I,
Michael M. Earley, Chief Executive Officer of Metropolitan Health Networks,
Inc., a Florida corporation (the “Company”), am writing on behalf of the Company
to respond to the comments of the staff (the “Staff”) of the Division of
Corporation Finance of the Securities and Exchange Commission (the “Commission”)
contained in its letter, dated June 17, 2010, addressed to me, with respect to
the above-referenced filings (the “SEC Comment Letter”).
For your convenience, the
numbered responses set forth below contain each of the Staff's comments in
total, set off in italics, and correspond to the numbered comments contained in
the SEC Comment Letter.
1. Please tell us what accounting
guidance you relied on in recording a $5.9 million gain on the sale of the HMO
in 2008 and a $1.3 million gain in 2009 in light of your continuing involvement
in the HMO via the IPA Agreement signed concurrent with the
sale.
RESPONSE: On June27, 2008, we entered into a Stock Purchase Agreement (the “Purchase Agreement”)
with Humana, Inc. (“Humana”). The Purchase Agreement provided for the
sale to Humana of all of the stock of METCARE Health Plans, Inc. (“MHP”), our
wholly owned subsidiary that operated our health maintenance organization (“the
HMO”). Prior to the Purchase Agreement, MHP had no preexisting
relationship with Humana.
Concurrent
with the sale of MHP, we were retained by Humana, through our Provider Service
Network (“PSN”), to provide or coordinate the healthcare services to Humana’s
customers in the counties served by the HMO on a per customer fee arrangement in
accordance with the terms of an independent practice association participation
agreement (“IPA Agreement”). As Humana did not operate in these
counties prior to its acquisition of MHP, substantially all of the customers to
be served under the IPA Agreement at the time of acquisition were customers
of the HMO. The IPA Agreement was and is similar to the other
longstanding agreements we have with Humana in other Florida
markets.
As a
result of the sale of MHP, Humana had to reapply for transfer of all State and
federal licenses to operate the HMO and assumed all the risks and
responsibilities of operating the HMO. In addition, substantially all
of the HMO’s third party provider agreements were assumed by
Humana. After the sale, negotiations of terms and conditions with
third party providers such as hospitals, specialist-physicians, labs and other
significant caregivers were under the control of Humana. Humana also
controlled the marketing, advertising, sales and enrollment process as well as
the approval of care, adjudication of claim payments and payment of claims of
the customers of MHP.
As the
sales transaction occurred prior to the FASB’s Accounting Standards
Codification, all references to accounting literature herein will use the names
of the standards that existed at that time.
“The
results of operations of a component of an entity that either has been disposed
of or is classified as held for sale shall be reported in discontinued
operations in accordance with paragraph 43 if both of the following conditions
are met: (a) the operations and cash flows of the component have been (or will
be) eliminated from the ongoing operations of the entity as a result of the
disposal transaction and (b) the entity will not have any significant continuing
involvement in the operations of the component after the disposal
transaction.”
In evaluating whether or not we should
account for the predisposition results of MHP and classify any gain or loss on
disposition within discontinued operations, we also considered EITF 03-13,
“Applying the
Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to
Report Discontinued Operations.” Issue 1 of this EITF provides
additional guidance in connection with Paragraph 42 of SFAS No. 144 as to
how an ongoing entity should evaluate whether the operations and cash
flows of a disposed component have been or will be eliminated from the ongoing
operations of the entity.
EITF
03-13 states:
“The Task
Force reached a consensus on Issue 1 that the evaluation of whether the
operations and cash flows of a disposed component have been or will be
eliminated from the ongoing operations of the entity depends on whether
continuing cash flows have been or are expected to be generated and, if so,
whether those continuing cash flows are direct or indirect. Continuing cash
flows are cash inflows or outflows that are generated by the ongoing entity and
are associated with activities involving a disposed component. If continuing
cash flows are generated, the determination as to whether those continuing cash
flows are direct or indirect should be based on their nature and significance. If any
continuing cash flows are direct, the cash flows have
not been eliminated and the operations of the component should not be presented
as a discontinued operation. Conversely, if all continuing cash flows are indirect (that is, not
direct), the cash flows are considered to be eliminated and the disposed
component meets the paragraph 42(a) criterion to be considered a discontinued
operation. The assessment as to whether continuing cash flows are direct cash
flows should be based on management's expectations using the best information
available.”
Based on
this guidance, we concluded that the disposal of MHP should not be accounted for
as a discontinued operation since the Company would be realizing direct cash
flows from the disposed entity. As we considered this guidance, we
noted that this guidance does not preclude the recognition of a gain or loss on
the sale of a disposed component with which a company will continue to do
business, rather guidance as to whether the gain or loss should be accounted for
as a discontinued operation. Since the Company had concluded that the
gain should not be accounted for as a discontinued operation, Issue 2 in EITF
03-13 was made moot.
