and bad-debt expense and increasing overall cash flow.
As part of the medical treatment process, providers use our
clinical information exchange capabilities to order and access
lab reports and for electronic prescribing.
8
Claim
Management
Our claims management solutions can be delivered to a provider
via our web-based direct solutions or through our network of
channel partners. In either case, our claim management solutions
leverage our industry leading payer connectivity to deliver
consistent and reliable access to virtually every payer in the
United States. Our solutions streamline reimbursement by
providing (i) tools to improve provider workflow,
(ii) tools to edit claims prior to submission and identify
errors that delay reimbursement and (iii) robust reporting
to providers in order to track claims throughout their life
cycle and to reduce claim rejections and denials.
Payment
Posting/Denial Management
Our payment automation solutions allow providers to manage and
automate the entire payment process. On behalf of our provider
customers, we can accept paper payments from both third party
payers and patients and convert them into automated workflows
which can be reconciled and posted. Our web-based solutions
allow providers to analyze remittance advice or payment data and
reconcile it with the originally submitted claim to determine
whether proper reimbursement has been received. These solutions
also: (i) allow providers to identify underpayments,
efficiently appeal denials and resubmit claims in a timely
manner, (ii) provide insight into patterns of denials and
(iii) enable the establishment of procedures that can
reduce the number of inaccurate claims submitted in the future.
Our payment posting solution automates the labor intensive,
paper-based payment reconciliation and manual posting process,
which we believe saves providers time and improves accuracy.
We also provide technology solutions and professional services
that enable providers to transform previously written-off
government and commercial payer underpayments into realized
revenue. Our provider payment integrity services not only help
identify root cause, but also help collect and prevent
underpayments from happening with audit and recovery services,
accounts receivable management, denial and appeals services and
performance improvement and prevention.
Patient
Billing and Payment
Our patient billing and payment solutions provide an efficient
means for providers to bill their patients for outstanding
balances due, including outsourced print and mail services for
patient statements and other communications, as well as email
updates to patients and online bill presentment and payment
functionality. We believe our solutions are more timely,
cost-effective and consistent than in-house print and mail
operations and improve patient collections. Our patient payment
lockbox allows providers to efficiently process patients
paper payments, reconcile them to the original bill and
automatically post these payments. Our eCashiering and merchant
services solutions allow providers to collect payments from
patients at the
point-of-service
or online.
Pharmacy
Products and Services
Prescription
Benefits Administration (Payers)
Our prescription solutions provide claims processing and other
administrative services for pharmacy payers that are conducted
online, in real-time, according to client benefit plan designs
and present a cost-effective alternative to an in-house pharmacy
claims adjudication system. Our offerings also allow payers to
directly manage more of their pharmacy benefits and include
pharmacy claims adjudication, network and payer administration,
client call center service and support, reporting, rebate
management, as well as implementation, training and account
management.
Claims
Management and Adjudication (Providers)
Our pharmacy claims, revenue management and electronic
prescribing solutions provide pharmacies and providers with
integrated tools for managing efficiency and profitability
through claims management, business intelligence and network
infrastructure. We believe our pharmacy provider products and
services improve
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pharmacy workflow and customer service, increase operational
efficiency and patient safety, and build pharmacy revenue and
customer loyalty.
Payment
Posting and Denial Management (Providers)
Our payment posting and denial management solutions offer
pharmacies efficient ways to monitor and track remittance and
third party payment information, as well as Medicaid and
Medicare denial claims, which we believe allows our pharmacy
customers to improve their collections.
Customers
We generally provide our products and services to our payer,
provider and pharmacy customers on either a per transaction, per
document, per communication or per member per month or, in some
cases, on a monthly flat-fee, contingent fee or hourly basis.
Our contracts with our payer, provider and pharmacy customers
are generally one to three years in term and automatically renew
for successive terms unless terminated. We have also entered
into exclusive or other comprehensive management services
agreements with more than 400 of our payer customers under which
we provide exclusive or other comprehensive services for certain
eligibility and benefit verification
and/or
claims management services. These comprehensive management
services agreements generally have terms of three years and
renew automatically for successive terms unless terminated.
Payer
Services
The payer market is comprised of more than 1,200 payers across
four main segments: Medicare, Medicaid, Blue Cross Blue Shield
fiscal intermediaries and private insurance companies. We are
directly connected and provide services to virtually all payers
offering electronic transaction connectivity services. We also
serve the payer market with payment and remittance distribution
services and with intelligent claim capture and routing
services. For the year ended December 31, 2010, our top 10
payer customers represented approximately 13% of our total
revenues and no payer customer accounted for more than 3% of our
total revenues.
Provider
Services
The provider market is composed of hospitals, physicians,
dentists and other healthcare providers, such as lab and home
healthcare providers. We currently have contractual or submitter
relationships, directly or through our channel partners, with
approximately 340,000 physicians, 2,700 hospitals, 81,000
dentists and 150 labs. For the year ended December 31,
2010, our top 10 provider customers represented approximately
10% of our total revenues and no provider customer accounted for
more than 4% of our total revenues.
Pharmacy
Services
The pharmacy market is composed of more than 60,000 chains and
independent pharmacies, as well as prescription benefits
solutions marketed directly to payers. We are connected and
provide services to virtually all pharmacies utilizing
electronic transaction connectivity services. For the year ended
December 31, 2010, no pharmacy services customer accounted
for more than 2% of our total revenues.
Marketing
and Sales
Marketing activities for our payer, provider and pharmacy
solutions include direct sales, targeted direct marketing,
advertising, tradeshow exhibits, provider workshops, web-based
marketing activities,
e-newsletters
and conference sponsorships. We have a dedicated sales force
that supports each of our payer, provider and pharmacy segments.
As of December 31, 2010, we also had over 600 channel
partner relationships. Our channel partners include physician
and dental practice management system and electronic medical
record vendors, hospital information system vendors, pharmacy
system vendors and other vendors that provide software and
services to
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providers. We integrate our products and services into these
channel partners software solutions for distribution to
their provider customers.
Technology
Our technology platforms employ a standard enterprise services
bus in a service-oriented architecture, configured for 24/7
operations. We maintain two secure, interconnected,
environmentally-controlled primary data centers, one in
Nashville, Tennessee and one in Memphis, Tennessee, each with
emergency power generation capabilities. We also operate several
satellite data centers that we plan to consolidate over time to
our two primary data centers. Our software development life
cycle methodology requires that all applications are able to run
in both of our primary data centers. We use a variety of
proprietary and licensed standards-based technologies to
implement our platforms, including those which provide for
orchestration, interoperability and process control. The
platforms also integrate a data infrastructure to support both
transaction processing and data warehousing for operational
support and data analytics.
Competition
We compete on the basis of the size and reach of our network,
the ability to offer a single-vendor solution, the breadth and
functionality of products and services we offer and are able to
develop, and our pricing models. While we do not believe any
single competitor offers a similarly expansive suite of products
and services, our payer, provider and pharmacy services compete
with:
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healthcare transaction processing companies, including those
providing EDI
and/or
internet-based services and those providing services through
other means, such as paper and fax;
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healthcare information system vendors that support providers and
their revenue and payment cycle management and clinical
information exchanges processes, including physician and dental
practice management system, hospital information system and
electronic medical record system vendors;
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large information technology and healthcare consulting service
providers;
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health insurance companies, pharmacy benefit management
companies, hospital management companies and pharmacies that
provide or are developing electronic transaction and payment
distribution services for use by providers
and/or by
their members and customers;
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healthcare focused print and mail vendors; and
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financial institutions that have invested in healthcare data
management assets.
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We also compete, in some cases, with alliances formed by the
above competitors. In addition, major software, hardware,
information systems and business process outsourcing companies,
both with and without healthcare companies as their partners,
offer or have announced their intention to offer competitive
products or services. Major competitors for our products
and/or
services include McKesson (RelayHealth) and UnitedHealth Group
(Ingenix and OptumHealth), as well as other smaller competitors
that typically compete with us in one or more of our product
and/or
service categories.
Some of our existing payer and provider customers compete with
us or plan to do so. In general, these customers offer services
that compete with some of our solutions but do not offer the
full range of products and services we offer. For example, some
payers currently offer, through affiliated clearinghouses,
internet portals and other means, electronic data transmission
services to providers that allow the provider to have a direct
connection to the payer, bypassing third party EDI service
providers such as us. In addition, the solutions offered by
healthcare information system vendors, including our channel
partners, may include products and services that we supply
directly or similar products and services offered by our
competitors.
Certain of our current and potential competitors have greater
financial and marketing resources than we have. Furthermore, we
believe that the increasing acceptance of automated solutions in
the healthcare marketplace, the adoption of more sophisticated
technology, legislative and regulatory reform and consolidation
within the payer, provider and pharmacy industries will result
in increased competition. There can be no
11
assurance that we will continue to maintain our existing
customer base or that we will be successful with any new
products or services that we have introduced or will introduce.
See Risk Factors We face significant
competition for our products and services in Part I,
Item 1A. of this Annual Report.
Regulation
and Legislation
Introduction
Almost all of our revenue is either derived from the healthcare
industry or could be affected by changes in healthcare spending.
The healthcare industry is highly regulated and subject to
changing political, legislative, regulatory and other
influences. In March 2010, the President signed into law the
PPACA. As enacted, PPACA will change how healthcare services are
covered, delivered and reimbursed through expanded coverage of
uninsured individuals, reduced Medicare program spending and
insurance market reforms. By January 2014, PPACA requires states
to expand Medicaid coverage significantly and establish health
insurance exchanges to facilitate the purchase of health
insurance by individuals and small employers and provides
subsidies to states to create non-Medicaid plans for certain
low-income residents. Effective in 2014, PPACA imposes penalties
on individuals who do not obtain health insurance and employers
that do not provide health insurance to their employees. PPACA
also sets forth several health insurance market reforms,
including increased dependent coverage, prohibitions on
excluding individuals based on pre-existing conditions and
mandated minimum medical loss ratios for health plans. In
addition, PPACA further provides for significant new taxes,
including an industry user tax paid by health insurance
companies beginning in 2014, as well as an excise tax on health
insurers and employers offering high cost health coverage plans.
PPACA also imposes significant Medicare Advantage funding cuts
and material reductions to Medicare and Medicaid program
spending. PPACA provides for additional resources to combat
healthcare fraud, waste and abuse and also requires the
U.S. Department of Health & Human Services
(HHS) to adopt standards for electronic transactions
in addition to those required under HIPAA, including standards
for electronic payments, and to establish operating rules to
promote uniformity in the implementation of each standardized
electronic transaction.
While many of the provisions of PPACA will not be directly
applicable to us, PPACA, as enacted, will affect the business of
our payer, provider and pharmacy customers and will also affect
the Medicaid programs of the states. Because of the many
variables involved, including PPACAs complexity, lack of
implementing regulations or interpretive guidance, gradual and
potentially delayed implementation, pending court challenges and
possible amendment or repeal, we are unable to predict all of
the ways in which PPACA could impact us or the business of our
customers. Implementation of PPACA, particularly those
provisions expanding health insurance coverage, could be
delayed, revised or even blocked due to court challenges and
congressional efforts to repeal or amend the law. Further, it is
unclear how federal lawsuits challenging the constitutionality
of PPACA will be resolved or what the impact will be of any
resulting changes to all or portions of PPACA.
In addition to PPACA, the healthcare industry is required to
comply with extensive and complex laws and regulations at the
federal and state levels. Although many regulatory and
governmental requirements do not directly apply to our
operations, our customers are required to comply with a variety
of laws, and we may be impacted by these laws as a result of our
contractual obligations. For many of these requirements, there
is little history of regulatory or judicial interpretation upon
which to rely. We may also be impacted by banking and financial
services industry laws, regulations and industry standards as a
result of payment and remittance services and products we offer
directly and through our third party vendors. We have attempted
to structure our operations to comply with applicable legal
requirements, but there can be no assurance that our operations
will not be challenged or impacted by enforcement initiatives.
HIPAA
Administrative Simplification and ARRA Electronic Health Records
Requirements
General. HIPAA mandated a package of
interlocking administrative simplification rules to establish
standards and requirements for the electronic transmission of
certain healthcare claims and payment transactions. These
regulations are intended to encourage electronic commerce in the
healthcare industry and apply directly to health plans, most
providers and healthcare clearinghouses (Covered
Entities). Some of our
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businesses, including our healthcare clearinghouse operations,
are considered Covered Entities under HIPAA and its implementing
regulations. Other aspects of our operations are considered
business associates under HIPAA and are impacted by
the HIPAA regulations as a result of our contractual obligations
to our customers and interactions with other constituents in the
healthcare industry that are Covered Entities (Business
Associates).
Transaction Standards. The standard
transaction regulations established under HIPAA, or Transaction
Standards, mandate certain format and data content standards for
the most common electronic healthcare transactions, using
technical standards promulgated by recognized standards
publishing organizations. These transactions include healthcare
claims, enrollment, payment and eligibility. In addition, PPACA
requires HHS to establish standards for additional electronic
healthcare transactions including electronic funds transfer and
health claims attachment transactions. The Transaction Standards
are applicable to that portion of our business involving the
processing of healthcare transactions among payers, providers,
patients and other healthcare industry constituents. Failure to
comply with the Transaction Standards may subject us to civil
and potentially criminal penalties and breach of contract
claims. The Centers for Medicare & Medicaid Services,
or CMS, is responsible for enforcing the Transaction Standards.
Payers and providers who are unable to exchange data in the
required standard formats can achieve Transaction Standards
compliance by contracting with a clearinghouse to translate
between standard and non-standard formats. As a result, use of a
clearinghouse has allowed numerous payers and providers to
establish compliance with the Transaction Standards
independently and at different times, reducing transition costs
and risks. In addition, the standardization of formats and data
standards envisioned by the Transaction Standards has only
partially occurred. Multiple versions of a HIPAA standard claim
have emerged as each payer defines for itself what constitutes a
HIPAA-compliant claim. To date, payers have
published more than 600 different companion
documents setting forth their individual interpretations
and implementation of the government guidelines. However, PPACA
requires HHS to establish operating rules to promote uniformity
in the implementation of each standardized electronic
transaction. The operating rules for eligibility for a health
plan and health claim status transactions must be adopted by
July 1, 2011 and will be effective no later than
January 1, 2013. PPACA sets forth a schedule with staggered
deadlines for the development of and compliance with operating
rules for the other standardized electronic transactions, with
all operating rules finalized and requiring compliance by
December 31, 2015. Under PPACA, payers and service
contractors of payers, including, in some cases, us, will be
required to certify compliance with these standards to HHS. The
compliance date for the certification requirement depends on the
type of transaction, with the earliest certification required by
December 31, 2013.
In order to help prevent disruptions in the healthcare payment
system, CMS has permitted the use of contingency
plans under which claims and other covered transactions
can be processed, in some circumstances, in either HIPAA
standard or legacy formats. CMS terminated the Medicare
contingency plan for incoming claims in 2005. The Medicare
contingency plan for HIPAA transactions, other than claims,
remains in effect. Our contingency plan, pursuant to which we
process HIPAA-compliant standard transactions and
legacy transactions, as appropriate, based on the needs of our
customers, remains in effect. We cannot provide assurance
regarding how CMS will enforce the Transaction Standards or how
long CMS will permit constituents in the healthcare industry to
utilize contingency plans. We continue to work with payers and
providers, healthcare information system vendors and other
healthcare constituents to implement fully the Transaction
Standards.
In January 2009, CMS published a final rule adopting updated
standard code sets for diagnoses and procedures known as the
ICD-10 code sets. A separate final rule also published by CMS in
January 2009 resulted in changes to the formats to be used for
electronic transactions subject to the ICD-10 code sets, known
as Version 5010. While use of the ICD-10 code sets is not
mandatory until October 1, 2013 and the use of Version 5010
is not mandatory until January 1, 2012, we have begun to
modify our systems and processes to prepare for their
implementation. These changes may result in errors and otherwise
negatively impact our service levels, and we may experience
complications related to supporting customers that are not fully
compliant with the revised requirements as of the applicable
compliance date. Also, the compliance date
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for ICD-10 code sets and the use of Version 5010 may
overlap with the adoption of the operating rules as mandated by
PPACA, which may further burden our resources.
NPI Standard. The national provider
identifier, or NPI, regulations established under HIPAA, or NPI
Standard, require providers that transmit any health information
in electronic form in connection with a HIPAA-standard
transaction to obtain a single, ten position all-numeric NPI and
to use the NPI in standard transactions for which a provider
identifier is required. Health plans and healthcare
clearinghouses must use a providers NPI to identify the
provider on all standard transactions requiring a provider
identifier.
All of our clearinghouse systems are fully capable of
transmitting transactions that include the NPI. We continue to
process transactions using legacy identifiers for non-Medicare
claims that are sent to us to the extent that the intended
recipients have not instructed us to suppress those legacy
identifiers. We cannot provide assurance regarding how CMS will
enforce the NPI Standard or how CMS will view our practice of
including legacy identifiers for non-Medicare claims. We
continue to work with payers, providers, practice management
system vendors and other healthcare industry constituents to
implement the NPI Standard. Any CMS regulatory change or
clarification or enforcement action that prohibited the
processing by healthcare clearinghouses or private payers of
transactions containing legacy identifiers could have an adverse
effect on our business.
Health Plan Identifier. PPACA requires HHS to
promulgate regulations implementing the establishment of a
unique health plan identifier, or HPI, by October 12, 2012.
Similar to a providers NPI, the HPI will provide an
identification system for health plans to use for electronic
transactions. How the HPI requirement will be applied, what
process will be involved to obtain a HPI and how the HPI process
will impact us is unclear at this time.
Electronic Health Records. ARRA provides for
Medicare and Medicaid incentive payments beginning in 2011 for
eligible hospitals and eligible professionals that adopt and
meaningfully use certified electronic health records, or EHR,
technology. At least $20 billion in incentives is being
made available through the Medicare and Medicaid incentive
programs to providers who successfully demonstrate meaningful
use of EHR technology. Beginning in 2015, eligible hospitals and
eligible professionals who fail to demonstrate meaningful use of
EHR technology will face reductions in Medicare payments.
Regulation
of Healthcare Relationships and Payments
A number of federal and state laws govern patient referrals,
financial relationships with physicians and other referral
sources and inducements to providers and patients, including
restrictions contained in amendments to the Social Security Act,
commonly known as the federal Anti-Kickback Law. The
federal Anti-Kickback Law prohibits any person or entity from
offering, paying, soliciting or receiving, directly or
indirectly, anything of value with the intent of generating
referrals or orders for services or items covered by a federal
healthcare program, such as Medicare, Medicaid or TriCare.
Violation of the federal Anti-Kickback Law is a felony.
The Anti-Kickback Law contains a limited number of exceptions,
and the Office of the Inspector General of HHS has created
regulatory safe harbors to the federal Anti-Kickback Law.
Activities that comply precisely with a safe harbor are deemed
protected from prosecution under the federal Anti-Kickback Law.
Failure to meet a safe harbor does not automatically render an
arrangement illegal under the Anti-Kickback Law. The
arrangement, however, does risk increased scrutiny by government
enforcement authorities, based on its particular facts and
circumstances. Our contracts and other arrangements may not meet
an exception or a safe harbor. Many states have laws and
regulations that are similar to the federal Anti-Kickback Law.
In many cases, these state requirements are not limited to items
or services for which payment is made by a federal healthcare
program.
The laws in this area are both broad and vague and generally are
not subject to frequent regulatory or judicial interpretation.
We review our practices with regulatory experts in an effort to
comply with all applicable laws and regulatory requirements.
However, we are unable to predict how these laws will be
interpreted or the full extent of their application,
particularly to services that are not directly reimbursed by
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federal healthcare programs, such as transaction processing
services. Any determination by a state or federal regulatory
agency that any of our practices violate any of these laws could
subject us to civil or criminal penalties and require us to
change or terminate some portions of our business. Even an
unsuccessful challenge by regulatory authorities of our
practices could cause adverse publicity and cause us to incur
significant legal and related costs.
Further, our products and services may indirectly impact the
ability of our payer customers to comply with state prompt
payment laws. These laws require payers to pay healthcare claims
meeting the statutory or regulatory definition of a clean
claim to be paid within a specified time frame.
False
Claims Laws and Other Fraud, Waste and Abuse
Restrictions
We provide claims processing and other products and services to
providers that relate to, or directly involve, the reimbursement
of health services covered by Medicare, Medicaid, other federal
healthcare programs and private payers. In addition, as part of
our data transmission and claims submission services, we may
employ certain edits, using logic, mapping and defaults, when
submitting claims to third party payers. Such edits are utilized
when the information received from providers is insufficient to
complete individual data elements requested by payers.
As a result of these aspects of our business, we may be subject
to, or contractually required to comply with, state and federal
laws that govern various aspects of the submission of healthcare
claims for reimbursement and the receipt of payments for
healthcare items or services. These laws generally prohibit an
individual or entity from knowingly presenting or causing to be
presented claims for payment to Medicare, Medicaid or other
third party payers that are false or fraudulent. False or
fraudulent claims include, but are not limited to, billing for
services not rendered, failing to refund known overpayments,
misrepresenting actual services rendered in order to obtain
higher reimbursement and improper coding and billing for
medically unnecessary goods and services. Further, providers may
not contract with individuals or entities excluded from
participation in any federal healthcare program. Like the
federal Anti-Kickback Law, these provisions are very broad. To
avoid liability, providers and their contractors must, among
other things, carefully and accurately code, complete and submit
claims for reimbursement.
Some of these laws, including restrictions contained in
amendments to the Social Security Act, commonly known as
the federal Civil Monetary Penalty Law, require a
lower burden of proof than other fraud, waste and abuse laws.
Federal and state governments increasingly use the federal Civil
Monetary Penalty Law, especially where they believe they cannot
meet the higher burden of proof requirements under the various
criminal healthcare fraud provisions. Many of these laws provide
significant civil and criminal penalties for noncompliance and
can be enforced by private individuals through
whistleblower or qui tam actions. For example, the
federal Civil Monetary Penalty Law provides for penalties
ranging from $10,000 to $50,000 per prohibited act and
assessments of up to three times the amount claimed or received.
Further, violations of the federal False Claims Act, or the FCA,
are punishable by treble damages and penalties of up to $11,000
per false claim, and whistleblowers may receive a share of
amounts recovered. Under PPACA, civil penalties also may now be
imposed for the failure to report and return an overpayment made
by the federal government within 60 days of identifying the
overpayment and may also result in liability under the FCA.
Whistleblowers, the federal government and some courts have
taken the position that entities that have violated other
statutes, such as the federal Anti-Kickback Law, have thereby
submitted false claims under the FCA.
From time to time, constituents in the healthcare industry,
including us, may be subject to actions under the FCA or other
fraud, waste and abuse provisions, such as the federal Civil
Monetary Penalty Law. We cannot guarantee that state and federal
agencies will regard any billing errors we process as
inadvertent or will not hold us responsible for any compliance
issues related to claims we handle on behalf of providers and
payers. Although we believe our editing processes are consistent
with applicable reimbursement rules and industry practice, a
court, enforcement agency or whistleblower could challenge these
practices. We cannot predict the impact of any enforcement
actions under the various false claims and fraud, waste and
abuse laws applicable to our operations. Even an unsuccessful
challenge of our practices could cause adverse publicity and
cause us to incur significant legal and related costs.
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Requirements
Regarding the Confidentiality, Privacy and Security of Personal
Information
Data Protection and Breaches. In recent years,
there have been a number of well-publicized data breaches
involving the improper dissemination of personal information of
individuals both within and outside of the healthcare industry.
Many states have responded to these incidents by enacting laws
requiring holders of personal information to maintain safeguards
and to take certain actions in response to a data breach, such
as providing prompt notification of the breach to affected
individuals. In many cases, these laws are limited to electronic
data, but states are increasingly enacting or considering
stricter and broader requirements. Effective August 2009,
Covered Entities must report breaches of unsecured protected
health information to affected individuals without unreasonable
delay but not to exceed 60 days of discovery of the breach
by a Covered Entity or its agents. Notification must also be
made to HHS and, in certain circumstances involving large
breaches, to the media. Business Associates must report breaches
of unsecured protected health information to Covered Entities
within 60 days of discovery of the breach by the Business
Associate or its agents. In addition, the Federal Trade
Commission, or FTC, has prosecuted some data breach cases as
unfair and deceptive acts or practices under the Federal Trade
Commission Act. Further, in October 2007, the FTC issued a final
rule requiring creditors, which may include some of our
customers, to implement identity theft prevention programs to
detect, prevent and mitigate identity theft in connection with
customer accounts. The enforcement date for this rule was
postponed until December 31, 2010. Although Congress
recently passed legislation that restricts the definition of
creditor and exempts many health providers from
complying with this rule, we may be required to apply additional
resources to our existing processes to assist our affected
customers in complying with this rule. We have implemented and
maintain physical, technical and administrative safeguards
intended to protect all personal data and have processes in
place to assist us in complying with all applicable laws and
regulations regarding the protection of this data and properly
responding to any security breaches or incidents.
HIPAA Privacy Standards and Security
Standards. The privacy regulations established
under HIPAA, or Privacy Standards, and the security regulations
established under HIPAA, or Security Standards, apply directly
as a Covered Entity to our operations as a healthcare
clearinghouse and indirectly as a Business Associate to other
aspects of our operations as a result of our contractual
obligations to our customers. Effective February 2010, ARRA
extended the direct application of some provisions of the
Privacy Standards and Security Standards to us when we are
functioning as a Business Associate of our Covered Entity
customers. The Privacy Standards extensively regulate the use
and disclosure of individually identifiable health information
by Covered Entities and their Business Associates. For example,
the Privacy Standards permit Covered Entities and their Business
Associates to use and disclose individually identifiable health
information for treatment and to process claims for payment, but
other uses and disclosures, such as marketing communications,
require written authorization from the individual or must meet
an exception specified under the Privacy Standards. The Privacy
Standards also provide patients with rights related to
understanding and controlling how their health information is
used and disclosed. Effective February 2010 or later (in the
case of restrictions tied to the issuance of implementing
regulations), ARRA imposes stricter limitations on certain types
of uses and disclosures, such as additional restrictions on
marketing communications and the sale of individually
identifiable health information. To the extent permitted by the
Privacy Standards, ARRA and our contracts with our customers, we
may use and disclose individually identifiable health
information to perform our services and for other limited
purposes, such as creating de-identified information.
