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12
PA L M E T T O G B A 2 0 1 0 A N N UA L R E P O R T
12
In today’s tumultuous health care environment, success takes resilience, leadership, achievement and a never-ending dedication to improvement. We see this admirable set of traits every day at Palmetto GBA workstations, offices and divisions.
While others hesitate, we are not content to wait. We provide solutions that set standards for others to follow. Our service helps make health care administration more effective and efficient for beneficiaries. Our solutions help us exceed our clients’ expectations. Our challenges drive our successes.
We believe there’s no question of success for Palmetto GBA in 2011. Together, we will rise to meet challenges; to overcome obstacles and to succeed like never before.
12
President’s Letter ..................................... 3
Company Overview ................................... 4
Rising to Meet Challenges ..................... 5
Rising Accomplishments ....................... 6
Rising to Provide Solutions ....................7
Rising Corporate Responsibility .........12
Rising to Meet Critical Needs ..............13
Leadership .................................................. 17• Q&A• Board of Directors• Corporate Officers
By the numbers .......................................30• Report of Independent Auditors• Balance Sheets• Statements of Operations• Statements of Changes
in Member’s Equity• Statements of Cash Flows• Notes to Financial Statements
table of contents
3PRESIDENT’S LET TER
Palmetto GBA’s annual report offers us the opportunity to review and celebrate our company-wide efforts for the past year. This year’s report details hard-won triumphs amid not just difficult eco-nomic circumstances, but some of the most turbulent times in our industry’s existence.
In 2010, we saw the health care reform debate become even more contentious.Accessibility to health care and the right to guaranteed medical insurance are being examined on a greater level today than ever before, but this we already know: effective health care administra-tion is one of the most fundamental tasks our nation must master in the 21st century. Fortunately, our position is one that will allow us to positively impact our nation’s ability to meet this and other difficult challenges.
Our job, already vital to the countless beneficiaries we serve every day, has become even more critical.
The coming years will present unfore-seen and unexpected obstacles. We will have the chance to turn these challenges into learning opportunities that will enhance our ability to solve problems. If we apply lessons learned in more difficult times, we can continue to realize our demanding goals.
Our organization has a foundation built for success. Our proven track record demonstrates our ability to face chal-lenges head-on, without hesitation and with fortitude that sustains our hard-won market position. Our thought-ful innovations, ongoing exceptional performance and attention to compli-ance set us apart from our competitors. Further, our workforce of motivated, reliable Palmetto GBA associates brings our corporate ideals to life each day.
As you enjoy this annual report, I hope you share my pride. The following pages are a reminder of our tremendous resilience, cohesive strength and the enormous significance of our shared
duty. The challenging times to come will test our focus and commitment. I believe we can and will rise to meet these challenges in spite of an ever-changing marketplace.
Thank you for your persistent dedica-tion. I look forward to the accomplish-ments we are sure to share in the months ahead.
bruce w. hughesPresident and COO
4
Palmetto GBA is a leading provider of technical, administrative and contact-center services to the federal government. Our primary business is providing services to the Centers for Medicare and Medicaid Services (CMS), Medicare beneficiaries and Medicare providers. Palmetto GBA is one of only two Medicare contractors with experience in all Medicare business segments: Medicare Part A, Medicare Part B, Durable Medical Equipment and Regional Home Health and Hospice. Palmetto GBA has administered Medicare contracts for 45 years and currently serves 11.3 million beneficiaries in all 50 states.
Palmetto GBA is comprised of more than 2,000 associates in Georgia, Ohio, Illinois and South Carolina as well as additional staff support throughout various jurisdictions. In 2010, Palmetto GBA processed more than 179 million Medicare claims and paid more than $59 billion in benefits. An undisputed reputation and commitment to operational excellence have resulted in ever-increasing customer satisfaction, product performance and efficiency.
COMPANY OVERVIEW
CLAIMS PROCESSED (in millions) BENEFITS PAID (in billions) BENEFICIARIES SERVED (in millions)
0
50
100
150
200
2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010$0
$10
$20
$30
$40
$50
$60
2005 2006 2007 2008 2009 20100
2
4
6
8
10
1211
7
117
98 12
0
181
179
$2
7
$3
0
$2
9 $3
6
$5
4 $5
9
10.2
9.4
8.3 9
.5 10.9 11.3
Medicare Integrity Program
Palmetto GBA protects the Medicare Trust Fund against fraud and waste with safeguards that result in significant savings for Medicare. Through September 2010, our efforts resulted in the following savings:
BI N/A
$ 453,063,728
$ 242,970,369
$ 696,034,097
$ 258,508
$ 257,766,935
$ 53,401,420
$ 311,426,863
$ 26,297
$ 5,811,530
$ 11,389,830
$ 17,227,657
N/A
$ 22,248,912
$ 16,479,180
$ 38,728,092
N/A
$ 46,995,872
$ 10,716,329
$ 57,712,201
MSP
MR
TOTAL
BI BENEFITS INTEGRITY MSP MEDICARE SECONDARY PAYER MR MEDICAL REVIEW
J1 A/B MAC PART A/RHHI PART B PART B(OH-WV)(SC)
RRB
5RISING TO MEET CHALLENGES
In spite of turbulent change and ongoing evolution in the health care arena, Palmetto GBA is focused on providing leadership. We provide customers with performance, integrity, attention-to-detail and a quick response to their needs. That our associates share these values enables us to successfully navigate even in a competitive, ever-changing environment.
Rising Success in New Contracting Environments
Section 911 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 mandated that the Secre-tary for Health and Human Services replace the current contracting author-ity to administer the Medicare Part A and Part B Fee-for-Service programs with the new Medicare Administrative Contractor authority (www.cms.gov/medicareContractingReform/). Prior to Medicare Contractor Reform, fiscal intermediaries processed claims for Medicare Part A and Part B for health care facilities while carriers processed claims for Medicare Part B services from physicians, and other outpatient services.
