Introduction and Background

CareAdvantage, Inc. (“CAI,” “CareAdvantage” or the “Company”) and its direct and indirect subsidiaries, CareAdvantage Health Systems, Inc. (“CAHS”) and Contemporary HealthCare Management, Inc. (“CHCM”), are in the business of providing management and consulting services designed to enable integrated health care delivery systems and other care management organizations and self-insured employers and unions to reduce the costs, while improving the quality, of medical services provided to their subscribers. The management and consulting services include care management program enhancement services, executive and clinical management services, and training programs. The Company's management and consulting services have been provided to integrated health care delivery systems and other care management organizations.

CAI was incorporated in August 1994 as a wholly owned subsidiary of Primedex Health Systems, Inc. (“PMDX”), a publicly traded New York corporation. In October 1994, the Company acquired CAHS (under its prior corporate name, Advantage Health Systems, Inc., (“AHS”)), from PMDX. On June 12, 1995, a stock dividend of all of the issued and outstanding shares of common stock of the Company was declared effective by PMDX. As a result, the Company commenced trading as a publicly traded company on that date.

Initially, CAI relied on PMDX to provide the bulk of its working capital. In addition to transferring all of its AHS stock to the Company, PMDX made a total of $9,700,059 in working capital advances to CAI (the last such advance being made in July 1995). Pursuant to a revised separation agreement between CAI and PMDX dated April 20, 1995, PMDX agreed to capitalize all such advances in connection with CAI’s separation from PMDX.

On February 22, 1996, the Company completed a series of transactions with CW Ventures II, L.P. (“CW Ventures”) and with Horizon Blue Cross and Blue Shield of New Jersey, formerly known as Blue Cross Blue Shield of New Jersey, Inc. (“Horizon BCBSNJ”).

Concurrently with the February 22, 1996 closing of the transaction with CW Ventures, CAHS purchased all of the outstanding capital stock of CHCM from a wholly owned Horizon BCBSNJ subsidiary, Enterprise Holding Company, Inc. (“EHC”). Although this acquisition was consummated on February 22, 1996, results of operations of CHCM have been reflected in the Company's financial statements since April 30, 1995 pursuant to an Interim Services Agreement between the Company and Horizon BCBSNJ (as amended from time to time, the “Services Agreement”) whereby the Company had effective control and responsibility of the day-to-day operations of CHCM pending a sale of CHCM to the Company.

On August 16, 2001, pursuant to a Satisfaction of Debt Agreement dated November 1, 2000, among the Company, Horizon BCBSNJ and one of Horizon BCBSNJ’s subsidiaries, Horizon Healthcare of New Jersey, Inc., the Company issued 15,777,400 shares of its Common Stock in exchange for the cancellation of approximately $1.6 million owed by it.

The foregoing transactions with CW Ventures and Horizon BCBS resulted in CW Ventures owning approximately 38% of the outstanding shares of the Company’s common stock, par value $.001 per share (“Common Stock”) and Horizon BCBSNJ owning approximately 54% of outstanding shares of the Company’s Common Stock.

Prior to January 1, 2003, the Company provided, principally to Horizon BCBSNJ and another Blue Cross Blue Shield organization, certain health care cost containment services, including utilization review, case management and disease management and independent reviews. During 2002, the Company ceased providing these services to the other Blue Cross Blue Shield organization, and as of December 31, 2002, to Horizon BCBSNJ on account of Horizon BCBSNJ’s termination of the Services Agreement as of that date. As a result, beginning January 1, 2003, the Company ceased offering these services to new customers, since it no longer maintained the employees and infrastructure necessary to support their delivery.

On October 1, 2004, as partial settlement of litigation between the Company and Horizon BCBSNJ, Horizon BCBSNJ transferred to the Company all of the Company’s common stock then held by it (i.e., 53,394,820 shares). On October 6, 2004, CW Ventures made a pro rata distribution of all of the 37,617,420 shares of common stock of the Company that it owned to the partners of CW Ventures.

 

 

The Company's executive offices are located at 485-C Route 1 South, Metropolitan Corporate Plaza, Iselin, New Jersey 08830 and its telephone number is (732) 362-5000.

Industry Overview: Consumerism, Health Care Expenditures and Managed Care

The American health care market continues to evolve within the environmental emphases on consumer choice and confidentiality protections, and still battling the double challenge of accelerating costs and an aging population . Employer groups are still trying to find a balance, providing health insurance to employees in order to attract the highest quality human capital, while developing strategies to control escalating costs. In addition to the previous considerations, the latest emphasis is shifting towards the principle of data transparency on the part of insurers, HMOs and providers.

