PACIFIC HEALTH CARE ORGANIZATION, INC.
Throughout this annual report on Form 10-K, unless the context indicates otherwise, the terms, “we,” “us,” “our” or “the Company” refer to Pacific Health Care Organization, Inc., (“PHCO”) and our wholly-owned subsidiaries Medex Healthcare, Inc. (“Medex”) and Industrial Resolutions Coalition, Inc. (“IRC”), Arissa Managed Care, Inc. (“Arissa”), Medex Managed Care, Inc. (“MMC”), Medex Legal Support, Inc., (“MLS”) and Medex Medical Management, Inc. (“MMM”).
Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to our management. For this purpose any statement contained in this annual report on Form 10-K that is not a statement of historical fact may be deemed to be forward-looking, including, but not limited to statements about future demand for the products and services we offer, changes in the composition of the products and services we offer, future revenues, expenses, results of operations, liquidity and capital resources or cash flows, or our actions, intentions, plans, strategies and objectives. Without limiting the foregoing, words such as “believe,” “expect,” “project,” “intend,” “estimate,” “budget,” “plan,” “forecast,” “predict,” “may,” “will,” “could,” “should,” or “anticipate” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements or the industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, economic conditions generally and in the industry in which we and our customers participate; competition within our industry, including competition from much larger competitors; legislative requirements or changes which could render our services less competitive or obsolete; our failure to successfully develop new services and/or products or to anticipate current or prospective customers’ needs; price increases or employee limitations; and delays, reductions, or cancellations of contracts we have previously entered.
Forward-looking statements are predictions and not guarantees of future performance or events. Forward-looking statements are based on current industry, financial and economic information, which we have assessed but which by its nature is dynamic and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. We hereby qualify all our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of their dates and should not be unduly relied upon. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise (other than pursuant to reporting obligations imposed on registrants pursuant to the Securities Exchange Act of 1934) to reflect subsequent events or circumstances.
The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this annual report on Form 10-K and in our other filings with the Securities and Exchange Commission.
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1. BUSINESS
Company History
Pacific Health Care Organization, Inc. was incorporated under the laws of the state of Utah on April 17, 1970 under the name Clear Air, Inc. The Company changed its name to Pacific Health Care Organization, Inc. on January 31, 2001. On February 26, 2001, we acquired Medex Healthcare, Inc. a California corporation organized March 4, 1994, in a share for share exchange. Medex is a wholly-owned subsidiary of the Company. Medex is in the business of managing and administering both Health Care Organizations (“HCOs”) and Medical Provider Networks (”MPNs”) in the state of California. On August 14, 2001, we formed the corporation now known as Industrial Resolutions Coalition, Inc. as a wholly-owned subsidiary of PHCO. IRC participates in the business of creating legal agreements for the implementation and administration of Workers’ Compensation Carve-Outs for California employers with collective bargaining units. On June 30, 2010 we acquired Arissa Managed Care, Inc. a Nevada corporation organized September 1, 2009 by purchasing all of its outstanding common stock. On February 2, 2012 Arissa changed its name to Medex Legal Support, Inc. MLS plans to offer lien representation services to clients. On March 16, 2011 we incorporated Medex Managed Care, Inc. in the state of Nevada, as a wholly owned subsidiary of the Company. In April 2011, MMC took over the responsibilities of overseeing and managing the utilization review and managed bill review business previously managed by our subsidiary, Medex. On February 13, 2012 we incorporated Medex Medical Management, Inc. in the state of Nevada, as a wholly owned subsidiary of the Company. MMM will be responsible for overseeing and managing nurse case management services previously managed by our subsidiary Medex.
Business of the Company
Through our wholly-owned subsidiaries we provide a range of workers’ compensation solutions to employers in California. These services include managing and administering Health Care Organizations and Medical Provider Networks, implementing and administering Workers’ Compensation Carve-Outs, utilization review, medical bill review and nurse case management. We are also preparing to offer lien representation services.
Through our two HCO licenses, we offer injured workers a choice of enrolling in an HCO with a network managed by primary care providers requiring a referral to specialists or a second HCO where injured workers do not need any prior authorization to be seen and treated by specialists.