In 2006, the Centers for Medicare and Medicaid Services (CMS) began to award Medicare Administrative Contracts (A/B MAC) through competi-tive procedures with fifteen regional jurisdictions, replacing the previous fiscal intermediaries and carriers. Currently nine A/B MAC contracts have been implemented and CMS intends to implement four additional contracts in 2011. In July 2010, CMS announced its intent to consolidate these fifteen jurisdictions into ten jurisdictions through a phased, multi-year approach (www.fbo.gov).
Palmetto GBA has been awarded two jurisdictions — Jurisdiction 1 and Jurisdiction 11 — in the new contracting environment. Our long-term track record of providing innovative, best value business solutions to our customers positions us for more success in the next phase of A/B MAC competitions.
6RISING ACCOMPLISHMENTS
Growth, differentiation and sustainability are significant drivers in Palmetto GBA’s strategic framework. We believe these priorities were significant contributors to a landmark year in business opportunities in 2010.
Business Development Accomplishments 2010
• Awarded the Jurisdiction 11 A/B Medicare Administrative Contractor (MAC) contract. Encompassing North Carolina, South Carolina, Virginia, and West Virginia, the projected claims volume for this contract is more than $495 million. With more than 47,000 physicians and nearly 400 hospitals providing care to more than 3.6 million Medicare beneficiaries, Jurisdiction 11 contract implementation will be complete in June 2011.
• Partnered with Noridian Administrative Services (NAS) to expand operations of the Healthcare Administration Association of America, LLC (HAAA)
in China. NAS created HAAA to serve as the third party administrator (TPA) for the government-run medical insurance program in the Chinese municipality of Xinxiang. The contract is the first of its kind between an international company and a Chinese government agency for the Chinese health care reform program.
• Won a task order to provide systems testing service for the newly developed National Level Repository (NLR) system. The system provides payment administration for incentive payments to providers in compliance with the Health Information Technology for Economic and Clinical Health (HITECH) regulation under the Health Reform legislation.
• Awarded an expanded Customer Service Support Center (CSSC) contract with CMS through our General Services Administration GSA Schedule 70 contract. The contract expansion includes development of a system to collect and process encounter data transactions from the Medicare Advantage plans. Also included is a Third Party Administrator (TPA) service to support and coordinate drug discount billings and payments between drug manufacturers and Medicare Prescription Drug plans.
• Won and implemented the Customer Service for Medicare Modernization (CSMM) Help Desk contract. Through the contract, Palmetto GBA operates the CSMM Help Desk,
which provides technical support for administration systems of the Medicare Advantage and Prescription Drug programs to Medicare Advantage plans across the nation.
• Awarded support of HIPAA 5010 processing for Pinnacle Business Solutions, Inc. Palmetto GBA provides Electronic Data Interchange (EDI) translation and routing services for Pinnacle’s Medicare contracts.
• Awarded the South Carolina Department of Health and Human Services (SCDHHS) contract to perform SC Medicaid Third Party Liability services in partnership with BlueCross BlueShield of South Carolina’s (BCBSSC) Medicaid Division.
7
At Palmetto GBA, commitment to ongoing operational excellence has equal footing with new business development initiatives. Our willingness to be accountable for performance, provide innovative solutions and operate with a lean cost structure led to many corporate accomplishments in 2010.
RISING TO PROVIDE SOLUTIONS
Operational Accomplishments 2010
• Exceeded $236 million in revenue and $7 million in pre-tax net income through December 2010.
• Began third contract year for Jurisdiction 1 A/B MAC Operations. Option Year 3 began January 25, 2011. There are more than 77,000 physicians and 500 hospitals providing care to more than 5.1 million Medicare beneficiaries in Jurisdiction 1.
• Achieved CMS accreditation of the Secure Provider Internet Portal, Online Provider Services (OPS). OPS provides a CMS 3-Zone compliant environment in which providers can check the status of claims, review electronic remits, lookup beneficiary eligibility and review financial data.
As of April 22, 2011, OPS has 53,665 Registered Users, representing 31,426 Providers.
• Transitioned the Wisconsin Physicians Service (WPS) Part A providers in the Jurisdiction 1 A/B MAC (J1) geographic area to the J1 contract. The additional providers and workload will increase the Part A workload by approximately 20% and add an estimated $12 million in annual revenue. We had the unique distinction of being the first contractor to perform this workload migration for CMS and set the standard process for future migrations.
• Completed the Round 1 Rebid for the Medicare Durable Medical Equipment Prosthetics, Orthotics and Supplies (DMEPOS) Competitive Bidding
Program through our Competitive Bidding Implementation Contractor (CBIC) contract. The effort included extensive education and outreach to key stakeholders, the evaluation of thousands of bids, and the award of contracts to eligible bidders to meet beneficiary demand.
• Completed the three-year recertification of the Palmetto GBA Systems Division for Capability Maturity Model Integration Level 2.
• Earned Customer Operations Perfor-mance Center, Inc. (COPC) certification of our Part A provider contact center.
• Enjoyed success in Healthcare Integrated General Ledger Accounting System (HIGLAS) Transition Support and HIGLAS Training Contracts.
We provided support to one HIGLAS Workload Manual Merge Transition, four HIGLAS Workload Merge Transitions, four A/B MAC Workload Transitions, and the inaugural Wisconsin Physician’s Services (WPS) Legacy HIGLAS Merge Transition to the J1 contractor.