The
Company also considered then existing SAB Topic 5e, “Accounting for Divestiture of a
Subsidiary or Other Business Operation.” SAB
Topic 5E partially states:
Before
recognizing any gain, Company X should identify all of the elements of the
divesture arrangement and allocate the consideration exchanged to each of those
elements.
Management
believes that the guidance in SAB Topic 5e, which addresses a situation where
gain recognition upon divestiture would clearly not be appropriate, is also
useful in our evaluation of the appropriateness of gain recognition for the sale
of MHP. As the facts and circumstances surrounding the sale of MHP were clearly
different than the fact pattern outlined in the SAB (e.g. performance
guarantees, etc.). We concluded that the guidance in SAB Topic 5e would not
preclude the Company from recognizing a gain upon the sale of the HMO. However,
based on the above guidance from SAB Topic 5e, management considered whether a
portion of the proceeds from the sale of the HMO should be attributed to the IPA
Agreement, which may have resulted in the deferral of a portion of the gain on
sale. As noted above, at the time of the sale of MHP, we had in place
agreements with Humana to provide services similar to the services being
provided under the IPA Agreement to Humana customers in other parts of the State
of Florida. The percentage of premium and other important terms and
conditions negotiated with Humana for the IPA Agreement were based on the rates
received from CMS for the area, the actual and anticipated medical costs and our
projected ongoing costs of administering the IPA Agreement. These were the same
factors that we considered in the negotiations of the terms of our other
provider network agreements with Humana. The resulting principal terms of the
IPA agreement were substantially similar to our other agreements with
Humana.
The
negotiations with Humana were at arms length. The principal terms of
the sale transaction, including price, were determined through negotiations with
Humana’s Corporate Development group in Humana’s Louisville headquarters office.
The IPA Agreement was negotiated with Humana’s Florida region management
team. Had we been unable to reach agreement on the terms of the IPA
Agreement, we believe that Humana could have negotiated similar terms with
organizations similar to ours to provide these services in the
HMO’s service
area.
The
Company concluded upon completion of the negotiations of the IPA Agreement
covering the former customers of MHP that the terms and conditions of the IPA
Agreement were at fair market value, and as a result, it would not be
appropriate to allocate any of the proceeds of the sale of the HMO to the IPA
Agreement.
The
Company also obtained a fairness opinion from an investment banking firm that
the amount we received from this transaction, from a financial point of view,
was fair, to the Company, of the consideration to be received in the proposed
transaction. The terms of the sale were the same as those
considered in the fairness opinion.
Therefore,
considering the then existing accounting guidance, and the facts and
circumstances surrounding the sale of the HMO and the signing of the IPA
Agreement (as described above), we concluded that it was appropriate to
recognize a gain on the sale of the HMO of $5.9 million during the year ended
December 31, 2008. As disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2009, additional gain on the sale of the HMO of $1.3 million
was recognized during 2009 as a result of changes in the estimates made at the
sale date of the final working capital settlement provided for in the
agreement.
Note 7 — Investments, page
F-15
2. Please revise your disclosure to
include a schedule of investments and the respective fair value measurements by
major category. Refer to ASC 820-10-50-2.
RESPONSE: We have
reviewed the disclosures required by ASC 820-10-50-2 and have identified below:
(i) each disclosure requirement and (ii) where such disclosures, to the extent
applicable, are addressed in the financial statements (the “Financial
Statements”) included in the Form 10-K for the fiscal year ended December 31,2009 (the “Form 10-K”). We wish to note that the disclosures
relating to our investments are in Note 2 as well as Note 7.
We do
agree that disclosure could be improved if we provide a list of the types of
investments held in our portfolio and will provide this information in future
filings.
ASC
820-10-50-2 requires the reporting entity to disclose all of the following
information for each interim and annual period separately for each major
category of assets and liabilities:
ASC 820-10-50-2
Disclosure Item
Location of Disclosure
in Form 10-K
The
fair value measurements at the reporting date
In
Note 2 to the Financial Statements, we state that all investments,
consisting of U.S. Treasury Securities, municipal bonds and corporate debt
are stated at fair value. Accordingly, the amounts
in the balance sheet at December 31, 2009 reflect the closing price of the
security.
The
level within the fair value hierarchy in which the fair value measurements
in their entirety fall, segregating fair value measurements using any of
the following:
(a)
Quoted prices in active markets for identical assets or liabilities (Level
1).
