EXHIBIT 99
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY
STATEMENTS
Magellan Health Services, Inc. (the "Company") and its representatives
may make forward looking statements (as such term is defined in the Private
Securities Litigation Reform Act) from time-to-time. The Company wants to invoke
to the fullest extent possible the protection of the Private Securities
Litigating Reform Act and the judicially created "bespeaks caution" doctrine
with respect to such statements. Accordingly, the Company is filing this Exhibit
99, which lists certain factors that may cause actual results to differ
materially from those in such forward looking statements.
This list is not necessarily exhaustive. The Company operates in a
rapidly changing business, and new risk factors emerge periodically. There can
be no assurance that this Exhibit lists all material risks to the Company at any
specific point in time. Readers are also referred to the risk factor disclosure
contained in the Company's Registration Statement on Form S-3 (Registration No.
333-20371).
On January 30, 1997, the Company announced that it had signed
definitive agreements for a series of transactions (the "Crescent Transactions")
with Crescent Real Estate Equities, limited partnership ("Crescent"), which are
described in "Item 5 - Other Information". The Company expects to close the
Crescent Transactions in the third quarter of fiscal 1997. The following risk
factors are prepared with a view toward the existing operating structure of the
Company as of December 31, 1996 before the effects of the Crescent Transaction:
Limitations Imposed by the New Revolving Credit Agreement
and Senior Note Indenture
In May 1994, the Company entered into a Second Amended and Restated
Credit Agreement (the "Credit Agreement") with certain financial institutions
and issued $375 million of Senior Subordinated Notes (the "Senior Notes") to
institutional investors. The Credit Agreement was terminated in October 1996 and
the Company entered into a new Credit Agreement (the "New Revolving Credit
Agreement"). The New Revolving Credit Agreement and the indenture for the Senior
Notes contain a number of restrictive covenants which, among other things, limit
the ability of the Company and certain of its subsidiaries to incur other
indebtedness, enter into certain joint venture transactions, incur liens, make
certain restricted payments and investments, enter into certain business
combination and asset sale transactions and make capital expenditures. These
restrictions could adversely affect the Company's ability to conduct its
operations, finance its capital needs or to pursue attractive business
combinations and joint ventures if such opportunities arise. Under the New
Revolving Credit Agreement, the Company also is required to maintain certain
specified financial ratios. Failure by the Company to maintain such financial
ratios or to comply with the restrictions contained in the New Revolving Credit
Agreement and the indenture for the Senior Notes could cause such indebtedness
(and by reason of cross-acceleration provisions, other indebtedness) to become
immediately due and payable and/or could cause the cessation of funding under
the New Revolving Credit Agreement.
Acquisition Growth Strategy
The Company has historically grown through acquisitions. There can be
no assurance that the Company will be able to make successful acquisitions in
the future or that any such acquisitions will be successfully integrated into
its operations. In addition, future acquisitions could have an adverse effect
upon the Company's operating results, particularly in the fiscal quarters
immediately following the consummation of such transactions while the acquired
operations are being integrated into its operations.
Green Spring Health Services, Inc. Acquisition and Potential Adverse Reaction
On December 13, 1995, the Company acquired a controlling interest in
Green Spring Health Services, Inc.
("Green Spring"), a leading provider of managed behavioral healthcare services.
The Company's hospitals have contracts with behavioral managed care companies
other than Green Spring. Such other companies could decide to terminate their
contracts with the Company's hospitals in reaction to the Company's acquisition
of a majority interest in one of their major competitors.
Historical Operating Losses
The Company experienced losses from continuing operations before
reorganization items, extraordinary items and the cumulative effect of a change
in accounting principle during each fiscal year since the completion of a
management buyout in 1988 through fiscal 1995. Such losses amounted to $81.7
million for the ten-month period ended July 31, 1992, $8.1 million for the
two-month period ended September 30, 1992 and $39.6 million, $47.0 million and
$43.0 million for the fiscal years ended September 30, 1993, 1994 and 1995,
respectively. The Company reported net revenue and income from continuing
operations of approximately $1.35 billion and $32.4 million, respectively, for
the year ended September 30, 1996. The Company also reported net revenue and net
income from continuing operations before extraordinary items of approximately
$295.7 million and $9.7 million, respectively, compared to net revenue and
income from continuing operations before extraordinary items of $346.8 million
and $7.1 million, respectively, for the three months ended December 31, 1996.