• Launched a series of creative anti-fraud initiatives to address growing Medicare program abuse. Palmetto GBA developed a customized risk score for both specific geographical areas and specific providers. The sophisticated risk scoring methodology factors in a number of data elements and helps identify and focus resources on problem areas.
robbie casselSystems and Support
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conetta rogersFinance and Accounting
banja bouphasavanhFinance and Accounting
kelly grahovacJ1 A/B MAC
kathy boundsMedicare Integrity Program
lucas dantzlerNational Supplier Clearinghouse
antonio burkettFinance and Accounting
12
American Heart Association’s Start! Heart Walk The American Heart Association (AHA) is committed to “building better lives free of heart disease and stroke.” AHA’s premier fundraising event — the annual Start! Heart Walk — brings together co-workers, friends and family members to fight this country’s No. 1 and 3 killers. The Start! Heart Walk promotes heart-healthy living and physical activity. In 2010, Palmetto GBA associates raised more than $6,664 in donations and walker sponsorships to support this life-saving organization.
United WayUnited Way is a nonprofit organization whose vision is to build a stronger America by mobilizing communities to build stronger lives. In 2010, BlueCross associates contributed a record-high $2 million to the United Way campaign, including Palmetto GBA associates who contributed more than $175,000 to the corporate total.
The March of DimesThe March of Dimes (MOD) is the leading nonprofit organization for pregnancy and baby health. MOD strives to improve infant health by preventing birth defects, premature birth and infant mortality. In 2010, Palmetto GBA associ-ates contributed to the $62,151 that BlueCross raised for the 2010 March of Dimes Walk America campaign.
RISING CORPORATE RESPONSIBILIT Y
Palmetto GBA associates make a profound impact on their communities in many ways. As part of our corporate philanthropic culture, we support and applaud their efforts for both major initiatives and local projects. Palmetto GBA associates give generously year after year of time, talent and gifts and 2010 brought giving to its highest level in our company history.
13
Children’s Health and Well-BeingAngel TreeCamp Burnt GinCamp KemoCourt Appointed Special Advocate (CASA)Epworth Children’s Home Firefighters 4 Kids Toy Drive Heart Warming TreeMarine Toys for Tots FoundationNational Association of Black Accountants ScholarshipsPalmetto PalsPalmetto Place Children’s Emergency ShelterSacks of LoveSchool Supply DrivesWorld Vision
Disease Prevention and ManagementAIDS Benefit Foundation of SC American Cancer Society – Relay for LifeAmerican Red CrossHospice of PortsmouthHuntington Disease Society of AmericaJuvenile Diabetes Research FoundationRonald McDonald HouseShepeard Community Blood Center
Health and Human ServicesAdopt-A-FamilyAdopt-A-TroopAngels HouseBrookland Baptist Church Soup KitchenColumbia Museum of ArtDillon High School Haiti Earthquake Water Campaign Extreme Makeover: Home Edition Families Helping FamiliesFranklin Furnace Flood VictimsHarvest Hope Food BankKillian Community Club Lutheran Family ServicesMLK Day of Service Manna HouseMcKissick MuseumMid-Ohio Food BankNorthwest Ohio Tornado Relief Fund
Oliver Gospel MissionSafe Homes of Augusta Salvation Army Red Kettle Campaign Scioto County Homeless ShelterSistercareWm. Jennings Bryan Dorn VA Medical Center
Animal ProtectionCanine CollectiveGreyhound Pets of AmericaPAALS – Palmetto Animals Assisted Life Services Sierra’s Haven
RISING TO MEET CRITICAL NEEDS
Palmetto GBA associates give generously of their time, talents and hearts for a vast number of local nonprofit organizations. It’s a profound level of support that reaches deeply into areas of need and yields positive effects in countless lives.
bartley boswellProjects and Planning
rocio montalvoNational Supplier Clearinghouse
garrett blackDocument Control
kevin gaidFinance and Accounting
rick newtonDocument Control
timothy bumfordNational Supplier Clearinghouse
leadership
Unwavering vision and firm resolve steady Palmetto GBA in even the most uncertain times. A group of our leaders shared their current thoughts on how values, resiliency and innovation enable our organization and associates to rise to meet challenges and foster continued growth.
Jean Catalano ....................................................19
Elaine Garrick .....................................................21
Ann Archibald ....................................................23
Sharon Cook-McEwen ....................................25
Sheri Thompson ............................................... 27
Board of Directors ...........................................28
Corporate Officers ...........................................29
leadership
17
jean catalanoAssistant Vice President, Competitive BiddingImplementation Program Manager
19
Q: How do you think our key strategic goals interface with our rapidly changing industry?
A: I think our key strategic goals are the right ones both for our internal and external environment. To stay com-petitive and succeed, we must remain financially sound and focus on growth in new and current markets. We do both by delivering high value business partner-ships. The competition will continue to get tougher and being ready means quickly adapting to rapidly changing customer requirements. Having the right people in the key positions sets us apart. The associates of Palmetto GBA – many of whom have been here 10 years or even 20 years – have expertise that enables us to meet the needs of a rapidly changing industry. Combine that resource with a deep commitment to core values and success follows.
Q: How are we prepared to rise to meet our primary issues and opportunities?
A: Increasing competition itself is a challenge and opportunity. To address the challenge, we evaluate technology solutions, adapt service and product offerings, and actively respond to customers. While it’s our responsibility to do what our customers have asked of us, we have the opportunity to do more.
The ability to anticipate and resolve problems before they arise takes a significant investment in training and cultivating innovation throughout the organization. We’re continually invest-ing in our infrastructure and human resources while inspiring performance and establishing a culture of responsive-ness. Our systems help us accomplish our goals, so at the end of the day you’re prepared to meet challenges head on.
elaine garrickVice President, Customer Service Strategies
2 1
Q: What represents Palmetto GBA as a company? How are we unique?
A: We represent different things to dif-ferent people. To customers, we repre-sent the utmost quality and exceptional service. To associates, we represent stability. To the communities in which we do business, we represent care and concern. That cultivation of relation-ships with associates, customers and communities sets us apart.
