ModivCare Inc - Annual Report: 2014 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

OR

For the transition period from              to             

Commission file number 001-34221

The Providence Service Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code

(520) 747-6600

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐  Yes    ☒  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ☐  Yes    ☒  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☐  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ☐  Yes    ☒  No

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates based on the closing price for such common equity as reported on The NASDAQ Global Select Market on the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2014) was $423.9 million.

As of March 10, 2015, there were outstanding 15,902,354 shares (excluding treasury shares of 1,016,879) of the registrant’s Common Stock, $.001 par value per share, which is the only outstanding capital stock of the registrant. 

DOCUMENTS INCORPORATED BY REFERENCE

All or a portion of items 10 through 14 in Part III of this Form 10-K are incorporated by reference to our definitive proxy statement on Schedule 14A for our 2015 stockholder meeting; provided that if such proxy statement is not filed on or before April 30, 2015, such information will be included in an amendment to this Report on Form 10-K filed on or before such date.

TABLE OF CONTENTS

PART I

Item 1.      Business.

Background 

The Providence Service Corporation (“Providence”, the “Company”, “we”, or “us”), which was formed in 1997, through its four business segments, provides and manages government sponsored non-emergency transportation (“NET”) services, human services, workforce development (“WD”) services and health assessment (“HA”) services. With respect to NET services, which operates under the Logisticare brand, we manage transportation networks and arrange for client transportation to health care related facilities and services for state or regional Medicaid agencies, managed care organizations (“MCOs”) and commercial insurers. With respect to our human services, our counselors, social workers and behavioral health professionals work with clients who are eligible for government assistance due to income level, disabilities or court order. With respect to our workforce development and justice services, provided primarily through Ingeus Proprietary Limited and its wholly and partly-owned subsidiaries and associates (collectively, “Ingeus”), which we acquired during the second quarter of 2014, we provide resume and job interview skills, networking and job placement services, and technical job training through internally staffed or outsourced resources. Additionally, with respect to our health assessment services, provided through CCHN Group Holdings, Inc. and its wholly-owned subsidiaries and affiliates (collectively, “Matrix”), which we acquired during the fourth quarter of 2014,we provide comprehensive health assessments (“CHAs”), for Medicare Advantage (“MA”) health plans, in members’ homes or nursing facilities.

Competitive Strengths

We believe the following competitive strengths uniquely position us to take advantage of the increase in the privatization of government sponsored services, as well as the home and community based delivery of behavioral health and other human services.

Leading market position and reputation

We believe we are the market leader in NET services, have a leading high-quality global workforce platform, are one of the largest for-profit providers of home and community based behavioral health services and, with the addition of Matrix, are the market leader in MA CHAs. We believe our market leadership and reputation for service quality in cost effective settings position us to benefit from the increased government outsourcing and the shift to home and community based care. Our broad footprint, as well as our local market density and knowledge, allows us to deliver a level of quality and responsiveness that smaller service providers are not always able to offer. This quality and responsiveness, coupled with our brand reputation and experienced management team, has allowed us to forge strong relationships with commercial business partners and national, state, and county government agencies.

Scalable operating platform

We believe the operational infrastructure within each of our business segments provides a competitive advantage. Unlike smaller competitors, we have developed a robust and scalable infrastructure, including functions such as quality assurance, compliance, risk management, information technology, and bidding and contract management. This infrastructure enables us to focus on efficiently delivering consistent, high-quality service and enables us to respond to the increasing compliance, regulatory and fiscal requirements of our customers. Our NET Services and WD Services segments utilize proprietary technology platforms to achieve efficiencies that are difficult for our competitors to match. These systems serve as the primary operating platforms for these businesses, and allow for the effective management of provider networks, enhanced reporting capabilities, and real-time detailed client tracking. We believe that the deployment of these technology platforms facilitate timely and accurate assessments of our business performance, and allow us to track and respond to identified trends efficiently. We believe that Matrix’s network of nurse practitioners (“NPs”) and a scalable operating platform, supported by proprietary technology, represents a key competitive advantage in the market for CHAs.

Diversified program and payer mix

Providence consists of four discrete business segments, characterized by decentralized management and location-specific service offerings. Our service offerings span NET, HA, and Human and WD services. Our payers include national, state, county and other government bodies as well as managed care organizations. Our business segments utilize various payment models including capitated, fee-for-service (“FFS”) and performance-based, which provide further revenue and cash flow diversification.

Ability to drive quality outcomes in low cost settings presents significant value proposition for payers and clients

Through our ability to design customized service plans that meet the unique needs of our clients in cost effective settings, we believe we offer a powerful value proposition to our payers and, ultimate clients. Rising costs are driving payers to shift away from costly facility based delivery and towards lower cost home, community and service center based delivery. For example, in the US, in order to save costs, Medicaid spending on long-term care has been shifting towards lower cost home and community based services. As a result, we estimate Medicaid home and community based services spending as a percent of total Medicaid long- term services and support expenditures has grown from 18% in 1995 to 50% in 2012, and is expected to continue growing. Internationally, there is a growing trend to shift the delivery of social services to the private sector with strict accountability for measurable results. We believe we are well positioned to benefit from these trends, as we provide a lower cost alternative for delivering social and medical care services, and drive high quality outcomes.

Positioned to benefit from emerging healthcare and social service trends

We believe we are well positioned to benefit from trends in healthcare, including the growth of Medicare, Medicaid and dual eligible (individuals eligible for both Medicaid and Medicare) populations, the growth in MA plan enrollment, development of integrated delivery models and increased focus on logistics management to improve patient access to preventative and health management services. Increasingly, individuals in need of our services are living longer lives, requiring additional care and in many cases outliving the ability to reside independently or with family caregivers. The Medicaid population is also expanding as a result of healthcare reform. We expect to continue to expand our service lines to meet these growing demands across all of our segments.

Business Strategy

Grow our volumes and expand our services in existing markets

We expect to leverage our market reputation and core competencies to capture growth opportunities embedded in our current business platforms. Our core competencies include managing provider networks, tailoring services to community needs, effective and efficient bidding and contracting processes, logistics management and designing service delivery models to achieve superior outcomes. By enhancing and leveraging these core competencies, we believe we can benefit from emerging trends in healthcare and human services.

Pursue opportunities in adjacent markets and complementary service lines

We have a proven track record of expanding both organically and through acquisitions into adjacent markets and we intend to leverage our core competencies and relationships with national, state, and county governmental entities, as well as commercial health plans to pursue additional expansion opportunities. We typically pursue organic and strategic expansion into markets that are contiguous to our existing markets or where we believe we can quickly establish a significant presence. In addition, we will continue to seek opportunities to cross-sell our services throughout our platform.

Increase returns on capital by enhancing our service offerings and improving performance

We believe we can continue to improve efficiencies and increase returns on capital by utilizing our expertise within our existing programs and by capitalizing on our increasing scale. In addition, we will invest in strong markets and premium products and programs while selectively exiting underperforming service lines, improving management systems, and improving bidding and contracting discipline.