There can be no assurance that the Company's profitability for the year ended
September 30, 1996 and the three months ended December 31, 1996 will continue in
future periods. The Company's history of losses could have an adverse effect on
its operations.
Potential Hospital Closures
The Company continually assesses events and changes in circumstances
that could effect its business strategy and the viability of its provider
facilities. During fiscal 1995, the Company consolidated, closed or sold 15
psychiatric hospitals. During fiscal 1996, the Company consolidated, closed or
sold nine psychiatric hospitals. The Company recorded charges of approximately
$4.1 million for the year ended September 30, 1996, as a result of these
consolidations, closures and sales. The Company may elect to consolidate
services in selected markets and to close or sell additional facilities in
future periods depending on market conditions and evolving business strategies.
If the Company closes additional psychiatric hospitals in future periods, it
could result in charges to income for the cost necessary to exit the hospital
operations.
Potential Reductions in Reimbursement by
Third-Party Payers and Changes in Hospital Payer Mix
The Company's hospitals have been adversely affected by factors
influencing the entire psychiatric hospital industry. Factors which affect the
Company include (i) the imposition of more stringent length of stay and
admission criteria and other cost containment measures by payers; (ii) the
failure of reimbursement rate increases from certain payers that reimburse on a
per diem or other discounted basis to offset increases in the cost of providing
services; (iii) an increase in the percentage of its business that the Company
derives from payers that reimburse on a per diem or other discounted basis; (iv)
a trend toward higher deductibles and co-insurance for individual patients; (v)
pricing pressure related to increasing rate of claims denials by third party
payers; and (vi) a trend toward limiting employee health benefits, such as
reductions in annual and lifetime limits on mental health coverage. Any of these
factors could result in reductions in the amounts that the Company's hospitals
can expect to collect per patient day for services provided.
For the fiscal year ended September 30, 1996, the Company derived
approximately 21% of its gross psychiatric patient service revenue from managed
care organizations (primarily HMOs and PPOs, as hereinafter defined), 25% from
other private payers (primarily commercial insurance and Blue Cross), 28% from
Medicare, 17% from Medicaid, 3% from the Civilian Health and Medical Program for
the Uniformed Services ("CHAMPUS") and 6% from other government programs.
Changes in the mix of the Company's patients among the managed care
organizations, Medicare and Medicaid categories, and among different types of
private-pay sources, can significantly affect the profitability of the Company's
hospital operations. Therefore, there can be no assurance that payments under
governmental and private third-party payer programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs of providing care to patients covered by such programs.
Previous Bankruptcy Reorganization
The Company was reorganized pursuant to Chapter 11 of the United States
Bankruptcy Code, effective on July 21, 1992 (the "Reorganization"). Prior to the
Reorganization, the Company's total indebtedness was approximately $1.8 billion.
From February 1991 until July 1992, the Company was in default in the payment of
interest and principal, or both, on substantially all such indebtedness. The
indebtedness was incurred by the Company in connection with a management buy-out
of the Company in 1988 and a hospital-construction program. As a result of the
Reorganization, the Company's long-term debt was reduced by approximately $700
million and its redeemable preferred stock of $233 million was eliminated. The
holders of such debt and preferred stock received approximately 97% of
Magellan's Common Stock outstanding on July 21, 1992.
Dependence on Healthcare Professionals
Physicians traditionally have been the source of a significant portion
of the patients treated at the Company's hospitals. Therefore, the success of
the Company's hospitals is dependent in part on the number and quality of the
physicians on the medical staffs of its hospitals and their admission practices.