Q: How can we sustain growth and ensure exceptional performance?
A: Strategy. We’ve enjoyed a reputation of being the go-to industry contractor for a very long time. We must reinforce this position in our customers’ eyes. They must continue to rely on us for innovative solutions. That means staying plugged in to potential opportunities and strategically aligned with effective partnerships that yield opportunity. Our performance is critical. Exceptional performance does not occur by hap-penstance. It’s achieved through an organized, systematic action plan that benchmarks and evaluates progress each step of the way. And you have to put the right resources behind that plan, and ultimately hold yourselves account-able to ensure your plan is working.
ann archibaldVice President and Compliance Officer
23
Q: Our core values are Communica-tion, Responsibility, Integrity, Service, People, Innovation and Quality. What makes these values so important?
A: These values represent what we believe in and what we stand for as a company. While they are the foundation on which we have always operated, we felt it essential to develop a structured ethics program in 1997: Our Values. Our Values states our commitment to laws, regulations and policies as well as outlines expectations and behaviors all associates are expected to follow. Our Values is a key element of our compliance program and embodies our philosophy for conducting business. The program has been widely successful because the people of Palmetto GBA have embraced it as a part of our culture and they believe that it is an imperative part of our success.
Q: How do we embrace these values in all we do?
A: They’re evident in everything we do. We refuse to compromise our integrity and have a compliance program to safeguard against it. A key component of that program is our associates. They share their concerns and trust we’ll approach them with the utmost priority to reach resolution. That speaks volumes to how well a compliance program works.
sharon cook-mcewen Assistant Vice President, Part B Operations
25
Q: How do we demonstrate resiliency in the midst of an extremely complex industry?
A: We foster the ability to adapt and innovate even in the face of heavy chal-lenges. Our robust Quality Management System supports ongoing evaluation of our performance against our customer’s needs and standards. One key compo-nent of our resiliency is the longevity of our associates. Their commitment benefits both the company and the beneficiaries we serve.
Q: As we ready ourselves for the future, what challenges lie ahead?
A: We will continue to be challenged by the ongoing national debate about health care funding and delivery. As we work toward solutions, we must remain open and prepared to be part of shaping solutions for changes yet to be defined. It’s imperative that we listen to custom-ers and adjust to meet their changing needs. In today’s market, we cannot rely solely on our past performance as an indicator of a business partner’s credibility. We must continue to do the fundamental things that made our partnerships successful while continu-ing to identify and implement new ideas. Demonstrating agility, responsiveness, and excellence will move us forward.
sheri thompsonAssistant Vice President, Part A Operations
27
Q: How does Palmetto GBA communi-cate, educate and foster associates’ innovation?
A: At Palmetto GBA, I think the employ-ees are the company’s concrete foundation and we have to consider and evaluate them to tap into their true motivations and desires. If a company wants to reach its greatest potential, it must work toward improvement rather than perfection. Innovation is not neces-sarily perfection; it’s working toward improvement. We demonstrate an innovation-rich culture through a variety of programs that reward star perform-ers, foster creative learning and provide comprehensive training and evaluation.
Q: How is innovation working for Palmetto GBA?
A: Our culture nurtures positive innova-tive thinking, period. It begins with each associate but ultimately becomes a shared experience. Our environment allows associates to freely contribute ideas, both individually and collectively via work groups. That level of encour-agement gives associates freedom to think deeply and effectively about what they do in their job. To gauge innovation’s role in our successes, we consider key elements: Did we apply this across multiple lines of business? Did we share the deployments? Did we actively promote team participation? Did the innovation save time and money? The answers to those questions tell us that innovation is working at Palmetto GBA.
28BOARD OF DIRECTORS
Col. Robert E. ShieldsRetired, Humana Military Healthcare Services (TRICARE)
Bruce W. HughesPresident, Government Programs Division, BlueCross BlueShield of South Carolina M. Edward SellersChairman, Board of Directors,BlueCross BlueShield of South Carolina
Lelia WrightRetired, Blue Cross Blue Shield of Texas
David PankauChairman, Board of Directors, Palmetto GBA, LLC and President/CEO BlueCross BlueShield of South Carolina
Ilene H. NagelRussell Reynolds Associates, Managing Director T. Jeffrey LittlefieldVice President, PGBA, LLC
PICTURED LEFT TO RIGHT
29
Ann ArchibaldVice President and Compliance Officer
Mike Barlow Vice President, A/B MAC Jurisdiction 1 Project Manager
Rex Brown Assistant Vice President, Quality and Training
Neal Burkhead Vice President, Medicare Integrity Program and Part A Operations
Bruce HughesPresident and Chief Operating Officer
Joe Johnson Assistant Vice President, EDI Systems
Elaine Garrick Vice President, Customer Service Strategies
Dickie Butler Vice President, Systems and Support
Jean Catalano Assistant Vice President, Competitive Bidding Implementation Program Manager
Sharon Cook-McEwen Assistant Vice President, Part B Operations
DeDee Rowe Secretary
Robin Spires Vice President, Part B Operations and Training
Sheri ThompsonAssistant Vice President, Part A Operations
Joe WrightVice President, and Chief Financial Officer
Bob LeichtleTreasurer
TOP ROW
BOTTOM ROW
NOT PICTURED
CORPORATE OFFICERS
12
Report of Independent Auditors .........31
Audited Financial Statements
Balance Sheets .............................................32
Statements of Operations ....................... 33
Statements of Changes in Member’s Equity ..................................... 33
Statements of Cash Flows ...................... 34
Notes to Financial Statements .............. 36
by the numbers
3 1
Board of Directors Palmetto GBA, LLC
We have audited the accompanying balance sheets of Palmetto GBA, LLC as of December 31, 2010 and 2009, and the related statements of operations, changes in member’s equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial state-ments based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reason-able 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 state-ment 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 financial position of Palmetto GBA, LLC at December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
February 23, 2011
32
PALMETTO GBA, LLC
(a single-member, limited liability company owned by BlueCross BlueShield of South Carolina)
The accompanying notes are an integral part of these financial statements.