Drive long-term intrinsic value embedded in our recent acquisitions

We believe that there is opportunity to increase the intrinsic value of our 2014 acquisitions of Ingeus and Matrix. Ingeus has a presence in ten countries outside the US, which substantially increases our international footprint. We intend to build upon Ingeus’s successful track record of delivering value added services, as well as utilizing its reputation to enter new international markets and service lines.

Additionally, we believe Matrix has multiple growth opportunities. We believe Matrix is well positioned to increase CHA volumes within its existing MA customer base and to add new MA customers. Matrix’s offerings are extensible across adjacent markets (Medicaid, dual eligible, and commercial), which, like the Medicare market, have a need to better assess, stratify, and mitigate risk.

Financial information about our segments

We operate in four segments, NET Services, Human Services, WD Services and HA Services. Financial information about segments and geographic areas, including revenues, net income and long-lived assets of each segment and from domestic and foreign operations for the Company as a whole is included in Note 19 of our consolidated financial statements presented elsewhere in this report and is incorporated herein by reference. Additionally, see Item 1A, Risk Factors, for a discussion of risks related to our foreign operations.

Business description

NET Services

Services offered. We are a provider of NET management services providing solutions to clients under 109 contracts in 39 states and the District of Columbia. We provide responsive and innovative solutions for a healthcare recipient’s covered transportation benefit through centralized call processing, development and management of transportation networks through the use of proprietary technologies. Our current payers include state Medicaid programs, local government agencies, hospital systems and MCOs providing Medicare, Medicaid and commercial products. For 2014, 2013 and 2012, our NET services accounted for 59.7%, 68.6% and 67.9%, respectively, of our consolidated revenue.

We provide services to a wide variety of people with varying needs. Our payers are primarily state Medicaid agencies and MCOs. Our clients are typically Medicaid or Medicare eligible members, as defined by our payers, most of whom are individuals with limited mobility, people with limited means of transportation and people with disabilities that prevent them from using conventional methods of transportation. The majority of our programs provide NET services to Medicaid members. Utilization rates and vehicle requirements differ depending on the individual’s condition, the location of the individual relative to the final destination, and available transportation systems.

As a transportation logistics manager, we match transportation services with the recipient’s needs. We employ a proprietary information technology platform and operational processes to manage the transportation services through a contracted network of transportation providers. As such, we typically do not provide direct transportation to end users. Rather, to fulfill requests under our contracts, we contract with local transportation providers, such as operators of multi-passenger and wheelchair equipped vans, taxi companies and ambulance companies. We receive transportation requests from members or their representatives, such as social workers, and arrange for the least costly and most effective transportation. We process transportation requests by assigning local transportation providers out of one of our 28 call and/or regional support centers. These decisions are aided by our proprietary logistics software. After we assign an appropriate transportation provider to the member, we carefully monitor the transportation service provided to ensure that the transport was completed before we pay the transportation vendor. We do not normally pay for services if the member does not show up for transport, or if the transport is not completed. A majority of the requests for transportation are standing orders, mostly for patients who require frequent, recurring services such as dialysis treatment. Most transportation requests are required to be scheduled with 48 to 72 hour advance notice, with a small number of requests scheduled on the same day, such as hospital discharges.

We contract with larger transportation companies as well as a number of diverse, small, local companies in order to provide superior coverage in both urban and rural areas. As part of this comprehensive provider network management, we provide access to third party screening and credentialing of drivers and transportation companies, provide program rule orientation, and monitor performance on an ongoing basis through field audits, performance reporting and other reviews. We typically use multiple transportation providers in each state, with an average provider fleet size of less than 10 vehicles. To ensure compliance and safety quality standards for all transportation providers, we perform a credentialing process for all of our network transportation providers who must meet minimum standards set by us and our payers. These standards include: (i) successful completion of criminal and driving record checks; (ii) required drug testing; (iii) required driver and program training on such topics as HIPAA, defensive driving, patient sensitivity, cultural diversity and first aid; (iv) both scheduled and random inspections of provider owned and/or leased vehicles and communication systems; and (v) insurance coverage that complies with contractual and statutory requirements. Our contracts with transportation providers are on a per completed trip basis and do not contain volume guarantees. They can be cancelled without cause with 60 days’ notice.

 Revenue and payers. We contract primarily with state and local government entities and MCOs. Approximately 80.9% of our NET services revenue in 2014 was generated under capitated contracts where we assume the responsibility of meeting the covered transportation requirements of a specific geographic population. These contracts are generally structured with fixed per member, per month payment rates based on a defined scope of work and population to be served. Typical state payer contracts are for three to five years with renewal options and range in size from approximately $2 million to $150 million annually. Approximately 5.7% of our NET services revenue is derived from FFS contracts and approximately 8.5% is derived from flat fee contracts.

We generate a significant portion of our revenue from a few payers. We derived approximately 17.0%, 15.3% and 15.2% of our NET services revenue from our contract with the State of New Jersey for the years ended December 31, 2014, 2013 and 2012, respectively. Additionally, we derived approximately 8.2%, 9.2% and 9.6% of our NET services revenue from our contract with the State of Virginia’s Department of Medical Assistance Services for the years ended December 31, 2014, 2013 and 2012, respectively. Our next three largest payers in the aggregate comprised approximately 18.0%, 19.2% and 18.4% of our NET services revenue for the years ended December 31, 2014, 2013 and 2012, respectively.

Our contracted per member, per month fee is predicated on actual historical transportation data for a defined population and geographical region, future assumptions on key cost and program drivers, actuarial analysis performed in-house as well as by third party actuarial firms and actuarial analysis provided by our payers. Our contract pricing is regularly reevaluated and may be reset based on actual experience under the contract, with adjustments for membership fluctuations and inflation factors such as cost of labor, fuel, insurance and utilization increases and decreases stemming from program re-designs.

Seasonality. The quarterly operating income and cash flows of our NET Services segment normally fluctuate as a result of seasonal variations in the business, principally due to lower client demand for NET services during the holiday and winter seasons. Due to the fixed revenue stream and variable expense base structure of our NET Services operating segment, expenses typically vary with these changes and, as a result, such expenses fluctuate on a quarterly basis. We expect quarterly fluctuations in operating income and cash flows to continue as a result of the seasonal demand for NET services.

Competition. We compete with a variety of organizations that provide similar NET services to Medicaid eligible beneficiaries in local markets, such as American Medical Response, Inc., Medical Transportation Management Inc., and SoutheasTrans., as well as a host of local and regional transportation providers. Most local competitors may seek to win contracts for specific counties or small geographic territories whereas we and the larger competitors listed above seek to win contracts for an entire state or large regional area. Historically, we have been successful in competitively bidding our NET management services for state-wide or other large Medicaid population programs, as well as specialized NET benefits often offered to populations covered by MCOs. We compete based on our technical expertise and experience, which is delivered in a high service, competitive price environment, although we are not necessarily the lowest priced management service provider in many instances. We have experienced, and expect to continue to experience, competition from new entrants into our markets that may be willing to provide services at a lower cost. Regardless of how well we perform under our contracts (based on service or cost), we face competitive rebid situations from time to time. Increased competitive pressure could result in pricing pressures, loss of or failure to gain market share or loss of payers, any of which could harm our business.