A small number of physicians account for a significant portion of patient
admissions at some of the Company's hospitals. There can be no assurance that
the Company can retain its current physicians on staff or that additional
physician relationships will be developed in the future. Furthermore, hospital
physicians generally are not employees of the Company and in general Magellan
does not have contractual arrangements with hospital physicians restricting the
ability of such physicians to practice elsewhere.
Potential General and Professional Liability
Effective June 1, 1995, Plymouth Insurance Company, Ltd. ("Plymouth"),
a wholly-owned Bermuda subsidiary of the Company, provides general and hospital
professional liability insurance up to $25 million per occurrence for the
Company's hospitals. All of the risk of losses from $1.5 million to $25 million
per occurrence has been reinsured with unaffiliated insurers. The Company also
insures with an unaffiliated insurer 100% of the risk of losses between $25
million and $100 million per occurrence, subject to an annual aggregate limit of
$75 million. The Company's general and professional liability coverage is
written on a "claims made or circumstances reported" basis. For reinsured claims
between $10 and $25 million per occurrence, the Company has an annual aggregate
limit of coverage of $30 million. For reinsured claims between $1.5 million and
$10 million per occurrence, the Company has no significant limitations on the
aggregate dollar amounts of coverage.
For the six years from June 1, 1989 through May 31, 1995, the Company
had a similar general and hospital professional liability insurance program. For
those years, the per occurrence deductible (with respect to which the Company
was self-insured) was $2.5 million for the years ended May 31, 1990 and 1991, $2
million for the years ended May 31, 1992 and 1993 and $1.5 million (relating to
the Company's general hospitals sold on September 30, 1993) for the year ended
May 31, 1994. For psychiatric hospitals, Plymouth's coverage did not contain a
per occurrence deductible for the years ended May 31, 1994 and 1995. In December
1994, the per occurrence deductible for the years ended May 31, 1989 and 1990
was eliminated. Plymouth provides coverage with no per occurrence deductible for
hospital system claims which had not been paid prior to December 31, 1994.
Plymouth does not underwrite any insurance policies with any parties other than
the Company or its affiliates and subsidiaries.
The amount of expense relating to Magellan's malpractice insurance may
materially increase or decrease from year to year depending, among other things,
on the nature and number of new reported claims against Magellan and amounts of
settlements of previously reported claims. To date, Magellan has not experienced
a loss in excess of policy limits. Management believes that its coverage limits
are adequate. However, losses in excess of the limits described above or for
which insurance is otherwise unavailable could have a material adverse effect
upon the Company.
Potential Expiration and Realization Uncertainties Related
to Estimated Tax Net Operating Loss Carryforwards
As of September 30, 1996, the Company had estimated tax net operating loss
("NOL") carryforwards of
approximately $250 million available to reduce future federal taxable income.
These NOL carryforwards expire in 2006 through 2010 and are subject to
adjustment upon examination by the Internal Revenue Service. Due to the
ownership change which occurred as a result of the Reorganization, the Company's
utilization of NOLs generated prior to the effective date of the Reorganization
is limited. Based on this limitation and certain other factors, the Company has
recorded a valuation allowance of approximately $102.2 million against the
amount of the NOL deferred tax asset that in Management's opinion, is not likely
to be recovered. There can be no assurance that these NOL carryforwards will not
expire, be reduced or be made subject to further limitations prior to their
potential utilization in future periods.
Governmental Budgetary Constraints and Healthcare Reform
In the 1995 and 1996 sessions of the United States Congress, the focus
of healthcare legislation has been on budgetary and related funding mechanism
issues. Both the Congress and the Clinton Administration have made proposals to
reduce the rate of increase in projected Medicare and Medicaid expenditures and
to change funding mechanisms and other aspects of both programs. If enacted,
these proposals would generally reduce Medicare and Medicaid expenditures. The
Company cannot predict the effect of any such legislation, if adopted, on its
operations; but the Company anticipates that, although overall Medicare and
Medicaid funding may be reduced from projected levels, the changes in such
programs may provide opportunities to the Company to obtain increased Medicare
and Medicaid business through risk-sharing or partial risk-sharing contracts
with managed care plans and state Medicaid programs.
