Sierra Health Services, Inc.

2724 North Tenaya Way
Las Vegas, Nevada 89128
(702) 242-7000
www.sierrahealth.com

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Sales

$1.5 billion

Business Description 

We are a managed health care organization that provides and administers the delivery of comprehensive health care programs with an emphasis on quality care and cost management. Our strategy has been to develop and offer a portfolio of managed health care products to employer groups and individuals. Our broad range of managed health care services is provided through the following:

a federally qualified health maintenance organization or HMO;

managed indemnity plans;

a subsidiary that administers a managed care federal contract for the Department of Defense's TRICARE program in Region 1 (consisting of approximately 707,000 eligible individuals as of December 31, 2003, in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and Washington, D.C.);

ancillary products and services that complement our managed health care product lines; and

a third-party administrative services program for employer-funded health benefit plans and self-insured workers' compensation plans.

Required financial information by business segment is set forth in Note 19 of the Notes to the Consolidated Financial Statements. Unless otherwise indicated, information presented in this 2003 Form 10-K is for continuing operations and excludes the discontinued Texas HMO health care operations and workers' compensation insurance operations.

Managed Care Products and Services

The primary types of health care coverage offered by our subsidiaries are HMO plans, HMO Point of Service, or POS, plans, and managed indemnity plans, which include a managed indemnity preferred provider organization, or PPO, option. As of December 31, 2003, we provided HMO products to approximately 292,000 members. We also provided managed indemnity products to approximately 25,000 members, Medicare supplement products to approximately 18,000 members, and administrative services to approximately 193,000 members. Medical premiums accounted for approximately 65% of total revenues from continuing operations in 2003.

Health Maintenance Organizations. We operate a mixed model HMO in Las Vegas, Nevada, in which we use our own multi-specialty medical group as well as a network of independent contracted providers. We also operate a network model HMO in Reno, Nevada. Independent contracted primary care physicians and specialists for our HMO are compensated on a capitation or modified fee-for-service basis. Contracts with our primary hospitals are on a discounted per diem or diagnosis related group, or DRG, basis. Members receive a wide range of coverage after paying a co-payment and are eligible for preventive care coverage.

Our commercial plans offer traditional HMO benefits and POS benefits. At December 31, 2003, we had approximately 202,000 commercial members. Based on data provided by the Nevada State Health Division as of September 30, 2003, we maintain approximately 62% of the Nevada, and approximately 76% of the Las Vegas, commercial HMO market share. In southern Nevada, HMOs have a market penetration of under 17%.

We also offer a Medicare risk product that we market directly to Medicare-eligible beneficiaries. The monthly payment we receive for Medicare members is determined by a formula established by Federal law. As of December 31, 2003, we had approximately 51,000 Medicare members of which approximately 49,000 were enrolled in the Social HMO, which is discussed below.

In addition, as of December 31, 2003, we had approximately 39,000 members enrolled in our HMO Medicaid risk products. To enroll in these products, an individual must be eligible for Medicaid benefits in the state of Nevada. We receive a monthly fee for each Medicaid member enrolled by the state's managed care division and we also receive a per case fee for each Medicaid eligible newborn delivery.

Social Health Maintenance Organization. In 1996, we entered into a Social HMO II contract with the Centers for Medicare and Medicaid Services, or CMS, pursuant to which a large portion of our Medicare risk members receive certain expanded benefits for which we receive additional revenues. The additional revenues are determined based on health risk assessments that have been, and will continue to be, performed on our eligible Medicare members. The additional benefits include, among other things, assisting the eligible Medicare members with activities of daily living such as bathing, dressing and walking. The members who receive these benefits, as identified by the health risk assessments, are those who currently have difficulty performing activities of daily living functions because of a health problem or physical disability.