Business development. With respect to our NET services sales and marketing strategy, we focus on providing information to key legislators and agency officials. We pursue potential opportunities through various methods including engaging lobbyists to assist in tracking legislation and funding that may impact NET programs, and monitoring state websites for upcoming requests for proposals (“RFPs”). In addition, we generate new business leads through trade shows and conferences, referrals, the Internet and direct marketing. The sales cycle usually takes between 6 to 24 months and there are various decision makers who provide input into the decision to outsource. By providing valuable information to key legislators and agency officials and creating a strong presence in the regions we serve, we are able to solidify the chance of renewal when contract terms expire. Additional payers are targeted within existing states in order to leverage pre-existing provider networks, technology, office and human resources investments. Furthermore, we target key commercial accounts which we define as accounts that are growing and located in multiple geographic areas.

In many of the states where we have regional contracts, we seek to expand to include additional regions in these states and in contiguous states. All decisions about which RFPs to consider are centralized and selectively targeted based on our goals and service capabilities. Medicaid NET Services contracts with state agencies and larger Medicaid MCOs represent the largest source of our NET Services revenue.

Human Services

Services offered. We primarily provide home and community based services and foster care services. The following describes these services:

Home and community based counseling

We also provide intensive home based counseling, which consists of up to 20 or more hours per client per week. Our intensive home based counselors are masters or Ph.D. level professional therapists or counselors. Intensive home based counseling is designed for clients struggling to cope with everyday situations. Our counselors are qualified to assist with marital and family issues, depression, drug or alcohol abuse, domestic violence, hyperactivity, criminal or anti-social behavior, sexual misbehavior, school expulsion or chronic truancy and other disruptive behaviors. In the absence of this type of counseling, many of these clients would be considered for 24-hour institutional care or incarceration.

For 2014, 2013 and 2012, our home and community based services represented approximately 21.6%, 27.2% and 28.0%, respectively, of our consolidated revenue.

Foster care

Revenue and payers. Substantially all of our revenue related to our Human Services operating segment is derived from contracts with state or local government agencies and government intermediaries.

 Fee-for-service contracts

The majority of our contracts are negotiated FFS arrangements with payers. Home and community based services are generally payable by the hour depending on the type and intensity of the service. Foster care services are generally payable pursuant to a fixed monthly fee. Approximately 76.0%, 72.0% and 72.5% of our Human Services operating segment revenue for the fiscal years ended December 31, 2014, 2013 and 2012 were FFS arrangements. A significant number of our FFS contracts allow the payer to terminate the contract immediately for cause, such as for our failure to meet our contract obligations. Additionally, these contracts typically permit the payer to terminate the contract at any time prior to its stated expiration date without cause, at will and without penalty to the payer, either upon the expiration of a short notice period, typically 30 days, or immediately, in the event federal or state appropriations supporting the programs serviced by the contract are reduced or eliminated.

We generate a significant portion of our revenue from a few payers. Under our contract with the State of Virginia’s Department of Medical Assistance Services, we derived approximately 10.6%, 11.1% and 10.1% of our Human Services segment revenue for the years ended December 31, 2014, 2013 and 2012, respectively.

           Cost-based service contracts

Revenues from our cost-based service contracts are generally recorded based on a combination of direct costs, indirect overhead allocations, and stated contractual margins on those incurred costs. These revenues are compared to annual contract budget limits and, depending on reporting requirements, reductions of revenue may be recorded for certain contingencies. This results in revenue from these contracts being recorded based on allowable costs incurred. The annual contract amount is based on projected costs to provide services under the contracts with adjustments for changes in the total contract amount. Annually, we submit projected costs for the coming year which assist the contracting payers in establishing the annual contract amount to be paid for services provided under the contracts. We submit monthly cost reports which are used by the contracting payers to determine the amount, if any, by which funds paid to us for services provided under the contracts were greater than the allowable costs to provide these services. Completion of this review process may range from one month to several years from the date we submit the cost report. In cases where funds paid to us exceed the allowable costs to provide services under contract, we may be required to pay back the excess funds.

Our cost reports are routinely audited by our contracted payers on an annual basis. We periodically review our provisional billing rates and allocation of costs and provide for estimated adjustments from the contracting payers. We believe that adequate provisions have been made in our consolidated financial statements for any adjustments that might result from the outcome of any cost report audits. Differences between the amounts provided and the settlement amounts are recorded in our consolidated statement of income in the year of settlement. Cost-based service contracts represented approximately 19.0%, 20.3% and 18.6% of our Human Services operating segment revenue for the years ended December 31, 2014, 2013 and 2012.

Block purchase (capitated) contract

We also provide certain services under an annual block purchase contract. We are required to provide or arrange for behavioral health services to eligible populations of beneficiaries as defined in the contract. We must provide a complete range of behavioral health services, including clinical, case management, therapeutic and administrative. We are obligated to provide services only to those clients with a demonstrated medical necessity. There is no contractual limit to the number of eligible beneficiaries that may be assigned to us, or a limit to the level of services that must be provided to these beneficiaries if the services are deemed to be medically necessary. Therefore, we are at-risk if the costs of providing necessary services exceed the associated reimbursement under the contractual arrangement. However, during the years ended December 31, 2014, 2013 and 2012, the eligible beneficiaries that were assigned to us did not exceed our budgeted expectations for those years. The terms of the contract typically are reviewed prospectively and amended as necessary to ensure adequate funding of our service offerings under the contract; however, no assurances can be made that such funding will adequately cover the costs of services previously provided. The annual block purchase contract represented 4.6%, 5.4% and 5.4% of our Human Services operating segment revenue for the years ended December 31, 2014, 2013 and 2012, respectively.

Seasonality. Our quarterly operating results and operating cash flows normally fluctuate as a result of seasonal variations in our Human Services operating segment, principally due to lower client demand for our home and community based services during the holiday and summer seasons. As our business has grown, our exposure to seasonal variations has also grown, and will continue to grow, particularly with respect to our school based, educational and tutoring services. Because the majority of our contracts are FFS, we experience lower home and community based services revenue when school is not in session. Our operating expenses, however, which are comprised largely of payroll and related costs, do not vary significantly with these changes. As a result, our Human Services operating segment experiences lower operating margins during the holiday and summer seasons. We expect quarterly fluctuations in operating results and operating cash flows to continue as a result of the seasonal demand for our home and community based services.