Determining whether data has been sufficiently de-identified to
comply with the Privacy Standards and our contractual
obligations may require complex factual and statistical analyses
and may be subject to interpretation. The Security Standards
require Covered Entities and their Business Associates to
implement and maintain administrative, physical and technical
safeguards to protect the security of individually identifiable
health information that is electronically transmitted or
electronically stored. In addition, in July 2010, HHS published
a notice of proposed rulemaking, or NPRM, to modify the Privacy
Standards, Security Standards and enforcement rules to align
with the HITECH Acts statutory changes that would require
substantially all of our Business Associate agreements to be
re-contracted within eighteen months of the final rule. To date,
final regulations have not been issued and HHS has said that
final regulations are expected to be released in March or April
of 2011.
If we are unable to properly protect the privacy and security of
health information entrusted to us, we could be found to have
breached our contracts with our customers. Further, HIPAA, as
amended by ARRA,
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includes civil and criminal penalties for Covered Entities and
Business Associates that violate the Privacy Standards or the
Security Standards. ARRA significantly increased the amount of
the civil penalties, with penalties of up to $50,000 per
violation for a maximum civil penalty of $1.5 million in a
calendar year for violations of the same requirement. Recently,
the HHS Office for Civil Rights, which enforces the Security
Standards and Privacy Standards, appears to have increased its
enforcement activities. ARRA also strengthened the enforcement
provisions of HIPAA, which may result in further increases in
enforcement activity. For example, ARRA requires HHS to conduct
periodic compliance audits of Covered Entities and their
Business Associates and authorizes state attorneys general to
bring civil actions seeking either injunctions or damages in
response to violations of HIPAA privacy and security regulations
that threaten the privacy of state residents.
We have implemented and maintain policies and processes to
assist us in complying with the Privacy Standards, the Security
Standards and our contractual obligations. We cannot provide
assurance regarding how these standards will be interpreted,
enforced or applied to our operations.
Other Requirements. In addition to HIPAA,
numerous other state and federal laws govern the collection,
dissemination, use, access to and confidentiality of
individually identifiable health information and healthcare
provider information. Some states also are considering new laws
and regulations that further protect the confidentiality,
privacy and security of medical records or other types of
medical information. In many cases, these state laws are not
preempted by the Privacy Standards and may be subject to
interpretation by various courts and other governmental
authorities. Further, the U.S. Congress and a number of
states have considered or are considering prohibitions or
limitations on the disclosure of medical or other information to
individuals or entities located outside of the United States.
Banking
and Financial Services Industry
The banking and financial services industry is subject to
numerous laws, regulations and industry standards, some of which
may impact our operations and subject us, our vendors and our
customers to liability as a result of the payment distribution
products and services we offer. Although we are not and do not
act as a bank, we offer products and services that involve banks
or vendors who contract with banks and other regulated providers
of financial services. As a result, we may be impacted by
banking and financial services industry laws, regulations and
industry standards, such as licensing requirements, solvency
standards, requirements to maintain privacy of nonpublic
personal financial information and Federal Deposit Insurance
Corporation, or FDIC, deposit insurance limits.
Intellectual
Property
We rely upon a combination of trade secret, copyright and
trademark laws, license agreements, confidentiality procedures,
nondisclosure agreements and technical measures to protect the
intellectual property used in our business. We generally enter
into confidentiality agreements with our employees, consultants,
vendors and customers. We also seek to control access to and
distribution of our technology, documentation and other
proprietary information.
We use numerous trademarks, trade names and service marks for
our products and services. We also rely on a variety of
intellectual property rights that we license from third parties.
Although we believe that alternative technologies are generally
available to replace such licensed intellectual property, these
third party technologies may not continue to be available to us
on commercially reasonable terms.
We also have several patents and patent applications covering
products and services we provide, including software
applications. Due to the nature of our applications, we believe
that patent protection is less significant than our ability to
further develop, enhance and modify our current products and
services.
The steps we have taken to protect our copyrights, trademarks,
servicemarks and other intellectual property may not be
adequate, and third parties could infringe, misappropriate or
misuse our intellectual property. If this were to occur, it
could harm our reputation and adversely affect our competitive
position or results of operations.
17
Employees
As of February 28, 2011, we had approximately
3,000 employees.
Available
Information
We file our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports with the Securities and Exchange
Commission, or the SEC. You may obtain copies of these documents
by visiting the SECs Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549, by
calling the SEC at
1-800-SEC-
0330 or by accessing the SECs website at www.sec.gov.
Our corporate website address is www.emdeon.com. You also can
obtain on our website, free of charge, a copy of our annual
reports on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K
and any amendments to those reports, as soon as reasonably
practicable after we electronically file such reports or
amendments with, or furnish them to, the SEC. Also available on
our website, free of charge, are copies of our Code of Business
Conduct and Ethics, our Corporate Governance Guidelines and the
charters for each of the standing committees of our board of
directors the Audit Committee, the Compensation
Committee and the Nominating and Corporate Governance Committee.
Our internet website and the information contained therein or
connected thereto are not intended to be incorporated by
reference into this Annual Report.
Overview
You should consider carefully the risks and uncertainties
described below, and all information contained in this Annual
Report, in evaluating our company and our business. The
occurrence of any of the following risks or uncertainties
described below could significantly and adversely affect our
business, prospects, financial condition and operating results.
Risks
Related to our Business
We
face significant competition for our products and
services.
The markets for our various products and services are intensely
competitive, continually evolving and, in some cases, subject to
rapid technological change. We face competition from many
healthcare information systems companies and other technology
companies within segments of the healthcare information
technology and services markets. We also compete with certain of
our customers that provide internally some of the same products
and services that we offer. Our key competitors include:
(i) healthcare transaction processing companies, including
those providing EDI
and/or
internet-based services and those providing services through
other means, such as paper and fax; (ii) healthcare
information system vendors that support providers and their
revenue cycle and payment management and clinical information
exchange processes, including physician and dental practice
management system, hospital information system and electronic
medical record system vendors; (iii) large information
technology and healthcare consulting service providers;
(iv) health insurance companies, pharmacy benefit
management companies, hospital management companies and
pharmacies that provide or are developing electronic transaction
and payment distribution services for use by providers
and/or by
their members and customers; (v) healthcare focused print
and mail vendors; and (vi) financial institutions that have
invested in healthcare data management assets. In addition,
major software, hardware, information systems and business
process outsourcing companies, both with and without healthcare
companies as their partners, offer or have announced their
intention to offer products or services that are competitive
with products and services that we offer.
Within certain of the products and services markets in which we
operate, we face competition from entities that are
significantly larger and have greater financial resources than
we do and have established reputations for success. Other
companies have targeted these markets for growth, including by
developing new technologies utilizing internet-based systems. We
may not be able to compete successfully with these
18
companies, and these or other competitors may commercialize
products, services or technologies that render our products,
services or technologies obsolete or less marketable.
Some
of our customers compete with us and some, instead of using a
third party provider, perform internally some of the same
services that we offer.
Some of our existing customers compete with us or may plan to do
so or belong to alliances that compete with us or plan to do so,
either with respect to the same products and services we provide
to them or with respect to some of our other lines of business.
For example, some of our payer customers currently
offer through affiliated clearinghouses, web portals
and other means electronic data transmission
services to providers that allow the provider to bypass third
party EDI service providers such as us, and additional payers
may do so in the future. The ability of payers to replicate our
products and services may adversely affect the terms and
conditions we are able to negotiate in our agreements with them
and our transaction volume with them, which directly relates to
our revenues. We may not be able to maintain our existing
relationships for connectivity services with payers or develop
new relationships on satisfactory terms, if at all. In addition,
some of our products and services allow payers and providers to
outsource business processes that they have been or could be
performing internally and, in order for us to be able to
compete, use of our products and services must be more efficient
for them than use of internal resources.
If we
are unable to retain our existing customers, our business,
financial condition and results of operations could
suffer.
Our success depends substantially upon the retention of our
customers, particularly due to our transaction-based, recurring
revenue model. We may not be able to retain some of our existing
customers if we are unable to continue to provide products and
services that our payer customers believe enable them to achieve
improved efficiencies and cost-effectiveness, and that our
provider and pharmacy customers believe allow them to more
effectively manage their revenue cycle, increase reimbursement
rates and improve cash flows. We also may not be able to retain
customers if our electronic
and/or
paper-based solutions contain errors or otherwise fail to
perform properly, if our pricing structure is no longer
competitive or upon expiration of our contracts. Historically,
we have enjoyed high customer retention rates; however, we may
not be able to maintain high retention rates in the future. Our
transaction-based, recurring revenues depend in part upon
maintaining this high customer retention rate, and if we are
unable to maintain our historically high customer retention
rate, our business, financial condition and results of
operations could be adversely impacted.
If we
are unable to connect to a large number of payers and providers,
our product and service offerings would be limited and less
desirable to our customers.
Our business largely depends upon our ability to connect
electronically to a substantial number of payers, such as
insurance companies, Medicare and Medicaid agencies and pharmacy
benefit managers, and providers, such as hospitals, physicians,
dentists, labs and pharmacies. The attractiveness of some of the
solutions we offer to providers, such as our claims management
and submission services, depends in part on our ability to
connect to a large number of payers, which allows us to
streamline and simplify workflows for providers. These
connections may either be made directly or through a
clearinghouse. We may not be able to maintain our links with a
large number of payers on terms satisfactory to us and we may
not be able to develop new connections, either directly or
through other clearinghouses, on satisfactory terms. The failure
to maintain these connections could cause our products and
services to be less attractive to our provider customers. In
addition, our payer customers view our connections to a large
number of providers as essential in allowing them to receive a
high volume of transactions and realize the resulting cost
efficiencies through the use of our products and services. Our
failure to maintain existing connections with payers, providers
and other clearinghouses or to develop new connections as
circumstances warrant, or an increase in the utilization of
direct links between payers and providers, could cause our
electronic transaction processing system to be less desirable to
healthcare constituents, which would reduce the number of
transactions that we process and for which we are paid,
resulting in a decrease in revenues and an adverse effect on our
financial condition and results of operations.
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The
failure to maintain our relationships with our channel partners
or significant changes in the terms of the agreements we have
with them may have an adverse effect on our ability to
successfully market our products and services.
We have entered into contracts with channel partners to market
and sell some of our products and services. Most of these
contracts are on a non-exclusive basis. However, under contracts
with some of our channel partners, we may be bound by provisions
that restrict our ability to market and sell our products and
services to potential customers. Our arrangements with some of
these channel partners involve negotiated payments to them based
on percentages of revenues they generate. If the payments prove
to be too high, we may be unable to realize acceptable margins,
but if the payments prove to be too low, the channel partners
may not be motivated to produce a sufficient volume of revenues.
The success of these contractual arrangements will depend in
part upon the channel partners own competitive, marketing
and strategic considerations, including the relative advantages
of using alternative products being developed and marketed by
them or our competitors. If any of these channel partners are
unsuccessful in marketing our products and services or seek to
amend the financial or other terms of the contracts we have with
them, we will need to broaden our marketing efforts to increase
focus on the solutions they sell and alter our distribution
strategy, which may divert our planned efforts and resources
from other projects. In addition, as part of the packages these
channel partners sell, they may offer a choice to their
customers between products and services that we supply and
similar products and services offered by our competitors or by
the channel partners directly. If our products and services are
not chosen for inclusion in vendor packages, the revenues we
earn from these relationships will decrease. Lastly, we could be
subject to claims and liability, as a result of the activities,
products or services of these channel partners or other
resellers of our products and services. Even if these claims do
not result in liability to us, investigating and defending these
claims could be expensive, time-consuming and result in adverse
publicity that could harm our business.
Our
business and future success may depend on our ability to
cross-sell our products and services.
Our ability to generate revenue and growth partly depends on our
ability to cross-sell our products and services to our existing
customers and new customers. We expect our ability to
successfully cross-sell our products and services will be one of
the most significant factors influencing our growth. We may not
be successful in cross-selling our products and services because
our customers may find our additional products and services
unnecessary or unattractive. Our failure to sell additional
products and services to existing customers could affect our
ability to grow our business.
We
have faced and will continue to face increasing pressure to
reduce our prices, which may reduce our margins, profitability
and competitive position.
As electronic transaction processing further penetrates the
healthcare market or becomes highly standardized, competition
among electronic transaction processors is increasingly focused
on pricing. This competition has placed, and could place
further, intense pressure on us to reduce our prices in order to
retain market share. If we are unable to reduce our costs
sufficiently to offset declines in our prices, or if we are
unable to introduce new, innovative product and service
offerings with higher margins, our results of operations could
decline.
In addition, many healthcare industry constituents are
consolidating to create integrated healthcare delivery systems
with greater market power. As provider networks, such as
hospitals, and payer organizations, such as private insurance
companies, consolidate, competition to provide the types of
products and services we provide will become more intense, and
the importance of establishing and maintaining relationships
with key industry constituents will become more significant.
These industry constituents have, in the past, and may, in the
future, try to use their market power to negotiate price
reductions for our products and services. If we are forced to
reduce prices, our margins will decrease and our results of
operations will decline, unless we are able to achieve
corresponding reductions in expenses.
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Our
ability to generate revenue could suffer if we do not continue
to update and improve our existing products and services and
develop new ones.
We must improve the functionality of our existing products and
services in a timely manner and introduce new and valuable
healthcare information technology and service solutions in order
to respond to technological and regulatory developments and,
thereby, retain existing customers and attract new ones. For
example, from time to time, government agencies may alter format
and data code requirements applicable to electronic
transactions. We may not be successful in responding to
technological and regulatory developments and changing customer
needs. The pace of change in the markets we serve is rapid, and
there are frequent new product and service introductions by our
competitors and channel partners who use our products and
services in their offerings. If we do not respond successfully
to technological and regulatory changes and evolving industry
standards, our products and services may become obsolete.
Technological changes may also result in the offering of
competitive products and services at lower prices than we are
charging for our products and services, which could result in
our losing sales unless we lower the prices we charge. If we do
lower our prices on some of our products and services, we will
need to increase our margins on these products and services in
order to maintain our overall profitability. In addition, the
products and services we develop or license may not be able to
compete with the alternatives available to our customers.
Our
business will suffer if we fail to successfully integrate
acquired businesses and technologies or to appropriately assess
the risks in particular transactions.
We have historically acquired and, in the future, plan to
acquire, businesses, technologies, services, product lines and
other assets. For example, in 2010, we acquired four businesses
and are in the process of integrating them into our existing
operations. The successful integration of any businesses and
assets we acquire into our operations, on a cost-effective
basis, can be critical to our future performance. The amount and
timing of the expected benefits of any acquisition, including
potential synergies between our current business and the
acquired business, are subject to significant risks and
uncertainties. These risks and uncertainties include, but are
not limited to, those relating to:
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our ability to maintain relationships with the customers of the
acquired business;
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our ability to cross-sell products and services to customers
with which we have established relationships and those with
which the acquired businesses have established relationships;
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our ability to retain or replace key personnel;
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potential conflicts in payer, provider, pharmacy, vendor or
marketing relationships;
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our ability to coordinate organizations that are geographically
diverse and may have different business cultures; and
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compliance with regulatory requirements.
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We cannot guarantee that any acquired businesses will be
successfully integrated with our operations in a timely or
cost-effective manner, or at all. Failure to successfully
integrate acquired businesses or to achieve anticipated
operating synergies, revenue enhancements or cost savings could
have an adverse effect on our business, financial condition and
results of operations.
Although our management attempts to evaluate the risks inherent
in each transaction and to evaluate acquisition candidates
appropriately, we may not properly ascertain all such risks and
the acquired businesses and assets may not perform as we expect
or enhance the value of our company as a whole. In addition,
acquired companies or businesses may have larger than expected
liabilities that are not covered by the indemnification, if any,
that we are able to obtain from the sellers.
21
Achieving
market acceptance of new or updated products and services is
necessary in order for them to become profitable and will likely
require significant efforts and expenditures.
Our future financial results will depend in part on whether our
new or updated products and services receive sufficient customer
acceptance. These products and services include, without
limitation:
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electronic billing, payment and remittance services for payers
and providers that complement our existing paper-based patient
billing and payment and payment distribution services;
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electronic prescriptions from healthcare providers to pharmacies
and pharmacy benefit managers;
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our other pre- and post-adjudication services for payers and
providers;
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payment integrity and fraud, waste and abuse services for payers
and providers;
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government program eligibility and enrollment services for
providers;
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accounts receivable management, denial management, appeals and
collection improvement services for providers;
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healthcare and information technology consulting services for
payers; and
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decision support, clinical information exchange or other
business intelligence solutions.
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Achieving market acceptance for new or updated products and
services is likely to require substantial marketing efforts and
expenditure of significant funds to create awareness and demand
by constituents in the healthcare industry. In addition,
deployment of new or updated products and services may require
the use of additional resources for training our existing sales
force and customer service personnel and for hiring and training
additional salespersons and customer service personnel. Failure
to achieve broad penetration in target markets with respect to
new or updated products and services could have an adverse
effect on our business prospects and financial results.
A
prolonged economic downturn could have a material adverse effect
on our business, financial condition and results of
operations.
The U.S. economy experienced a significant economic
downturn during the past three years. We are unable to predict
the likely duration or ultimate severity of the economic
downturn and there can be no assurance that current economic
conditions will not worsen. A prolonged or further weakening of
economic conditions could lead to reductions in demand for our
products and services. For example, for the year ended
December 31, 2010, our revenues were adversely affected by
the impact of lower healthcare utilization trends driven by
continued high unemployment and other adverse economic factors.
A sustained recession could further reduce the amount of income
patients are able to spend on healthcare services. As a result,
patients may elect to delay or forgo seeking healthcare
services, which could further lessen healthcare utilization and
our transaction volumes or decrease payer and provider demand
for our products and services. Also, prolonged high unemployment
rates could cause commercial payer membership to decline which
could also lessen healthcare utilization and decrease our
transaction volumes. In addition, as a result of weak economic
conditions, we may experience the negative effects of increased
financial pressures on our payer and provider customers. For
instance, our business, financial condition and results of
operations could be negatively impacted by increased competitive
pricing pressure and a decline in our customers credit
worthiness, which could result in us incurring increased bad
debt expense. If we are not able to timely and appropriately
adapt to changes resulting from a weak economic environment, our
business, results of operations and financial condition may be
materially and adversely affected.
There
are increased risks of performance problems during times when we
are making significant changes to our products and services or
to systems we use to provide services. In addition,
implementation of our products and services and cost savings
initiatives may cost more, may not provide the benefits
expected, may take longer than anticipated or may increase the
risk of performance problems.
In order to respond to technological and regulatory changes and
evolving industry standards, our products and services must be
continually updated and enhanced. The software and systems that
we sell and use to
22
provide services are inherently complex and, despite testing and
quality control, we cannot be certain that errors will not be
found in any changes, enhancements, updates and new versions
that we market or use. Even if new or modified products and
services do not have performance problems, our technical and
customer service personnel may have difficulties in installing
them or in their efforts to provide any necessary training and
support to customers.
Implementation of changes in our technology and systems may cost
more or take longer than originally expected and may require
more testing than originally anticipated. While the new hardware
and software will be tested before it is used in production, we
cannot be sure that the testing will uncover all problems that
may occur in actual use. If significant problems occur as a
result of these changes, we may fail to meet our contractual
obligations to customers, which could result in claims being
made against us or in the loss of customer relationships. In
addition, changes in our technology and systems may not provide
the additional functionality or other benefits that were
expected.
In addition, we also periodically implement efficiency measures
and other cost saving initiatives to improve our operating
performance. These efficiency measures and other cost saving
initiatives may not provide the benefits anticipated or do so in
the time frame expected. Implementation of these measures also
may increase the risks of performance problems due to unforeseen
impacts on our organization, systems and processes.
Disruptions
in service or damages to our data or other operation centers, or
other software or systems failures, could adversely affect our
business.
Our data centers and operation centers are essential to our
business. Our operations depend on our ability to maintain and
protect our computer systems, many of which are located in our
primary data centers that we operate in Memphis and Nashville,
Tennessee. We also operate several satellite data centers that
we plan to consolidate over time to our primary data centers.
Our business and results of operations are also highly dependent
on our print and mail operations, which are primarily conducted
in Bridgeton, Missouri and Toledo, Ohio. We conduct business
continuity planning and maintain insurance against fires,
floods, other natural disasters and general business
interruptions to mitigate the adverse effects of a disruption,
relocation or change in operating environment; however, the
situations we plan for and the amount of insurance coverage may
not be adequate in any particular case. The occurrence of any of
these events could result in interruptions, delays or cessations
in service to users of our products and services, which could
impair or prohibit our ability to provide our products and
services, reduce the attractiveness of our products and services
to our customers and adversely impact our financial condition
and results of operations.
In addition, despite the implementation of security measures,
our infrastructure, data centers or systems that we interface
with, including the internet and related systems, may be
vulnerable to physical break-ins, hackers, improper employee or
contractor access, computer viruses, programming errors,
denial-of-service
attacks, terrorist attacks or other attacks by third parties or
similar disruptive problems. Any of these events can cause
system failure, including network, software or hardware failure,
which can result in service disruptions or increased response
time for our products and services. As a result, we may be
required to expend significant capital and other resources to
protect against security breaches and hackers or to alleviate
problems caused by such breaches. The occurrence of any of these
events also could disrupt our business and operations or harm
our brand and reputation, either of which could adversely affect
our financial condition and operating results.
We also rely on a limited number of suppliers to provide us with
a variety of products and services, including telecommunications
and data processing services necessary for our transaction
services and processing functions and software developers for
the development and maintenance of certain software products we
use to provide our solutions. If these suppliers do not fulfill
their contractual obligations or choose to discontinue their
products or services, our business and operations could be
disrupted, our brand and reputation could be harmed and our
financial condition and operating results could be adversely
affected.
23
We may
be liable to our customers and may lose customers if we provide
poor service, if our products and services do not comply with
our agreements or if our software products or transmission
systems contain errors or experience failures.
We must meet our customers service level expectations and
our contractual obligations with respect to our products and
services. Failure to do so could subject us to liability, as
well as cause us to lose customers. In some cases, we rely upon
third party contractors to assist us in providing our products
and services. Our ability to meet our contractual obligations
and customer expectations may be impacted by the performance of
our third party contractors and their ability to comply with
applicable laws and regulations. For example, our electronic
payment and remittance services depend in part on the ability of
our vendors to comply with applicable banking and financial
service requirements and their failure to do so could cause an
interruption in the services we provide or require us to seek
alternative solutions or relationships.
Errors in the software and systems we provide to customers or
the software and systems we use to provide our products and
services also could cause serious problems for our customers. In
addition, because of the large amount of data we collect and
manage, it is possible that hardware failures and errors in our
systems would result in data loss or corruption or cause the
information that we collect to be incomplete or contain
inaccuracies that our customers regard as significant. For
example, errors in our transaction processing systems can result
in payers paying the wrong amount, making payments to the wrong
payee or delaying payments. Since some of our products and
services relate to laboratory ordering and reporting and
electronic prescriptions, an error in our systems also could
result in injury to a patient. If problems like these occur, our
customers may seek compensation from us or may seek to terminate
their agreements with us, withhold payments due to us, seek
refunds from us of part or all of the fees charged under our
agreements, a loan or advancement of funds, or initiate
litigation or other dispute resolution procedures. In addition,
we may be subject to claims against us by others affected by any
such problems.
Our activities and the activities of our third party contractors
involve the storage, use and transmission of personal health
information. Accordingly, security breaches of our or their
computer systems or at print and mail operation centers could
expose us to a risk of loss or litigation, government
enforcement actions and contractual liabilities. We cannot be
certain that contractual provisions attempting to limit our
liability in these areas will be successful or enforceable, or
that other parties will accept such contractual provisions as
part of our agreements. Any security breaches also could impact
our ability to provide our products and services, as well as
impact the confidence of our customers in our products and
services, either of which could have an adverse effect on our
business, financial condition and results of operations.
We attempt to limit, by contract, our liability for damages
arising from our negligence, errors, mistakes or security
breaches. However, contractual limitations on liability may not
be enforceable or may otherwise not provide sufficient
protection to us from liability for damages. We maintain
liability insurance coverage, including coverage for errors and
omissions. It is possible, however, that claims could exceed the
amount of our applicable insurance coverage, if any, or that
this coverage may not continue to be available on acceptable
terms or in sufficient amounts. Even if these claims do not
result in liability to us, investigating and defending against
them could be expensive and time consuming and could divert
managements attention away from our operations. In
addition, negative publicity caused by these events may delay
market acceptance of our products and services, including
unrelated products and services, or may harm our reputation and
our business.
We
have a substantial amount of indebtedness, which could affect
our financial condition.
As of December 31, 2010, we had an aggregate of
$988.9 million of outstanding indebtedness (before
deduction of unamortized debt discount of $42.6 million and
including an obligation under our data sublicense agreement of
$40.3 million) and we had the ability to borrow an
additional $46.8 million under our revolving credit
facility. If we cannot generate sufficient cash flow from
operations to service our debt, we may need to refinance our
debt, dispose of assets or issue equity to obtain necessary
funds. We do not know whether we will be able to take any of
such actions on a timely basis or on terms satisfactory to us or
at all.
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Our substantial amount of indebtedness could limit our ability
to:
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obtain necessary additional financing for working capital,
capital expenditures or other purposes in the future;
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plan for, or react to, changes in our business and the
industries in which we operate;
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make future acquisitions or pursue other business
opportunities; and
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react in an extended economic downturn.
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Despite our substantial indebtedness, we may still be able to
incur significantly more debt. The incurrence of additional debt
could increase the risks associated with our substantial
leverage, including our ability to service our indebtedness. In
addition, because borrowings under our credit agreements bear
interest at a variable rate, our interest expense could
increase, and thus exacerbate these risks. For instance,
assuming an aggregate principal balance of $948.5 million
outstanding under our credit agreements, which was the amount
outstanding as of December 31, 2010, and considering the
effect of our interest rate swap agreement, a 1% increase in the
interest rate we are charged on our debt would increase our
annual interest expense by $7.1 million.
The
credit markets may affect our ability to refinance our existing
debt or obtain additional debt financing on acceptable
terms.
We may need or seek additional financing in the future to either
refinance our existing indebtedness or to fund our operations,
fund acquisitions, develop additional products and services or
implement other projects. For example, our existing credit
facilities expire in November 2013 and May 2014, respectively.
Depending on the conditions applicable in the credit markets, it
may be difficult to refinance our existing indebtedness or
obtain any such additional financing on acceptable terms, which
could have an adverse effect on our financial condition,
including our results of operations
and/or
business plans. In addition, if any of the lenders participating
in our revolving credit facility are unable to fund borrowings
under such facility, our liquidity could be adversely affected.
The
terms of our credit agreements may restrict our current and
future operations, which would adversely affect our ability to
respond to changes in our business and to manage our
operations.