Effective January 2004, CMS has revised the payment factors for Medicare members to include a risk adjustment methodology and a frailty adjuster that uses measures of functional impairment to predict expenditures. Under the new payment methodology, in 2004, we will be paid 90% based on the current payment approach and 10% based on the new approach. CMS has preliminarily indicated that the payment methodology will be completely transitioned to the new approach in 2008. The Social HMO program was due to expire at the end of 2003; however, CMS administratively extended the Social HMO program for one year, through 2004. Continuation of this program is under consideration, but there is no guarantee at this time that the Social HMO contract will be renewed beyond 2004. If the Social HMO contract is not renewed beyond 2004, we would seek to transfer the members into one of our traditional Medicare plans. This transfer would allow for the continuity of care for our members but without the additional Social HMO specific benefits that are currently available to them. If the reimbursement for these members decreases significantly and related benefit changes are not made timely, there could be a materially adverse effect on our business. Continued Medicare medical premium revenue growth is principally dependent upon continued enrollment in our products and upon competitive and regulatory factors.

Preferred Provider Organizations. Our managed indemnity plans generally offer members a PPO option of receiving their medical care from either contracted or non-contracted providers. Members pay higher deductibles and co-insurance or co-payments when they receive care from non- contracted providers. Out-of-pocket costs are lowered by utilizing contracted independent providers who are part of our PPO network.

During 2003, we provided managed indemnity, accidental death and disability and/or Medicare supplement services to individuals in California, Colorado, Iowa, Louisiana, Nevada and Texas. As of December 31, 2003, our managed indemnity subsidiary was licensed in a total of 44 states and the District of Columbia.

Ancillary Medical Services. Most of our managed health care services in Clark County and surrounding rural areas are provided through our independent contracted network of approximately 2,300 providers and 28 hospitals. These Nevada networks include our affiliated multi-specialty medical group, which provides medical services to approximately 75% of our southern Nevada HMO members and employs approximately 200 primary care and other providers in various medical specialties. Through our affiliates the following services are offered: three urgent care centers; home health care; hospice care; behavioral health care; home infusion; oxygen and durable medical equipment; a free-standing ambulatory surgery center; radiology; and occupational medicine.


These services are provided to members of our HMO, managed indemnity, fee-for-service and administrative service plans. As of December 31, 2003, mental health and substance abuse services were provided to approximately 212,000 participants.
We believe that this vertical integration of our health care delivery system in southern Nevada provides a competitive advantage as it helps us to effectively manage health care costs while delivering quality care.

Administrative Services. Our administrative services products provide, among other things, PPO network access and utilization review services to large employer groups that are usually self-insured. As of December 31, 2003, approximately 193,000 members were enrolled in our health administrative services plans. In addition, we provide administration services for self-insured workers' compensation plans. The revenues and expenses for these services are included in investment and other revenues and in general and administrative expenses, respectively, in the Consolidated Statements of Operations.

Military Contract Services

Sierra Military Health Services, Inc., or SMHS. Pursuant to a triple-option health benefits contract, known as TRICARE, with the Department of Defense, or DoD, SMHS provides managed health care coverage to dependents of active duty military personnel, military retirees and dependents of military retirees through subcontractor partnerships and individual providers in Region 1. SMHS also performs specific administrative services, including health care appointment scheduling, enrollment, network management and health care management services. SMHS performs these services using primarily DoD information systems.

SMHS completed the fifth year of a five-year contract in May 2003 and is in the first year of a contract extension. In August 2002, the DoD requested proposals for managed care services under the Next Generation TRICARE, or T-Nex, contract. We submitted our proposal in January 2003 for the T-Nex North Region contract, which includes Region 1, as well as Michigan, Ohio, Kentucky, Indiana, Illinois, Wisconsin, Virginia and North Carolina. However, in August 2003, the DoD awarded the T-Nex North Region contract to a competitor and the General Accounting Office denied our protest of the award in December 2003. The new contractor is scheduled to be operational in Region 1 on September 1, 2004 and the new contract will supersede the remainder of our current TRICARE Region 1 contract. After the new contractor is operational on September 1, 2004, SMHS will commence a six-month phase-out of operations at prices previously negotiated with the DoD. SMHS does not meet the definition of discontinued operations since we do not have plans to dispose of the operations before the phase-out is complete.
 

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