Competition. The human services industry is a highly fragmented industry. We compete for clients with a variety of organizations that offer similar services. Most of our competition consists of local human services organizations that compete with us for local contracts, such as agencies supported by the United Way, and faith-based agencies such as Catholic Social Services, Jewish Family and Children’s Services and the Salvation Army. Other competitors include local not-for-profit organizations and community based organizations. Historically, these types of organizations have been favored in our industry as incumbent providers of services to government entities. On a national level, there are very few organizations that compete for local, county and state contracts to provide the types of services we offer. We also compete with larger companies, such as Res-Care, Inc., which provides support services, training and educational programs predominantly to Medicaid eligible beneficiaries. National Mentor, Inc. is the country’s largest provider of foster care services and competes with us in certain markets for foster care services. Many institutional providers offer some type of community based care including such organizations as The GEO Group, Inc. and The Devereaux Foundation. While we believe that we compete on the basis of price and quality, many of our competitors have greater financial, technical, political and marketing resources, name recognition, and a larger number of clients and payers than we do. In addition, some of these organizations offer more services than we do. We have experienced, and expect to continue to experience, competition from new entrants into our markets. Increased competition may result in negative pricing pressures, loss of or failure to gain market share or loss of clients or payers.

Business development. Substantially all of our marketing is performed at the local and regional level. Through our local and regional managers, we have successfully developed and maintained extensive relationships with various payers. These relationships allow us to develop leads on new business, cross-sell our other services to existing payers and negotiate payer contracts. A significant portion of our business is procured in this manner. We also seek to market our services to payers in geographical areas contiguous to existing markets and in which we believe our reputation as a low cost quality service provider will enhance our ability to compete for and win business. From time to time we respond to RFPs. Additionally, we subscribe to a service that keeps us informed of and tracks on a national basis RFPs for privatization of human services. We selectively choose the RFPs to which we respond based upon whether our reputation enhances our ability to compete or if the RFP presents a unique opportunity to develop a new service offering.

WD Services

Services offered. Through Ingeus, we provide workforce development services that include resume and job interview skills, networking and job placement services, and technical job training through internally staffed or outsourced resources. Our end-user client base is broad, and includes long-term unemployed, disabled, and unskilled individuals, as well as individuals that cope with medical illnesses, are newly graduated from educational institutions, and those that have been released from incarceration for an extended length of time. As of December 31, 2014, our WD Services segment operates across ten countries, including Australia, France, Germany, Poland, Saudi Arabia, South Korea, Spain, Sweden, Switzerland and the United Kingdom.

Revenue, payers and clients. We contract primarily with national government entities that seek to reduce the unemployment rate generally, or for specific targeted cohorts. For the year ended December 31, 2014, approximately 77.6% and 9.4% of our WD Services revenue and consolidated revenue, respectively, was derived from operations in the United Kingdom. The nature of services offered by our WD Services segment may require significant upfront capital and operating cost outlays upon contract award, while revenues may be payable in large part only after incentive measures are achieved or the clients’ continued employment for a substantial period of time has been established. Further, the level of funding required is dependent upon the size and nature of the contract, and the timing of revenue recognition will vary based upon contract terms. Because of these two factors, there can be significant variability in our earnings from quarter to quarter, and from year to year. Our legacy workforce development services not related to Ingeus are included in the Human Services segment for the years ended December 31, 2014, 2013 and 2012.

Seasonality. While there has been period-to-period variability in the Ingeus earnings due to the factors set forth in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – How We Earn our Revenue – WD Services,”, there has not been a material seasonal effect on Ingeus’s results of operations.

Competition. The international workforce development market is comprised primarily of large multi-national corporations that provide a wide range of human resource, networking and job placement services, and smaller niche companies that generally provide services to an individual country or a small host of countries. Our larger competitors include Maximus, Manpower, Adecco, Randstad, G4S and Serco. We believe we have been successful bidding for large, nationwide contracts, and have also focused on significant contracts that cover smaller geographic regions within various countries. While our larger competitors also have deployed the same strategy, we believe we have been successful competing based on our reputation for past success, high level of professionalism and service delivery, and demonstrated expertise in our market space. While we are not always the lowest priced competitor in all situations, we do experience price pressure during the bid process, and sometimes post-bid when a contract is up for renewal. Increased competitive pressure could result in negative pricing pressures, loss of or failure to gain market share or loss of payers.

Business development. Our business development activities for our international workforce development business are performed at both the local country level as well as centrally in the WD Services segment headquarters in London. Through local and global networks and relationships, we become aware of new opportunities for which we develop bids through the RFP process. The nature of the RFP process varies from highly competitive to being one of a few, or the sole, service provider to bid on a contract. We market heavily on our past successes and performance, as well as competitive pricing. Our primary focus is building large, national contract bases, but we also have begun to expand into more regional markets within countries where we currently operate. Through local and international formal and informal lobbying efforts, we provide educational information to government officials regarding the economic efficiency of workforce development privatization. We perform extensive profitability and service delivery modeling before entering bids, and selectively choose which opportunities to pursue.

HA Services

Services offered.  Through Matrix, we deliver CHAs and related services through a national network of approximately 800 NPs located in communities throughout 33 states. Matrix’s model of delivering services through an employed network of NPs affords greater control, uniformity, and consistency in managing and training providers to deliver high quality services for its customers and their members. The NPs also reside in the same geographic area as the beneficiaries they serve, considerably improving their knowledge and access to medical and community based services.

Matrix’s CHAs are conducted at the member’s home or residential facility. Unlike a typical 8 to 15 minute office visit with a physician or physician’s assistant, which is often singularly focused on a specific symptom or condition, Matrix NPs spend up to 60 minutes with each member and any of the member’s family members or caregivers he or she chooses. The CHA is comprehensive and is comprised of a number of distinct components. In addition to checking vital signs and performing a physical examination, Matrix NPs review the member’s health history and medical prescriptions, conduct a depression screening, evaluate the immediate residential setting for any physical safety issues, review recommended screening tests, and conduct a series of geriatric screens for fall risks, nutrition, and cognitive function. As the evaluation is intended to provide a complete clinical assessment, Matrix NPs are also trained to record all diagnoses of medical conditions.

The data collected during the CHA is captured electronically in real-time in a portable tablet that each NP brings to the member’s residence. The CHA process is also specifically designed to engage and coordinate with the member’s care network to facilitate follow-up care and treatment. Following each CHA, educational and clinical information is shared with the member, provider and MA plan to identify and close gaps in care. The CHA measures MA plan liability and assists in determining risk adjusted payments made by Medicare to the MA plan. In addition to identifying opportunities to improve and optimize care, Matrix’s service offering can deliver immediate impact on care outcomes.

Revenue, payers and clients. As of December 31, 2014, Matrix customers included approximately 34 MA plans, including for profit multi-state MA plans and non-profit MA plans that operate in only one state or several counties within one state. Matrix serves many of the largest and most prestigious health plans and health systems in the US. From October 23, 2014 to December 31, 2014, Matrix’s top five customers accounted for approximately 70.8% of its revenue, and its largest customer accounted for about 43.2% of its revenue. Matrix enters into annual or multi-annual contracts with its customers under which it is paid on a per assessment basis.