BAL ANCE SHEETS (IN T HOUS A ND S)
Year ended December 31,
2010 2009AssetsCurrent assets:
Cash and cash equivalents $ 18,774 $ 23,886Accounts receivable, net 35,241 25,231Accounts receivable from affiliates 1,403 940Accrued revenue 33,580 38,147Prepaid expenses 1,561 1,354Deferred income taxes 3,505 2,116
Total current assets 94,064 91,674
Long-term Assets:Fixed assets, net of accumulated depreciationof $27,005 and $25,347 in 2010 and 2009, respectively 4,458 4,228Long-term investments 4,207 —Investments in affiliates 6,123 2,073Deferred income taxes 286 346
Total long-term assets 15,074 6,647Total assets $ 109,138 $ 98,321
Liabilities and Member’s EquityCurrent liabilities:
Accrued payroll, taxes and benefits $ 13,092 $ 14,918Payable to parent 8,282 7,294Other liabilities 23,449 17,044Deferred income taxes 208 218
Total current liabilities 45,031 39,474
Long-term liabilities:Deferred income taxes 68 —
Total long-term liabilities 68 —
Member’s equity:Contributed capital 28,461 28,461Retained earnings 5,452 30,386Accumulated other comprehensive income 126 —
Total member’s equity 64,039 58,847Total liabilities and member’s equity $ 109,138 $ 98,321
33STATEMENTS OF OPERATIONS (IN T HOUS A ND S)
Year ended December 31,
2010 2009RevenuesTotal revenues $ 236,156 $ 246,890
ExpensesTotal expenses 230,172 242,325
Gain from operations 5,984 4,565 Investment income 1,086 491
Income before income taxes 7,070 5,056Provision for income taxes 2,004 863
Net Income $ 5,066 4,193
Discontinued operations (Note 8)Pre-tax income from discontinued operations 476Pre-tax gain on sale of discontinued operations 139Income tax expense 193
Income from discontinued operations, net of income taxes 422Net Income $ 4,615
STATEMENTS OF CHANGES IN MEMBER’S EQUIT Y (IN T HOUS A ND S)
Accumulated Other Contributed Retained Comprehensive Capital Earnings Income Total
Balance January 1, 2009 $ 28,596 $ 25,771 $ — $ 54,367
Net income — 4,615 — 4,615
Contribution of capital (135) — — (135)Balance December 31, 2009 28,461 30,386 — 58,847
Net income — 5,066 — 5,066
Change in unrealized gainon securities classified as available-for-sale — — 126 126
Balance December 31, 2010 $ 28,461 $ 35,452 $ 126 $ 64,039
PALMETTO GBA, LLC
(a single-member, limited liability company owned by BlueCross BlueShield of South Carolina)
The accompanying notes are an integral part of these financial statements.
3 4STATEMENTS OF CASH FLOWS (IN T HOUS A ND S)
Year ended December 31,
2010 2009Cash flows from operating activitiesNet income $ 5,066 $ 4,193Adjustments to reconcile net income to net cashprovided from operating activities:
Depreciation 1,594 1,003Amortization on bonds 4 —Realized loss on investments 127 —Equity in income of affiliate 950 837 Deferred income tax provision (1,339) 144
Changes in operating assets and liabilities:(Increase)/decrease in accounts receivable (10,010) 5,143 (Increase)/decrease in receivables from affiliates (463) 13,417 Decrease /(increase) in accrued revenue 4,567 (5,304)Increase in prepaid expense (207) (366)(Decrease)/increase in accrued payroll, taxes and benefits (1,826) 339 Increase/(decrease) in payable to parent 988 (1,555)Increase/(decrease) in other liabilities 6,405 (2,312)
Net cash provided from operating activities 5,856 15,539
Cash flows from investing activities:Capital contribution to affiliate (5,000) —Fixed assets purchased (1,824) (815)Investments sold - available-for-sale 956 —Investments purchased - held-to-maturity (1,547) —Investments purchased - available-for-sale (3,553) —
Net cash used in investing activities (10,968) (815)
Cash flows from financing activities:Capital contribution from parent — (135)
Net (decrease) increase in cash and cash equivalents from continuing operations (5,112) 14,589
PALMETTO GBA, LLC
(a single-member, limited liability company owned by BlueCross BlueShield of South Carolina)
The accompanying notes are an integral part of these financial statements.
35STATEMENTS OF CASH FLOWS (CONTINUED) (IN T HOUS A ND S)
Year ended December 31,
2010 2009
Cash flows from discontinued operationsIncome of discontinued operations $ — $ 422 Cash flows from operating activities of discontinued operations — 560
Net increase in cash and cash equivalents from discontinued operations — 982
Net (decrease) increase in cash and cash equivalents (5,112) 15,571
Cash and cash equivalents from continuing operations, beginning of year 23,886 7,458 Cash and cash equivalents of discontinued operations, beginning of year — 857 Cash and cash equivalents from continuing operations, end of year $ 18,774 $ 23,886
Supplemental disclosures of cash paid during the year for:Income taxes $ 2,072 $ 1,321
PALMETTO GBA, LLC
(a single-member, limited liability company owned by BlueCross BlueShield of South Carolina)
The accompanying notes are an integral part of these financial statements.