A number of states in which the Company has operations have either
adopted or are considering the adoption of healthcare reform proposals of
general applicability or Medicaid reform proposals, partly in response to
possible changes in Medicaid law. Where adopted, these state reform laws have
often not yet been fully implemented. The Company cannot predict the effect of
these state healthcare reform and Medicaid reform laws on its operations.
Provider Business-Competition
Each of the Company's hospitals competes with other hospitals, some of
which are larger and have greater financial resources. Some competing hospitals
are owned and operated by governmental agencies, others by nonprofit
organizations supported by endowments and charitable contributions and others by
proprietary hospital corporations. The hospitals frequently draw patients from
areas outside their immediate locale and, therefore, the Company's hospitals
may, in certain markets, compete with both local and distant hospitals. In
addition, the Company's hospitals compete not only with other psychiatric
hospitals, but also with psychiatric units in general hospitals, and outpatient
services provided by the Company may compete with private practicing mental
health professionals and publicly funded mental health centers. The competitive
position of a hospital is, to a significant degree, dependent upon the number
and quality of physicians who practice at the hospital and who are members of
its medical staff. The Company has entered into joint venture arrangements with
other healthcare providers in certain markets to promote more efficiency in the
local delivery system. The Company believes that its provider business competes
effectively with respect to the aforementioned factors. However, there can be no
assurance that Magellan will be able to compete successfully in the provider
business in the future.
Competition among hospitals and other healthcare providers for patients
has intensified in recent years. During this period, hospital occupancy rates
for inpatient behavioral care patients in the United States have declined as a
result of cost containment pressures, changing technology, changes in
reimbursement, changes in practice patterns from inpatient to outpatient
treatment and other factors. In recent years, the competitive position of
hospitals has been affected by the ability of such hospitals to obtain contracts
with Preferred Provider Organizations ("PPO's"), Health Maintenance
Organizations ("HMO's") and other managed care programs to provide inpatient and
other services. Such contracts normally involve a discount from the hospital's
established charges, but provide a base of patient referrals. These contracts
also frequently provide for pre-admission certification and for concurrent
length of stay reviews. The importance of obtaining contracts with HMO's, PPO's
and other managed care companies varies from market to market, depending on the
individual market strength of the managed care companies. State certificate of
need laws regulate the Company and its competitors' ability to build new
hospitals and to expand existing hospital facilities and services. These laws do
provide some protection from competition, as their interest is to prevent
duplication of services. In most cases, these laws do not restrict the ability
of the Company or its competitors to offer new outpatient services. As of
December 31, 1996, the Company operated 39 hospitals in 12 states (Arizona,
Arkansas, California, Colorado, Indiana, Kansas, Louisiana, Nevada, New Mexico,
South Dakota, Texas and Utah) which do not have certificate of need laws
applicable to hospitals.
Managed Care Business - Competition
The managed healthcare industry is being affected by various external
factors including rising healthcare costs, intense price competition, and market
consolidation by major managed care companies. Magellan faces competition from a
number of sources including other behavioral health managed care companies and
traditional full service managed care companies that contract to provide
behavioral healthcare benefits. Also, to a lesser extent, competition exists
from fully capitated multi-specialty medical groups and individual practice
associations that directly contract with managed care companies and other
customers to provide and manage all components of healthcare for the members
including the behavioral healthcare component. The Company believes that the
most significant factors in a customer's selection of a managed behavioral
healthcare company include price, the extent and depth of provider networks and
quality of services. The Company also believes that the acquisition of Green
Spring creates opportunities to enhance its revenues through managed care
contracts utilizing the continuum of care and through information systems that
support care management and at-risk pricing mechanisms, although no such
assurance can be given. Management believes that its managed care business
competes effectively with respect to these factors. However, there can be no
assurance that Magellan will be able to compete successfully in the managed care
business in the future.