Seasonality. CHAs are typically provided as part of MA plan’s annual program and are conducted with an individual member once per year. Historically, Matrix has experienced higher CHA volume in the second half of the calendar year as a result of an accelerating demand towards year-end from its existing customers and Matrix’s growing customer base.

Competition. We believe that Matrix and CenseoHealth are the largest providers of CHAs to the MA market. There are many smaller volume competitors, including EMSI Healthcare Services, MedXM, and Inovalon, Inc. Some MA plans internally provide CHA services for their members. The foundation of Matrix’s CHA programs is a network of full-time, community-based NPs. Matrix believes that this network provides a competitive advantage versus alternative models that rely upon a subcontracted network of part-time staff. Matrix’s employed network of community-based NPs and supporting management and infrastructure results in consistency, quality, and compliance in the delivery of CHAs and care management. Matrix’s services are often priced at a premium relative to its competitors, and Matrix believes it will continue to maintain a pricing differential as result of: (i) Matrix’s national footprint across 33 states, (ii) Matrix’s sophisticated stratification techniques to identify gaps in data and care, (iii) Matrix’s multi-channel member engagement capabilities, (iv) the benefits of Matrix’s full-time, dedicated, community based NPs, (v) Matrix’s greater control, uniformity and consistency in delivering high quality services for beneficiaries, and (vi) Matrix’s ability to execute and deliver the assessment goals of its customers.

Business development. The Affordable Care Act (“ACA”) expansion is creating significant opportunities for growth as risk-bearing healthcare organizations have an increasing need to assess, stratify, and ultimately mitigate the risk of member populations. In particular, the rapidly evolving healthcare industry landscape is expanding the market opportunity for CHAs across the following populations:

• Medicaid Expansion. At least 24 states use a risk adjustment model to adjust Medicaid Managed Care payments to health plans. The prevalence of risk adjustment in Medicaid is expected to expand as states need to create equitable incentives for plans to serve high-risk individuals in managed care as well as drive improvements in care quality. According to Centers for Medicare & Medicaid Services (“CMS”), the number of Medicaid enrollees is projected to grow approximately 5% per year to 77 million by 2020, largely driven by the ACA.

• Commercial Individual and Small Group Markets. Risk adjustment is a key component of the ACA-driven commercial markets. The continued expansion of coverage across higher risk demographics and the potential for adverse selection on public exchanges will require risk adjustment and sophisticated risk management capabilities. Non-grandfathered plans in the individual and small group markets, both on and off exchange, are subject to risk adjustment that began in 2014. By 2020, the Congressional Budget Office estimates that the individual exchange market will grow to serve 25 million individuals, up from the CMS-reported 8 million that enrolled in the first open enrollment season.

• Dual Eligible Population. Dual eligible individuals are those who are eligible for both Medicare and Medicaid. Given the cost and complexity of the dual eligible population, new member navigation, clinical screenings, health assessments and ongoing member engagement are critical to driving quality outcomes at a lower cost. There are more than nine million dual eligible beneficiaries. That group represents approximately $300 billion, or 10% of total healthcare expenditures. Approximately 40% of duals suffer from both physical and mental diseases, and these co-morbid conditions further complicate and add to the cost of care. With the anticipated expansion of Medicaid, the dual eligible market is also expected to increase, creating a large opportunity for Matrix to assist managed care plans in managing this high-cost population.

Employees

As of December 31, 2014, we conducted our operations with approximately 13,700 clinical, client service representatives and administrative personnel.

We believe that our employee relations are good because we offer competitive compensation, including stock-based compensation to key employees, training, education assistance and career advancement opportunities. By offering competitive compensation and benefit packages to our employees, we believe we are able to consistently deliver high quality service, recruit qualified candidates and increase employee confidence, satisfaction and retention.

Regulatory Environment

Overview. We are subject to numerous federal, state and local laws and regulations. These laws and regulations significantly affect the way in which we operate various aspects of our business. We must also comply with state and local licensing requirements and requirements for participation in Medicare, Medicaid, federal block grant requirements, requirements of various state Children’s Health Insurance Programs (“CHIP”), requirements for contracting with MA plans, and contractual requirements imposed upon us by the state and local agencies with which we contract for such health care and human services. CHIP is a federal program providing benefits administered by states that submit plans for health benefits for children whose parents meet certain financial needs tests. Failure to follow the rules and requirements of these programs can significantly affect our ability to be paid for the services we provide.

In addition, our revenue is largely derived from contracts that are directly or indirectly paid or funded by government agencies, including Medicare and Medicaid. A significant decline in expenditures, or shift of expenditures or funding, could cause payers to reduce their expenditures under those contracts or not renew such contracts, either of which could have a negative impact on our future operating results. As funding for our contracts is dependent in part upon federal funding, such funding changes could have a significant effect on our business.

The healthcare industry is highly regulated and the federal and state laws that affect our business are significant. Federal law and regulations are based primarily upon the Medicare and Medicaid programs, each of which is financed, at least in part, with federal money. State jurisdiction is based upon a state’s authority to license certain categories of healthcare professionals and providers and the state’s interest in regulating the quality of healthcare in the state, regardless of the source of payment. The significant areas of federal and state regulatory laws that may affect our business, include, but are not limited to the following:

A violation of any laws could result in civil and criminal penalties, the refund of monies paid by government and/or private payers, our exclusion from participation in federal healthcare payer programs, and/or the loss of our license to conduct business within a particular state’s boundaries. Although we believe that we are able to maintain material compliance with all applicable laws, these laws are complex and a review of our practices by a court, or applicable law enforcement or regulatory authority, could result in an adverse determination that could harm our business. Furthermore, the laws applicable to our business are subject to change, interpretation and amendment, which could adversely affect our ability to conduct our business.

Federal Law. Federal healthcare laws apply in any case in which we are providing an item or service that is reimbursable by a federal healthcare payer program. The principal federal laws that affect our business include those that prohibit the filing of false or improper claims with federal healthcare payer programs and those that prohibit unlawful inducements for the referral of business reimbursable under federal healthcare payer programs.

False and Other Improper Claims. Under the federal False Claims Act (31 U.S.C. §§ 3729-3733) and similar state laws, the government may impose civil liability on us if we knowingly submit, or participate in submitting, any claims for payment to the federal or state government that are false or fraudulent, or that contain false or misleading information. Liability can be incurred not only for submitting false claims with actual knowledge, but also for doing so with reckless disregard or deliberate ignorance. In addition, knowingly making or using a false record or statement to receive payment from the federal government is also a violation. Recent amendments to the False Claims Act expand liability by eliminating any requirement that a false claim be submitted, or a false record or statement be made, directly to the government. The amendments also create new liability for “knowingly and improperly avoiding or decreasing an obligation to pay or transmit money or property to the government.” Consequently, a provider need not take an affirmative action to conceal or avoid an obligation to the government, but the mere retention of an overpayment from the government could lead to potential liability under the False Claims Act.