The two HCO certifications obtained by Medex cover the entire state of California. Medical and indemnity costs associated with workers’ compensation in the state California are billions of dollars annually. Our two HCO certified programs have contracted with over 3,900 individual providers and clinics, as well as hospitals, pharmacies, rehabilitation centers and other ancillary services making our HCOs capable of providing comprehensive medical services throughout this region. We are continually developing these networks based upon the nominations of new clients and the approvals of their claims’ administrators. Provider credentialing is performed by Medex.
As discussed above, under the HCO guidelines, all HCOs are required to pay certain fees. These requirements increase the administrative costs of an HCO, although, as a result of the restructuring of the HCO enrollment fee, such differences are no longer substantial.
Due to multiple HCO requirements, many clients opt to use the less complicated MPN even though the client has less control over the employee’s claim. The HCO program gives the client, in most cases, 180 days of medical control in a provider network within which the client has the ability to direct the claim. The injured worker may change physicians once, but may not leave the network. Whereas the MPN program seems to allow medical control for the life of the claim, but contains provisions that allow the employer client’s control of only the initial treatment before the employee can treat with anyone in the network. In addition, the MPN statute and regulations allow the injured worker to dispute treatment decisions, leading to second and third opinions, and then a review by an Independent Medical Reviewer, whose decision can end up with the employer client losing medical control. A significant number of employer clients have availed themselves of the MPN. Others utilize the provisions of the HCO plus MPN program.
Unlike HCOs, MPNs are not assessed annual fees and no annual enrollment notice delivery requirements. MPN’s are only required to provide an enrollment notice at the time the employee first joins the MPN and a second notice must be delivered to the employee at the time he suffers a workplace injury. As a result, there are fewer administrative costs associated with administering an MPN program, which allows MPNs to market their services at a lower cost fees than HCOs.
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We maintain ongoing discussions with insurance brokers, carriers, third party administrators, managed care organizations and with representatives of self-insured employers, both as partners and potential clients. Based on potential cost savings to employers and the approximately fourteen million workers eligible for our services, we expect that employers will continue to sign contracts with us to retain our services. The amounts we charge employers per enrollee may vary based upon factors such as employer history and exposure to risk; for instance, a construction company would likely pay more than a payroll service company. In addition, employers who have thousands of enrollees are more likely to get a discount.
Because we contract with medical providers, who own their own medical equipment, we have not incurred significant capital expenditures. We do, however, incur fixed costs such as liability insurance and other usual costs of running a business.
Ancillary Services
We have access to a full range of ancillary services to cover all requirements of the DIR. This includes interpreter services, ambulances, physical therapy, occupational therapy, pharmacies and much more. The ancillary services are vital to ensure there is a complete network capable of independently providing all care that may be necessary.
Industry Background
In July 1993 the California legislature passed Assembly Bill 110 (“AB 110” or the “bill”) and deregulated the premiums paid by employers for workers’ compensation insurance. These two events have given rise to our business.
AB 110 was a collaboration of efforts from both employers and workers’ compensation insurance carriers, in an effort to curtail employers from leaving California due to escalating workers’ compensation costs. The bill was designed to address the problem of rising medical costs and poor quality of care provided to injured workers. Two of the major problems with the system, as identified by the legislature, were fraud, (including malingering), and the lack of managed care programs that allowed control of the quality of medical care of an injured worker beyond thirty days. AB 110 created a new health care delivery body to solve the unique medical and legal issues associated with workers’ compensation. The health care delivery entities established under AB 110 are known as Health Care Organizations. HCOs are networks of health care professionals specializing in the treatment of workplace injuries and in back-to-work rehabilitation and training. An HCO does not waive the statutory obligation of companies to either possess workers’ compensation insurance or qualify as permissibly self-insured entities.
HCOs were created to appeal to employees, while providing substantial savings to employers. This is accomplished by providing high quality medical care with professional oversight and increasing the length of time the employer is involved in the medical care provided to injured workers. The increased length in control is designed to decrease the incidence of fraudulent claims and disability awards and is also based upon the notion that if there is more control over medical treatment there will be more control over costs, and subsequently, more control over getting injured workers back on the job. The intent of the increase in control was to reduce the costs of claims and thereby reduce workers’ compensation premiums.