Regulatory Environment
The federal government and all states in which the Company operates
regulate various aspects of the Company's businesses. Such regulations provide
for periodic inspections or other reviews of the Company's provider operations
by, among others, state agencies, the United States Department of Health and
Human Services (the "Department") and CHAMPUS to determine compliance with their
respective standards of care and other applicable conditions of participation
which is necessary for continued licensure or participation in identified
healthcare programs, including, but not limited to, Medicare, Medicaid and
CHAMPUS. The Company is also subject to state regulation regarding the admission
and treatment of patients and federal regulations regarding confidentiality of
medical records of substance abuse patients. Although the Company endeavors to
comply with such regulatory requirements, there can be no assurance that the
Company will always be in full compliance. The failure to obtain or renew any
required regulatory approvals or licenses or to qualify for continued
participation in identified healthcare programs could adversely affect the
Company's operations.
The Company is also subject to federal and state laws that govern
financial and other arrangements between healthcare providers. These laws often
prohibit certain direct and indirect payments between healthcare providers that
are designed to induce overutilization of services paid for by Medicare or
Medicaid. Such laws include the anti- kickback provisions of the federal
Medicare and Medicaid Patients and Program Protection Act of 1987. These
provisions prohibit, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare and
Medicaid patients. GPA, the Company's subsidiary that owns or manages
professional group practices, is subject to the federal and the state illegal
remuneration, practice of medicine and certain other laws which prohibit the
subsidiary from owning, but not managing, professional practices. In addition,
some states prohibit business corporations from providing, or holding themselves
out as a provider of, medical care. The Company endeavors to comply with all
federal and state laws applicable to its business. However, a violation of these
federal and state laws may result in civil or criminal penalties for individuals
or entities or exclusion from participation in identified healthcare programs.
Magellan's managed care business operations, in some states, are
subject to utilization review, licensure and related state regulation
procedures. Green Spring provides managed behavioral healthcare services to
various Blue Cross/Blue Shield plans that operate Medicare and Medicaid health
maintenance organizations or other at-risk managed care programs and that
participate in the Blue Cross Federal Employees health program. As a contractor
to these Blue Cross/Blue Shield plans, Green Spring is indirectly subject to
federal and, with respect to the Medicaid program, state monitoring and
regulation of performance and financial reporting requirements. Although
Magellan believes that it is in compliance with all current state and federal
regulatory requirements applicable to the managed care business it
conducts, failure to do so could adversely affect its operations.
Physician ownership of or investment in healthcare entities to which
they refer patients has come under increasing scrutiny at both state and federal
levels. Congress passed legislation (commonly referred to as "Stark I") which
prohibits physicians from referring Medicare patients for clinical laboratory
services to an entity with which the physician has a financial relationship. The
Department recently published final Stark I regulations on August 14, 1995. Such
regulations will govern how the Department views and reviews these financial
relationships. Additionally, Congress passed legislation (commonly referred to
as "Stark II") which prohibits physicians from referring Medicare or Medicaid
patients for certain designated health services, including inpatient and
outpatient hospital services, to entities in which they have an ownership or
investment interest or with which they have a compensation arrangement. The
entity is also prohibited from billing the Medicare or Medicaid programs for
such services rendered pursuant to a prohibited referral. To the extent
designated services are provided by the Company's provider and managed care
operations, physicians who have a financial relationship with the Company and
the Company will be subject to the provisions of Stark II. Some states have
passed similar legislation which prohibits the referral of private pay patients.
To date, the Department has not published Stark II regulations. However, the
Department indicated that it will review referrals involving any of the
designated services under the language and interpretations set forth in the
Stark I rule.
The Company's acquisitions and joint venture activities are also
subject to federal antitrust laws. The healthcare industry has recently been an
active area of antitrust enforcement action by the United States Federal Trade
Commission (the "FTC") and the Department of Justice ("DOJ"). The Company's
acquisitions and joint venture arrangements could be the subject of a DOJ or an
FTC enforcement action which, if determined adversely to the Company, could have
a material adverse effect upon the Company's operations.