If we are ever found to have violated the False Claims Act, we could be required to make significant payments to the government (including damages and penalties in addition to the return of reimbursements previously collected) and could be excluded from participating in federal healthcare programs. Many states also have similar false claims statutes. In addition, healthcare fraud is a priority of the US Department of Justice, Office of Inspector General and the Federal Bureau of Investigation and state Attorneys General. These agencies have devoted a significant amount of resources to investigating healthcare fraud.

While the criminal statutes generally are reserved for instances evidencing fraudulent intent, the civil and administrative penalty statutes are being applied by the federal government in an increasingly broad range of circumstances. Examples of the types of activities giving rise to liability for filing false claims include billing for services not rendered, misrepresenting services rendered (i.e., mis-coding) and applications for duplicate reimbursement. Additionally, the federal government takes the position that a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant should have known that the services were unnecessary. The federal government also takes the position that claiming reimbursement for services that are substandard is a violation of these statutes if the claimant should have known that the care was substandard. Criminal penalties also are available in the case of claims filed with private insurers if the federal government shows that the claims constitute mail fraud or wire fraud or violate any of the federal criminal healthcare fraud statutes.

State Medicaid agencies and state Attorneys General also have authority to seek criminal or civil sanctions for fraud and abuse violations. In addition, private insurers may bring actions under state false claim laws. In certain circumstances, federal and state laws authorize private whistleblowers to bring false claim or “qui tam” suits on behalf of the government against providers and reward the whistleblower with a portion of any final recovery. In addition, the federal government has engaged a number of private audit organizations to assist it in tracking and recovering false claims for healthcare services.

Governmental investigations and whistleblower “qui tam” suits against healthcare companies have increased significantly in recent years, and have resulted in substantial penalties and fines. Although we monitor our billing practices for compliance with applicable laws, such laws are very complex, and we might not be able to detect all errors or interpret such laws in a manner consistent with a court or an agency’s interpretation.

Health information practices

Under HIPAA, the US Department of Health and Human Services, or DHHS, issued rules to define and implement standards for the electronic transactions and code sets for the submission of transactions such as claims, and privacy and security of individual health information in whatever manner it is maintained.

In February 2006, DHHS published its Final Rule on Enforcement of the HIPAA Administrative Simplification provisions, including the transaction standards, the security standards and the privacy rule. This enforcement rule addresses, among other issues, DHHS’s policies for determining violations and calculating civil monetary penalties, how DHHS will address the statutory limitations on the imposition of civil monetary penalties, and various procedural issues. The rule extends enforcement provisions currently applicable to the health care privacy regulations to other HIPAA standards, including security, transactions and the appropriate use of service code sets.

On February 17, 2009, the Health Information Technology for Economic and Clinical Health Act, (“HITECH”), was enacted as part of the American Recovery and Reinvestment Act of 2009 to, among other things, extend certain of HIPAA’s obligations to parties providing services to health care entities covered by HIPAA known as “business associates,” impose new notice of privacy breach reporting obligations, extend enforcement powers to state attorney generals and amend the HIPAA privacy and security laws to strengthen the civil and criminal enforcement of HIPAA, establishing four categories of violations that reflect increasing levels of culpability, four corresponding tiers of penalty amounts that significantly increase the minimum penalty amount for each violation, and a maximum penalty amount of $1.5 million for all violations of an identical provision. With the additional HIPAA enforcement power under HITECH, the Office of Civil Rights of the Department of Health and Human Services and states are increasing their investigations and enforcement of HIPAA compliance. We have taken steps to ensure compliance with HIPAA and we are monitoring compliance on an ongoing basis.

Lastly, on January 17, 2013, DHHS released the HITECH Final Rule. The HITECH Final Rule imposes various new requirements on covered entities and business associates, and also expands the definition of “business associates.” The various requirements of the HITECH Final Rule must be implemented before certain transition period deadlines. The final deadline in the transition period was September 24, 2014. We will continue to assess our compliance obligations as regulations under HIPAA as modified by HITECH, continue to become effective as more guidance becomes available from DHHS and other federal agencies. The evolving privacy and security requirements, however, may require substantial operational and systems changes, associate education and resources and there is no guarantee that we will be able to implement them adequately or prior to their effective date. Given HIPAA’s complexity and the evolving regulations, which may be subject to changing and perhaps conflicting interpretation, our ongoing ability to comply with all of the HIPAA requirements is uncertain, which may expose us to the criminal and increased civil penalties provided under HITECH and may require us to incur significant costs in order to seek to comply with its requirements.

Federal and state anti-kickback laws 

Federal law commonly known as the “Anti-Kickback Statute” prohibits the knowing and willful offer, solicitation, payment or receipt of anything of value (direct or indirect, overt or covert, in cash or in kind) which is intended to induce: the referral of an individual for a service for which payment may be made by Medicare, Medicaid or certain other federal healthcare programs; or the ordering, purchasing, leasing, or arranging for, or recommending the purchase, lease or order of, any service or item for which payment may be made by Medicare, Medicaid or certain other federal healthcare programs.

Interpretations of the Anti-Kickback Statute have been very broad and under current law, courts and federal regulatory authorities have stated that this law is violated if even one purpose (as opposed to the sole or primary purpose) of the arrangement is to induce referrals. Even bona fide investment interests in a healthcare provider may be questioned under the Anti-Kickback Statute if the government concludes that the opportunity to invest was offered as an inducement for referrals.

This act is subject to numerous statutory and regulatory “safe harbors.” The safe harbor regulations, however, do not cover all lawful relationships between healthcare providers and referral sources. Failure of an arrangement to satisfy all of the requirements of a particular safe harbor does not mean that the arrangement is unlawful. However, it may mean that such an arrangement will be subject to scrutiny by the regulatory authorities.

While we believe that our operations are in compliance with applicable Medicare and Medicaid fraud and abuse laws, there can be no guarantee. We seek to structure all applicable arrangements to comply with applicable safe harbors where reasonably possible. There is a risk however, that the federal government might investigate such arrangements and conclude they violate the Anti-Kickback Statute. If our arrangements are found to violate the Anti-Kickback Statute, we, along with our clients would be subject to civil and criminal penalties, which may include exclusion from participation in government reimbursement programs, and our arrangements would not be legally enforceable, which could materially and adversely affect our business.

Many states, including some where we do business, have adopted anti-kickback laws that are similar to the federal Anti-Kickback Statute. Some of these state laws are very closely patterned on the federal Anti-Kickback Statute; others, however, are broader and reach reimbursement by private payers. If our activities were deemed to be inconsistent with state anti-kickback or illegal remuneration laws, we could face civil and criminal penalties or be barred from such activities, any of which could harm our business.