Our credit agreements contain, and the terms of any future
indebtedness of ours would likely contain, a number of
restrictive covenants that impose significant operating and
financial restrictions on us, including restrictions on our
ability to, among other things:
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incur additional debt;
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issue preferred stock;
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create liens;
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create or incur contingent obligations;
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engage in sales of assets or subsidiary stock;
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enter into sale-leaseback transactions;
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make investments and acquisitions;
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change our fiscal year or our lines of business;
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enter into hedging arrangements;
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make capital expenditures;
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pay dividends and make other restricted payments;
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enter into transactions with affiliates; and
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transfer all or substantially all of our assets or enter into
merger or consolidation transactions.
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Our credit agreements also require us to maintain certain
financial ratios, including a maximum total leverage ratio and a
minimum interest coverage ratio. A failure by us to comply with
the covenants or financial ratios contained in our credit
agreements could result in an event of default under the
applicable facility which could adversely affect our ability to
respond to changes in our business and manage our operations. A
change of control of our company is also an event of default
under our credit agreements. Under our credit agreements, a
change of control of our company will occur if any person other
than the Principal Equityholders or us or our subsidiaries
acquires, directly or indirectly, the power to vote more than
35% of the outstanding equity interests of EBS Master and at the
time of the acquisition the Principal Equityholders do not
collectively hold equity interests of EBS Master representing
greater voting power in EBS Master than such person. In the
event of any default under our first lien credit agreement, the
lenders under that agreement will not be required to lend any
additional amounts to us. In addition, upon the occurrence of an
event of default under either our first or second lien credit
agreements, the lenders under both credit agreements could elect
to declare all amounts outstanding to be due and payable and
require us to apply all of our available cash to repay these
amounts. If the indebtedness under our credit agreements were to
be accelerated, there can be no assurance that our assets would
be sufficient to repay this indebtedness in full.
Recent
and future developments in the healthcare industry could
adversely affect our business
In March 2010, the President signed into law PPACA. As enacted,
PPACA will change how healthcare services are covered, delivered
and reimbursed through expanded coverage of uninsured
individuals, reduced Medicare program spending and insurance
market reforms. By January 2014, PPACA requires states to expand
Medicaid coverage significantly and establish health insurance
exchanges to facilitate the purchase of health insurance by
individuals and small employers and provides subsidies to states
to create non-Medicaid plans for certain low-income residents.
Effective in 2014, PPACA imposes penalties on individuals who do
not obtain health insurance and employers that do not provide
health insurance to their employees. PPACA also sets forth
several insurance market reforms, including increased dependent
coverage, prohibitions on excluding individuals based on
pre-existing conditions and mandated minimum medical loss ratios
for health plans. In addition, PPACA provides for significant
new taxes, including an industry user tax paid by health
insurance companies beginning in 2014, as well as an excise tax
on health insurers and employers offering high cost health
coverage plans. PPACA also imposes significant Medicare
Advantage funding cuts and material reductions to Medicare and
Medicaid program spending. PPACA further provides for additional
resources to combat healthcare fraud, waste and abuse and also
requires HHS to adopt standards for electronic transactions in
addition to those required under HIPAA and to establish
operating rules to promote uniformity in the implementation of
each standardized electronic transaction. In addition, several
states are considering, or may consider, legislative proposals
that could affect our business or that of our customers.
If implemented as enacted, the provisions of PPACA that are
designed to expand health coverage potentially could result in
an overall increase in transactions for our business and the
need for our products and services; however, our customers may
attempt to reduce spending to offset the increased costs
associated with meeting the various PPACA insurance market
reforms. Likewise, as the Medicare payment reductions and other
reimbursement changes impact our customers, our customers may
attempt to seek price concessions from us or reduce their use of
our services. Thus, PPACA may result in a reduction of
expenditures by customers or potential customers in the
healthcare industry, which could have an adverse effect on our
business, financial condition and results from operations.
Further, we may experience increased costs from responding to
new standardized transactions and implementation rules and our
customers needs.
While many of the provisions of PPACA will not be directly
applicable to us, PPACA, as enacted, will affect the business of
our payer, provider and pharmacy customers and will also affect
the Medicaid programs of the states with which we have
contracts. Because of the many variables involved, including
PPACAs complexity, lack of implementing regulations or
interpretive guidance, gradual and possibly delayed
implementation, pending court challenges and possible amendment
or repeal, we are unable to predict all of the ways in which
PPACA could impact us or the business of our customers.
Implementation of PPACA, particularly those provisions expanding
health insurance coverage, could be delayed or even blocked due
to court challenges and
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efforts to repeal or amend the law. Further, it is unclear how
federal lawsuits challenging the constitutionality of PPACA will
be resolved or what the impact will be of any resulting changes
to all or portions of PPACA. Due to these factors, we are unable
to predict with any reasonable certainty or otherwise quantify
the likely impact of PPACA on our business model, financial
condition or result of operations.
Moreover, there currently are numerous federal, state and
private initiatives and studies seeking ways to increase the use
of information technology in healthcare as a means of improving
care and reducing costs. These initiatives may result in
additional or costly legal or regulatory requirements that are
applicable to us and our customers, may encourage more companies
to enter our markets, may provide advantages to our competitors
and may result in the development of technology solutions that
compete with ours. Any such initiatives may result in a
reduction of expenditures by customers or potential customers in
the healthcare industry, which could have an adverse effect on
our business.
In addition, other general reductions in expenditures by
healthcare industry constituents could result from, among other
things:
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government regulation or private initiatives that affect the
manner in which providers interact with patients, payers or
other healthcare industry constituents, including changes in
pricing or means of delivery of healthcare products and services;
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reductions in governmental funding for healthcare, in addition
to reductions required by PPACA; and
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adverse changes in business or economic conditions affecting
payers, providers, pharmaceutical companies, medical device
manufacturers or other healthcare industry constituents.
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Even if general expenditures by industry constituents remain the
same or increase, other developments in the healthcare industry
may result in reduced spending on information technology and
services or in some or all of the specific markets we serve or
are planning to serve. In addition, our customers
expectations regarding pending or potential industry
developments may also affect their budgeting processes and
spending plans with respect to the types of products and
services we provide. For example, use of our products and
services could be affected by:
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changes in the billing patterns of providers;
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changes in the design of health insurance plans;
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changes in the contracting methods payers use in their
relationships with providers; and
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decreases in marketing expenditures by pharmaceutical companies
or medical device manufacturers, as a result of governmental
regulation or private initiatives that discourage or prohibit
promotional activities by pharmaceutical or medical device
companies.
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The healthcare industry has changed significantly in recent
years, and we expect that significant changes will continue to
occur. The timing and impact of developments in the healthcare
industry are difficult to predict. Furthermore, we are unable to
predict how providers, payers and other market participants will
respond to the various reform provisions contained in PPACA,
many of which will not be implemented for several years and
could be delayed or even blocked. We cannot be sure that the
markets for our products and services will continue to exist at
current levels or that we will have adequate technical,
financial and marketing resources to react to changes in those
markets.
Government
regulation creates risks and challenges with respect to our
compliance efforts and our business strategies.
The healthcare industry is highly regulated and subject to
changing political, legislative, regulatory and other
influences. Many healthcare laws are complex, and their
application to specific services and relationships may not be
clear. In particular, many existing healthcare laws and
regulations, when enacted, did not anticipate the healthcare
information products and services that we provide, and these
laws and regulations may be applied to our products and services
in ways that we do not anticipate. PPACA, as enacted, and other
federal and state proposals to reform or revise aspects of the
healthcare industry or to revise or create additional
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statutory and regulatory requirements, if implemented, could
impact our operations, the use of our products or services and
our ability to market new products and services, or could create
unexpected liabilities for us. We may also be impacted by
non-healthcare laws as a result of some of our products and
services. For example, laws, regulations and industry standards
regulating the banking and financial services industry may
impact our operations as a result of the electronic payment and
remittance services we offer directly or through third party
vendors. We are unable to predict what changes to laws or
regulations might be made in the future or how those changes
could affect our business or the costs of compliance.
We have attempted to structure our operations to comply with
legal requirements applicable to us directly and to our
customers and third party contractors, but there can be no
assurance that our operations will not be challenged or impacted
by enforcement initiatives. Any determination by a court or
agency that our products and services violate, or cause our
customers to violate, applicable laws or regulations could
subject us or our customers to civil or criminal penalties. Such
a determination could also require us to change or terminate
portions of our business, disqualify us from serving customers
who are or do business with government entities, or cause us to
refund some or all of our service fees or otherwise compensate
our customers. In addition, failure to satisfy laws or
regulations could adversely affect demand for our products and
services and could force us to expend significant capital,
research and development and other resources to address the
failure. Even an unsuccessful challenge by regulatory
authorities or private whistleblowers could result in loss of
business, exposure to adverse publicity and injury to our
reputation and could adversely affect our ability to retain and
attract clients. Laws and regulations impacting our operations
include the following:
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Data Protection and Breaches. In recent years,
there have been a number of well-publicized data breaches
involving the improper dissemination of personal information of
individuals both within and outside of the healthcare industry.
Many states have responded to these incidents by enacting laws
requiring holders of personal information to maintain safeguards
and to take certain actions in response to a data breach, such
as providing prompt notification of the breach to affected
individuals. In many cases, these laws are limited to electronic
data, but states are increasingly enacting or considering
stricter and broader requirements. Effective August 2009,
Covered Entities must report breaches of unsecured protected
health information to affected individuals without unreasonable
delay but not to exceed 60 days of discovery of the breach
by a Covered Entity or its agents. Notification must also be
made to HHS and, in certain circumstances involving large
breaches, to the media. Business Associates must report breaches
of unsecured protected health information to Covered Entities
within 60 days of discovery of the breach by the Business
Associate or its agents. In addition, the FTC has prosecuted
certain data breach cases as unfair and deceptive acts or
practices under the Federal Trade Commission Act. Further, in
October 2007, the FTC issued a final rule requiring creditors,
which may include some of our customers, to implement identity
theft prevention programs to detect, prevent and mitigate
identity theft in connection with customer accounts. The
enforcement date for this rule was postponed until
December 31, 2010. Although Congress recently passed
legislation that restricts the definition of
creditor and exempts many health providers from
complying with this rule, we may be required to apply additional
resources to our existing process to assist our affected
customers in complying with this rule. We have implemented and
maintain physical, technical and administrative safeguards
intended to protect all personal data and have processes in
place to assist us in complying with all applicable laws and
regulations regarding the protection of this data and properly
responding to any security breaches or incidents; however, we
cannot be sure that these safeguards are adequate to protect all
personal data or assist us in complying with all applicable laws
and regulations regarding the protection of personal data.
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HIPAA and Other Privacy and Security
Requirements. There are numerous federal and
state laws and regulations related to the privacy and security
of personal health information. In particular, regulations
promulgated pursuant to HIPAA established privacy and security
standards that limit the use and disclosure of individually
identifiable health information and require the implementation
of administrative, physical and technological safeguards to
ensure the confidentiality, integrity and availability of
individually identifiable health information in electronic form.
Our operations as a healthcare clearinghouse are directly
subject to the Privacy Standards and Security Standards. In
addition, our payer and
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provider customers are also directly subject to the Privacy
Standards and Security Standards and are required to enter into
written agreements with us, known as business associate
agreements, which require us to safeguard individually
identifiable health information and restrict how we may use and
disclose such information. Effective February 2010, ARRA
extended the direct application of certain provisions of the
Privacy Standards and Security Standards to us when we are
functioning as a Business Associate of our payer or provider
customers. In addition, in July 2010, HHS published a NPRM to
modify the Privacy Standards, Security Standards and enforcement
rules to align with the HITECH Acts statutory changes that
would require substantially all of our Business Associate
agreements to be re-contracted within eighteen months of the
final rule. To date, final regulations have not been issued and
HHS has said that final regulations are expected to be released
in March or April of 2011. If the final regulations require
re-contracting of our Business Associate agreements, then we
will be required to apply additional resources to the
re-contracting process and our affected customers in complying
with this rule.
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Violations of the Privacy Standards and Security Standards may
result in civil and criminal penalties, and ARRA increased the
penalties for HIPAA violations and strengthened the enforcement
provisions of HIPAA. Recently, enforcement activities appear to
have increased, and ARRA may further increase such enforcement
activities. For example, ARRA requires HHS to conduct periodic
compliance audits and authorizes state attorneys general to
bring civil actions seeking either injunctions or damages in
response to violations of Privacy Standards and Security
Standards that threaten the privacy of state residents.
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HIPAA Transaction and Identifier
Standards. HIPAA and its implementing regulations
also mandate format, data content and provider identifier
standards that must be used in certain electronic transactions,
such as claims, payment advice and eligibility inquiries.
Although our systems are fully capable of transmitting
transactions that comply with these requirements, some payers
and healthcare clearinghouses with which we conduct business
interpret HIPAA transaction requirements differently than we do
or may require us to use legacy formats or include legacy
identifiers as they transition to full compliance. However,
PPACA also requires HHS to establish operating rules to promote
uniformity in the implementation of each standardized electronic
transaction. Where payers or healthcare clearinghouses require
conformity with their interpretations or require us to
accommodate legacy transactions or identifiers as a condition of
successful transactions, we seek to comply with their
requirements, but may be subject to enforcement actions as a
result. In addition, PPACA requires HHS to establish standards
for additional electronic healthcare transactions including
electronic funds transfer and health claims attachment
transactions.
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In January 2009, CMS published a final rule adopting updated
standard code sets for diagnoses and procedures known as the
ICD-10 code sets. A separate final rule also published by CMS in
January 2009 resulted in changes to the formats to be used for
electronic transactions subject to the ICD-10 code sets, known
as Version 5010. While use of the ICD-10 code sets is not
mandatory until October 1, 2013 and the use of Version 5010
is not mandatory until January 1, 2012, we have begun to
modify our payment systems and processes to prepare for their
implementation. We may not be successful in responding to these
changes and any responsive changes we make to our transactions
and software may result in errors or otherwise negatively impact
our service levels. We may also experience complications related
to supporting customers that are not fully compliant with the
revised requirements as of the applicable compliance date. Also,
the compliance date for ICD-10 code sets and the use of Version
5010 may overlap with the adoption of the operating rules
as mandated by PPACA, which may further burden our resources.
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Anti-Kickback and Anti-Bribery Laws. A number
of federal and state laws govern patient referrals, financial
relationships with physicians and other referral sources and
inducements to providers and patients. For example, the federal
Anti-Kickback Law prohibits any person or entity from offering,
paying, soliciting or receiving, directly or indirectly,
anything of value with the intent of generating referrals of
patients covered by Medicare, Medicaid or other federal
healthcare programs. Many states also have similar anti-kickback
laws that are not necessarily limited to items or services for
which
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payment is made by a federal healthcare program. Moreover, both
federal and state laws forbid bribery and similar behavior. Any
determination by a state or federal regulatory agency that any
of our activities or those of our customers or vendors violate
any of these laws could subject us to civil or criminal
penalties, could require us to change or terminate some portions
of our business, could require us to refund a portion of our
service fees, could disqualify us from providing services to
customers who are or do business with government programs and
could have an adverse effect on our business. Even an
unsuccessful challenge by regulatory authorities of our
activities could result in adverse publicity and could require a
costly response from us.
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False or Fraudulent Claim Laws. There are
numerous federal and state laws that prohibit false or
fraudulent claims. False or fraudulent claims include, but are
not limited to, billing for services not rendered, failing to
refund known overpayments, misrepresenting actual services
rendered, improper coding and billing for medically unnecessary
items or services. The FCA and some state false claims laws
contain whistleblower provisions that allow private individuals
to bring actions on behalf of the government alleging that the
defendant has defrauded the government. Whistleblowers, the
federal government and some courts have taken the position that
entities that have violated other statutes, such as the federal
anti-kickback law, have thereby submitted false claims under the
FCA. We rely on our customers to provide us with accurate and
complete information. Errors and the unintended consequences of
data manipulations by us or our systems with respect to entry,
formatting, preparation or transmission of claim information may
be determined or alleged to be in violation of these laws and
regulations or could adversely impact the compliance of our
customers.
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Banking and Financial Services Industry
Laws. The banking and financial services industry
is subject to numerous laws, regulations and industry standards,
some of which may impact our operations and subject us, our
vendors and our customers to liability as a result of the
payment distribution products and services we offer. Although we
do not act as a bank, we offer products and services that
involve banks, or vendors who contract with banks and other
regulated providers of financial services. As a result, we may
be impacted by banking and financial services industry laws,
regulations and industry standards, such as licensing
requirements, solvency standards, requirements to maintain the
privacy and security of nonpublic personal financial information
and FDIC deposit insurance limits. Further, our products and
services may impact the ability of our payer customers to comply
with state prompt payment laws. These laws require payers to pay
healthcare claims meeting the statutory or regulatory definition
of a clean claim to be paid within a specified time
frame.
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Legislative
changes may impede our ability to utilize our off-shore service
capabilities.
In our operations, we have contractors located outside of the
United States who may have access to patient health information
in order to assist us in performing services for our customers.
In recent sessions, the U.S. Congress has considered
legislation that would restrict the transmission of personally
identifiable information regarding a U.S. resident to any
foreign affiliate, subcontractor or unaffiliated third party
without adequate privacy protections or without providing notice
of the transmission and an opportunity to opt out. Some of the
proposals considered would have required patient consent and
imposed liability on healthcare businesses arising from the
improper sharing or other misuse of personally identifiable
information. Congress also has considered creating a private
civil cause of action that would allow an injured party to
recover damages sustained as a result of a violation of these
proposed restrictions. A number of states have also considered,
or are in the process of considering, prohibitions or
limitations on the disclosure of medical or other personal
information to individuals or entities located outside of the
United States. If legislation of this type is enacted, our
ability to utilize off-shore resources may be impeded, and we
may be subject to sanctions for failure to comply with the new
mandates of the legislation. In addition, the enactment of such
legislation could result in such work being performed at a lower
margin of profitability, or even at a loss. Further, as a result
of concerns regarding the possible misuse of personally
identifiable information, some of our customers have
contractually limited our ability to use our off-shore
resources. Use of off-shore resources may increase our risk of
violating our contractual obligations to our customers to
protect the privacy and security of
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individually identifiable health information provided to us,
which could adversely impact our reputation and operating
results.
Failure
by our customers to obtain proper permissions or provide us with
accurate and appropriate data may result in claims against us or
may limit or prevent our use of data which could harm our
business.
We require our customers to provide necessary notices and to
obtain necessary permissions for the use and disclosure of the
information that we receive. If they do not provide necessary
notices or obtain necessary permissions, then our use and
disclosure of information that we receive from them or on their
behalf may be limited or prohibited by state or federal privacy
laws or other laws. Such failures by our customers could impair
our functions, processes and databases that reflect, contain or
are based upon such data. For example, as part of our claims
submission services, we rely on our customers to provide us with
accurate and appropriate data and directives for our actions.
While we have implemented features and safeguards designed to
maximize the accuracy and completeness of claims content, these
features and safeguards may not be sufficient to prevent
inaccurate claims data from being submitted to payers. In
addition, such failures by our customers could interfere with or
prevent creation or use of rules, analyses or other data-driven
activities that benefit us. Accordingly, we may be subject to
claims or liability for inaccurate claims data submitted to
payers or for use or disclosure of information by reason of lack
of valid notice or permission. These claims or liabilities could
damage our reputation, subject us to unexpected costs and
adversely affect our financial condition and operating results.
Certain
of our products and services present the potential for
embezzlement, identity theft or other similar illegal behavior
by our employees or contractors with respect to third
parties.
Among other things, our products and services include printing
and mailing checks
and/or
facilitating electronic funds transfers for our payer customers
and handling mail and payments from payers and from patients for
many of our provider customers. These services frequently
include handling original checks
and/or
credit card information and occasionally may include currency.
Even in those cases in which we do not facilitate payments or
handle original documents or mail, our services also involve the
use and disclosure of personal and business information that
could be used to impersonate third parties or otherwise gain
access to their data or funds. If any of our employees or
contractors takes, converts or misuses such funds, documents or
data, or we experience a data breach creating a risk of identity
theft, we could be liable for damages, and our business
reputation could be damaged or destroyed. In addition, we could
be perceived to have facilitated or participated in illegal
misappropriation of funds, documents or data and, therefore, be
subject to civil or criminal liability. Federal and state
regulators may take the position that a data breach or
misdirection of data constitutes an unfair or deceptive act or
trade practice. We also may be required to notify individuals
affected by any data breaches. Further, a data breach or similar
incident could impact the ability of our customers that are
creditors to comply with the federal red flags rule,
which requires the implementation of identity theft prevention
programs to detect, prevent and mitigate identity theft in
connection with customer accounts.
Contractual
relationships with customers that are governmental agencies or
are funded by government programs may impose special burdens on
us and provide special benefits to those
customers.
A portion of our revenues comes from customers that are
governmental agencies or are funded by government programs. Our
contracts and subcontracts may be subject to some or all of the
following:
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termination when appropriated funding for the current fiscal
year is exhausted;
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termination for the governmental customers convenience,
subject to a negotiated settlement for costs incurred and profit
on work completed, along with the right to place contracts out
for bid before the full contract term, as well as the right to
make unilateral changes in contract requirements, subject to
negotiated price adjustments;
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compliance and reporting requirements related to, among other
things, agency specific policies and regulations, equal
employment opportunity, affirmative action for veterans and
workers with disabilities and accessibility for the disabled;
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broad audit rights; and
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specialized remedies for breach and default, including setoff
rights, retroactive price adjustments and civil or criminal
fraud penalties, as well as mandatory administrative dispute
resolution procedures instead of state contract law remedies.
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In addition, certain violations of federal and state law may
subject us to having our contracts terminated and, under certain
circumstances, suspension
and/or
debarment from future government contracts. We are also subject
to
conflict-of-interest
rules that may affect our eligibility for some government
contracts, including rules applicable to all
U.S. government contracts, as well as rules applicable to
the specific agencies with which we have contracts or with which
we may seek to enter into contracts.
The
protection of our intellectual property requires substantial
resources.
We rely upon a combination of trade secret, copyright and
trademark laws, license agreements, confidentiality procedures,
nondisclosure agreements and technical measures to protect the
intellectual property used in our business. The steps we have
taken to protect and enforce our proprietary rights and
intellectual property may not be adequate. For instance, we may
not be able to secure trademark or service mark registrations
for marks in the U.S. or in foreign countries or take
similar steps to secure patents for our proprietary
applications. Third parties may infringe upon or misappropriate
our copyrights, trademarks, service marks and other intellectual
property rights, which could have an adverse affect on our
business, financial condition and results of operations. If we
believe a third party has misappropriated our intellectual
property, litigation may be necessary to enforce and protect
those rights, which would divert management resources, would be
expensive and may not effectively protect our intellectual
property. As a result, if anyone misappropriates our
intellectual property, it may have an adverse effect on our
business, financial condition and results of operations.
Third
parties may claim that we are infringing their intellectual
property, and we could suffer significant litigation or
licensing expenses or be prevented from selling products or
services.
We could be subject to claims that we are misappropriating or
infringing intellectual property or other proprietary rights of
others. These claims, even if not meritorious, could be
expensive to defend and divert managements attention from
our operations. If we become liable to third parties for
infringing these rights, we could be required to pay a
substantial damage award and to develop non-infringing
technology, obtain a license or cease selling the products or
services that use or contain the infringing intellectual
property. We may be unable to develop non-infringing products or
services or obtain a license on commercially reasonable terms,
or at all. We may also be required to indemnify our customers if
they become subject to third party claims relating to
intellectual property that we license or otherwise provide to
them, which could be costly.
A
write-off of all or a part of our identifiable intangible assets
or goodwill would adversely affect our operating results and
reduce our net worth.
We have significant identifiable intangible assets and goodwill,
which represents the excess of the total consideration
transferred in connection with our acquisitions over the
estimated fair value of the net assets acquired. As of
December 31, 2010, we had $1,035.9 million of
identifiable intangible assets and $908.3 million of
goodwill on our balance sheet, which represented in excess of
78.1% of our total assets. We amortize identifiable intangible
assets over their estimated useful lives which range from 1 to
20 years. We also evaluate our goodwill for impairment at
least annually using a combination of valuation methodologies.
Because one of the valuation methodologies we use is impacted by
market conditions, the likelihood and severity of an impairment
charge increases during periods of market volatility, such as
the recent global economic downturn. We are not permitted to
amortize goodwill under U.S. generally accepted accounting
principles. In the event an impairment of goodwill is
identified, a charge to earnings would be recorded. Although it
does not affect our cash flow, a write-off in future periods of
all or a part of these assets would adversely affect our
financial condition and operating results. See
Managements Discussion and Analysis of Financial
Condition and
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Results of Operations Critical Accounting
Estimates Goodwill and Intangible Assets in
Part II, Item 7. of this Annual Report.
Our
success depends in part on our ability to identify, recruit and
retain skilled management, including our executive officers, and
technical personnel. If we fail to recruit and retain suitable
candidates or if our relationship with our employees changes or
deteriorates, there could be an adverse effect on our
business.
Our future success depends upon our continuing ability to
identify, attract, hire and retain highly qualified personnel,
including skilled technical, management, product and technology
and sales and marketing personnel, all of whom are in high
demand and are often subject to competing offers. In particular,
our executive officers are critical to the management of our
business. The loss of any of our executive officers could impair
our ability to execute our business plan and growth strategy,
reduce revenues, cause us to lose customers, or lead to employee
morale problems
and/or the
loss of key employees. Competition for qualified personnel in
the healthcare information technology and services industry is
intense, and we may not be able to hire or retain a sufficient
number of qualified personnel to meet our requirements, or be
able to do so at salary, benefit and other compensation costs
that are acceptable to us. A loss of a substantial number of
qualified employees, or an inability to attract, retain and
motivate additional highly skilled employees required for
expansion of our business, could have an adverse effect on our
business. In addition, while none of our employees are currently
unionized, unionization of our employees is possible in the
future. Such unionizing activities could be costly to address
and, if successful, would likely adversely impact our operations.
Lengthy
sales, installation and implementation cycles for some of our
solutions may result in delays or an inability to generate
revenues from these solutions.
Sales of certain complex solutions and applications may result
in longer sales, contracting and implementation cycles for our
customers. These sales may be subject to delays due to
customers internal procedures for deploying new
technologies and processes and implementation may be subject to
delays based on the availability of the internal customer
resources needed. The use of our solutions may also be delayed
due to reluctance to change or modify existing procedures. We
are unable to control many of the factors that will influence
the timing of the buying decisions of potential customers or the
pace at which installation and training may occur. If we
experience longer sales, contracting and implementation cycles
for our solutions, we may experience delays in generating, or an
inability to generate revenue from these solutions, which could
have an adverse effect on our financial results.