Data transparency has several key characteristics, which include easy accessibility, standardized performance metrics, n ationally recognized/MD-approved set of rules governing claim coding/grouping procedures, a utomated data sharing/integration availability via the Internet, an underlying reward system using chronic disease in lieu of episodic management/efficiency and demonstration of intervention benefits in a credible way. So crucial is this factor that all of the major forces within the business, labor and health care community have come together in an attempt to provide the elements of structure and process that are the underpinnings of data transparency. The Consumer-Purchaser Disclosure Project, underwritten by the Robert Wood Johnson Foundation has as its goal, “to provide all Americans with publicly reported health care performance information by January 1, 2007.”   The “ shared vision [of this project] is that Americans will be able to select hospitals, physicians, and treatments based on nationally standardized measures for clinical quality, consumer experience, equity, and efficiency . ” 1  

 

The above focus of the marketplace points to an increased emphasis on health care quality and cost-benefit. Tools that provide clear and defensible information that is based on best practice and express results based on the relative severity of disease of the underlying population provide full and accurate disclosure. The Gartner Group has stated, “Without severity adjusted data, no comparison can be made between entities within any stakeholder category (e.g. hospital vs. hospital or MCO vs. MCO) because all differences may be completely attributable to variations among the types and intensities of diseases underlying the data.” 2 Increasingly consumers, purchasers, insurers and providers will need tools that provide severity-adjusted data in order to provide a clear and accurate picture of health care quality attributable to different health plans and groups.

Services and Products

The Company is a management consulting firm specializing in the improvement of health care delivery and quality while reducing unnecessary cost. The Company has a proven track record for detecting and reducing unnecessary utilization while optimizing program performance and quality of care. Program performance and quality of care are measured not only on the basis of reduced costs but also using the context of a population’s relative disease burden/severity and the rate at which the interventions of particular provider and programs have an impact on the rate of progression.

 

CareAdvantage clients include health plans, employer, hospital systems, providers and other purchaser groups. For the past ten years, the Company has worked with many leading health plans to develop effective, affordable and timely data-driven strategies that improve case, disease and utilization, as well as operations and network management. These strategies have helped CareAdvantage clients to more effectively:

·   Identify and quantify disease burden and associated risk for their entire population and sub-populations

·   Improve member care quality through the defensible evaluation of health care providers and facilities

·   Facilitate provider cooperation and collaboration based on case mix and severity-adjusted data

·   Forecast resource consumption based on disease burden

·   Optimize allocation of resource

Recently, the Company has also assisted health plan clients with respect to further validating the value that they bring to purchasers and have had a demonstrable impact on sales retention and attraction of new sales.

 

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1 www.healthcaredisclosure.org

2 The Gartner Report - The Gartner Group - 1999

 

 

In addition, this expertise has been applied to help employers assess the efficiency and effectiveness of their present health care insurers, carriers and supporting vendors. CareAdvantage achieves this by empowering employers with the information, skills and guidance necessary to facilitate future purchasing decisions and optimize managerial and administrative practices.

In order to deliver these solutions, CareAdvantage utilizes experienced health plan executives and medical directors as well as a wide range of care management operations, clinical data analysis and information technology (IT) subject-matter experts. It is this vast array of experience that enables CareAdvantage to benefit clients with objective and quantifiable insight to develop the strategies and tactical initiatives that combine care management processes with a deep understanding of medical and health care insurance-related best practices.

Operations

 

The Company utilizes a multi-disciplinary team approach in providing its management and consulting services. The Company, through its employees and independent contractors, assesses care management operations, systems resources, integration and outcomes. Typically, assessment occurs on the client’s site, through interviews and data analysis. At the center of CareAdvantage’s data-driven analyses is RightPath ® Navigator (RPNavigator), the next generation software solution and an element of the Company’s RightPath ® Care Management product suite. RPNavigator categorizes and quantifies a population’s disease burden and provides a clear picture of the health status and severity associated with its clients’ member populations. RPNavigator’s underlying infrastructure incorporates a classification methodology from 3M Health Information Systems along with various analytical techniques to stratify the population and describe the individual member’s associated risks in intuitive ways. It also enables the valid assessment of existing health care quality and cost as well as projection of future risk from a resource consumption, disease progression and mortality perspective.

RPNavigator utilizes this information to stratify its clients’ members, groups and providers through the use of a wide range of clinical and demographic descriptors to quantify their risk as well as evaluate the impact of key interventions and programs. These descriptors and the underlying logic increase the associated transparency of the resulting analyses and support the new direction of the industry. Among the benefits of this solution is the ability of CareAdvantage clients to:

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Access meaningful information via an Internet-based portal

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Track population and member-related changes in disease status and severity over time

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Compare client sub-populations

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Profile provider using case mix and severity-adjusted techniques

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Select and prioritize members who would best benefit from care management interventions

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Understand adverse selection associated with existing and/or newly-obtained business as well as understand the impact of a plan’s overall turnover in terms of stayers and leavers

·  
Reduce the dependence on internal resources to develop and produce required reports to accomplish these tasks

There are several related efforts that result in additional sources of income for CareAdvantage, including:

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Development of new standardized analyses on a client-specific basis to meet a particular need for that client

·  
Undertaking of broader analytic consulting projects, using the methodology and logic within RPNavigator, on behalf of clients that need CareAdvantage’s expertise in analyzing and interpreting the data.