Federal and State Self-Referral Prohibitions

We may be subject to federal and state statutes banning payments for referrals of patients and referrals by physicians to healthcare providers with whom the physicians have a financial relationship. Section 1877 of the Social Security Act, also known as the “Stark Law”, prohibits physicians from making a “referral” for “designated health services” for Medicare (and in many cases Medicaid) patients from entities or facilities in which such physicians directly or indirectly hold a “financial relationship”.

A financial relationship can take the form of a direct or indirect ownership, investment or compensation arrangement. A referral includes the request by a physician for, or ordering of, or the certifying or recertifying the need for, any designated health services.

Certain services that we provide may be identified as “designated health services” for purposes of the Stark Law. We cannot provide assurance that future regulatory changes will not result in other services we provide becoming subject to the Stark Law’s ownership, investment or compensation prohibitions in the future.

Many states, including some states where we do business, have adopted similar or broader prohibitions against payments that are intended to induce referrals of clients. Moreover, many states where we operate have laws similar to the Stark Law prohibiting physician self-referrals. We contract with a significant number of human services providers and practitioners, including therapists, physicians and psychiatrists, and arrange for these individuals or entities to provide services to our clients. While we believe that these contracts are in compliance with the Stark Law, no assurance can be made that such contracts will not be considered in violation of the Stark Law.

Healthcare Reform. On March 23, 2010, the President of the United States signed into law comprehensive health reform through the Patient Protection and Affordable Care Act (Pub. L. 11-148) (“PPACA” or “ACA”). On March 30, 2010, the President signed a reconciliation budget bill that included amendments to the PPACA (Pub. L. 11-152). These laws in combination form the “Health Care Reform Act” referred to herein. The changes to various aspects of the healthcare system in the Health Care Reform Act are far-reaching and include, among many others, substantial adjustments to Medicare reimbursement, establishment of individual mandates for healthcare coverage, extension of coverage to certain populations, expansion of Medicaid and CHIP, restrictions on physician-owned hospitals, and increased efficiency and oversight provisions.

Some of the provisions of the Health Care Reform Act took effect immediately, while others will take effect later or will be phased in over time, ranging from a few months following approval to ten (10) years. Due to the complexity of the Health Care Reform Act, it is likely that additional legislation will be considered and enacted. The Health Care Reform Act requires the promulgation of regulations that will likely have significant effects on the health care industry and third party payers. Thus, the healthcare industry and our operations may be subjected to significant new statutory and regulatory requirements and contractual terms and conditions, and consequently to structural and operational changes and challenges.

The Health Care Reform Act also implements significant changes to healthcare fraud and abuse laws that will intensify the risks and consequences of enforcement actions. These include expansion of the False Claims Act by: (a) narrowing the public disclosure bar; and (b) explicitly stating that violations of the Anti-Kickback Statute trigger false claims liability. In addition, the Health Care Reform Act lessens the intent requirements under the Anti-Kickback Statute to provide that a person may violate the statute without knowledge or specific intent. The Health Care Reform Act also provides new funding and expanded powers to investigate fraud, including through expansion of the Medicare Recovery Audit Contractor (RAC) program to Medicare Parts C and D and Medicaid and authorizing the suspension of Medicare and Medicaid payments to a provider of services pending an investigation of a credible allegation of fraud. Finally, the legislation creates enhanced penalties for noncompliance, including increased criminal penalties and expansion of administrative penalties under Medicare and Medicaid. Collectively, such changes could have a material adverse impact on our operations.

Surveys and audits

Our programs are subject to periodic surveys by government authorities and/or their contractors to ensure compliance with various requirements. Regulators conducting periodic surveys often provide reports containing statements of deficiencies for alleged failures to comply with various regulatory requirements. In most cases, if a deficiency finding is made by a reviewing agency, we will work with the reviewing agency to agree upon the steps to be taken to bring our program into compliance with applicable regulatory requirements. In some cases, however, an agency may take a number of adverse actions against a program, including:

While we believe that our programs are in compliance with Medicaid and other program certification requirements and state licensure requirements, failure to comply with these requirements could have a material adverse impact on our business and our ability to enter into contracts with other agencies to provide services.

Billing/claims reviews and audits

Agencies and other payers periodically conduct pre-payment or post-payment medical reviews or other audits of our claims. In order to conduct these reviews, payers request documentation from us and then review that documentation to determine compliance with applicable rules and regulations, including the eligibility of clients to receive benefits, the appropriateness of the care provided to those clients, and the documentation of that care.

For-profit ownership

Certain of the agencies for which we provide services restrict our ability to contract directly as a for-profit organization. Instead, these agencies contract directly with a not-for-profit organization and in certain cases we negotiate to provide administrative and management services to the not-for-profit providers. The extent to which other agencies impose such requirements may affect our ability to continue to provide the full range of services that we provide or limit the organizations with which we can contract directly to provide services.

Corporate practice of medicine and fee splitting

Some states in which we operate prohibit general business entities, such as we are, from “practicing medicine,” which definition varies from state to state and can include employing physicians, professional therapists and other mental health professionals, as well as engaging in fee-splitting arrangements with these health care providers. Among other things, we currently contract with professional therapists to provide intensive home based counseling and with NPs to perform CHAs. We believe that we have structured our operations appropriately, however, we could be alleged or found to be in violation of some or all of these laws. If a state determines that some portion of our business violates these laws, it may seek to have us discontinue those portions or subject us to penalties, fines, certain license requirements or other measures. Any determination that we have acted improperly in this regard may result in liability to us. In addition, agreements between the corporation and the professional may be considered void and unenforceable.

Professional licensure and other requirements

Many of our employees are subject to federal and state laws and regulations governing the ethics and practice of their professions. In addition, professionals who are eligible to participate in Medicare and Medicaid as individual providers must not have been excluded from participation in government programs at any time. Our ability to provide services depends upon the ability of our personnel to meet individual licensure and other requirements.

International Regulation of WD Services segment

As a provider of WD services in multiple international jurisdictions, we are subject to numerous national and local laws and regulations. These laws and regulations significantly affect the way in which we operate various aspects of our business. We must also comply with contract-specific technical and infrastructure requirements. Failure to follow the rules and requirements of these programs can significantly affect our ability to be paid for the services we provide. In addition, our revenue is primarily derived from contracts that are funded by national governments that are seeking to reduce the overall unemployment rate, or improve job placement success for targeted cohorts. Further, the revenue we receive from these contracts is typically tied to milestones that are largely uncontrolled by us. Such milestones include the job placement success of clients, duration and tenure of clients in jobs once they are placed, and various other market and industry factors including the overall unemployment rate. A significant decline in national and local government initiatives to provide funding for employment programs, or shift of expenditures or funding, could cause government sponsors to reduce their expenditures under those contracts or not renew such contracts, either of which could have a negative impact on our future operating results.