Risks
Related to our Organization and Structure
We are
a holding company and our principal asset is our ownership of
equity interests in EBS Master, and we are accordingly dependent
upon distributions from EBS Master to pay dividends, if any,
taxes and other expenses.
We are a holding company and our principal asset is our
ownership of units of membership interest in EBS Master, or EBS
Units. We have no independent means of generating revenue. We
intend to cause EBS Master to make distributions to its
unitholders, including us, in an amount sufficient to cover all
applicable taxes payable but are limited in our ability to cause
EBS Master to make these and other distributions to us
(including for purposes of paying corporate and other overhead
expenses and dividends) due to the terms of our credit
agreements. To the extent that we need funds and EBS Master is
restricted from making such distributions under applicable law
or regulation, as a result of the terms in our credit agreements
or is otherwise unable to provide such funds, it could adversely
affect our liquidity and financial condition.
We are controlled by our Principal Equityholders whose interest
in our business may be different than the interests of our other
stockholders, and certain statutory provisions afforded to
stockholders are not applicable to us.
Together, our Principal Equityholders control approximately 72%
of the combined voting power of our Class A common stock
and Class B common stock. We are subject to a Stockholders
Agreement with the
33
General Atlantic Equityholders, the H&F Equityholders and
certain individuals, including certain members of our senior
management team and board of directors. Under the Stockholders
Agreement, our Principal Equityholders are entitled to nominate
a majority of the members of our board of directors and each of
the Principal Equityholders has agreed to vote for all of such
nominees.
Accordingly, our Principal Equityholders can exercise
significant influence over our business policies and affairs,
including the power to nominate a majority of our board of
directors. In addition, the Principal Stockholders can control
any action requiring the general approval of our stockholders,
including the adoption of amendments to our certificate of
incorporation and bylaws and the approval of mergers or sales of
substantially all of our assets. The concentration of ownership
and voting power of our Principal Equityholders may also delay,
defer or even prevent an acquisition by a third party or other
change of control of our company and may make some transactions
more difficult or impossible without the support of our
Principal Equityholders, even if such events are in the best
interests of minority stockholders. The concentration of voting
power among the Principal Equityholders may have an adverse
effect on the price of our Class A common stock.
We have opted out of section 203 of the General Corporation
Law of the State of Delaware, which we refer to as the
Delaware General Corporation Law, which prohibits a
publicly held Delaware corporation from engaging in a business
combination transaction with an interested stockholder for a
period of three years after the interested stockholder became
such unless the transaction fits within an applicable exemption,
such as board approval of the business combination or the
transaction which resulted in such stockholder becoming an
interested stockholder. Therefore, the General Atlantic
Equityholders and the H&F Equityholders are able to
transfer control of us to a third party by transferring their
common stock (subject to the restrictions in the Stockholders
Agreement), which would not require the approval of our board of
directors or our other stockholders.
Our amended and restated certificate of incorporation provides
that the doctrine of corporate opportunity will not
apply against the General Atlantic Equityholders, the H&F
Equityholders or any of our directors who are employees of the
Principal Equityholders, in a manner that would prohibit them
from investing in competing businesses or doing business with
our customers. To the extent they invest in such other
businesses, our Principal Equityholders may have differing
interests than our other stockholders. In addition, under the
EBS Master LLC Agreement, the members of EBS Master, including
certain members of our senior management team and board of
directors that received EBS Units and unvested options to
purchase shares or our Class A common stock as part of the
reorganization of the company prior to our IPO (the EBS
Equity Plan Members) and the affiliates of the H&F
Equityholders that hold EBS Units or their successors (the
H&F Continuing LLC Members), have agreed that
the H&F Continuing LLC Members
and/or one
or more of their respective affiliates are permitted to engage
in business activities or invest in or acquire businesses which
may compete with our business or do business with any client of
ours.
We
have elected to be exempt from certain corporate governance
requirements since we are a controlled company
within the meaning of the NYSE rules and, as a result, our
stockholders do not have the protections afforded by these
corporate governance requirements.
Together, our Principal Equityholders control more than 50% of
the voting power of our outstanding common stock. As a result,
we are a controlled company for the purposes of the
NYSE listing requirements and therefore we are eligible for, and
have elected to take advantage of, exemptions from certain NYSE
listing requirements that would otherwise require our board of
directors to have a majority of independent directors and our
compensation and nominating and corporate governance committees
to be comprised entirely of independent directors. Accordingly,
for so long as we remain a controlled company and
elect to opt out of these provisions, our stockholders do not
and will not have the same protections afforded to stockholders
of companies that are subject to all of the NYSE governance
requirements, and the ability of our independent directors to
influence our business policies and affairs may be reduced.
34
We are
required to pay an affiliate of our Principal Equityholders and
the EBS Equity Plan Members for certain tax benefits we may
claim, and the amounts we may pay could be
significant.
The EBS Units (along with a corresponding number of shares of
our Class B common stock) held by the H&F Continuing
LLC Members and EBS Equity Plan Members are exchangeable in the
future for cash or shares of our Class A common stock.
These future exchanges are likely to result in tax basis
adjustments to the assets of EBS Master, which adjustments would
also be allocated to us. Both the existing and the anticipated
basis adjustments are expected to reduce the amount of tax that
we would otherwise be required to pay in the future.
Additionally, we have entered into two tax receivable agreements
with an entity controlled by the Principal Equityholders, or the
Tax Receivable Entity. The first of these tax receivable
agreements generally provides for the payment by us to the Tax
Receivable Entity of 85% of the amount of cash savings, if any,
in U.S. federal, state and local income tax or franchise
tax that we actually realize as a result of (i) any
step-up in
tax basis in EBS Masters assets resulting from the
purchases by us and our subsidiaries of EBS Units prior to our
IPO; (ii) tax benefits related to imputed interest deemed
to be paid by us as a result of this tax receivable agreement;
and (iii) loss carryovers from prior periods (or portions
thereof).
The second of these tax receivable agreements generally provides
for the payment by us to the Tax Receivable Entity of 85% of the
amount of cash savings, if any, in U.S. federal, state and
local income tax or franchise tax that we actually realize as a
result of (i) any
step-up in
tax basis in EBS Masters assets resulting from
(a) exchanges by the H&F Continuing LLC Members of EBS
Units (along with the corresponding shares of our Class B
common stock) for cash or shares of our Class A common
stock or (b) payments under this tax receivable agreement
to the Tax Receivable Entity and (ii) tax benefits related
to imputed interest deemed to be paid by us as a result of this
tax receivable agreement.
We have also entered into a third tax receivable agreement with
the EBS Equity Plan Members which will generally provide for the
payment by us to the EBS Equity Plan Members of 85% of the
amount of the cash savings, if any, in U.S. federal, state
and local income tax or franchise tax that we actually realize
as a result of (i) any
step-up in
tax basis in EBS Masters assets resulting from
(a) the purchases by us and our subsidiaries of EBS Units
from the EBS Equity Plan Members using a portion of the proceeds
from our IPO, (b) the exchanges by the EBS Equity Plan
Members of EBS Units (along with the corresponding shares of our
Class B common stock) for cash or shares of our
Class A common stock or (c) payments under this tax
receivable agreement to the EBS Equity Plan Members and
(ii) tax benefits related to imputed interest deemed to be
paid by us as a result of this tax receivable agreement.
The actual increase in tax basis, as well as the amount and
timing of any payments under the tax receivable agreements, will
vary depending upon a number of factors, including the timing of
exchanges by the H&F Continuing LLC Members or the EBS
Equity Plan Members, as applicable, the price of our
Class A common stock at the time of the exchange, the
extent to which such exchanges are taxable, the amount and
timing of the taxable income we generate in the future and the
tax rate then applicable, our use of loss carryovers and the
portion of our payments under the tax receivable agreements
constituting imputed interest or amortizable basis.
The payments we will be required to make under the tax
receivable agreements could be substantial. We estimate that, as
a result of the amount of the increases in the tax basis of the
tangible and intangible assets of EBS Master and the loss
carryovers from prior periods (or portions thereof), assuming no
material changes in the relevant tax law and that we earn
sufficient taxable income to realize in full the potential tax
benefit described above, future payments under the tax
receivable agreements in respect of the purchases and the loss
carryovers will aggregate approximately $142 million and
range from approximately $3 million to $15 million per
year over the next 15 years. These amounts reflect only the
cash savings attributable to current tax attributes resulting
from the purchases and the loss carryovers. It is possible that
future transactions or events could increase or decrease the
actual tax benefits realized and the corresponding tax
receivable agreement payments from these tax attributes. Future
payments under the tax receivable agreements in respect of
subsequent acquisitions of EBS Units would be in addition to
these amounts.
35
In addition, although we are not aware of any issue that would
cause the Internal Revenue Service to challenge the tax basis
increases or other benefits arising under the tax receivable
agreements, the Tax Receivable Entity and the EBS Equity Plan
Members will not reimburse us for any payments previously made
if such basis increases or other benefits are subsequently
disallowed, except that excess payments made to the Tax
Receivable Entity or the EBS Equity Plan Members will be netted
against payments otherwise to be made, if any, after our
determination of such excess. As a result, in such
circumstances, we could make payments under the tax receivable
agreements that are greater than our actual cash tax savings and
may not be able to recoup those payments, which could adversely
affect our liquidity.
Finally, because we are a holding company with no operations of
our own, our ability to make payments under the tax receivable
agreements is substantially dependent on the ability of our
subsidiaries to make distributions to us. Our credit agreements
restrict the ability of our subsidiaries to make distributions
to us, which could affect our ability to make payments under the
tax receivable agreements. To the extent that we are unable to
make payments under the tax receivable agreements for any
reason, such payments will be deferred and will accrue interest
until paid, which could adversely affect our results of
operations and could also affect our liquidity in periods in
which such payments are made.
Rights to receive payments under the tax receivable agreements
may be terminated by the Tax Receivable Entity or the EBS Equity
Plan Members, as applicable, if as the result of an actual or
proposed change in law, the existence of the agreements would
cause recognition of ordinary income (instead of capital gain)
in connection with future exchanges of EBS Units for cash or
shares of our Class A common stock or would otherwise have
material adverse tax consequences to the Tax Receivable Entity,
its owners or the EBS Equity Plan Members. In recent years,
there have been legislative proposals that, if enacted in their
proposed form, would have resulted in such ordinary income
recognition. Further, in the event of such a termination, the
Tax Receivable Entity or the EBS Equity Plan Members would have
the right, subject to the delivery of an appropriate tax
opinion, to require us to determine a lump sum amount in lieu of
the payments otherwise provided under the agreements. That lump
sum amount would be calculated by increasing the portion of the
tax savings retained by us to 30% (from 15%) and by calculating
a present value for the total amount that would otherwise be
payable under the agreements, using a discount rate equal to the
lesser of LIBOR plus 100 basis points and 6.5% per annum
and assumptions as to income tax rates and as to our ability to
utilize the tax benefits (including the assumption that we will
have sufficient taxable income). If the assumptions used in this
calculation turn out not to be true, we may pay more or less
than the specified percentage of our actual cash tax savings.
This lump sum amount may be paid in cash or by a subordinated
note with a seven-year maturity and an interest rate equal to
the lesser of LIBOR plus 200 basis points and 6% per annum.
Any such acceleration can occur only if the Tax Receivable
Entity or any EBS Equity Plan Member, as applicable, has
terminated a substantial portion of our obligations (or, in the
case of an EBS Equity Plan Member, such Members share of
our obligations) under the applicable tax receivable agreement
with respect to exchanges of EBS Units. The ultimate impact of a
decision to accelerate will depend on what the ongoing payments
would have been under the tax receivable agreement absent
acceleration, which will in turn depend on the various factors
mentioned above.
In addition, the tax receivable agreements provide that, upon
certain mergers, asset sales, or other forms of business
combination or certain other changes of control, our or our
successors obligations with respect to tax benefits would
be based on certain assumptions, including that we or our
successor would have sufficient taxable income to fully utilize
the deductions arising from the increased tax deductions and tax
basis and other benefits covered by the tax receivable
agreements. As a result, upon a change of control, we could be
required to make payments under the tax receivable agreements
that are greater than or less than the specified percentage of
our actual cash tax savings.
36
Risks
Related to Ownership of Our Class A Common Stock
The
market price of our Class A common stock may be volatile,
and your investment in our Class A common stock could
suffer a decline in value.
There has been significant volatility in the market price and
trading volume of equity securities, which is often unrelated or
disproportionate to the financial performance of the companies
issuing the securities. These broad market fluctuations may
negatively affect the market price of our Class A common
stock. The market price of our Class A common stock has and
may fluctuate significantly in response to various factors, some
of which are beyond our control. In addition to the factors
discussed in this Risk Factors section and elsewhere
in this Annual Report, these factors include:
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our actual or anticipated operating performance and growth and
the actual or anticipated operating performance and growth of
our competitors;
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the overall performance of the equity markets;
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actions of our historical equity investors, including sales of
common stock by our directors and executive officers;
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public response to press releases and other announcements by us
and our competitors, including announcements of acquisitions,
business developments and new products and services;
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changes to our senior management team;
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legal and regulatory changes;
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publication of research reports or news stories about us, our
competitors or our industry or positive or negative
recommendations or withdrawal of research coverage by securities
analysts; and
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general economic, industry and market conditions, and in
particular those conditions specific to the healthcare industry.
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In addition, the stock market in general, and the market for
technology-based companies in particular, has experienced
extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
those companies. Securities class action litigation has often
been instituted against companies following periods of
volatility in the overall market and in the market price of
companies securities. Such litigation, if instituted
against us, could entail substantial costs, divert our
managements time and attention from operational matters
and harm our business, operating results and financial condition
and, as a result, may negatively affect the market price of our
Class A common stock.
We do
not intend to pay dividends in the foreseeable future, and,
because we are a holding company, we may be unable to pay
dividends.
For the foreseeable future, we intend to retain any earnings to
finance the development and expansion of our business, and we do
not anticipate paying any cash dividends on our Class A
common stock. Any future determination to pay dividends will be
at the discretion of our board of directors and will be
dependent on then-existing conditions, including our financial
condition and results of operations, capital requirements,
contractual restrictions, business prospects and other factors
that our board of directors considers relevant. Furthermore,
because we are a holding company, any dividend payments could
depend on the cash flow of our subsidiaries. However, our credit
agreements limit the amount of distributions our subsidiaries
(including EBS Master) can make to us and the purposes for which
distributions could be made. Accordingly, we may not be able to
pay dividends even if our board of directors would otherwise
deem it appropriate. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources in
Part II, Item 7. of this Annual Report. For the
foregoing reasons, you will not be able to rely on dividends on
our Class A common stock to receive a return on your
investment.
37
Provisions
in our organizational documents may delay or prevent our
acquisition by a third party.
Our amended and restated certificate of incorporation and
by-laws contain several provisions that may make it more
difficult or expensive for a third party to acquire control of
us without the approval of our board of directors. These
provisions also may delay, prevent or deter a merger,
acquisition, tender offer, proxy contest or other transaction
that might otherwise result in our stockholders receiving a
premium over the market price for their Class A common
stock. The provisions include, among others:
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provisions relating to the number of directors on our board of
directors and the appointment of directors upon an increase in
the number of directors or vacancy on our board of directors;
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provisions requiring a 66 and
2/3%
stockholder vote for the amendment of certain provisions of our
certificate of incorporation, such as provisions relating to the
election of directors and the inability of stockholders to act
by written consent or call a special meeting, and for the
adoption, amendment and repeal of our by-laws;
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provisions barring stockholders from calling a special meeting
of stockholders or requiring one to be called;
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elimination of the right of our stockholders to act by written
consent; and
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provisions that set forth advance notice procedures for
stockholders nominations of directors and proposals for
consideration at meetings of stockholders.
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These provisions of our amended and restated certificate of
incorporation and by-laws could discourage potential takeover
attempts and reduce the price that investors might be willing to
pay for shares of our Class A common stock in the future
which could reduce the market price of our Class A common
stock.
Failure
to establish and maintain effective internal controls over
financial reporting could have an adverse effect on our
business, operating results and stock price.
Maintaining effective internal control over financial reporting
is necessary for us to produce reliable financial reports and is
important in helping to prevent financial fraud. Our management
is required to furnish a report on our internal control over
financial reporting pursuant to the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley) and the related rules of the SEC.
The report contains, among other matters, an assessment of the
effectiveness of our internal control over financial reporting
as of the end of our most recent fiscal year, including a
statement as to whether our internal control over financial
reporting is effective. This assessment must include disclosure
of any material weaknesses in our internal control over
financial reporting identified by management. While we were able
to assert in this Annual Report that our internal control over
financial reporting was effective as of December 31, 2010,
we must continue to monitor and assess our internal control over
financial reporting. If we are unable to maintain adequate
internal controls, our business and operating results could be
harmed. Any failure to remediate material weaknesses noted by us
or our independent registered public accounting firm or to
implement required new or improved controls or difficulties
encountered in their implementation could cause us to fail to
meet our reporting obligations or result in material
misstatements in our financial statements. If our management
were unable to conclude in future reports that our internal
control over financial reporting is effective, or if our
independent registered public accounting firm is unable to
express an opinion on the effectiveness of our internal
controls, investors could lose confidence in our reported
financial information, and the trading price of our Class A
common stock could drop significantly. Failure to comply with
Section 404 of Sarbanes-Oxley also could potentially
subject us to sanctions or investigations by the SEC, the NYSE
or other regulatory authorities.
We
have and will continue to incur additional costs as a public
company, and our management may be required to devote
substantial time and attention to compliance
initiatives.
As a public company, we incur significant levels of legal,
accounting and other expenses. Sarbanes-Oxley and related rules
of the SEC and the NYSE corporate governance practices for
public companies impose significant requirements relating to
disclosure controls and procedures and internal control over
financial
38
reporting. Our management and other personnel continue to devote
a substantial amount of time and attention to these compliance
initiatives, and additional laws may divert further management
resources. Moreover, if we are not able to comply with these
requirements and with the requirements of new compliance
initiatives in a timely manner, the market price of our
Class A common stock could decline, and we could be subject
to sanctions or investigations by the SEC, the Financial
Industry Regulatory Authority, or FINRA, the NYSE or other
regulatory authorities, which would require additional financial
and management resources.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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Not applicable
We do not own any real property. In late 2008, we expanded our
lease of office space in Nashville Tennessee, which is due to
expire in October 2018, from approximately 55,000 square
feet to approximately 164,000 square feet, and moved our
corporate headquarters and consolidated certain of our other
Nashville-area operations to this location.
In 2009, we entered into lease agreements pursuant to which a
new data center and adjoining office space, comprising
approximately 55,000 total square feet, was constructed to our
specifications in Nashville, Tennessee to replace the data
center located at our former corporate headquarters that we
vacated in December 2010. The initial term on our lease for the
new data center expires in August 2025, and we have the option
to extend the lease by two five-year renewal terms.
Our other primary data center, containing approximately
20,000 square feet of data center space, is located in
Memphis, Tennessee, and is subject to a lease agreement due to
expire in January 2017.
We also lease approximately 93,000 square feet of office
space at a facility located in Toledo, Ohio for our provider
patient statement operations and approximately
53,000 square feet of office space at a facility located in
Bridgeton, Missouri for payer distribution services.
We also lease a number of other data centers, operations,
business and sales offices in several states.
We believe that our facilities are generally adequate for
current and anticipated future use, although we may from time to
time lease or vacate additional facilities as our operations
require.
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ITEM 3.
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LEGAL
PROCEEDINGS
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In the normal course of business, the Company is subject to
claims, lawsuits and legal proceedings. While it is not possible
to ascertain the ultimate outcome of such matters, in
managements opinion, the liabilities, if any, in excess of
amounts provided or covered by insurance, are not expected to
have a material adverse effect on our consolidated financial
position, results of operations or liquidity.
39
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ITEM 4.
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REMOVED
AND RESERVED
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PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
Information
Our Class A common stock has been listed for trading on the
NYSE under the trading symbol EM since
August 12, 2009. Prior to that date, there was no
established public trading market for our Class A common
stock. The following table sets forth the high and low sales
prices of our Class A common stock, as reported by the
NYSE, for each of the periods listed.
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High
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Low
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2010
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First Quarter
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$
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16.88
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$
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14.77
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Second Quarter
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16.85
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12.50
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Third Quarter
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13.08
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10.07
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Fourth Quarter
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14.00
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11.82
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2009
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First Quarter
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$
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N/A
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$
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N/A
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Second Quarter
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N/A
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N/A
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Third Quarter
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18.00
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15.21
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Fourth Quarter
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16.20
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14.56
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On March 4, 2011, the last reported sale price for our
Class A common stock was $15.74 per share. No established
public trading market currently exists for our Class B
common stock. Shares of Class B common stock can be
exchanged with the Company for shares of Class A common
stock on a
one-for-one
basis.
Holders
As of March 4, 2011, there were 41 and 19 holders of
record of our Class A common stock and Class B common
stock, respectively. Because many shares of Class A common
stock are held by brokers and other institutions on behalf of
our stockholders, we are unable to estimate the total number of
beneficial stockholders represented by these record holders.
Dividends
We have not declared or paid any cash dividends on our
Class A common stock or Class B common stock since our
organization. For the foreseeable future, we intend to retain
any earnings to finance the development and expansion of our
business, and we do not anticipate paying any cash dividends on
our Class A common stock or Class B common stock. Any
future determination to pay dividends will be at the discretion
of our board of directors and will be dependent upon
then-existing conditions, including our financial condition and
results of operations, capital requirements, contractual
restrictions, including restrictions contained in our credit
agreements, business prospects and other factors that our board
of directors considers relevant.
40
Performance
Graph
The following graph compares the change in the cumulative total
return (including the reinvestment of dividends) on our
Class A common stock for the period from August 12,
2009, the date our shares of Class A common stock began
trading on the NYSE, to the change in the cumulative total
return on the stocks included in the Standard &
Poors 500 Stock Index and the NYSE Health Services Index
over the same period. The graph assumes an investment of $100
made in our Class A common stock at a price of $16.52 per
share, the closing sale price on August 12, 2009, our first
day of trading following our IPO (at $15.50 per share), and an
investment in each of the other indices on August 12, 2009.
We did not pay any dividends during the period reflected in the
graph.
Comparison
of Cumulative Total Return
Assumes Initial Investment of $100
December 2010
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8/12/2009
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9/30/2009
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12/31/2009
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3/31/2010
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6/30/2010
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9/30/2010
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12/31/2010
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Emdeon Inc.
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100.00
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98.06
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92.31
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100.01
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75.85
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73.73
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81.96
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S&P 500 Index Total Returns
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100.00
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105.39
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111.75
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117.77
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104.32
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116.10
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128.59
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NYSE Health Services Index
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100.00
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100.16
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112.90
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119.74
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102.91
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109.89
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119.84
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|
|
The comparisons shown in the graph above are based on historical
data and we caution that the stock price performance shown in
the graph above is not indicative of, and is not intended to
forecast, the potential future performance of our Class A
common stock. The information in this Performance
Graph section shall not be deemed to be soliciting
material or to be filed with the SEC, nor
shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that we specifically
incorporate it by reference into such filing.
41
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following table sets forth our selected historical
consolidated financial data for periods beginning on and after
November 16, 2006. For the period prior to
November 16, 2006, the table below presents the selected
historical consolidated financial data of the group of
wholly-owned subsidiaries of WebMD that comprised EBS. For
periods on and after November 16, 2006, the selected
consolidated financial data gives effect to the reorganization
transactions relating to our IPO as if they occurred on
November 16, 2006.
Our selected statement of operations data for the years ended
December 31, 2010, 2009, 2008 and 2007 and for the period
from November 16, 2006 through December 31, 2006 and
the selected balance sheet data for all periods presented have
been derived from our consolidated financial statements that
have been audited by our independent registered public
accounting firm.