Changes in laws or regulations or new interpretations of existing laws
or regulations can have an adverse effect on the Company's operating methods,
costs, reimbursement amounts and acquisition and joint venture activities. In
addition, the healthcare industry is subject to increasing governmental
scrutiny, and additional laws and regulations may be enacted which could require
changes in the Company's operations. A federal or state agency charged with
enforcement of such laws and regulations might assert an interpretation of such
laws and resolutions or may increase scrutiny of a previously ignored area,
which may require changes in the Company's operations.
Capitation Arrangements
The Company's managed care business contracts with companies holding
state HMO or insurance company licenses on a capitated or "at-risk" basis where
the risk of patient care is assumed by the Company in exchange for a monthly fee
per member regardless of utilization level. As of December 31, 1996,
approximately 35% of Green Spring's managed care members were under capitated
arrangements. During fiscal 1996, approximately 70% of Green Spring's revenues
were from at-risk contracts. Increases in utilization levels under capitated
contractual arrangements could adversely effect the operations of the managed
care business.
Some jurisdictions are taking the position that capitated agreements in
which the provider bears the risk should be regulated by insurance laws. In this
regard, Green Spring's primary customers are comprised of Blue Cross/Blue Shield
Plans and other insurance entities which are licensed insurance organizations in
their respective states. Green Spring offers "carved out" managed mental health
benefits, on a wholesale basis, as a vendor to the regulated insurance
organizations. Most current employer group relationships are also contracted
through the respective regulated insurance organizations. However, as Magellan
and Green Spring develop more direct risk arrangements on a retail basis
directly with employer groups or other non-insurance entity customers, the
Company may be required to obtain insurance licenses in the respective states
where the direct risk arrangements are to be pursued. There can be no assurance
that the Company can obtain the insurance licenses required by the respective
states in a timely or cost effective manner to respond to market demand.
Mental Health Parity Legislation
In October 1996, President Clinton signed a bill submitted by the U.S.
Congress that prohibits health plans from setting annual or lifetime caps on
mental health coverage ("parity") at levels below those set for general
medical/surgical healthcare services. The bill does not require a health plan to
offer or provide mental health services and does not affect other terms and
conditions of health plans, such as inpatient day or outpatient visit limits or
scope of benefits, nor does this bill prohibit health plans from utilizing other
forms of cost containment. The definition of mental health services in the bill
excludes substance abuse and chemical dependency. The effective date for the
parity legislation is January 1, 1998. Other key components of the parity
legislation are as follows:
1) Employers with 50 or fewer employees are exempt from the parity
legislation.
2) Health plans that incur increased costs of 1% or more as a result of the
parity legislation will be exempt.
3) The parity legislation expires on September 30, 2001 unless extended by
Congress.
The Company views the parity legislation as an acknowledgment by the
Federal government of the importance of effective treatment of mental health
disorders for society in general. The parity legislation could result in cost
containment mechanisms by third party payers such as the elimination of mental
health benefit plans or encouraging the utilization of managed care
organizations to administer mental health benefit plans, which could both result
in lower demand and lower revenue per equivalent patient day in the Company's
provider business. However, this bill is subject to administrative and judicial
interpretation, neither of which the Company is able to predict. There can be no
assurance that such interpretations will not adversely effect the Company's
businesses.
Possible Volatility of Stock Price
The Company believes factors such as announcements with respect to
healthcare reform measures, reductions in government healthcare program
projected expenditures, acquisitions and quarter-to-quarter and year-to-year
variations in financial results could cause the market price of Magellan Common
Stock to fluctuate substantially. Any such adverse announcement with respect to
healthcare reform measures or program expenditures, acquisitions or any
shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
Magellan Common Stock in any given period. As a result, the market for Magellan
Common Stock may experience price and volume fluctuations unrelated to the
operating performance of Magellan.