36
NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Palmetto GBA, LLC (the Company) is a single-member limited liability company organized on January 1, 1998. The Company’s sole member is Blue Cross and Blue Shield of South Carolina (BCBSSC). The Company is engaged in the business of providing Medicare Administrative Contractor Services, Medicare Part A fiscal intermediary services and Medicare Part B carrier services in various states. These services include health insurance claims processing and payment, customer service for Medicare beneficiaries and health care providers, and payment safeguard functions designed to detect and prevent fraud and abuse in the Medi-care program. The Company provides services to Medicare beneficiaries residing in various states, Puerto Rico and the U.S. Virgin Islands. The Company’s major customer is the Centers for Medicare and Medicaid Services (CMS), the federal agency with fiduciary responsibility for the Medicare program.
In 2009, the Company was notified that it was the successful bidder on the CMS Jurisdiction 11 A/B MAC. This jurisdiction includes the states of North Carolina, South Carolina, Virginia and West Virginia. Under this five year contract, Palmetto GBA would perform all the Medicare Parts A and B administration for the jurisdiction. The contract also encompasses Regional Home Health and Hospice Intermediary (RHHI) for 16 states. Although the award of this con-tract was protested, the protest was resolved in the Company’s favor in 2010. This contract will result in annual revenue of approximately $66,000,000 beginning in 2011.
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant accounting policies and the methods of applying those policies are summarized below.
Cash equivalentsCash equivalents represent certificates of deposit that have maturities of less than three months at date of purchase and money market fund investments. Market risk for cash and cash equivalents is limited to any one institution when deposits exceed federally insured limits.
Financial instrumentsThe Company holds certain financial instruments including cash and accounts receivable. Management believes that the carrying values of financial instruments approximate fair value as required by Financial Accounting Standards Board (FASB) rules.
Subsequent eventsSubsequent events have been evaluated through February 23, 2011, which is the date the financial statements were available to be issued. The Company received a capital call from Health Administration Association of America, LLC (HAAA) in February of an amount up to $6,000,000. On February 18, 2011, the Company made an initial payment towards this obligation of $2,000,000.
Asset valuation allowancesThe Company recorded an allowance for uncollectible receivables in the amount of $3,000 and $3,000 at December 31, 2010 and 2009, respectively.
Fixed assetsFixed assets are stated at amortized cost. Depreciation on new assets purchased is com-puted using the straight-line method over the estimated useful lives of the respective assets: four to eight years for furniture and fixtures, three to five years for data processing equipment and software, and four years for automobiles. Leasehold improvements are depreciated over the lesser of the remaining lease term or estimated useful life of the asset. Depreciation on used assets purchased is computed by using the straight-line method over the estimated remaining useful lives at the time of purchase of the respective assets.
NOTES TO FINANCIAL STATEMENTS
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Investment in affiliateThe Company has a 25% interest in TriCenturion, Inc. that is accounted for using the equity method. The Company’s proportionate share of earnings or losses of this affiliate are reflected in income as earned and dividends or distributions are credited against investment in affiliate when received. The Company received dividends of $500,000 and $1,000,000 at December 31, 2010 and 2009, respectively.
Assets, liabilities and results of operations for TriCenturion, Inc. were as follows:
Year ended December 31,
2010 2009 (in thousands)Assets $ 10,427 $ 11,299Liabilities $ 4,121 $ 3,551Net income $ 558 $ 700
In 2010, the Company acquired a 50% interest in HAAA that is accounted for using the equity method. The Company’s proportionate share of earnings or losses of this affiliate are reflected in income as earned. The Company has received no dividends or distributions related to this investment.
Assets, liabilities and results of operations for HAAA were as follows:
Year ended December 31,
2010 2009 (in thousands)Assets $ 8,846 $ —Liabilities $ 5,633 $ —Net income $ (4,176) $ —
InvestmentsInvestments are comprised of common stocks, bonds and money market mutual funds. These assets are accounted for in accordance with FASB guidance which requires that fixed maturities are to be classified as either “held-to-maturity”, “available-for-sale”, or “trading”.
Management determines the appropriate classification of its fixed maturity securities at the time of purchase and reevaluates such designation as of each balance sheet date. Fixed maturity securities are classified as held-to-maturity when the Company has the positive intent and ability to hold them to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization as well as interest earned is included in investment income.
Revenue recognition policiesThe Company recognizes revenues based upon allowable costs incurred which are reimbursable under the terms of the following contracts:
• Medicare Part A Fiscal Intermediary subcontract between the Company and the Blue Cross Blue Shield Association (BCBSA) (this includes the Regional Home Health Intermediary subcontract)
• Medicare Part B Carrier Services contract between the Company and CMS
• Railroad Retirement Board Part B Carrier contract between the Company and the Railroad Retirement Board
The Company recognizes revenue on the DDI System Access, CSSC and various other contracts when services are performed and billable.
The Company recognizes revenue on the Jurisdiction 1 A/B MAC, Jurisdiction 11 A/B MAC, Single Testing Contractor, CBIC, NSC MAC and Train the Trainer contracts on cost plus a fixed fee basis. Award fees, if applicable, for these contracts are recognized based upon historical performance or management estimates if no historical data is available.
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ReclassificationsCertain 2009 amounts have been reclassified on the Balance Sheet and Statement of Cash Flows in order for them to be comparable with the 2010 amounts. These reclassifications resulted in no change to net income or equity.
Income taxesThe Company adopted the authoritative guidance on accounting for and disclosure of uncertainty in tax positions on January 1, 2009, which required the Company to determine whether a tax position of the Company is more likely than not to be sustained upon examina-tion, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. The tax position determination did not have a material effect on the Company’s financial statements.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. As of December 31, 2010, the tax years 2007 forward remain subject to examination by the federal tax jurisdiction under the statute of limitations.
If applicable, the Company accrues interest and penalties that may be assessed by the taxing authorities on any underpayment of tax. As of December 31, 2010, the Company had not accrued any interest and penalties related to income tax accruals.