CareAdvantage also supports its clients through the provision of a wide range of consulting services to develop and implement the right solutions. These solutions provide the health care industry with strategies and tactical initiatives for effectively managing health care consumption, reducing costs and improving the quality and cost benefit of care.

For its services, the Company seeks to be compensated either (i) on a fee-for-service basis; (ii) per member per month (PMPM); or (iii) on the basis of a combination of both fee-for-service and PMPM.

Customers and Marketing

The Company currently provides its services to Blue Cross Blue Shield (“BCBS”) organizations, Kaiser Permanente, employers and a union pursuant to one or a combination of the compensation arrangements described above.

The Company markets its services to the health insurance industry, health service organizations, hospitals, insurance carriers, employers and unions.

 

Competition

The Company faces intense competition in a highly fragmented market of managed care services firms. Several managed care service firms currently provide and aggressively market services, which are in some respects similar to the Company's services. There are also a number of organizations developing a variety of approaches that are in competition with the Company’s products and services. Some of the Company's competitors have substantially greater financial resources and employ substantially greater numbers of personnel.

The Company intends to compete by offering what it believes to be the most comprehensive approach in the marketplace to address the medical cost and quality of care issues. Further, it believes that its competitive position is enhanced by its ability to develop tailored programs for large clients.

Government Regulation

Health Care Regulation

Government regulation of health care cost containment services, such as those provided by the Company, is a changing area of law that varies from jurisdiction to jurisdiction   and generally gives responsible administrative agencies broad discretion. The Company is subject to extensive and frequently changing federal, state and local laws and regulations concerning company licensure , conduct of operations, acquisitions of businesses operating within its industry, the employment of physicians and other licensed professionals by business corporations and the reimbursement for services. Regulatory compliance could have an adverse effect on the Company's present business and future growth by restricting or limiting the manner in which it can acquire businesses, market its services, and contract for services with other health care providers by limiting or denying licensure or by limiting its reimbursement for services provided.

It should be noted that in providing utilization review and case management services, the Company made recommendations regarding what is considered appropriate medical care based upon professional judgments and established protocols. However, the ultimate responsibility for all health care decisions is with the health care provider. Furthermore, the Company is not an insurer, and the ultimate responsibility for the payment of medical claims is with the insurer.

 

Although the Company is not a health care provider, it could have potential liability for adverse medical consequences. The Company could also become subject to claims based upon the denial of health care services and claims such as malpractice arising from the acts or omissions of health care professionals. Its exposure in this regard is substantially reduced since it ceased providing utilization review and case management services as of December 31, 2002. Nonetheless, until the applicable statutes of limitations have run, the Company retains exposure for past activities as well as on account of its continued internal physician review services offered as part of its Executive and Clinical Management Services.

The Company’s operations in a particular state are typically subject to certification by the appropriate state agency. The Company has received or has filed the necessary application for such certification where required. In addition, various state and federal laws regulate the relationships between providers of health care services and physicians and other clinicians, including employment or service contracts, investment relationships and referrals for certain designated health services. These laws include the fraud and abuse provisions of the Medicare or Medicaid statutes, which prohibit the solicitation, payment, receipt or offering of any direct or indirect remuneration for the referral of Medicare or Medicaid patients or for the ordering or providing of Medicare or Medicaid covered services, items or equipment. Violations of these provisions may result in civil or criminal penalties for individuals or entities including exclusion from participation in the Medicare and Medicaid programs. Several states have adopted similar laws that cover patients in private programs as well as government programs. Because the anti-fraud and abuse laws have been broadly interpreted, they may limit the manner in which the Company can acquire businesses and market its services to, and contract for services with, other health care providers.

The Company's management believes that its present operations are in compliance with all applicable laws and regulations and that it maintains sufficient comprehensive general liability and professional liability insurance coverage to mitigate claims to which the Company may be subject in the future. The Company is unable to predict what, if any, government regulations affecting its business may be enacted in the future or how existing or future regulations may be interpreted. To maintain future compliance, it may be necessary for the Company to modify its services, products, structure or marketing methods. This could increase the cost of compliance or otherwise adversely affect the Company's operations, products, profitability or business prospects.

Proposed Health Care Reform

If proposed federal and state health care reform initiatives are enacted, the payments for and the availability of health care services may be affected. Aspects of certain proposals, such as reductions in Medicare and Medicaid payments, could adversely affect the Company. The Company is unable to predict what impact, if any, future enacted health care reform legislation may have on its current and future business, and no assurance can be given that any such reforms will not have an adverse impact on its business operations or potential profitability.

Employees

At December 31, 2005, the Company employed a total of 17 full-time employees. Of this total, 12 employees are engaged in servicing its clients. The 5 remaining employees include administrative support, finance, information systems and human resources personnel. None of the Company’s employees are party to any collective bargaining agreements.