The selected statement of operations data of EBS for the period
from January 1, 2006 through November 15, 2006 has
been derived from EBS consolidated financial statements
that have been audited by EBS independent registered
public accounting firm.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
|
|
Emdeon Inc.
|
|
|
|
Services
|
|
|
|
|
(Successor)(1)(2)
|
|
|
|
(Predecessor)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 16,
|
|
|
|
January 1, 2006
|
|
|
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
2006 thru
|
|
|
|
thru
|
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
November 15,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2006
|
|
|
|
|
(In thousands, except share and per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
|
1,002,152
|
|
|
|
$
|
918,448
|
|
|
|
$
|
853,599
|
|
|
|
$
|
808,537
|
|
|
|
$
|
87,903
|
|
|
|
$
|
663,186
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
|
612,594
|
|
|
|
|
562,867
|
|
|
|
|
541,563
|
|
|
|
|
514,918
|
|
|
|
|
56,628
|
|
|
|
|
425,108
|
|
Development and engineering
|
|
|
|
35,515
|
|
|
|
|
33,928
|
|
|
|
|
28,625
|
|
|
|
|
28,198
|
|
|
|
|
2,782
|
|
|
|
|
21,782
|
|
Sales, marketing, general and administrative
|
|
|
|
111,948
|
|
|
|
|
113,701
|
|
|
|
|
91,212
|
|
|
|
|
94,475
|
|
|
|
|
12,762
|
|
|
|
|
80,352
|
|
Depreciation and amortization
|
|
|
|
124,721
|
|
|
|
|
105,321
|
|
|
|
|
97,864
|
|
|
|
|
62,811
|
|
|
|
|
7,127
|
|
|
|
|
30,440
|
|
Loss on abandonment of leased properties
|
|
|
|
(105
|
)
|
|
|
|
1,675
|
|
|
|
|
3,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
|
884,673
|
|
|
|
|
817,492
|
|
|
|
|
762,345
|
|
|
|
|
700,402
|
|
|
|
|
79,299
|
|
|
|
|
557,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
117,479
|
|
|
|
|
100,956
|
|
|
|
|
91,254
|
|
|
|
|
108,135
|
|
|
|
|
8,604
|
|
|
|
|
105,504
|
|
Interest income
|
|
|
|
(14
|
)
|
|
|
|
(75
|
)
|
|
|
|
(963
|
)
|
|
|
|
(1,567
|
)
|
|
|
|
(139
|
)
|
|
|
|
(67
|
)
|
Interest expense
|
|
|
|
61,031
|
|
|
|
|
70,246
|
|
|
|
|
71,717
|
|
|
|
|
74,325
|
|
|
|
|
10,113
|
|
|
|
|
25
|
|
Other
|
|
|
|
(9,284
|
)
|
|
|
|
(519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
65,746
|
|
|
|
|
31,304
|
|
|
|
|
20,500
|
|
|
|
|
35,377
|
|
|
|
|
(1,370
|
)
|
|
|
|
105,546
|
|
Income tax provision
|
|
|
|
32,579
|
|
|
|
|
17,301
|
|
|
|
|
8,567
|
|
|
|
|
18,101
|
|
|
|
|
1,014
|
|
|
|
|
42,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
33,167
|
|
|
|
|
14,003
|
|
|
|
|
11,933
|
|
|
|
|
17,276
|
|
|
|
|
(2,384
|
)
|
|
|
|
63,542
|
|
Net income attributable to noncontrolling interest
|
|
|
|
13,621
|
|
|
|
|
4,422
|
|
|
|
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Emdeon Inc.
|
|
|
$
|
19,546
|
|
|
|
$
|
9,581
|
|
|
|
$
|
9,231
|
|
|
|
$
|
17,276
|
|
|
|
$
|
(2,384
|
)
|
|
|
$
|
63,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share to Class A
common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$
|
0.22
|
|
|
|
$
|
0.12
|
|
|
|
$
|
0.12
|
|
|
|
$
|
0.33
|
|
|
|
$
|
(0.05
|
)
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$
|
0.21
|
|
|
|
$
|
0.12
|
|
|
|
$
|
0.12
|
|
|
|
$
|
0.17
|
|
|
|
$
|
(0.05
|
)
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computing earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
90,100,070
|
|
|
|
|
82,459,169
|
|
|
|
|
74,775,039
|
|
|
|
|
52,000,000
|
|
|
|
|
52,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
90,832,631
|
|
|
|
|
82,525,002
|
|
|
|
|
100,000,000
|
|
|
|
|
100,000,000
|
|
|
|
|
52,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emdeon Inc.
|
|
|
|
At
|
|
|
At
|
|
|
At
|
|
|
At
|
|
|
At
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
99,188
|
|
|
$
|
211,999
|
|
|
$
|
71,478
|
|
|
$
|
33,687
|
|
|
$
|
30,513
|
|
Total assets
|
|
|
2,488,563
|
|
|
|
2,229,413
|
|
|
|
2,000,279
|
|
|
|
1,357,229
|
|
|
|
1,372,853
|
|
Total
debt - (3)
|
|
|
946,243
|
|
|
|
840,682
|
|
|
|
825,230
|
|
|
|
871,934
|
|
|
|
907,349
|
|
Tax receivable obligation to related parties
|
|
|
142,279
|
|
|
|
142,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
1,055,288
|
|
|
$
|
979,869
|
|
|
$
|
878,153
|
|
|
$
|
300,969
|
|
|
$
|
292,657
|
|
|
|
|
(1) |
|
Our financial results prior to November 16, 2006 represent
the financial results of the group of wholly-owned subsidiaries
of WebMD that comprised EBS. On November 16, 2006, WebMD
sold a 52% interest in EBS Master (which was formed as a holding
company for our business in connection with that transaction) to
an affiliate of General Atlantic. Accordingly, the financial
information presented reflects the results of operation and
financial condition of EBS before the November 16, 2006
transaction (Predecessor) and of us after the November 16,
2006 transaction (Successor). |
|
(2) |
|
As a result of our history of business combinations, our
financial position and results of operations may not be
comparable for each of the periods presented. See
Business Organizational Structure and
Corporate History in Part I of this Annual Report. |
|
(3) |
|
Our debt at December 31, 2010, 2009 and 2008 is reflected
net of unamortized debt discount of approximately
$42.6 million, $53.3 million and $64.7 million,
respectively, related to original loan fees and purchase
accounting adjustments to discount the debt to fair value in
conjunction with the 2008 Transaction. Total debt as of
December 31, 2010 and 2009 includes an obligation of
approximately $40.3 million and $37.6 million,
respectively, related to our data sublicense obligation. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion in conjunction with
Selected Financial Data and our consolidated
financial statements and related notes included elsewhere in
this Annual Report. Some of the statements in the following
discussion are forward-looking statements. See
Forward-Looking Statements included elsewhere in
this Annual Report.
Overview
We are a leading provider of revenue and payment cycle
management and clinical information exchange solutions
connecting payers, providers and patients in the
U.S. healthcare system. Our product and service offerings
integrate and automate key business and administrative functions
of our payer and provider customers throughout the patient
encounter, including pre-care patient eligibility and benefits
verification and enrollment, clinical information exchange
capabilities, claims management and adjudication, payment
integrity, payment distribution, payment posting and denial
management and patient billing and payment processing. Our
customers are able to improve efficiency, reduce costs, increase
cash flow and more efficiently manage the complex revenue and
payment cycle and clinical information exchange processes by
using our comprehensive suite of products and services.
We deliver our solutions and operate our business in three
business segments: (i) payer services, which provides
solutions to commercial insurance companies, third party
administrators and governmental payers; (ii) provider
services, which provides services to hospitals, physicians,
dentists and other healthcare providers, such as labs and home
healthcare providers; and (iii) pharmacy services, which
provides services to pharmacies, pharmacy benefit management
companies, government agencies and other payers. For 2010, payer
services constituted 43% of revenues, provider services 49% and
pharmacy services 8%. Through our payer services segment, we
provide payment cycle solutions, both directly and through our
network of channel partners that help simplify the
administration of healthcare related to insurance eligibility
and benefit
43
verification, claims filing, payment integrity and claims and
payment distribution. Additionally, we provide consulting
services through our payer services segment. Through our
provider services segment, we provide revenue cycle management
solutions, patient billing and payment services, government
program eligibility and enrollment services and clinical
information exchange capabilities, both directly and through our
channel partners, that simplify providers revenue cycle
and workflow, reduce related costs and improve cash flow.
Through our pharmacy services segment, we provide electronic
prescribing services and other electronic solutions to
pharmacies, pharmacy benefit management companies and government
agencies related to prescription benefit claim filing,
adjudication and management.
There are a number of company-specific initiatives and industry
trends that may affect our transaction volumes, revenues, cost
of operations and margins. As part of our strategy, we encourage
our customers to migrate from paper-based claim, patient
statement, payment and other transaction processing to
electronic, automated processing in order to improve efficiency.
Our business is aligned with our customers to support this
transition, and as they migrate from paper-based transaction
processing to electronic processing, even though our revenues
for an applicable customer generally will decline, our margins
and profitability will typically increase. For example, because
the cost of postage is included in our revenues for patient
statement and payment services (which is then also deducted as a
cost of operations), when our customers transition to electronic
processing, our revenues and costs of operations are expected to
decrease as we will no longer incur or be required to charge for
postage. As another example, as our payer customers migrate to
exclusive or other comprehensive management services agreements
with us, our electronic transaction volume usually increases
while the rebates we pay and the per transaction rates we charge
under these agreements are typically reduced.
Part of our strategy also includes the development and
introduction of new products and services. Our new and updated
products and services are likely to require us to incur
development and engineering expenditures at levels similar to,
and possibly greater than, recent years expenditures in
order to successfully develop and achieve market acceptance of
such products and services. We also may acquire, or enter into
agreements with third parties to assist us in providing, new
products and services. For example, we offer our electronic
payment solutions through banks or vendors who contract with
banks and other financial service firms. The costs of these
initiatives or the failure to achieve broad penetration in
target markets with respect to new or updated products and
services may negatively affect our results of operations and
margins. Because newly introduced products and services
generally will have lower margins initially as compared to our
existing and more mature products and services, our margins may
be adversely affected on a percentage basis until these new
products achieve scale and maturity. Though the revenue from
these newly introduced products and services was not significant
enough to have a material effect on our margins in 2010, if the
revenue from these or future new products and services increase
significantly during 2011 or future years, our margin growth
could be negatively impacted until such time as these new
products and services reach scale and maturity.
In addition to our internal development efforts, we actively
evaluate opportunities to improve and expand our solutions
through strategic acquisitions. Our acquisition strategy focuses
on identifying acquisitions that improve and streamline the
business and administrative functions of healthcare. We believe
our broad customer footprint allows us to deploy acquired
products and services into our installed base, which, in turn,
can help to accelerate growth of our acquired businesses. We
also believe our management teams ability to identify
acquisition opportunities that are complementary and synergistic
to our business, and to integrate them into our existing
operations with minimal disruption, will continue to play an
important role in the expansion of our business and in our
growth. Our success in acquiring and integrating acquired
businesses into our existing operations, the associated costs of
such acquisitions, including integration costs, and the
operating characteristics of the acquired businesses also may
impact our results of operations and margins. Because the
products and services of the businesses we have acquired
recently generally have lower margins than our existing products
and services, primarily as a result of their lack of scale and
maturity, our margins on a percentage basis may be adversely
affected in the periods subsequent to an acquisition from
revenue mix changes and integration activities associated with
these acquisitions. For example, the 2010 acquisitions
negatively impacted our percentage margin growth during 2010. We
currently expect a similar, and possibly greater, impact during
2011 as the revenues from these 2010 acquisitions increase
relative to our overall revenues.
44
We also expect to continue to be affected by general economic,
regulatory and demographic factors affecting the healthcare
industry. For several years, there has been pricing pressure in
our industry, which has led and is expected to continue to lead
to reduced prices for the same services. We have sought in the
past and will continue to seek to mitigate pricing pressure by
(i) providing additional value-added products and services,
(ii) increasing the volume of services we provide and
(iii) managing our costs. In addition, significant changes
in regulatory schemes, such as the updated HIPAA Version 5010
standard electronic transaction code set requirements for
ICD-10, ARRA, PPACA and other federal healthcare policy
initiatives could impact our customers healthcare
activities. For example, because the HIPAA Version 5010
transaction code formats become mandatory on January 1,
2012, we expect to incur increased operating costs and capital
expenditures related to compliance with HIPAA Version 5010
testing and conversion efforts throughout 2011.
Demographic trends affecting the healthcare industry, such as
population growth and aging or continued high unemployment rates
as a result of recent adverse economic conditions, also could
affect the frequency and nature of our customers
healthcare transactional activity. The impact of such changes
could impact our revenues, cost of operations and infrastructure
expenses and thereby affect our results of operations and the
way we operate our business. For example, an increase in the
U.S. population, if such increase is accompanied by an
increase in the U.S. population that has health benefits,
or the aging of the U.S. population, which requires an
overall increased need for healthcare services, may result in an
increase in our transaction volumes which, in turn, may increase
our revenues and costs of operations. Alternatively, a
continuation of the recent general economic downturn, which
reduces the number of discretionary health procedures by
patients, or a persistent high unemployment rate, if such
unemployment rate is accompanied by a decrease in the
U.S. population that has health benefits, may lessen
healthcare utilization which may decrease or offset other growth
in our transaction volumes, which, in turn, may adversely impact
our revenues and cost of operations. For example, for the year
ended December 31, 2010, revenues for each of our payer
services, provider services and pharmacy services segments were
adversely affected by the impact of lower healthcare utilization
trends driven by continued high unemployment and other economic
factors.
Our
Revenues and Expenses
We generate virtually all of our revenue by providing products
and services that automate and simplify business and
administrative functions for payers, providers and pharmacies,
generally on either a per transaction, per document, per
communication or per member per month basis, or, in some cases,
on a monthly flat-fee, contingent fee or hourly basis. For
certain services, we may charge an implementation fee in
conjunction with related setup and connection to our network and
other systems.
Cost of operations consists primarily of costs related to
products and services we provide to customers and costs
associated with the operation and maintenance of our networks.
These costs include (i) postage and materials costs related
to our patient statement and payment services, (ii) rebates
paid to our channel partners and (iii) data communications
costs, all of which generally vary with our revenues
and/or
volumes. Cost of operations also includes (i) personnel
costs associated with production, network operations, customer
support and other personnel, (ii) facilities expenses and
(iii) equipment maintenance, which vary less directly with
our revenue
and/or
volumes due to the fixed or semi-fixed nature of these expenses.
The largest component of our cost of operations is currently
postage which is primarily incurred in our patient statements
and payment services and which is also a component of our
revenue in those businesses. Our postage costs increase as our
patient statement and payment services volumes increase and also
when the U.S. Postal Service increases postage rates.
U.S. postage rate increases, while generally billed as
pass-through costs to our customers, affect our cost of
operations as a percentage of revenue. In prior years, we have
offset the impact of postage rate increases through cost
reductions from efficiency measures, including data
communication expense reductions and production efficiencies.
Though we plan to continue our efficiency measures, we may not
be able to offset the impact of postage rate increases in the
future and, as a result, cost of operations as a percentage of
revenue may rise if postage rate increases continue. Although
the U.S. Postal Service increased postal rates annually
from 2006 to 2009, such annual increases may not occur as
regularly in the future. For example, no postage rate increase
occurred in 2010, and planned increases for 2011 are expected to
be limited to only certain categories of mailings.
45
Rebates are paid to channel partners for electronic and other
volumes delivered through our network to certain payers and can
be impacted by the number of exclusive or other comprehensive
management services agreements we execute with payers, the
associated rate structure with our payer customers, the success
of our direct sales efforts for provider revenue cycle
management products and services and the extent to which direct
connections to payers are developed by channel partners.
Our data communication expense consists of telecommunication and
transaction processing charges. Over the last several years, we
have been able to reduce our data communication expense due to
efficiency measures and contract pricing changes. Due to the
significance of these past reductions in recent years, further
reductions may have a lesser impact in future periods.
Our material costs relate primarily to our patient statement and
payment services volumes, and consist primarily of paper and
printing costs.
Development and engineering expense consists primarily of
personnel costs related to the development, management and
maintenance of our current and future products and services. We
plan to invest more in this area in the future as we develop new
products and enhance existing products.
Sales, marketing, general and administrative expense (excluding
corporate expense described in the next paragraph) consists
primarily of personnel costs associated with our sales, account
management and marketing functions and management and
administrative services related to the operations of our
business segments.
Our corporate expense relates to personnel costs associated with
management, administrative, finance, human resources, legal,
marketing, public and investor relations and other corporate
service functions as well as professional services, costs
incurred in connection with acquisitions, certain facilities
costs, advertising and promotion, insurance and other expenses
related to our overall business operations. Since the IPO, we
have incurred costs and we expect to incur additional costs
related to operating as a public company, including additional
directors and officers liability insurance, outside
director compensation, additional personnel costs and
Sarbanes-Oxley and other compliance costs.
Our development and engineering expense, sales, marketing,
general and administrative expense and our corporate expense,
while related to our current operations, are also affected and
influenced by our future plans including the development of new
products and services, business strategies and enhancement and
maintenance of our infrastructure.
Our depreciation and amortization expense is related to
depreciation of our property and equipment, including technology
assets and amortization of intangible assets acquired and
recorded in conjunction with acquisition method accounting.
During 2009 and to a greater extent in 2010, we made increased
investments in property and equipment primarily related to our
new data center, print equipment upgrades in our patient
statement business, product development, efficiency measures and
system upgrades related to regulatory requirements, such as
HIPAA Version 5010. In addition, our increased acquisition
activity in 2009 and 2010 resulted in an increase in acquired
technology and intangible assets, as well as increased capital
expenditure requirements due to the inclusion of product
development infrastructures of the acquired businesses. As a
result of these investments, we expect our depreciation and
amortization expense to increase in 2011 and future years.
Our interest expense consists principally of cash interest
associated with our long-term debt obligations and our interest
rate swap agreement. Interest expense also includes non-cash
interest associated with the amortization of the debt discount
recorded in connection with the 2008 Transaction, borrowing
costs and discounts related to debt issuance, amortization of
our discontinued cash flow hedges and changes in the fair value
of our interest rate swap agreement during periods when the
interest rate swap agreement has not been subject to hedge
accounting. Due to the unusually low interest rates on the
variable portion of our long-term debt during the past few
years, our interest expense has been less than otherwise would
have been expected. If market interest rates on the variable
portion of our long-term debt increase in the future, our
interest expense would increase. The amount of our interest
expense also could increase if and when we refinance our current
long-term debt facilities.
Our income taxes consist of federal and state income taxes.
These amounts include current income taxes payable as well as
income taxes for which the payment is deferred to future periods
and dependent on the occurrence of future events. Our income tax
expense currently exceeds the expense that would be expected
46
based on statutory rates due principally to our organizational
structure and differences in the book and tax basis of our
investment in EBS Master. The recognition of valuation
allowances related to certain net operating loss carryovers can
also affect our income tax expense. For additional information
see the discussion of income taxes in the section
Significant Items Affecting Comparability-Income
Taxes.
Significant
Items Affecting Comparability
Certain significant items or events should be considered to
better understand differences in our results of operations from
period to period. We believe that the following items or events
have had a significant impact on our results of operations for
the periods discussed below or may have a significant impact on
our results of operations in future periods:
Acquisitions
and Divestitures
We actively evaluate opportunities to improve and expand our
business through targeted acquisitions that are consistent with
our strategy. On occasion, we also may dispose of certain
components of our business that no longer fit within our overall
strategy. Because of our acquisitions and divestiture activity,
our results of operations may not be directly comparable among
periods. The following summarizes our acquisitions and
divestiture transactions since January 1, 2008 and affected
segments:
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|
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Date
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|
Business
|
|
Description
|
|
Affected Segment
|
|
Acquisitions:
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|
|
|
|
|
|
September 2008
|
|
Patient statements business of GE Healthcare
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|
Patient billing and payment solutions
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Provider
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|
|
|
|
|
|
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June 2009
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The Sentinel Group
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|
Payment integrity solutions
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|
Payer
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|
|
|
|
|
|
|
July 2009
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eRx Network, L.L.C. (eRx)
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Electronic pharmacy solutions
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Pharmacy
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|
|
|
|
|
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|
October 2009 and April 2010
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Data Rights
|
|
Acquired certain additional rights to specified uses of data
from WebMD
|
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N/A
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|
|
|
|
|
|
|
January 2010
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|
FVTech
|
|
Electronic data conversion and management solutions
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Provider; Payer
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|
|
|
|
|
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March 2010
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HTMS
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Consulting solutions
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Payer
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|
|
|
|
|
|
|
June 2010
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|
Chapin
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Accounts receivable denial and recovery services
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Provider
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|
|
|
|
|
|
|
October 2010
|
|
CEA
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|
Government program eligibility and enrollment services
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Provider
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|
|
|
|
|
|
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Divestiture:
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October 2009
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Control-o-Fax
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Office supplies and print services
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Provider
|
For certain of our acquisitions, we agreed to transfer
additional consideration to the sellers of the acquired
businesses in the event that specified performance measures are
achieved. U.S. generally accepted accounting principles
generally require us to recognize the initial fair value of the
expected amount to be paid under such contingent consideration
arrangements as a component of the total consideration
transferred. Subsequent
47
changes in the fair value of the amounts expected to be paid,
however, are generally required to be recognized as a component
of net income. Such changes in fair value may occur based on
changes in the expected timing or amount of payments or the
effect of discounting the liability for the time value of money.
During the year ended December 31, 2010, we recognized an
increase in pretax income of $9.3 million related to
changes in fair value of contingent consideration related to
acquisitions.
Efficiency
Measures
We evaluate and implement efficiency measures and other cost
savings initiatives on an ongoing basis to improve our financial
and operating performance through reorganization, cost savings,
productivity improvements and other process improvements. For
instance, we are consolidating our data centers, consolidating
our networks and outsourcing certain information technology and
operations functions. The implementation of these measures often
involve upfront costs related to severance, professional fees,
contractor costs
and/or
capital expenditures, with the cost savings or other
improvements not realized until the measures are successfully
completed.
Income
Taxes
Our statutory federal and state income tax rate ranges from 38%
to 40%. Our effective income tax rate, however, is affected by
several factors. The following table and subsequent commentary
reconciles our federal statutory rate to our effective income
tax rate and the subsequent commentary describes the more
significant of the reconciling factors:
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Year Ended December 31,
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2010
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2009
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2008
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Statutory U.S. federal tax rate
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35.00
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%
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35.00
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%
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35.00
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%
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State income taxes (net of federal benefit)
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2.78
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8.75
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3.57
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Meals and entertainment
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0.63
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|
|
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0.39
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0.52
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Other
|
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(1.38
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)
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2.60
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1.38
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Tax credits
|
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(0.63
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)
|
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(1.14
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)
|
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Equity-based compensation
|
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2.06
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|
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5.67
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|
|
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1.61
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Non-timing basis differences
|
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12.49
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|
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33.57
|
|
|
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(22.62
|
)
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Noncontrolling interest
|
|
|
(7.20
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)
|
|
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(5.17
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)
|
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(5.09
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)
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Foreign loss not benefited
|
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(0.34
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)
|
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3.29
|
|
|
|
5.85
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Return to provision adjustments
|
|
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1.34
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|
|
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10.12
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|
|
|
(4.28
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)
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Change in valuation allowance
|
|
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4.80
|
|
|
|
(37.81
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)
|
|
|
25.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
49.55
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%
|
|
|
55.27
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%
|
|
|
41.79
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%
|
|
|
|
|
|
|
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Equity-based compensation Prior to the IPO,
certain members of our senior management team and board of
directors held profits interest in EBS Master which had only a
nominal, if any, value at the date they were originally granted.
Because of this nominal value, each of the profits interest
holders had made an election to pay income taxes based on the
fair value of the profits interest on the grant date. As a
result, while the Company continues to recognize compensation
expense related to these awards as they vest, the Company
receives no tax deduction related to these awards.
Non-timing basis differences Due to our
organizational structure, certain items, including a portion of
our equity-based compensation, other comprehensive income and
income of corporate consolidated subsidiaries of EBS Master,
affect our book basis in EBS Master without similarly affecting
our tax basis in EBS Master. In the case of our corporate
consolidated subsidiaries, the Company recognizes income tax
expense both at the subsidiary and the parent company level for
the same income (once as it is earned at the subsidiary level
and once as a result of the tax effect of the difference in tax
and book basis of the limited liability company which controls
those corporate subsidiaries). As a result, our effective income
tax rates may be impacted by these matters.
48
Noncontrolling interest We conduct
substantially all of our operations through the direct and
indirect subsidiaries of EBS Master, a portion of the interests
of which are held by entities controlled by the Principal
Equityholders. Accordingly, we recognize income tax expense only
for the portion of the income generated by EBS Master that is
attributable to us.
Return to provision adjustments Prior to
finalizing our tax returns, we are required to make certain
assumptions and exercise judgment in estimating the tax we will
owe for a given tax year. These assumptions and judgments are
often made based on facts and circumstances that change between
the balance sheet date and the date the tax returns are
finalized. Upon finalizing our tax returns for a given year, we
routinely adjust our income tax expense for differences between
our initial estimates and the actual amounts and tax positions
reflected on our tax returns.
Change in valuation allowance We record
valuation allowances or reverse existing valuation allowances
related to assumed future income tax benefits depending on
circumstances and factors related to our business. During 2009,
we concluded, based primarily on our taxable income during the
year and the expected accretive impact of our recent
acquisitions on future taxable income, that we would generate
sufficient future taxable income to utilize certain of our
federal net operating losses, the benefit of which we had not
previously recognized. As a result, income tax expense for 2009
is net of a benefit of approximately $11.8 million related
to these net operating losses that had been the subject of a
valuation allowance in the prior year. The benefit was partially
offset by an increase in state income tax valuation allowance
related to a consolidated subsidiary of approximately
$5.8 million. During 2010, we recognized a capital loss for
tax purposes. Because we do not anticipate being able to
recognize the benefit of this capital loss in the foreseeable
future, we increased our valuation allowance by approximately
$3.2 million related to this matter. Additionally, we
increased our valuation allowance in 2010 related to state net
operating losses by approximately $7.1 million as a result
of incremental losses of a corporate consolidated subsidiary.
Stock-Based
and Equity-Based Compensation Expense
Prior to the IPO, certain employees and directors of EBS Master
participated in one of two equity-based compensation
plans the Amended and Restated EBS Executive Equity
Incentive Plan (the EBS Equity Plan) and the Amended
and Restated EBS Incentive Plan (the EBS Phantom
Plan). In connection with the IPO, outstanding awards
under the EBS Phantom Plan were converted into awards under the
2009 Equity Incentive Plan adopted by the Companys
stockholders in July 2009 (the 2009 Plan) and
outstanding awards under the EBS Equity Plan were converted into
EBS Units that are governed by individual agreements with
certain directors and members of executive management, as well
as awards under the 2009 Plan. The EBS Equity Plan consisted of
a class of non-voting EBS Master equity units called Grant
Units. The Grant Units represented profits interests in
EBS Master and appreciated with increases in value of EBS
Master. The EBS Phantom Plan was designed to allow individual
employees to participate economically in the future growth and
value creation at EBS LLC. Each participant received a specified
number of units in the EBS Phantom Plan called Phantom
Units. These Phantom Units appreciated with increases in
value of EBS Master. These Phantom Units did not give employees
an ownership interest in the Company and had no voting rights.
We incurred stock-based and equity-based compensation expense of
$17.7 million, $25.4 million and $4.1 million
during 2010, 2009 and 2008, respectively. Comparability among
the respective periods has been impacted by the following
factors:
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Change in the estimated fair value of liability
awards. All equity-based awards granted under the
EBS Equity Plan and EBS Phantom Plan prior to the second quarter
of 2009 were classified as liabilities due to certain repurchase
features. As liabilities, we were required to adjust the
equity-based awards to fair value at the end of each quarter.
The fair value of these liabilities generally fluctuated with
the value of the underlying EBS Units.
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|
|
|
Modification of equity-based awards. In June
2009, we modified the repurchase features of all Grant Units
previously granted under the EBS Equity Plan. Following this
modification, all Grant Units were reclassified as equity
awards. Immediately prior to this reclassification, we adjusted
the value of these Grant Units to their fair value. In addition
to a change in estimate recognized at the modification date,
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49
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|
|
|
|
we also began to recognize compensation expense prospectively
based on the increased fair value of these Grant Units at the
modification date.
|
|
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|
|
|
Conversion in connection with our IPO. In
connection with the IPO and reorganization transactions, the
Phantom Units were converted into shares of our Class A
common stock, restricted Class A common stock units and
options to purchase shares of our Class A common stock
under the 2009 Plan. As a result of the IPO and this conversion,
in addition to a change in estimate recognized at the IPO date,
we also began recognizing compensation expense prospectively
based on the fair value of these Phantom Units at the IPO date.