Fair value measurementsThe Company adopted the provision of Accounting Standards Codification (ASC) 820 effec-tive 2009. ASC 820 establishes a framework for measuring the fair value of assets and liabili-ties recognized in the financial statements in periods subsequent to initial recognition. The adoption did not impact the Company’s results of operations, cash flows or financial position.
New accounting mattersThe Financial Accounting Standards Board (FASB) issues FASB ASC effective for financial statements issued for interim and annual periods after September 15, 2009. The ASC is an aggregation of previously issued authoritative U.S. generally accepted accounting principles (GAAP) in one comprehensive set of guidance organized by subject area. In accordance with the ASC, references to previously issued accounting standards have been replaced by ASC references. Subsequent revisions to GAAP will be incorporated in the ASC through Accounting Standards Updates (ASU).
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NOTE 2 FIXED ASSETS
Fixed assets consist of the following:
Year ended December 31,
2010 2009 (in thousands)Leasehold improvements $ 439 $ 438Equipment, furniture & fixtures 24,041 23,021Software 6,962 6,095Automobiles 21 21 31,463 29,575Accumulated depreciation (27,005) (25,347) $ 4,458 $ 4,228
Depreciation expense was $1,594,000 and $1,003,000 for the years ended December 31, 2010 and 2009, respectively.
NOTE 3 INVESTMENTS
Long-term investments consist of the following:
Gross Gross Amortized Unrealized Unrealized FairDecember 31, 2010 Cost Or Cost Gains Losses Value
Held-to-maturity securities:Corporate bonds $ 1,543,000 $ 15,000 $ 4,000 $ 1,554,000
Available-for-sale securities:Common stocks 2,470,000 280,000 86,000 2,664,000
Total long-term investments $ 4,013,000 $ 295,000 $ 90,000 $ 4,218,000
The fair value of available-for-sale securities with unrealized losses was $715,000 and $0 at December 31, 2010 and 2009, respectively. The Company monitors investment securities for other than temporary declines in fair value. In determining whether a decline in fair value is other than temporary, consideration is given to the extent of the decline, the length of time fair value has been below cost, and other relevant factors including estimated future cash flows. None of the unrealized losses at December 31, 2010, were considered other than temporary.
The amortized cost and estimated market values of held-to-maturity debt securities, by contractual maturity, at December 31, 2010, are as follows:
Book Value Market Value
Held-to-maturity securities:Due in one year or less $ — $ —Due in one year through five years 503,000 509,000Due in five years through ten years 1,040,000 1,045,000Due after ten years — —
Total held-to-maturity $ 1,543,000 $ 1,554,000
There were gross realized gains of $16,000 and $0 for the years ended December 31, 2010 and 2009, respectively, and there were gross realized losses of $143,000 and $0 for the years ended December 31, 2010 and 2009, respectively, that were included in net investment income. Gross unrealized holding gains and losses on securities classified as available-for-sale are reported in accumulated other comprehensive income in the accompanying balance sheets. No cash or assets are pledged or restricted for any purpose.
For available-for-sale investments in an unrealized loss position at December 31, 2010, the aggregate amount of unrealized loss that had been in an unrealized loss position for less than twelve months was $86,000 and the aggregate estimated fair value was $715,000. No investments had been held for more than twelve months.
For held-to-maturity investments in an unrealized loss position at December 31, 2010, the aggregate amount of unrealized loss that had been in an unrealized loss position for less than twelve months was $4,000 and the aggregate estimated fair value was $515,000. There were no held-to-maturity investments that had been held more than twelve months.
Fair value measurementsThe Company’s financial assets carried at fair value have been classified, for disclosure purposes, based on a hierarchy defined by FASB. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). The levels of the fair value hierarchy are as follows:
Level 1 - Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date.
Level 2 – Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves.
Level 3 – Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.
Fair Value of assets and liabilities measured on a recurring basis at December 31, 2010, are as follows:
December 31, 2010 Level 1 Level 2 Level 3 Total
Held-to-maturity securities:Corporate bonds $ — $ 1,554,000 $ — $ 1,554,000
Available-for-sale securities:Common stocks 2,664,000 — — 2,664,000
Total $ 2,664,000 $ 1,554,000 $ — $ 4,218,000
The Company measures certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the year ended December 31, 2010, the Company did not record any other-than-temporary impairments on those assets required to be measured at fair value on a nonrecurring basis.
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NOTE 4 INCOME TAXES
The Company’s operations are included in the consolidated federal income tax return of BCBSSC. Under a written tax-sharing agreement, BCBSSC allocates the tax provision to each company within the consolidated group based upon the company’s proportionate share of the consolidated federal income tax liability computed on a stand-alone basis, multiplied by the total consolidated federal income tax return liability.
The Company had income tax payables to BCBSSC of $1,870,000 and $239,000 at December 31, 2010 and 2009, respectively, which are included in net payables to the parent. The Company made payments to BCBSSC for income taxes of $2,072,000 and $1,321,000 during the years ended December 31, 2010 and 2009, respectively.
The Company recognized a provision for income taxes as follows (in thousands):
Year ended December 31,
2010 2009
Current $ 3,343 $ 720Deferred (1,339) 143Provision for income taxes /continuing operations 2,004 863Provision for income taxes /discontinued operations — 193
Total income taxes incurred $ 2,004 $ 1,056
Unrealized gains on investments credited directly to equity have been reduced by deferred income tax expense of $68,000 for the year ended December 31, 2010.
The provision for income taxes differs from the amount computed by applying the federal statutory tax rate of 35% to income before income taxes primarily due to changes in the tax contingency reserve, investment in subsidiaries, the dividends received deduction, and benefits derived from filing on a consolidated basis versus separate company basis. The temporary differences that give rise to deferred tax assets and liabilities are primarily related to accrued expenses, fixed assets, and prepaid expenses. There was no valuation allowance at December 31, 2010 and 2009.