(b)
Significant other observable inputs (Level 2).
(c) Significant
unobservable inputs (Level 3).
In
Note 2 to the Financial Statements, we state that all investments are
Level 1 investments.
For
fair value measurements using significant unobservable inputs (Level 3), a
reconciliation of the beginning and ending balances, separately presenting
changes during the period attributable to any of the
following:
(a)
Total gains or losses for the period (realized and unrealized),
segregating those gains or losses included in earnings (or changes in net
assets), and a description of where those gains or losses included in
earnings (or changes in net assets) are reported in the statement of
income (or activities).
(b)
Purchases, sales, issuances, and settlements (net).
(c)
Transfers in and/or out of Level 3 (for example, transfers due to changes
in the observability of significant inputs).
As
noted above, all of our investments are Level 1 investments and,
accordingly, this disclosure item is not applicable. However,
please note that the total gains or losses for the period are disclosed in
Note 7 to Financial Statements and that purchases, sales, issuances and
settlements (net) are included in the Consolidated Statements of Cash
Flows.
The
amount of the total gains or losses for the period in (c)(1) included in
earnings (or changes in net assets) that are attributable to the change in
unrealized gains or losses relating to those assets and liabilities still
held at the reporting date and a description of where those unrealized
gains or losses are reported in the statement of income (or
activities)
This
information is included in Note 7 to the Financial
Statements.
The
inputs and valuation technique(s) used to measure fair value and a
discussion of changes in valuation techniques and related inputs, if any,
during the period.
This
disclosure item is not applicable.
Signatures, page
53
3. We note that your Form 10-K does not
appear to have been filed by an individual identified as your principal
accounting officer or controller as required under Instruction D to Form
10-K. If your principal accounting officer or controller has signed
the Form 10-K, please confirm that you will indicate this additional capacity in
the signature block of this individual in your future filings. If
your principal accounting officer or controller has not signed your Form 10-K,
please amend your Form 10-K to provide this required
signature.
RESPONSE: Our Chief
Financial Officer, who signed the Form 10-K, serves both as our principal
financial officer and principal accounting officer. In future
filings, we will clarify in the signature block that he is signing in both such
capacities.
Risk Assessment of
Compensation Policies and Practices, page 27
4. We note your disclosure in response
to Item 402(s) of Regulation S-K. Please describe the process you
undertook to reach the conclusion that disclosure is not
necessary.
RESPONSE: In
January 2010, our Board of Directors and the Governance and Nominating Committee
of the Board (the “Committee”) each met and discussed the new proxy disclosure
rules applicable to our 2010 Form 10-K and proxy filings. In anticipation of the
meetings, the Board and the Committee had reviewed a memorandum summarizing
certain new rules and proposing an action plan for addressing each anticipated
disclosure item. One of the proposed action items was for the Committee to
review whether there were any material risks associated with our compensation
policies and practices. At various times between January 2010 and the
date of our filing of the Form 10-K/A for the fiscal year ended December 31,2009 (the “Form 10-K/A”), our management offered to the Board and the Committee
its assessment that there were no perceived material risks associated with our
compensation policies and practices.
In
February 2010, the Compensation Committee of the Board (the “Compensation
Committee”) met and discussed a wide range of compensation related issues,
including discussions related to our various executive and employee long-term
compensation plans, various forms of non-cash compensation and stock ownership
guidelines. A portion of the conversations revolved around how our
long-term compensation plans, various forms of non-cash compensation and stock
ownership guidelines are intended to align the interests of executives and
employees with the long-term interests of our shareholders. In the course of
discussing and approving a number of executive and employee compensation
policies, the Compensation Committee did not identify any material risks
associated with our compensation policies and practices. Moreover,
the Compensation Committee discussed how our long-term compensation plans,
various forms of non-cash compensation and stock ownership guidelines were
generally viewed as dampening various potential compensation related
risks. In April 2010, the Compensation Committee met again and
discussed a wide range of compensation related issues. In April 2010,
the Board met to discuss and, ultimately, approve of the filing of the Form
10-K/A.
* the
Company is responsible for the adequacy and accuracy of the disclosure in the
filings;
* staff
comments or changes to disclosure in response to staff comments do not foreclose
the Commission from taking any action with respect to the filings;
and
* the
Company may not assert staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United
States.
*****
Any
comments or questions regarding the foregoing should be directed to me at (561)
805-8500. Thank you very much for your assistance with this matter.
Sincerely,
/s/ Michael
M. Earley
Michael
M. Earley
Dates Referenced Herein and Documents Incorporated by Reference