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Additional 2009 Plan Grants. On and since the
IPO date, we have granted restricted Class A common stock
units and options to purchase shares of our Class A common
stock under the 2009 Plan to certain of our employees and
directors, some of which contain performance conditions.
|
Interest
Rate Swap
In order to manage our exposure to fluctuations in interest
rates, we maintain an interest rate swap agreement which has the
effect of converting a portion of our obligations under our
credit agreements to a fixed rate of interest. At inception, we
designated this interest rate swap agreement as a hedge of
variability in our cash flows such that changes in the value of
this instrument were reflected within accumulated comprehensive
income. In connection with the 2008 Transaction, this instrument
no longer met the criteria for hedge accounting such that
changes in its fair value from the date of the 2008 Transaction
to its redesignation as a hedge in September 2008 were reflected
within interest expense. Effective October 1, 2010, we
removed the hedge designation for this interest rate swap to
take advantage of a lower variable interest rate under our
credit agreements such that changes in the fair value of this
swap agreement are once again reflected within interest expense
for all periods following October 1, 2010. Interest expense
was reduced by $3.9 million and $12.7 million for 2010
and 2008, respectively, due to changes in the fair value of this
interest rate swap agreement.
Critical
Accounting Estimates
The preparation of financial statements in accordance with
U.S. generally accepted accounting principles requires us
to make estimates and assumptions that affect reported amounts
and related disclosures. We consider an accounting estimate to
be critical if:
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|
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it requires assumptions to be made that were uncertain at the
time the estimate was made; and
|
|
|
|
changes in the estimate or different estimates that could have
been made could have a material impact on our consolidated
results of operations and financial condition.
|
The following discussion of critical accounting estimates is not
intended to be a comprehensive list of all of our accounting
policies that require estimates. We believe that, of our
significant accounting policies discussed in Note 2 of our
consolidated financial statements included elsewhere in this
Annual Report, the estimates discussed below involve a higher
degree of judgment and complexity. We believe the current
assumptions and other considerations used to estimate amounts
reflected in our consolidated financial statements are
appropriate. However, if actual experience differs from the
assumptions and other considerations used in estimating amounts
reflected in our consolidated financial statements, the
resulting changes could have a material adverse effect on our
consolidated results of operations and financial condition.
The discussion that follows presents information about our
critical accounting estimates, as well as the effects of
hypothetical changes in the material assumptions used to develop
each estimate:
Revenue
Recognition
We generate virtually all of our revenue by providing products
and services that automate and simplify business and
administrative functions for payers and providers, generally on
either a per transaction, per document, per communication or per
member per month basis or, in some cases, on a monthly flat-fee,
50
contingent fee or hourly basis. For certain services, we may
charge an implementation fee in conjunction with related setup
and connection to our network and other systems.
Revenue for transaction services, payment services, patient
statements and consulting services are recognized as the
services are provided. Postage fees related to our payment
services and patient statement volumes are recorded on a gross
basis. Implementation fees are amortized to revenue on a
straight-line basis over the period of performance, which
generally varies from one to three years. Revenue for our
government eligibility and enrollment services and accounts
receivable management services generally are recognized at the
time that our provider customer receives notice from the payer
of a pending payment.
Cash receipts or billings in advance of revenue recognition are
recorded as deferred revenues on our consolidated balance sheets.
We exclude sales and use tax from revenue in our consolidated
statements of operations.
Business
Combinations
We allocate the consideration transferred (i.e. purchase price)
in a business combination to the acquired business
identifiable assets, liabilities and noncontrolling interests at
their acquisition date fair value. The excess of the
consideration transferred over the amount allocated to the
identifiable assets and liabilities and noncontrolling interest,
if any, is recorded as goodwill. Any excess of the fair value of
the identifiable assets acquired and liabilities assumed over
the consideration transferred, if any, is generally recognized
within earnings as of the acquisition date. To the extent that
our initial accounting for a business combination is incomplete
at the end of a reporting period, provisional amounts are
reported for those items which are incomplete. We retroactively
adjust such provisional amounts as of the acquisition date once
new information is received about facts and circumstances that
existed as of the acquisition date.
The fair value of the consideration transferred, assets,
liabilities and noncontrolling interests is estimated based on
one or a combination of income, cost or market approaches as
determined based on the nature of the asset or liability and the
level of inputs available to us (i.e. quoted prices in an active
market, other observable inputs or unobservable inputs). With
respect to assets, liabilities and noncontrolling interest, the
determination of fair value requires management to make
subjective judgments as to projections of future operating
performance, the appropriate discount rate to apply, long-term
growth rates, etc. The effect of these judgments then impacts
the amount of the goodwill that is recorded and the amount of
depreciation and amortization expense to be recognized in future
periods related to tangible and intangible assets acquired.
With respect to the consideration transferred, certain of our
acquisitions include contingent consideration, the fair value of
which is generally required to be measured each quarter until
resolution of the contingency. In addition to the judgments
applicable to valuing tangible and intangible assets, the
determination of the fair value of contingent consideration
requires management to make subjective judgments as to the
probability and timing of the attainment of certain specified
financial performance measures. The determination of fair value
of the contingent consideration is particularly sensitive to
judgments relative to the probability of achieving the specified
financial performance measures. For example, assuming all other
inputs are unchanged, a hypothetical 10% decrease in
managements initial estimate of the probability of
achieving the specified financial performance measures would
impact our pretax income by approximately $2.4 million.
51
Goodwill
and Intangible Assets
Goodwill and intangible assets from our acquisitions are
accounted for using the acquisition method of accounting.
Intangible assets with definite lives are amortized on a
straight-line basis over the estimated useful lives of the
related assets generally as follows:
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|
|
|
|
Customer relationships
|
|
|
9 to 20 years
|
|
Trade names
|
|
|
20 years
|
|
Data sublicense agreement
|
|
|
8 years
|
|
Non-compete agreements
|
|
|
1 to 5 years
|
|
Backlog
|
|
|
1 year
|
|
With respect to intangible assets (excluding goodwill), we
review for impairment whenever events or changes in
circumstances indicate that carrying amounts may not be
recoverable. For those assets that are held and used, we
recognize an impairment loss only if its carrying amount is not
recoverable through its undiscounted cash flows and measure the
impairment loss based on the difference between the carrying
amount and fair value. Assets held for sale are reported at the
lower of cost or fair value less costs to sell.
We review the carrying value of goodwill annually and whenever
indicators of impairment are present. With respect to goodwill,
we determine whether potential impairment losses are present by
comparing the carrying value of our reporting units to the fair
value of our reporting units (step one of the annual impairment
test). If the fair value of the reporting unit is less than the
carrying value of the reporting unit, then a hypothetical
purchase price allocation is used to determine the amount of
goodwill impairment.
We have identified our payer, provider, and pharmacy operating
segments as our reporting units. We estimate the fair value of
our reporting units using a methodology that considers both
income and market approaches. Specifically, we develop an
initial estimate of the fair value of each reporting unit as the
present value of the expected future cash flows to be generated
by the reporting unit. We then validate this initial amount by
comparison to a value determined based on transaction multiples
among guideline publicly traded companies.
Each approach requires the use of certain assumptions. The
income approach requires management to exercise judgment in
making assumptions regarding the reporting units future
income stream, a discount rate and a constant rate of growth
after the initial five year forecast period utilized. These
assumptions are subject to change based on business and economic
conditions and could materially affect the indicated values of
our reporting units. For example, a 100 basis point
increase in our selected discount rate would result in a
decrease in the indicated value of our payer, provider and
pharmacy reporting units of approximately $131.8 million,
$155.2 million and $40.1 million, respectively.
However, as the indicated fair value of each reporting unit
significantly exceeded their respective carrying values in the
annual impairment test, we do not believe that any of our
reporting units are at risk of failing step one of our annual
impairment test.
The market approach requires management to exercise judgment in
its selection of the guideline companies, as well in its
selection of the most relevant transaction multiple. Guideline
companies selected are comparable to us in terms of product or
service offerings, markets
and/or
customers, among other characteristics. We considered two
transaction multiples (i) the ratio of market
value of invested capital to earnings before interest and taxes
(MVIC/EBIT) and (ii) the ratio of market value of invested
capital to earnings before interest, taxes, depreciation and
amortization (MVIC/EBITDA).
Our method of assessing the fair value of our reporting units
and our method of selecting the key assumptions did not change
from 2009 to 2010. However, an increase in the market returns on
equity at the date of our evaluation resulted in an average
127 basis point increase in the discount rate from the
comparable prior year evaluation.
52
Income
Taxes
We record deferred income taxes for the tax effect of
differences between book and tax bases of our assets and
liabilities, as well as differences related to the timing of
recognition of income and expenses.
Deferred income taxes reflect the available net operating losses
and the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Realization of the future tax benefits related to deferred tax
assets is dependent on many factors, including our past earnings
history, expected future earnings, the character and
jurisdiction of such earnings, unsettled circumstances that, if
unfavorably resolved would adversely affect utilization of our
deferred tax assets, carryback and carryforward periods, and tax
strategies that could potentially enhance the likelihood of
realization of a deferred tax asset.
We recognize tax benefits for uncertain tax positions at the
time that we conclude the tax position, based solely on its
technical merits, is more likely than not to be sustained upon
examination. The benefit, if any, is measured as the largest
amount of benefit, determined on a cumulative probability basis
that is more likely than not to be realized upon ultimate
settlement. Tax positions failing to qualify for initial
recognition are recognized in the first subsequent interim
period that they meet the more likely than not standard, are
resolved through negotiation or litigation with the taxing
authority or on expiration of the statute of limitations.
Equity-Based
Compensation
Compensation expense related to our equity-based awards is
generally recognized on a straight-line basis over the requisite
service period. For awards subject to vesting based on
performance conditions, however, compensation expense is
recognized under the accelerated method. The fair value of the
equity awards is determined by use of a Black-Scholes model and
assumptions as to expected term, expected volatility, expected
dividends and the risk free rate.
The following table summarizes the weighted average fair values
of our 2010 and 2009 option awards using the Black-Scholes
option pricing model and the weighted average assumptions used
to develop the respective fair value estimates:
|
|
|
|
|
|
|
|
|
|
|
2009 Equity Plan Options
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Weighted average fair value
|
|
$
|
6.95
|
|
|
$
|
7.54
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
43.10
|
%
|
|
|
47.00
|
%
|
Risk-free interest rate
|
|
|
2.53
|
%
|
|
|
2.55
|
%
|
Expected term (years)
|
|
|
6.3
|
|
|
|
6.3
|
|
Expected dividend yield This is an estimate
of the expected dividend yield on the Class A common stock.
The Company is subject to limitations on the payment of
dividends under its credit facilities as further discussed in
Note 10 to the consolidated financial statements included
elsewhere in this Annual Report. An increase in the dividend
yield will decrease compensation expense.
Expected volatility This is a measure of the
amount by which the price of the Class A common stock has
fluctuated or is expected to fluctuate. We estimate the expected
volatility based upon a weighted average of our historical
volatility following the IPO and the median historical
volatility of a group of guideline companies (weighted based
upon proportion of the expected term represented by our
historical volatility and the volatility of the guideline
companies, respectively). An increase in the expected volatility
will increase compensation expense.
Risk-free interest rate This is the
U.S. Treasury rate for the week of the grant having a term
approximating the expected life of the award. An increase in the
risk-free interest rate will increase compensation expense.
53
Expected term This is the period of time over
which the awards are expected to remain outstanding. We estimate
the expected term as the mid-point between the vesting date and
the contractual term. An increase in the expected term will
increase compensation expense.
Of these significant valuation inputs, however, our measured
equity-based compensation is most susceptible to a material
change as a result of changes in our expected volatility. In the
event that our expected volatility for 2010 equity grants
increased by 10%, our pretax income for 2010 would have been
reduced by approximately $0.2 million.
Tax
Receivable Agreements
In connection with the IPO, we entered into tax receivable
agreements which obligate us to make payments to certain parties
affiliated with General Atlantic, H&F and former Grant Unit
holders generally equal to 85% of the applicable cash savings
that we realize as a result of tax attributes arising from the
2006 Transaction, the 2008 Transaction and the former Grant Unit
holders exchange of EBS Units (along with corresponding
shares of Class B common stock) for cash or shares of
Class A common stock. We will retain the benefit of the
remaining 15% of these tax savings.
Future exchanges of EBS Units (along with corresponding shares
of Class B common stock) for cash or shares of Class A
common stock related to the affiliates of H&F and the
former Grant Unit holders who are parties to the tax receivable
agreements are expected to result in an additional tax
receivable obligation for the Company with a corresponding
offset to our additional paid in capital account. Subsequent
adjustments of the tax receivable obligations due to certain
events (e.g., tax rate changes) are expected to result in a
corresponding adjustment of our net income. For example, if our
corporate tax rate were to increase by 100 basis points,
our obligation under these tax receivable agreements would
increase and our pretax income would be reduced by approximately
$4.1 million.
54
Results
of Operations
The following table summarizes our consolidated results of
operations for the years ended December 31, 2010, 2009 and
2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Revenue(1)
|
|
|
Amount
|
|
|
Revenue(1)
|
|
|
Amount
|
|
|
Revenue(1)
|
|
|
Revenues
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payer Services
|
|
$
|
431,916
|
|
|
|
43.1
|
%
|
|
$
|
397,492
|
|
|
|
43.3
|
%
|
|
$
|
372,159
|
|
|
|
43.6
|
%
|
Provider Services
|
|
|
492,345
|
|
|
|
49.1
|
|
|
|
462,513
|
|
|
|
50.4
|
|
|
|
444,845
|
|
|
|
52.1
|
|
Pharmacy Services
|
|
|
81,794
|
|
|
|
8.2
|
|
|
|
60,843
|
|
|
|
6.6
|
|
|
|
39,067
|
|
|
|
4.6
|
|
Eliminations
|
|
|
(3,903
|
)
|
|
|
(0.4
|
)
|
|
|
(2,400
|
)
|
|
|
(0.3
|
)
|
|
|
(2,472
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,002,152
|
|
|
|
100.0
|
|
|
|
918,448
|
|
|
|
100.0
|
|
|
|
853,599
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payer Services
|
|
|
283,050
|
|
|
|
65.5
|
|
|
|
253,473
|
|
|
|
63.8
|
|
|
|
242,950
|
|
|
|
65.3
|
|
Provider Services
|
|
|
303,252
|
|
|
|
61.6
|
|
|
|
294,700
|
|
|
|
63.7
|
|
|
|
292,844
|
|
|
|
65.8
|
|
Pharmacy Services
|
|
|
30,067
|
|
|
|
36.8
|
|
|
|
16,668
|
|
|
|
27.4
|
|
|
|
7,612
|
|
|
|
19.5
|
|
Eliminations
|
|
|
(3,775
|
)
|
|
|
|
|
|
|
(1,974
|
)
|
|
|
|
|
|
|
(1,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of operations
|
|
|
612,594
|
|
|
|
61.1
|
|
|
|
562,867
|
|
|
|
61.3
|
|
|
|
541,563
|
|
|
|
63.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development and engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payer Services
|
|
|
12,127
|
|
|
|
2.8
|
|
|
|
12,677
|
|
|
|
3.2
|
|
|
|
10,472
|
|
|
|
2.8
|
|
Provider Services
|
|
|
16,078
|
|
|
|
3.3
|
|
|
|
15,294
|
|
|
|
3.3
|
|
|
|
14,015
|
|
|
|
3.2
|
|
Pharmacy Services
|
|
|
7,310
|
|
|
|
8.9
|
|
|
|
5,957
|
|
|
|
9.8
|
|
|
|
4,138
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total development and engineering
|
|
|
35,515
|
|
|
|
3.5
|
|
|
|
33,928
|
|
|
|
3.7
|
|
|
|
28,625
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, marketing, general and admin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payer Services
|
|
|
26,700
|
|
|
|
6.2
|
|
|
|
25,803
|
|
|
|
6.5
|
|
|
|
23,286
|
|
|
|
6.3
|
|
Provider Services
|
|
|
30,711
|
|
|
|
6.2
|
|
|
|
31,978
|
|
|
|
6.9
|
|
|
|
30,475
|
|
|
|
6.9
|
|
Pharmacy Services
|
|
|
5,970
|
|
|
|
7.3
|
|
|
|
8,047
|
|
|
|
13.2
|
|
|
|
3,864
|
|
|
|
9.9
|
|
Eliminations
|
|
|
(128
|
)
|
|
|
|
|
|
|
(426
|
)
|
|
|
|
|
|
|
(624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales, marketing, general and admin excluding corporate
|
|
|
63,253
|
|
|
|
6.3
|
|
|
|
65,402
|
|
|
|
7.1
|
|
|
|
57,001
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from segment operations
|
|
|
290,790
|
|
|
|
29.0
|
|
|
|
256,251
|
|
|
|
27.9
|
|
|
|
226,410
|
|
|
|
26.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expense
|
|
|
48,590
|
|
|
|
4.8
|
|
|
|
49,974
|
|
|
|
5.4
|
|
|
|
37,292
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
124,721
|
|
|
|
12.4
|
|
|
|
105,321
|
|
|
|
11.5
|
|
|
|
97,864
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
117,479
|
|
|
|
11.7
|
|
|
|
100,956
|
|
|
|
11.0
|
|
|
|
91,254
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(14
|
)
|
|
|
(0.0
|
)
|
|
|
(75
|
)
|
|
|
(0.0
|
)
|
|
|
(963
|
)
|
|
|
(0.1
|
)
|
Interest expense
|
|
|
61,031
|
|
|
|
6.1
|
|
|
|
70,246
|
|
|
|
7.6
|
|
|
|
71,717
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (gain) loss
|
|
|
(9,284
|
)
|
|
|
(0.9
|
)
|
|
|
(519
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
65,746
|
|
|
|
6.6
|
|
|
|
31,304
|
|
|
|
3.4
|
|
|
|
20,500
|
|
|
|
2.4
|
|
Income tax provision
|
|
|
32,579
|
|
|
|
3.3
|
|
|
|
17,301
|
|
|
|
1.9
|
|
|
|
8,567
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
33,167
|
|
|
|
3.3
|
%
|
|
|
14,003
|
|
|
|
1.5
|
%
|
|
|
11,933
|
|
|
|
1.4
|
%
|
Net income attributable to noncontrolling interest
|
|
|
13,621
|
|
|
|
|
|
|
|
4,422
|
|
|
|
|
|
|
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Emdeon Inc.
|
|
$
|
19,546
|
|
|
|
|
|
|
$
|
9,581
|
|
|
|
|
|
|
$
|
9,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All references to percentage of revenues for expense components
refer to the percentage of revenues for such segment. |
|
(2) |
|
See
Note 23-Segment
Reporting to our consolidated financial statements
included elsewhere in this Annual Report for further detail of
our revenues within each reportable segment. |
55
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009
Revenues
Our total revenues were $1,002.2 million for 2010 as
compared to $918.4 million for 2009, an increase of
approximately $83.7 million, or 9.1%.
On an overall basis, revenues for our payer services, provider
services and pharmacy services segments for 2010 were adversely
affected as compared to the prior year by the impact of lower
healthcare utilization driven by continued high unemployment and
other economic factors. Additional factors affecting our various
product line revenues are described in the following paragraphs.
Our payer services segment revenue is summarized by product line
in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
Claims management
|
|
$
|
194,239
|
|
|
$
|
184,605
|
|
|
$
|
9,634
|
|
Payment services
|
|
|
234,176
|
|
|
|
211,985
|
|
|
|
22,191
|
|
Intersegment revenue
|
|
|
3,501
|
|
|
|
902
|
|
|
|
2,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
431,916
|
|
|
$
|
397,492
|
|
|
$
|
34,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims management revenues for 2010 increased by approximately
$9.6 million, or 5.2%. Claims management revenues for 2010
include approximately $21.6 million related to products and
services acquired in the FVTech and HTMS acquisitions. Excluding
this revenue, claims management revenues decreased by
approximately $11.7 million, or 6.4%, primarily due to the
impact of market pricing pressures on our average transaction
rates and the impact of reduced transaction growth rates caused
by lower healthcare utilization during 2010. This decrease was
partially offset by increased payment integrity revenue in 2010.
Payment services revenues for 2010 increased by approximately
$22.2 million, or 10.5%. This increase was primarily driven
by new sales and implementations, as well as the full year
impact of the U.S. postage rate increase effective in May
2009. The increase in payment services revenues was partially
offset by the impact of lower healthcare utilization during 2010.
Our provider services segment revenue is summarized by product
line in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
Patient statements
|
|
$
|
262,521
|
|
|
$
|
274,390
|
|
|
$
|
(11,869
|
)
|
Revenue cycle management
|
|
|
198,019
|
|
|
|
155,112
|
|
|
|
42,907
|
|
Dental
|
|
|
31,403
|
|
|
|
31,513
|
|
|
|
(110
|
)
|
Intersegment revenue
|
|
|
402
|
|
|
|
1,498
|
|
|
|
(1,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
492,345
|
|
|
$
|
462,513
|
|
|
$
|
29,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient statements revenues for 2010 decreased by approximately
$11.9 million, or 4.3%, primarily due to the absence of
approximately $5.7 million of revenue related to our office
supplies and print services business, which was sold in October
2009, and customer attrition. This decrease was partially offset
by new sales and implementations and the full year impact of the
U.S. postage rate increase in May 2009.
Revenue cycle management revenues for 2010 increased by
approximately $42.9 million, or 27.7%. Revenue cycle
management revenues for 2010 include approximately
$28.9 million related to products and services acquired in
the CEA and Chapin acquisitions. Excluding this revenue, revenue
cycle management revenues increased by approximately
$14.0 million or 9.0%. This increase was primarily due to
new sales and implementations, partially offset by customer
attrition.
Dental revenues for 2010 were generally consistent with those
reflected in the comparable prior year period.
56
Additionally, all provider services segment revenues were
adversely affected by the impact of lower healthcare utilization
during 2010.
Our pharmacy services segment revenues were $81.8 million
for 2010 as compared to $60.8 million for 2009, an increase
of approximately $21.0 million, or 34.4%. This increase was
primarily due to the full year impact in 2010 of the eRx
acquisition and new sales and implementations, partially offset
by the impact of lower healthcare utilization during 2010.
Cost
of Operations
Our total cost of operations was $612.6 million for 2010 as
compared to $562.9 million for the 2009, an increase of
approximately $49.7 million, or 8.8%.
Our cost of operations for our payer services segment was
approximately $283.1 million for 2010 as compared to
$253.5 million for 2009, an increase of approximately
$29.6 million, or 11.7%. As a percentage of revenue, our
payer services cost of operations increased to 65.5% for 2010 as
compared to 63.8% for 2009. Cost of operations for our payer
services segment includes approximately $2.5 million and
$3.5 million of equity-based compensation for 2010 and
2009, respectively. Excluding this equity-based compensation,
payer services cost of operations was $280.6 million for
2010 as compared to $250.0 million for 2009, an increase of
approximately $30.6 million, or 12.3%. The increase in our
payer services cost of operations is primarily due to revenue
growth in payment services, including increased postage costs
resulting from the full year impact of the U.S. postage
rate increase effective in May 2009, and the inclusion of the
FVTech and HTMS businesses acquired in 2010. Excluding
equity-based compensation, as a percentage of revenue, our payer
services cost of operations increased to 65.0% for 2010 as
compared to 62.9% for 2009. The increase as a percentage of
revenue was primarily due to (i) increased postage costs
which, though reimbursable by our customers, results in an
increase in cost of operations as a percentage of revenue and
(ii) changes in revenue mix between our payment services
solutions and the recently acquired FVTech and HTMS businesses,
which generally have higher cost of operations, as compared to
our historical claims management services, which generally have
lower cost of operations.
Our cost of operations for our provider services segment was
$303.3 million for 2010 as compared to $294.7 million
for 2009, an increase of approximately $8.6 million, or
2.9%. As a percentage of revenue, our provider services segment
cost of operations decreased to 61.6% for 2010 as compared to
63.7% for 2009. Cost of operations for our provider services
segment includes approximately $1.3 million and
$2.6 million of equity-based compensation for 2010 and
2009, respectively. Excluding this equity-based compensation,
provider services cost of operations was $302.0 million for
2010 as compared to $292.1 million for 2009, an increase of
approximately $9.9 million, or 3.4%. The increase in our
provider services cost of operations is primarily due to the
inclusion of operating costs of the CEA and Chapin businesses
acquired in 2010. This increase in provider services cost of
operations was partially offset by a change in revenue mix
between our patient statements services, which generally have
higher cost of operations, and revenue cycle management
services, which generally have lower cost of operations. The
decrease in provider services cost of operations as a percentage
of revenue is primarily due to this change in revenue mix.
Our cost of operations for our pharmacy services segment was
$30.1 million for 2010 as compared to $16.7 million
for 2009, an increase of approximately $13.4 million, or
80.4%. This increase is primarily related to the full year
impact in 2010 of the eRx acquisition.
Development
and Engineering Expense
Our total development and engineering expense was
$35.5 million for 2010 as compared to $33.9 million
for 2009, an increase of approximately $1.6 million, or
4.7%. Development and engineering expense includes approximately
$1.3 million and $1.6 million of equity-based
compensation for 2010 and 2009, respectively. The increase in
development and engineering expense is primarily related to
increased product development activity in our payer services and
provider services segments and the inclusion of the product
development infrastructures associated with our recently
acquired businesses.
57
Sales,
Marketing, General and Administrative Expense (Excluding
Corporate Expense)
Our total sales, marketing, general and administrative expense
(excluding corporate expense) was $63.3 million for 2010 as
compared to $65.4 million for 2009, a decrease of
approximately $2.1 million, or 3.3%.
Our sales, marketing, general and administrative expense for our
payer services segment was approximately $26.7 million for
2010 as compared to $25.8 million for 2009, an increase of
approximately $0.9 million, or 3.5%. Sales, marketing,
general and administrative expense for our payer services
segment includes approximately $2.5 million and
$4.2 million of equity-based compensation for 2010 and
2009, respectively. Excluding this equity-based compensation,
payer services sales, marketing, general and administrative
expense was $24.2 million for 2010 as compared to
$21.6 million for 2009, an increase of approximately
$2.6 million, or 12.1%, The increase in our payer services
sales, marketing, general and administrative expense is
primarily due to the inclusion during 2010 of the
infrastructures associated with the FVTech and HTMS acquisitions.
Our sales, marketing, general and administrative expense for our
provider services segment was approximately $30.7 million
for 2010 as compared to $32.0 million for 2009, a decrease
of approximately $1.3 million, or 4.0%. Sales, marketing,
general and administrative expense for our provider services
segment includes approximately $2.0 million and
$3.1 million of equity-based compensation for 2010 and
2009, respectively. Excluding this equity-based compensation,
provider services sales, marketing, general and administrative
expense was $28.7 million for 2010 as compared to
$28.9 million for 2009, a decrease of approximately
$0.2 million, or 0.5%. The decrease in our provider
services sales, marketing, general and administrative expense is
primarily due to reduced bad debt expense and compensation costs
from efficiency measures, offset by the inclusion during 2010 of
the infrastructures associated with the CEA and Chapin
acquisitions.