Deferred tax assets and liabilities are classified as current and long-term based on the classification of the related asset or liability, as follows (in thousands):
Year ended December 31,
2010 2009
Deferred tax assets:Current $ 3,505 $ 2,116Long-term 286 346
3,791 2,462
Deferred tax liabilities:Current 208 218Long-term 68 —
276 218 Net deferred tax asset $ 3,515 $ 2,244
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NOTE 5 RELATED PARTIES
The Company is a single-member limited liability company owned by BCBSSC. Certain offices, other facilities and services are provided by BCBSSC pursuant to an administrative services agreement. Expenses associated with the administrative services agreement allocated from BCBSSC to the Company totaled $63,332,000 and $70,419,000 for the years ended Decem-ber 31, 2010 and 2009, respectively. The Company paid $84,559,000 and $91,705,000 during the years ended December 31, 2010 and 2009, respectively, to BCBSSC for expenses paid on behalf of the Company.
BCBSSC made capital contributions related to the job tax credit to the Company of $0 and ($135,000) during the years ended December 31, 2010 and 2009, respectively.
There are certain administrative services provided by the Company to BCBSSC and its subsidiaries. The Company received $9,335,000 and $14,781,000 from various subsidiaries for these services during the years ended December 31, 2010 and 2009, respectively.
NOTE 6 COMMITMENTS AND CONTINGENCIES
A financial guarantee has been issued by BCBSSC, which equals the Company’s estimated annual net operating expenses multiplied by 8.33%, less current capitalization. This guaran-tee is estimated to be $0 at December 31, 2010. BCBSSC has also executed an indemnifica-tion agreement, pursuant to minimum reserve and other requirements established by the Blue Cross and Blue Shield Association (“BCBSA”). BCBSSC is therefore liable to the Company to the extent of its financial guarantee and to the BCBSA to the full extent of its assets for any claims asserted against the BCBSA resulting from the contractual and financial obligations of the Company arising out of its Medicare Part A subcontract with the BCBSA.
In consideration of the novation of the fiscal intermediary and carrier contracts from BCBSSC to the Company, BCBSSC has issued a financial guarantee which equals 20 percent of the administrative costs of the contracts contained in the Notice of Budget Approval, less current capitalization. This guarantee is estimated to be $0 at December 31, 2010. The financial guarantee agreement remains in effect until both the contracts and intermediary agreement expire, are non-renewed or are terminated.
In addition, BCBSSC has executed a statutorily required financial guarantee of $75,000 on behalf of the Company in order for the Company to obtain a Third Party Administrator’s license pursuant to the South Carolina insurance laws.
The Company recorded an estimated contingent liability for potential repayments of costs claimed on its contracts with CMS. The liability was $4,895,000 and $2,645,000 at December 31, 2010 and 2009, respectively.
The Company is obligated for additional capital contributions of up to $726,000 and $6,750,000 to its affiliates TriCenturion, Inc and HAAA, respectively.
The Company has entered into certain non-cancelable operating leases in excess of one year as of December 31, 2010. The future minimum lease payments required under these leases are as follows (in thousands):
Year Amount
2011 $2,2652012-2015 — $2,265
Total rent expense was $3,523,000 and $7,243,000 during the years ended December 31, 2010 and 2009, respectively. The majority of the Company’s leases are guaranteed by BCBSSC. The Company’s main facility was purchased by BCBSSC in December 2009.
In the ordinary course of business, there are various legal proceedings pending against the Company. Management believes the aggregate liabilities, if any, arising from legal actions would not have a material adverse effect on the financial position of the Company.
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NOTE 7 EMPLOYEE BENEFIT PLANS
The Company’s employees are part of the 401(k) plan sponsored by BCBSSC. Eligible employees may defer up to 50% of their salary and the Company matched 50% of the first 6% deferred in 2010 and 2009. For employees hired after January 1, 2003, there is a 2-year cliff-vesting schedule on the match contribution. For certain employees not covered by the BCBSSC defined benefit pension plan, the Company makes a discretionary contribution to the 401(k) plan which is 50% vested for employees with one year of service and fully vested for employees with two years of service. Employees must be employed on the last day of the year to be eligible for the discretionary contribution, unless terminated during the year due to retirement (age 55 and 5 years of service), death or disability. The discretionary contribution for 2010 and 2009 was 6% of salary.
The cost of providing the 401(k) contribution was $3,370,000 and $3,992,000 for the years ended December 31, 2010 and 2009, respectively. The pension expense allocated to the Company under the BCBSSC pension plan was $5,601,000 and $5,135,000 for the years ended December 31, 2010 and 2009, respectively.
NOTE 8 DISCONTINUED OPERATIONS
In 2009, the Company sold Q2 Administrators for $1,500,000 in net cash proceeds and recorded a gain of $139,000 on the sale.
The following table reflects net revenue, pre-tax income from discontinued operations, pre-tax gain on sale of discontinued operations and income taxes for 2009:
Year ended December 31, 2009
Net Revenue $ 6,768
Pre-tax income from discontinued operations 476
Pre-tax gain on sale of discontinued operations 139
Income tax expense (193)Income from discontinued
operations, net of income taxes $ 422
RISING TOGETHER
As we look beyond a successful 2010, we rise together to meet 2011. Our unwavering commitment and sound strategic focus prepare us for the challenges of an ever-changing marketplace and prime us for even greater success in the coming year.
PO Box 100190Columbia, SC 29202palmettogba.com
BlueCross and BlueShield are registered marks of the Blue Cross and Blue Shield Association, an association of independent Blue Cross and Blue Shield Plans.
The Palmetto GBA logo and Partners in Excellence are registered marks of Palmetto GBA, LLC.
COPC-2000® is a registered trademark of the Customer Operations Performance Center, Inc.
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