Our sales, marketing, general and administrative expense for our
pharmacy services segment was approximately $6.0 million
for 2010 as compared to $8.0 million for 2009, a decrease
of approximately $2.0 million, or 25.8%. This decrease is
primarily attributable to the integration of eRxs
infrastructure into the Companys pharmacy operations.
Corporate
Expense
Our corporate expense was $48.6 million for 2010 as
compared to $50.0 million for 2009, a decrease of
approximately $1.4 million, or 2.8%. Corporate expense
includes approximately $7.7 million and $9.8 million
of equity-based compensation for 2010 and 2009, respectively.
Excluding this equity-based compensation, corporate expense was
$40.9 million for 2010 as compared to $40.2 million
for 2009, an increase of approximately $0.7 million, or
1.8%. This increase was primarily attributable to incremental
legal and other professional fees incurred in connection with
2010 acquisition activities.
Depreciation
and Amortization Expense
Our depreciation and amortization expense was
$124.7 million for 2010 as compared to $105.3 million
for 2009, an increase of approximately $19.4 million, or
18.4%. This increase was primarily due to depreciation of
property and equipment placed in service during 2010, additional
depreciation and amortization expense related to acquisition
method adjustments associated with technology and intangible
assets acquired in connection with the 2010 and 2009
acquisitions and the amortization of additional rights to
specified uses of our data acquired in 2010 and 2009.
Interest
Expense
Our interest expense was $61.0 million for 2010 as compared
to $70.2 million for 2009, a decrease of approximately $9.2
million, or 13.1%. Interest expense for 2010 was reduced by
approximately $3.9 million related to a change in the fair
value of our interest rate swap agreement following our removal
of its designation as a cash flow hedge in October 2010. The
remaining decrease was primarily due to a scheduled
58
decrease in the notional amount of our interest rate swap
agreement of approximately $123.6 million as of
December 31, 2009, which caused less of our debt to be
subject to the higher fixed rate of our interest rate swap
agreement during 2010.
Income
Taxes
Our income tax expense was $32.6 million (an effective rate
of 49.6%) for 2010 as compared to $17.3 million (an
effective rate of 55.3%) for 2009, an increase of approximately
$15.3 million. Differences between the federal statutory
rate and the effective income tax rates for these periods
principally relate to the change in our book basis versus tax
basis of our investment in EBS Master, including the effect of
income allocated to a noncontrolling interest, valuation
allowance changes, state income tax rate changes and the impact
of other permanent differences relative to pretax income. During
2010, the Company recognized an increase in income tax expense
of approximately $10.1 million related to changes in
valuation allowances. During 2009, the Company recognized a net
decrease in income tax expense of approximately
$4.6 million related to changes in valuation allowances.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Revenues
Our total revenues were $918.4 million for 2009 as compared
to $853.6 million for 2008, an increase of approximately
$64.8 million, or 7.6%.
Our payer services segment revenue is summarized by product line
in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
Claims management
|
|
$
|
184,605
|
|
|
$
|
179,930
|
|
|
$
|
4,675
|
|
Payment services
|
|
|
211,985
|
|
|
|
191,874
|
|
|
|
20,111
|
|
Intersegment revenue
|
|
|
902
|
|
|
|
355
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
397,492
|
|
|
$
|
372,159
|
|
|
$
|
25,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims management revenues for 2009 increased by approximately
$4.7 million, or 2.6%, from 2008 primarily due to an
increase in the volume of electronic claims processed during
2009, as well as payment integrity solutions revenue generated
following our acquisition of The Sentinel Group in June 2009.
The increase was partially offset by the impact of market
pricing pressures on our average transaction rates.
Payment services revenues for 2009 increased by approximately
$20.1 million, or 10.5%. This increase was primarily driven
by new sales and implementations, as well as the impact of the
U.S. postage rate increases effective in May 2009 and May
2008.
Our provider services segment revenue is summarized by product
line in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
Patient statements
|
|
$
|
274,390
|
|
|
$
|
266,233
|
|
|
$
|
8,157
|
|
Revenue cycle management
|
|
|
155,112
|
|
|
|
144,904
|
|
|
|
10,208
|
|
Dental
|
|
|
31,513
|
|
|
|
31,591
|
|
|
|
(78
|
)
|
Intersegment revenue
|
|
|
1,498
|
|
|
|
2,117
|
|
|
|
(619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
462,513
|
|
|
$
|
444,845
|
|
|
$
|
17,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient statement revenues for 2009 increased approximately
$8.2 million, or 3.1%, primarily due to the acquisition of
the patient statement business operated by GE Healthcare in
September 2008 and the impact of the U.S. postage rate
increases effective in May 2009 and May 2008. These increases
were partially offset by customer attrition and the sale of our
office supplies and print services business in October 2009.
59
Revenue cycle management revenues for 2009 increased
approximately $10.2 million, or 7.0%, primarily from new
sales and implementations, partially offset by attrition in
legacy products.
Dental revenues for 2009 decreased approximately
$0.1 million, or 0.2%, primarily due to pricing pressures
in the dental market, which offset the impact of new sales and
implementations.
Our pharmacy services segment revenues were $60.8 million
for 2009 as compared to $39.1 million for 2008, an increase
of approximately $21.8 million, or 55.7%. This increase was
primarily due to our acquisition of eRx in July 2009, as well as
new sales and implementations.
Cost
of Operations
Our total cost of operations was $562.9 million for 2009 as
compared to $541.6 million for 2008, an increase of
approximately $21.3 million, or 3.9%.
Our cost of operations for our payer services segment was
approximately $253.5 million for 2009 as compared to
$243.0 million for 2008, an increase of approximately
$10.5 million, or 4.3%. As a percentage of revenue, our
payer services cost of operations decreased to 63.8% for 2009 as
compared to 65.3% for 2008. Cost of operations for our payer
services segment includes approximately $3.5 million and
$0.6 million of equity-based compensation for 2009 and
2008, respectively. Excluding this equity-based compensation,
payer services cost of operations were $250.0 million for
2009 as compared to $242.3 million for 2008, an increase of
approximately $7.6 million, or 3.1%. The increase is
primarily due to revenue growth in payment services, including
increased postage costs resulting from the U.S. postage
rate increases effective in May 2009 and May 2008, which was
partially offset by reduced data communication expenses from
improved utilization of our existing data communication
capabilities. Excluding the equity-based compensation, as a
percentage of revenue, our payer services cost of operations
decreased to 62.9% for 2009 as compared to 65.1% for 2008. This
decrease was primarily due to reduced data communication
expenses, production efficiencies in our payment services
business and operating leverage associated primarily with our
electronic claims management solutions.
Our cost of operations for our provider services segment was
$294.7 million for 2009 as compared to $292.8 million
for 2008, an increase of approximately $1.9 million, or
0.6%. As a percentage of revenue, our provider services segment
cost of operations decreased to 63.7% for 2009 as compared to
65.8% for 2008. Cost of operations for our provider services
segment includes approximately $2.6 million and
$0.1 million related to equity-based compensation for 2009
and 2008, respectively. Excluding this equity-based
compensation, provider services cost of operations was
$292.1 million for 2009 as compared to $292.7 million
for 2008, a decrease of approximately $0.6 million, or
0.2%. The decrease is primarily due to reduced data
communication expenses from improved utilization of our existing
data communication capabilities and changes in revenue mix
between our patient statements solutions, which generally have
higher cost of operations, and revenue cycle management
solutions, which generally have lower cost of operations.
Excluding the equity-based compensation, as a percentage of
revenue, our provider services cost of operations decreased to
63.2% for 2009 as compared to 65.8% for 2008. This decrease was
primarily due to reduced data communication expenses, efficiency
measures related to facility consolidations in our patient
statement operations, changes in revenue mix and operating
leverage associated primarily with our revenue cycle management
solutions.
Our cost of operations for our pharmacy services segment was
$16.7 million for 2009 as compared to $7.6 million for
2008, an increase of $9.1 million, or 119.0%. This increase
is primarily related to the inclusion of the revenues and
associated costs of the eRx business following the eRx
acquisition in July 2009.
Development
and Engineering Expense
Our total development and engineering expense was
$33.9 million for 2009 as compared to $28.6 million
for 2008, an increase of approximately $5.3 million, or
18.5%. Development and engineering expense includes
approximately $1.6 million and $0.1 million related to
equity-based compensation for 2009 and 2008, respectively.
Excluding this equity-based compensation, development and
engineering expense was $32.3 million for 2009 as compared
to $28.6 million for 2008, an increase of approximately
$3.8 million, or 13.2%.
60
This increase is primarily related to increased product
development activity in our payer and provider services segments
and the inclusion of the product development infrastructure
related to the eRx acquisition.
Sales,
Marketing, General and Administrative Expense (Excluding
Corporate Expense)
Our total sales, marketing, general and administrative expense
(excluding corporate expense) was $65.4 million for 2009 as
compared to $57.0 million for 2008, an increase of
approximately $8.4 million, or 14.7%.
Our sales, marketing, general and administrative expense for our
payer services segment was $25.8 million for 2009 as
compared to $23.3 million for 2008, an increase of
approximately $2.5 million, or 10.8%. Sales, marketing,
general and administrative expense for our payer services
segment includes approximately $4.0 million and
$0.8 million related to equity-based compensation for 2009
and 2008, respectively. Excluding this equity-based
compensation, payer services sales, marketing, general and
administrative expense was $21.8 million for 2009 as
compared to $22.5 million for 2008, a decrease of
approximately $0.7 million, or 3%. This decrease was
primarily due to the absence in 2009 of severance costs and
compensation related to 2008 efficiency measures.
Our sales, marketing, general and administrative expense for our
provider services segment was $32.0 million for 2009 as
compared to $30.5 million for 2008, an increase of
approximately $1.5 million, or 4.9%. Sales, marketing,
general and administrative expense for our provider services
segment includes approximately $3.7 million and
$0.5 million related to equity-based compensation for 2009
and 2008, respectively. Excluding this equity-based
compensation, provider services sales, marketing, general and
administrative expense was $28.3 million for 2009 as
compared to $30.0 million for 2008, a decrease of
approximately $1.7 million, or 5.6%. This decrease was
primarily due to 2008 efficiency measures which reduced
compensation costs, as well as our utilization of internal
personnel to develop product enhancements for which eligible
costs were capitalized in 2009. This decrease was partially
offset by a moderate increase in bad debt expense related to our
revenue cycle management business.
Our sales, marketing, general and administrative expense for our
pharmacy services segment was approximately $8.0 million
for 2009 as compared to $3.9 million for 2008, an increase
of approximately $4.2 million, or 108.3%. Sales, marketing,
general and administrative expense for our pharmacy services
segment includes approximately $0.5 million and
$0.0 million related to equity-based compensation for 2009
and 2008, respectively. Excluding this equity-based
compensation, pharmacy services sales, marketing, general and
administrative expense was $7.5 million for 2009 as
compared to $3.8 million for 2008, an increase of
approximately $3.7 million, or 95.9%. This increase is
primarily related to the inclusion of the infrastructure related
to the eRx acquisition.
Corporate
Expense
Our corporate expense was $50.0 million for 2009 as
compared to $37.3 million for 2008, an increase of
approximately $12.7 million, or 34.0%. Corporate expense
includes approximately $9.1 million and $2.0 million
related to equity-based compensation for 2009 and 2008,
respectively. Excluding this equity-based compensation,
corporate expense was $40.9 million for 2009 as compared to
$35.3 million for 2008, an increase of approximately
$5.5 million, or 15.7%. The increase in 2009 was primarily
due to (i) incremental costs associated with the
infrastructure required to operate as a public company, such as
increased directors and officers insurance costs, increased
compliance costs and additional finance, legal and other
personnel costs, (ii) expenses associated with the IPO and
(iii) increased costs of additional corporate functions,
including business development and public relations, not present
for the entire year during 2008.
Depreciation
and Amortization Expense
Our depreciation and amortization expense was
$105.3 million for 2009 as compared to $97.9 million
for 2008, an increase of approximately $7.5 million, or
7.6%. This increase was primarily due to depreciation of
property and equipment placed in service during 2009, additional
depreciation and amortization expense
61
related to acquisition method adjustments associated with the
2008 Transaction and the 2008 and 2009 acquisitions, as well as
amortization of additional rights to specified uses of our data
acquired in 2009.
Interest
Income
Our interest income was $0.1 million for 2009 as compared
to $1.0 million for 2008, a decrease of approximately
$0.9 million. While our interest-bearing cash and cash
equivalent balances increased in 2009, this increase was more
than offset by the effect of a reduction in the market interest
rates available to us during 2009.
Interest
Expense
Our interest expense was $70.2 million for 2009 as compared
to $71.7 million for 2008, a decrease of approximately
$1.5 million, or 2.1%. This decrease is primarily due to a
scheduled decrease in the notional amount of our interest rate
swap of $171.7 million as of December 31, 2008, offset
by a difference in the periods for which our interest rate swap
was designated as a hedge for accounting purposes. The decrease
in the notional amount of our interest rate swap agreement
caused interest expense to decline because less of our debt was
subject to the higher fixed rate of the interest rate swap
agreement during 2009 as compared to 2008.
Our discontinuation of hedge accounting treatment in 2008
required us to adjust our interest rate swap to fair market
value with the change reflected in interest expense. As a result
of the fair value adjustment, we reduced interest expense by
approximately $12.7 million during 2008. No similar
adjustment was reflected in 2009 as we redesignated our interest
rate swap agreement as a hedge of our interest rate risk in
September 2008.
Income
Taxes
Our income tax expense was $17.3 million (an effective rate
of 55.3%) for 2009 as compared to $8.6 million (an
effective rate of 41.8%) for 2008, an increase of approximately
$8.7 million, or 101.9%. Differences between the federal
statutory rate and these effective income tax rates principally
relate to the change in our book basis versus tax basis in our
investment in EBS Master, changes in our valuation allowances,
the effect of income allocated to noncontrolling interest, state
income tax rate changes and the impact of other permanent
differences relative to pretax income.
Liquidity
and Capital Resources
General
We are a holding company with no material business operations.
Our principal asset is the equity interests we own in EBS
Master. We conduct all of our business operations through the
direct and indirect subsidiaries of EBS Master. Accordingly, our
only material sources of cash are borrowings under our credit
agreement and dividends or other distributions or payments that
are derived from earnings and cash flow generated by the
subsidiaries of EBS Master.
We have financed our operations primarily through cash provided
by operating activities, private sales of EBS Units to the
Principal Equityholders, borrowings under our credit agreements
and the IPO. As of December 31, 2010, we had cash and cash
equivalents of $99.2 million. We believe that our existing
cash on hand, cash generated from operating activities and
available borrowings under our revolving credit agreement
($46.8 million as of December 31, 2010) will be
sufficient to service our existing debt, finance internal
growth, fund capital expenditures and fund small to mid-size
acquisitions.
Our cash balances in the future may be reduced if we expend our
cash on capital expenditures, future acquisitions or elect to
make optional prepayments under our credit agreements. In
addition, if any of the lenders participating in our revolving
credit agreement become insolvent, it may make it more difficult
for us to borrow under our revolving credit agreement, which
could adversely affect our liquidity. Credit market instability
also may make it more difficult for us to obtain additional
financing or refinance our existing credit facilities in the
future on acceptable terms, or at all. If we were unable to
obtain such additional financing
62
when needed or were unable to refinance our credit facilities,
our financial condition and results of operations could be
materially and adversely affected.
Cash
Flows
Operating
Activities
Cash provided by operating activities for 2010 was
$171.8 million as compared to $162.8 million for 2009.
This $9.0 million increase is related primarily to business
growth and the year end timing of collections and disbursements.
Cash provided by operating activities for 2009 was
$162.8 million as compared to $83.3 million for 2008.
This $79.4 million increase is related primarily to
business growth, reduced interest payments and year end timing
of collections and disbursements.
Cash provided by operating activities can be significantly
impacted by our non-cash working capital assets and liabilities,
which may vary based on the timing of cash receipts that
fluctuate by day of week
and/or month
and also may be impacted by cash management decisions. For
example, the timing of our cash disbursements during the fourth
quarter of 2008 affected the amounts of our prepaid expenses,
accounts payable and accrued expenses at December 31, 2008
and the cash provided by operating activities during 2009.
Investing
Activities
Cash used in investing activities for 2010 was
$334.5 million as compared to $123.2 million for 2009.
Cash used in investing activities for 2010 and 2009 includes
cash paid for acquisitions of $251.5 million and
$76.3 million, respectively, and capital expenditures of
$80.0 million and $48.3 million, respectively. Our
capital expenditures increased during 2010 primarily due to our
investment in a new data center in Nashville, Tennessee and
equipment upgrades in our patient statements business, product
development projects and costs associated with system upgrades
related to HIPAA Version 5010 and other regulatory requirements.
Cash used in investing activities for 2009 was
$123.2 million as compared to $355.3 million for 2008.
Excluding payments related to the 2008 Transaction totaling
$306.3 million and acquisitions totaling approximately
$76.3 million and $21.1 million for 2009 and 2008,
respectively, cash used in investing activities of
$47.0 million for 2009 and $28.0 million for 2008 was
primarily related to capital expenditures. Our capital
expenditures increased in 2009 primarily due to the timing and
extent of efficiency measures and product development projects.
Financing
Activities
Cash provided by financing activities for 2010 was
$49.8 million as compared to $101.0 million for 2009.
During 2010, we borrowed approximately $97.4 million (net
of borrowing costs and discount) which we used to partially
finance the CEA acquisition, retired debt assumed in the CEA
acquisition of approximately $35.2 million and made
regularly scheduled principal payments related to our existing
debt obligations. During 2009, we received net proceeds of
approximately $148.0 million from the IPO and, in addition
to scheduled principal payments, also paid amounts previously
borrowed under our revolving credit facility and made an
optional principal payment under our first lien credit agreement.
Cash provided by financing activities for 2009 was
$101.0 million as compared to $309.7 million for 2008.
Excluding items related to the 2008 Transaction of
$307.6 million in 2008 and proceeds from the IPO of
$148.0 million in 2009, cash used in financing activities
was $47.0 million for 2009 as compared to cash provided by
financing activities of $2.1 million for 2008. The
remaining change in cash used in financing activities for 2009
was primarily attributable to repurchases of our Class A
common stock and EBS Units in connection with the IPO and
scheduled and optional payments on our revolver and first lien
credit agreements.
Credit
Facilities
In November 2006, our subsidiary, EBS LLC, entered into the
first lien credit agreement, which we refer to as the
First Lien Credit Agreement, and the second lien
credit agreement, which we refer to as the
63
Second Lien Credit Agreement, each as amended from
time to time. Together, we refer to the First Lien Credit
Agreement and the Second Lien Credit Agreement as the
Credit Agreements. The original term loan borrowings
under the First Lien Credit Agreement provided us
$805.0 million of total available financing, consisting of
a secured $755.0 million term loan facility and a secured
$50.0 million revolving credit facility. In October 2010,
EBS LLC borrowed an additional $100.0 million pursuant to
an incremental term loan facility under an amendment to the
First Lien Credit Agreement.
The revolving credit facility provides for the issuance of
standby letters of credit, in an aggregate face amount at any
time not in excess of $12.0 million. The issuance of
standby letters of credit reduces the available capacity under
our revolving credit facility. In addition, under the terms of
the First Lien Credit Agreement, we can borrow up to an
additional $100.0 million in additional incremental term
loans and increase the available capacity under the revolving
credit facility by $25.0 million, provided that the
aggregate amount of such increases may not exceed
$100.0 million. There were no borrowings on our revolving
credit facility as of December 31, 2010.
The original term loan borrowings outstanding under the First
Lien Credit Agreement amounted to $678.8 million as of
December 31, 2010, and currently bear interest, at our
option, at either an adjusted LIBOR rate plus 2.00% or the
lenders alternate base rate plus 1.00%, or a combination
of the two. In addition, under the October 2010
$100.0 million incremental term loan facility, we are
required to pay interest, at our option, at either an adjusted
LIBOR rate plus 3.00% (subject to a LIBOR floor of 1.50%) or the
lenders alternate base rate plus 2.00% (subject to an
alternate base rate floor of 2.50%). Other than the interest
rate, the incremental term loans are on substantially the same
terms as the Companys original term loans incurred under
the First Lien Credit Agreement. Not including optional
prepayments, we are generally required to make quarterly
principal payments through 2013 of approximately
$1.8 million and $0.3 million on the original and
additional $100.0 million incremental term loan facilities,
respectively, under the First Lien Credit Agreement.
We are required to pay a commitment fee of 0.5% per annum,
provided that our total leverage ratio is greater than or equal
to 4.0:1, and otherwise 0.375% per annum on the undrawn portion
of the revolving credit facility. We are permitted to prepay the
revolving credit facility or the term loans (including the
$100.0 million incremental term loans) under the First Lien
Credit Agreement at any time. We are required to prepay amounts
outstanding under the First Lien Credit Agreement with proceeds
we receive from asset sales that generate proceeds in excess of
$1.0 million if not reinvested (as defined in the Credit
Agreements), from indebtedness we incur that is not specifically
permitted to be incurred under the First Lien Credit Agreement,
with any excess cash flow (as defined in the First Lien Credit
Agreement) we generate in any fiscal year and from casualty
events.
Our Second Lien Credit Agreement is a term loan facility with an
aggregate principal amount of $170.0 million, which was the
amount outstanding as of December 31, 2010. Borrowings
outstanding under the Second Lien Credit Agreement currently
bear interest, at our option, at either an adjusted LIBOR rate
plus 5.00% or the lenders alternate base rate plus 4.00%,
or a combination of the two. Although we are permitted to prepay
the loans under our Second Lien Credit Agreement at any time,
the terms of our First Lien Credit Agreement restrict our
ability to make such prepayments to the amount of previous
years retained excess cash flow (as defined under the
Credit Agreements) and only if our total leverage ratio is 4.0:1
or better.
The revolving portion of the First Lien Credit Agreement matures
in November 2012 and the term loans (including the additional
$100.0 million incremental term loans) mature in November
2013. The Second Lien Credit Agreement matures in May 2014. We
anticipate refinancing our Credit Agreements prior to or as of
their maturity dates. We cannot be certain that we will be
successful in our refinancing efforts on acceptable terms or at
all, which could have an adverse effect on our liquidity and
results of operations.
The obligations of EBS LLC under the Credit Agreements are
unconditionally guaranteed by EBS Master and all of its
subsidiaries and are secured by liens on substantially all of
EBS Masters assets, including the stock of its
subsidiaries.
64
As of December 31, 2010, total borrowings outstanding under
the Credit Agreements amounted to $948.6 million (before
unamortized debt discount of $42.6 million primarily
related to the adjustment of our long-term debt to fair value in
connection with the 2008 Transaction). Under the revolving
portion of our First Lien Credit Agreement, net of
$3.1 million of outstanding but undrawn letters of credit
issued, we had $46.8 million in available borrowing
capacity at December 31, 2010.
During 2010, the weighted average cash interest rate of our
borrowings under our Credit Agreements (including the net cash
payments under our interest rate swap) was approximately 4.9%.
Approximately $352.8 million of our weighted average debt
outstanding during 2010 was subject to a fixed interest rate
component of 4.94% under our interest rate swap agreement.
Covenants
The Credit Agreements require us to satisfy specified financial
covenants, including a minimum interest coverage ratio and a
maximum total leverage ratio, as set forth in the Credit
Agreements.
The interest coverage ratio is calculated as the ratio of
earnings before interest, taxes, depreciation, amortization and
certain other items that are non-recurring, non-cash or unusual
in nature (defined as Consolidated EBITDA in the
Credit Agreements) to cash interest expense (i.e., interest
expense less amortization of discount or premium and loan
costs). The minimum interest coverage ratio permitted was
2.85:1.0 at December 31, 2010 and increases at varying
intervals over time until October 1, 2011, at which time it
is fixed at 3.5:1.0. At December 31, 2010, we estimate our
interest coverage ratio as defined under the Credit Agreements
was approximately 6.2 to 1.0.
The total leverage ratio is calculated as the ratio of net debt
(i.e., total debt less excess cash as defined in the Credit
Agreements) to Consolidated EBITDA. The maximum total leverage
ratio permitted was 3.75:1.0 at December 31, 2010 and
declines at varying intervals over time until October 1,
2011, at which time it is fixed at 3.0:1.0. At December 31,
2010, we estimate our total leverage ratio was approximately 3.2
to 1.0 which, under the terms of the Credit Agreements,
reflected only $35.0 million of the cash on our balance
sheet at December 31, 2010 as a reduction of our debt.
The Credit Agreements also limit us with respect to amounts we
may spend on capital expenditures. As defined in the Credit
Agreements, capital expenditures exclude certain items such as
the expenditures made with the retained portion of excess cash
flow, replacement of property and equipment, additions funded
with equity offering proceeds and additions funded with proceeds
of asset sales. The limitation varies based on certain base
capital expenditure levels included in the Credit Agreements and
the amount of unused capital expenditures from the previous
calendar year, if any, as well as allowable amounts from future
year expenditure limits. For the year ending December 31,
2011, our capital expenditures (as defined under the Credit
Agreements) are limited to approximately $62.0 million
including allowable amounts from 2012. For the years ending
December 31, 2012 and 2013, our capital expenditures are
limited to $63.0 million each year, excluding any
carryovers from previous years. During 2010, in addition to our
normal level of capital expenditures, we incurred approximately
$25.0 million to replace our primary data center in
Nashville, Tennessee, and we upgraded equipment in our patient
statements business. We currently expect capital expenditures
for 2011 to be approximately $45.0 million to
$50.0 million.
The Credit Agreements contain negative covenants that may
restrict the operation of our business, including our ability to
incur additional debt, create liens, make investments, engage in
asset sales, enter into transactions with affiliates, enter into
sale-leaseback transactions and enter into hedging arrangements.
In addition, our Credit Agreements restrict the ability of EBS
Master and its subsidiaries to make dividends or other
distributions to us, issue equity interests, repurchase equity
interests or certain indebtedness or enter into mergers or
consolidations.
As of December 31, 2010, we were in compliance with all of
the financial and other covenants under the Credit Agreements.
The Credit Agreements do not contain provisions that would
accelerate the maturity date of the loans under the Credit
Agreement upon a downgrade in our credit ratings. However, a
downgrade in our credit
65
ratings could adversely affect our ability to obtain other
capital sources in the future and could increase the cost of our
borrowings.
Events of default under the Credit Agreements include
non-payment of principal, interest, fees or other amounts when
due; violation of certain covenants; failure of any
representation or warranty to be true in all material respects
when made or deemed made; cross-default and cross-acceleration
to indebtedness with an aggregate principal amount in excess of
$15.0 million; certain ERISA events; dissolution,
insolvency and bankruptcy events; and actual or asserted
invalidity of the guarantees or security documents. In addition,
a Change of Control (as such term is defined in the
Credit Agreements) is an event of default under the Credit
Agreements. Some of these events of default allow for grace
periods and materiality qualifiers.
Commitments
and Contingencies
The following table presents certain minimum payments due under
contractual obligations with minimum firm commitments as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments by Period
|
|
|
|
Total
|
|
|
2011
|
|
|
2012-2013
|
|
|
2014-2015
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Long-term Obligations
|
|
$
|
988,873
|
|
|
$
|
12,494
|
|
|
$
|
781,003
|
|
|
$
|
183,798
|
|
|
$
|
11,578
|
|
Expected interest(a)
|
|
|
98,272
|
|
|
|
31,684
|
|
|
|
59,276
|
|
|
|
6,428
|
|
|
|
884
|
|
Interest rate swap agreement(b)
|
|
|
10,738
|
|
|
|
10,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax receivable agreement obligations to related parties(c)
|
|
|
142,279
|
|
|
|
3,746
|
|
|
|
24,405
|
|
|
|
28,025
|
|
|
|
86,103
|
|
Operating lease obligations(d)
|
|
|
52,748
|
|
|
|
8,373
|
|
|
|
12,455
|
|
|
|
10,813
|
|
|
|
21,107
|
|
Contingent consideration obligations(e)
|
|
|
16,298
|
|
|
|
1,306
|
|
|
|
14,992
|
|
|
|
|
|
|
|
|
|
Purchase obligations and other(f)
|
|
|
8,461
|
|
|
|
4,877
|
|
|
|
3,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations(g)
|
|
$
|
1,317,669
|
|
|
$
|
73,218
|
|
|
$
|
895,715
|
|
|
$
|
229,064
|
|
|
$
|
119,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Expected interest consists of both interest payable under our
Credit Agreements and imputed interest payable under our data
sublicense agreement. Interest related to our Credit Agreements
is based on our interest rates in effect as of December 31,
2010 and assumes that we make no optional or mandatory
prepayments of principal prior to maturity of the Credit
Agreements. Because the interest rates under our Credit
Agreements are variable, actual payments may differ. |
|
(b) |
|
Under our interest rate swap agreement, we receive a three month
LIBOR rate and pay a fixed rate of 4.944% on a specified
notional amount. The above payments represent the present value
of the net amounts we expect to pay in the respective periods
based upon the three-month LIBOR yield curve in effect at
December 31, 2010. |
|
(c) |
|
Represents amount due based on facts and circumstances existing
as of December 31, 2010. The timing and/or amount of the
aggregate payments due may vary based on a number of factors,
including the amount and timing of the taxable income the
Company generates in the future and the tax rate then
applicable, the use of loss carryovers, future exchanges of EBS
Units (and corresponding shares of Class B common stock)
into Class A common stock and the portion of payments under
the tax receivable agreements constituting imputed interest or
amortizable basis. |
|
(d) |
|
Represents amounts due under existing operating leases related
to our offices and other facilities. |
|
(e) |
|
Contingent consideration transferred in connection with certain
2010 acquisitions included contingent obligations to make
additional payments based on the achievement of certain future
financial performance targets. Because the ultimate timing and
amount of payments are dependent upon the outcome of future
events, the timing and/or amount of these additional payments
may vary from this estimate. |
|
(f) |
|
Represents contractual commitments under certain
telecommunication and other supply contracts as well as other
obligations. Where our purchase commitments are cumulative over
a period of time, (i.e. no |
66
|
|
|
|
|
specified annual commitment), the table above assumes such
commitments will be fulfilled on a ratable basis over the
commitment period. |
|
(g) |
|
Total contractual obligations exclude liabilities for uncertain
tax positions of $1,368 due to the high degree of uncertainty
regarding the timing of future cash outflows, if any, to the
taxing authorities. |
See the notes to our consolidated financial statements contained
elsewhere in this Annual Report for additional information
related to our operating leases and other commitments and
contingencies.
Off-Balance
Sheet Arrangements
As of December 31, 2010, we had no off-balance sheet
arrangements or obligations, other than those related to letters
of credit and surety bonds of an insignificant amount.
Recent
Accounting Pronouncements
Our recent accounting pronouncements are summarized in
Note 2 to our consolidated financial statements beginning
on
Page F-1
of this Annual Report.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We have interest rate risk primarily related to borrowings under
the Credit Agreements. The original term loan borrowings under
the First Lien Credit Agreement bear interest, at our option, at
either an adjusted LIBOR rate plus 2.00% or the lenders
alternate base rate plus 1.00%, or a combination of the two, and
borrowings under the Second Lien Credit Agreement bear interest,
at our option, at either an adjusted LIBOR rate plus 5.00% or
the lenders alternate base rate plus 4.00%, or a
combination of the two. As of December 31, 2010, we had
outstanding borrowings (before unamortized debt discount of
$42.6 million) of $678.8 million pursuant to the
original term loans under the First Lien Credit Agreement and
$170.0 million under the Second Lien Credit Agreement.
In October 2010, we borrowed an additional $100.0 million
under an incremental term loan facility through an amendment to
the First Lien Credit Agreement. The incremental term loan
facility bears interest at our option at either an adjusted
LIBOR rate plus 3.00% (subject to a LIBOR floor of 1.50%) or the
lenders alternate base rate plus 2.00% (subject to an
alternate base rate floor of 2.50%).
We manage our interest rate risk, in part, through the use of an
interest rate swap agreement. Effective December 31, 2006,
we entered into an interest rate swap to exchange three month
LIBOR rates for fixed interest rates, resulting in the payment
of an all-in fixed rate of 4.944% on an initial notional amount
of $786.3 million which amortizes on a quarterly basis
until maturity at December 30, 2011. At December 31,
2010, the notional amount of the interest rate swap was
$240.7 million. As a result, as of December 31, 2010,
$707.8 million of our total borrowings were effectively
subject to a variable interest rate.
A change in interest rates on variable rate debt impacts our
pretax earnings and cash flows. Based on our outstanding debt as
of December 31, 2010, and assuming that our mix of debt
instruments, interest rate swap and other variables remain the
same, the annualized effect of a one percentage point change in
variable interest rates would have a pretax impact on our
earnings and cash flows of approximately $7.1 million. In
addition to the effect of changes in variable rates on the
interest we pay, beginning October 1, 2010 (the date we
removed the designation of our interest rate swap as a cash flow
hedge), our interest expense is also affected by fluctuations in
the fair value of our interest rate swap.
In the future, in order to manage our interest rate risk, we may
refinance our existing debt, enter into additional interest rate
swaps, modify our existing interest rate swap or make changes
that may impact our ability to treat our interest rate swap as a
cash flow hedge. However, we do not intend or expect to enter
into derivative or interest rate swap transactions for
speculative purposes.
67
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Information with respect to this Item is contained in our
consolidated financial statements beginning on
Page F-1
of this Annual Report.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the participation of our Chief
Executive Officer (CEO) and Chief Financial Officer
(CFO), management has evaluated the effectiveness of
the design and operation of our disclosure controls and
procedures (as defined in
Rules 13a-15(e)
and
Rule 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of December 31, 2010. Based
upon that evaluation, our CEO and CFO concluded that, as of
December 31, 2010, our disclosure controls and procedures
were effective in causing material information relating to us
(including our consolidated subsidiaries) to be recorded,
processed, summarized and reported by management on a timely
basis and to ensure the quality and timeliness of our public
disclosures with SEC disclosure obligations.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. The Companys internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles. The Companys internal control over financial
reporting includes those policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2010. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework.
The scope of managements assessment of the effectiveness
of internal control over financial reporting as of
December 31, 2010 excludes the businesses acquired by the
Company in 2010 (FVTech, HTMS, Chapin and CEA). This scope
exception is permissible under applicable SEC guidelines. The
businesses acquired in 2010 represented approximately 5% of the
Companys consolidated revenues for the year ended
December 31, 2010.
68
Based on managements assessment and the COSO criteria,
management believes that, as of December 31, 2010, the
Companys internal control over financial reporting was
effective.
The Companys independent registered public accounting
firm, Ernst & Young LLP, has issued an attestation
report on the Companys internal control over financial
reporting. That report begins on
Page F-2
of this Annual Report and is incorporated by reference herein.
Changes
in Internal Control Over Financial Reporting
There have been no changes in our internal control over
financial reporting that occurred during the year ended
December 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
On March 10, 2011, the Compensation Committee (the
Compensation Committee) of the Board of Directors of
the Company approved a payment of annual cash bonuses under the
Companys Management Bonus Program (the
Program) for the year ended December 31, 2010
to the Companys named executive officers. As previously
disclosed, the amount of bonus compensation received under the
Program is tied to achievement of performance criteria
established annually based both upon the objective performance
of the Company and a subjective evaluation of the individual
participants performance. For 2010, Program bonus payments
were based in part upon the Companys achievement of
certain levels of revenue and Adjusted EBITDA targets. Under the
objective performance criteria of the Program, the Company
achieved certain threshold performance levels but did not
achieve full target performance levels for 2010. The
Compensation Committee exercised its discretion under the
Program in awarding bonuses to all Program participants,
including the Companys named executive officers, after
determining that the significant efforts expended by Program
participants, the continued advancement of the Companys
strategic objectives and the financial results achieved by the
Company in light of the impact of lower healthcare utilization
trends affecting the entire healthcare industry merited
recognition and reward.
The following table sets forth the bonus that each of the
Companys named executive officers was awarded under the
Program and the percentage of such named executive
officers target bonus under the Program that the award
represented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Award as a Percentage of
|
|
|
|
Amount of Award
|
|
|
Program Target Bonus
|
|
|
George Lazenby, IV
|
|
$
|
91,679
|
|
|
|
30.6
|
%
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
Tracy L. Bahl
|
|
$
|
73,399
|
|
|
|
30.6
|
%
|
Executive Chairman
|
|
|
|
|
|
|
|
|
Bob A. Newport, Jr.
|
|
$
|
48,131
|
|
|
|
30.6
|
%
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
J. Philip Hardin
|
|
$
|
44,311
|
|
|
|
30.6
|
%
|
Executive Vice President-Provider Services
|
|
|
|
|
|
|
|
|
Gregory T. Stevens
|
|
$
|
45,839
|
|
|
|
30.6
|
%
|
Executive Vice President, General Counsel and Secreatary
|
|
|
|
|
|
|
|
|
The foregoing description of the Program is qualified in its
entirely by reference to the Program, a copy of which has been
previously filed with the SEC as Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
filed on March 12, 2010.
69
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this Item will be presented in our
definitive proxy statement for the 2011 Annual Meeting of
Stockholders anticipated to be held on May 25, 2011 (the
Proxy Statement) and is incorporated by reference
herein.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this Item will be presented in the
Companys Proxy Statement and is incorporated by reference
herein.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this Item will be presented in the
Companys Proxy Statement and is incorporated by reference
herein.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by this Item will be presented in the
Companys Proxy Statement and is incorporated by reference
herein.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this Item will be presented in the
Companys Proxy Statement and is incorporated by reference
herein.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) List of Documents Filed
1. Financial Statements
All financial statements are set forth under
Item 8 Financial Statements and
Supplementary Data of this Annual Report
2. Financial Statement Schedules
All financial statement schedules required to be filed are set
forth under Item 8 Financial Statements
and Supplementary Data of this Annual Report
3. Exhibits
The list of exhibits filed as part of this Annual Report is
submitted in the Exhibit Index and is incorporated herein
by reference.
(b) Exhibits
The list of exhibits filed as part of this Annual Report is
submitted in the Exhibit Index and is incorporated herein
by reference.
(c) None.
70
Index to
Consolidated Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
S-1
|
|
|
|
|
S-4
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders
Emdeon Inc.
We have audited Emdeon Inc.s internal control over
financial reporting as of December 31, 2010, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Emdeon Inc.s
management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting
included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Managements Report on
Internal Control Over Financial Reporting, managements
assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal
controls of Future Vision Investment Group L.L.C., Healthcare
Technology Management Services Inc., Chapin Revenue Cycle
Management, L.L.C. and Chamberlin Edmonds Holdings, Inc., each
of which was acquired during 2010, which are included in the
2010 consolidated financial statements of Emdeon Inc. and whose
combined revenues constitute 5% of the consolidated revenues of
Emdeon Inc. for the year ended December 31, 2010. Our audit
of internal control over financial reporting of Emdeon Inc. also
did not include the internal control over financial reporting
for Future Vision Investment Group L.L.C., Healthcare Technology
Management Services Inc., Chapin Revenue Cycle Management,
L.L.C. and Chamberlin Edmonds Holdings, Inc.
In our opinion, Emdeon Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010 based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Emdeon Inc. as of
December 31, 2010 and 2009 and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
December 31, 2010, and our report dated March 10, 2011
expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
March 10, 2011
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENTS
To the Board of Directors and Stockholders
Emdeon Inc.
We have audited the accompanying consolidated balance sheets of
Emdeon Inc. as of December 31, 2010 and 2009, and the
related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2010. Our audits
also included the financial statement schedules listed in the
index at Item 15(a)(2). These financial statements and
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Emdeon Inc. at December 31, 2010 and
2009, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2010, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set
forth therein.
As discussed in Note 2 to the consolidated financial
statements, the Company changed its method of accounting for
business combinations and noncontrolling interests effective
January 1, 2009.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Emdeon Inc.s internal control over financial reporting as
of December 31, 2010, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 10, 2011 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
March 10, 2011
F-3
Emdeon
Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
99,188
|
|
|
$
|
211,999
|
|
Accounts receivable, net of allowance for doubtful accounts of
$5,394 and $4,433 at December 31, 2010 and
December 31, 2009, respectively
|
|
|
174,191
|
|
|
|
150,009
|
|
Deferred income tax assets
|
|
|
4,911
|
|
|
|
4,924
|
|
Prepaid expenses and other current assets
|
|
|
25,020
|
|
|
|
16,632
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
303,310
|
|
|
|
383,564
|
|
Property and equipment, net
|
|
|
231,307
|
|
|
|
152,091
|
|
Goodwill
|
|
|
908,310
|
|
|
|
703,027
|
|
Intangible assets, net
|
|
|
1,035,886
|
|
|
|
989,280
|
|
Other assets, net
|
|
|
9,750
|
|
|
|
1,451
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,488,563
|
|
|
$
|
2,229,413
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,732
|
|
|
$
|
9,910
|
|
Accrued expenses
|
|
|
112,245
|
|
|
|
72,493
|
|
Deferred revenues
|
|
|
12,130
|
|
|
|
11,140
|
|
Current portion of long-term debt
|
|
|
12,494
|
|
|
|
9,972
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
141,601
|
|
|
|
103,515
|
|
Long-term debt, excluding current portion
|
|
|
933,749
|
|
|
|
830,710
|
|
Deferred income tax liabilities
|
|
|
197,355
|
|
|
|
145,914
|
|
Tax receivable agreement obligations to related parties
|
|
|
138,533
|
|
|
|
142,044
|
|
Other long-term liabilities
|
|
|
22,037
|
|
|
|
27,361
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock (par value, $0.00001), 25,000,000 shares
authorized and 0 shares issued and outstanding
|
|
|
|
|
|
|
|
|
Class A common stock (par value, $0.00001),
400,000,000 shares authorized and 91,064,486 and
90,423,941 shares outstanding at December 31, 2010 and
December 31, 2009 respectively
|
|
|
1
|
|
|
|
1
|
|
Class B common stock, exchangeable (par value, $0.00001),
52,000,000 shares authorized and 24,689,142 and
24,752,955 shares outstanding at December 31, 2010 and
December 31, 2009, respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
738,888
|
|
|
|
730,941
|
|
Contingent consideration
|
|
|
1,955
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(2,569
|
)
|
|
|
(11,198
|
)
|
Retained earnings
|
|
|
53,250
|
|
|
|
33,704
|
|
|
|
|
|
|
|
|
|
|
Emdeon Inc. equity
|
|
|
791,525
|
|
|
|
753,448
|
|
Noncontrolling interest
|
|
|
263,763
|
|
|
|
226,421
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
1,055,288
|
|
|
|
979,869
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,488,563
|
|
|
$
|
2,229,413
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
Emdeon
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands, except share and per share amounts)
|
|
|
Revenue
|
|
$
|
1,002,152
|
|
|
$
|
918,448
|
|
|
$
|
853,599
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations (exclusive of depreciation and amortization
below)
|
|
|
612,594
|
|
|
|
562,867
|
|
|
|
541,563
|
|
Development and engineering
|
|
|
35,515
|
|
|
|
33,928
|
|
|
|
28,625
|
|
Sales, marketing, general and administrative
|
|
|
111,948
|
|
|
|
113,701
|
|
|
|
91,212
|
|
Depreciation and amortization
|
|
|
124,721
|
|
|
|
105,321
|
|
|
|
97,864
|
|
(Gain) loss on abandonment of leased properties
|
|
|
(105
|
)
|
|
|
1,675
|
|
|
|
3,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
117,479
|
|
|
|
100,956
|
|
|
|
91,254
|
|
Interest income
|
|
|
(14
|
)
|
|
|
(75
|
)
|
|
|
(963
|
)
|
Interest expense
|
|
|
61,031
|
|
|
|
70,246
|
|
|
|
71,717
|
|
Other income, net
|
|
|
(9,284
|
)
|
|
|
(519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
65,746
|
|
|
|
31,304
|
|
|
|
20,500
|
|
Income tax provision
|
|
|
32,579
|
|
|
|
17,301
|
|
|
|
8,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
33,167
|
|
|
|
14,003
|
|
|
|
11,933
|
|
Net income attributable to noncontrolling interest
|
|
|
13,621
|
|
|
|
4,422
|
|
|
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Emdeon Inc.
|
|
$
|
19,546
|
|
|
$
|
9,581
|
|
|
$
|
9,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Class A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
90,100,070
|
|
|
|
82,459,169
|
|
|
|
74,775,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
90,832,631
|
|
|
|
82,525,002
|
|
|
|
100,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
Emdeon
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Contingent
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Consideration
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Interest
|
|
|
Equity
|
|
|
|
(Amounts in thousands, except share amounts)
|
|
|
Balance at January 1, 2008
|
|
|
52,000,000
|
|
|
$
|
1
|
|
|
|
48,000,000
|
|
|
$
|
|
|
|
$
|
300,550
|
|
|
$
|
|
|
|
$
|
14,892
|
|
|
$
|
(14,474
|
)
|
|
$
|
|
|
|
$
|
300,969
|
|
Capital contribution from affiliates of General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlantic LLC and Hellman and Friedman LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the purchase of HLTH Corporations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48% interest in EBS Master LLC on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 8, 2008
|
|
|
25,413,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578,409
|
|
Establish noncontrolling interest on February 8, 2008
|
|
|
|
|
|
|
|
|
|
|
22,586,390
|
|
|
|
|
|
|
|
(210,585
|
)
|
|
|
|
|
|
|
|
|
|
|
5,435
|
|
|
|
205,150
|
|
|
|
|
|
Eliminate HLTH Corporations 48% minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest on February 8, 2008
|
|
|
|
|
|
|
|
|
|
|
(48,000,000
|
)
|
|
|
|
|
|
|
1,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,345
|
|
Capital contribution from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,300
|
|
Distribution to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(317
|
)
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,231
|
|
|
|
|
|
|
|
2,702
|
|
|
|
11,933
|
|
Change in the fair value of interest rate swap,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,705
|
)
|
|
|
(3,240
|
)
|
|
|
(23,945
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
(13
|
)
|
|
|
(56
|
)
|
Other comprehensive income amortization,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,592
|
|
|
|
1,923
|
|
|
|
8,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
77,413,610
|
|
|
$
|
1
|
|
|
|
22,586,390
|
|
|
$
|
|
|
|
$
|
670,702
|
|
|
$
|
|
|
|
$
|
24,123
|
|
|
$
|
(23,195
|
)
|
|
$
|
206,522
|
|
|
$
|
878,153
|
|
Capital contribution from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
Distribution to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
Reclassification of liability awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,183
|
|
|
|
26,731
|
|
Equity-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,531
|
|
|
|
7,315
|
|
Purchase of eRx Network L.L.C.
|
|
|
|
|
|
|
|
|
|
|
1,850,000
|
|
|
|
|
|
|
|
3,504
|
|
|
|
|
|
|
|
|
|
|
|
318
|
|
|
|
19,707
|
|
|
|
23,529
|
|
Issuance of Units of EBS Master to members
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of management, net of taxes
|
|
|
|
|
|
|
|
|
|
|
2,537,325
|
|
|
|
|
|
|
|
(11,899
|
)
|
|
|
|
|
|
|
|
|
|
|
394
|
|
|
|
18,246
|
|
|
|
6,741
|
|
Issuance of Class A common stock to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employees and directors, net of taxes
|
|
|
349,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,372
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
(851
|
)
|
|
|
503
|
|
Conversion of EBS Master Units held by eRx
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to shares of Class A common stock,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
|
|
1,850,000
|
|
|
|
|
|
|
|
(1,850,000
|
)
|
|
|
|
|
|
|
21,968
|
|
|
|
|
|
|
|
|
|
|
|
(376
|
)
|
|
|
(17,443
|
)
|
|
|
4,149
|
|
Issuance of Class A shares in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IPO (includes costs paid in 2008)
|
|
|
10,725,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,915
|
|
Issuance of Units of EBS Master to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emdeon Inc., net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,706
|
|
|
|
|
|
|
|
|
|
|
|
(448
|
)
|
|
|
(21,025
|
)
|
|
|
(7,767
|
)
|
Repurchase of Class A shares (to satisfy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax withholding obligation)
|
|
|
(102,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,780
|
)
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
190
|
|
|
|
(1,586
|
)
|
Repurchase of units of EBS Master issued to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
members of management, net of taxes
|
|
|
|
|
|
|
|
|
|
|
(370,760
|
)
|
|
|
|
|
|
|
(1,107
|
)
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
(3,500
|
)
|
|
|
(4,681
|
)
|
Contribution of data sublicense intangible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to EBS Master
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,312
|
|
|
|
3,440
|
|
Tax receivable agreements with related parties,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131,433
|
)
|
Issuance of Class A common stock upon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vesting of Restricted Stock Units
|
|
|
188,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
764
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
(368
|
)
|
|
|
390
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,581
|
|
|
|
|
|
|
|
4,422
|
|
|
|
14,003
|
|
Change in the fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest rate swap, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,755
|
|
|
|
1,933
|
|
|
|
8,688
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
8
|
|
|
|
25
|
|
Other comprehensive income amortization,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,431
|
|
|
|
1,554
|
|
|
|
6,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
90,423,941
|
|
|
$
|
1
|
|
|
|
24,752,955
|
|
|
$
|
|
|
|
$
|
730,941
|
|
|
$
|
|
|
|
$
|
33,704
|
|
|
$
|
(11,198
|
)
|
|
$
|
226,421
|
|
|
$
|
979,869
|
|
Equity-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,628
|
|
|
|
17,721
|
|
Exchange of units of EBS Master to Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock, net of taxes
|
|
|
36,829
|
|
|
|
|
|
|
|
(36,829
|
)
|
|
|
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(339
|
)
|
|
|
82
|
|
Cancellation of Class B common stock,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
|
|
|
|
|
|
|
|
|
|
(26,984
|
)
|
|
|
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(197
|
)
|
|
|
(72
|
)
|
Issuance of Class A common stock upon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vesting of Restricted Stock Units, net of taxes
|
|
|
213,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(472
|
)
|
|
|
162
|
|
Issuance of Class A common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection with acquisitions, net of taxes
|
|
|
361,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,369
|
|
|
|
1,955
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
720
|
|
|
|
7,037
|
|
Tax receivable agreements with related parties,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
Settlement of liability related to IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Contribution of data sublicense intangible to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBS Master
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,358
|
|
|
|
502
|
|
Capital contribution to EBS Master
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,092
|
|
|
|
6,315
|
|
Transactions with noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(467
|
)
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
(362
|
)
|
|
|
(821
|
)
|
Issuance of Class A common stock to ESPP
|
|
|
28,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
|
|
282
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,546
|
|
|
|
|
|
|
|
13,621
|
|
|
|
33,167
|
|
Changes in the fair value of interest rate swap,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,591
|
|
|
|
1,250
|
|
|
|
5,841
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
25
|
|
|
|
91
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,979
|
|
|
|
1,083
|
|
|
|
5,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
91,064,486
|
|
|
$
|
1
|
|
|
|
24,689,142
|
|
|
$
|
|
|
|
$
|
738,888
|
|
|
$
|
1,955
|
|
|
$
|
53,250
|
|
|
$
|
(2,569
|
)
|
|
$
|
263,763
|
|
|
$
|
1,055,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
Emdeon
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,167
|
|
|
$
|
14,003
|
|
|
$
|
11,933
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
124,721
|
|
|
|
105,321
|
|
|
|
97,864
|
|
Equity-based compensation expense
|
|
|
17,721
|
|
|
|
25,415
|
|
|
|
4,145
|
|
Deferred income tax expense (benefit)
|
|
|
12,236
|
|
|
|
(1,248
|
)
|
|
|
(4,140
|
)
|
Amortization of debt discount and issuance costs
|
|
|
12,911
|
|
|
|
11,947
|
|
|
|
9,954
|
|
Amortization of discontinued cash flow hedge from other
comprehensive loss
|
|
|
5,800
|
|
|
|
7,970
|
|
|
|
9,745
|
|
Change in fair value of interest rate swap (not subject to hedge
accounting)
|
|
|
(3,908
|
)
|
|
|
|
|
|
|
(12,714
|
)
|
(Gain) loss on abandonment of leased properties
|
|
|
(105
|
)
|
|
|
1,675
|
|
|
|
3,081
|
|
Change in contingent consideration
|
|
|
(9,284
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
524
|
|
|
|
(502
|
)
|
|
|
177
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,429
|
)
|
|
|
(2,571
|
)
|
|
|
(19,409
|
)
|
Prepaid expenses and other
|
|
|
(12,552
|
)
|
|
|
4,945
|
|
|
|
(12,049
|
)
|
Accounts payable
|
|
|
(7,499
|
)
|
|
|
4,731
|
|
|
|
(9,159
|
)
|
Accrued expenses, deferred revenue, and other liabilities
|
|
|
451
|
|
|
|
(9,234
|
)
|
|
|
3,907
|
|
Tax receivable agreement obligations to related parties
|
|
|
95
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|