Additional information

Our website is www.provcorp.com. We make available, free of charge at this website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission. The information on the website listed above is not and should not be considered part of this annual report on Form 10-K and is not incorporated by reference in this document. In addition, we will provide, at no cost, paper or electronic copies of our Forms 10-K, 10-Q and 8-K and amendments to those reports filed with or furnished to the Securities and Exchange Commission. Requests for such filings should be directed to James Lindstrom, Chief Financial Officer, telephone number: (520) 747-6600.

Item 1A.  Risk Factors.

The following risks should be read in conjunction with other information contained, or incorporated by reference, in this report, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and our consolidated financial statements and related notes. If any of the following risks actually occurs, our business, financial condition and operating results could be adversely affected.

General Risks

Our annual operating results and stock price may be volatile or may decline regardless of our operating performance.

        Our annual operating results and the market price for our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

        In addition, the stock markets, and in particular the NASDAQ Global Market, have experienced considerable price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs, and our resources and the attention of management could be diverted from our business.

We obtain a significant portion of our business through responses to government requests for proposals and we may not be awarded contracts through this process in the future, or contracts we are awarded may not be profitable.

We obtain, and will continue to seek to obtain, a significant portion of our business from state or local government entities. To obtain business from government entities, we are often required to respond to RFPs. To propose effectively, we must accurately estimate our cost structure for servicing a proposed contract, the time required to establish operations and the terms of the proposals submitted by competitors. We must also assemble and submit a large volume of information within rigid and often short timetables. Our ability to respond successfully to RFPs will greatly impact our business. We may not be awarded contracts through the RFP process, and our proposals may not result in profitable contracts.

If we fail to establish and maintain important relationships with officials of government entities and agencies, we may not be able to successfully procure or retain government-sponsored contracts, which could negatively impact our revenues.

To facilitate our ability to procure or retain government-sponsored contracts, we rely in part on establishing and maintaining relationships with officials of various government entities and agencies. These relationships enable us to provide informal input and advice to the government entities and agencies prior to the development of an RFP or program for privatization of human services and enhance our chances of procuring contracts with these payers. The effectiveness of our relationships may be reduced or eliminated with changes in the personnel holding various government offices or staff positions. We also may lose key personnel who have these relationships. We may be unable to successfully manage our relationships with government entities and agencies and with elected officials and appointees. Any failure to establish, maintain or manage relationships with government and agency personnel may hinder our ability to procure or retain government-sponsored contracts.

Government unions may oppose privatizing government programs to outside vendors such as us, which could limit our market opportunities.

Our success depends in part on our ability to win contracts to administer and manage programs traditionally administered by government employees. Many government employees, however, belong to labor unions with considerable financial resources and lobbying networks. These unions could apply opposing political pressure on legislators and other officials seeking to privatize government programs. Union opposition could result in our losing government contracts or being precluded from providing services under government contracts, or maintaining or renewing existing contracts. The ability to renew and obtain new contracts is critical to our financial success. If we could not renew certain contracts, or obtain new contracts, due to opposition political actions, it could have a material adverse impact on our operating results.

Inaccurate, misleading or negative media coverage could damage our reputation and harm our ability to procure government sponsored contracts.

The media sometimes provides news coverage about our contracts and the services we or our competitors provide to clients in our sectors. This media coverage, if negative, could influence government officials to slow the pace of privatizing or retendering government services. Moreover, inaccurate, misleading or negative media coverage about us could harm our reputation and, accordingly, our ability to obtain government sponsored contracts.

Our business is subject to risks of litigation.

The services we provide across our four segments are subject to lawsuits and claims. A substantial award could have a material adverse impact on our operations and cash flows, and could adversely impact our ability to continue to purchase appropriate liability insurance. We can be subject to claims for negligence or intentional misconduct (in addition to professional liability type claims) by an employee or a third party we engage to assist with the provision of services, including but not limited to claims arising out of accidents involving vehicle collisions, workforce development placements or CHAs and various claims that could result from employees or contracted third parties driving to or from interactions with clients and while providing direct client services. We are also subject to claims alleging we did not properly treat an individual or failed to properly diagnose, supervise and/or care for a client. We can be subject to employee related claims such as wrongful discharge or discrimination or a violation of equal employment laws and permitting issues. While we are insured for these types of claims, damages exceeding our insurance limits or outside our insurance coverage, such as a claim for fraud, certain wage and hour violations or punitive damages, could adversely affect our cash flow and financial condition.

We face substantial competition in attracting and retaining experienced professionals, and we may be unable to sustain or grow our business if we cannot attract and retain qualified employees.

Our success depends to a significant degree on our ability to attract and retain highly qualified and experienced professionals who possess the skills and experience necessary to deliver high quality services to our clients. Our objective of providing the highest quality of service to our clients is a significant consideration when we evaluate education, experience and qualifications of potential candidates for employment as direct care and administrative staff. To that end, we attempt to hire professionals and others with requisite educational backgrounds and professional certifications. These employees are in great demand and are likely to remain a limited resource for the foreseeable future. We must quickly hire project leaders and case management personnel after a contract is awarded to us. Contract provisions and client needs determine the number, education and experience levels of social services professionals we hire. We continually evaluate client census, case loads and client eligibility to determine our staffing needs under each contract.

The performance in each of our business segments also depends on the talents and efforts of our highly skilled intellectual technology professionals. Competition for skilled intellectual technology professionals can be intense. Our success depends on our ability to recruit, retain and motivate these individuals.

Our ability to attract and retain employees with the requisite experience and skills depends on several factors including, but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities. Some of the companies with which we compete for experienced personnel have greater financial, technical, political and marketing resources, name recognition and a larger number of clients and payers than we do. The inability to attract and retain experienced personnel could have a material adverse effect on our business.

Our success depends on our ability to manage growing and changing operations.

Since 1996, our business has grown significantly in size and complexity, most recently with the acquisitions of Ingeus and Matrix in 2014. This growth has placed, and is expected to continue to place, significant demands on our management, systems, internal controls and financial and physical resources. In addition, we expect that we will need to further develop our financial and managerial controls and reporting systems to accommodate future growth. This could require us to incur significant expense for, among other things, hiring additional qualified personnel, retaining professionals to assist in developing the appropriate control systems and expanding our information technology infrastructure. The nature of our business is such that qualified management personnel can be difficult to find. Our inability to manage growth effectively could have a material adverse effect on our financial results.

Our success depends on our ability to compete effectively in the marketplace.

We compete for clients and for contracts with a variety of organizations that offer similar services across all of our segments. Many organizations of varying sizes compete with us, including local human services organizations, local not-for-profit organizations and community based organizations, larger companies and institutional providers that offer community based care services, organizations that provide similar NET management services to Medicaid eligible beneficiaries in local markets, large multi-national corporations that provide WD services and CHA providers. Some of these companies have greater financial, technical, political, marketing, name recognition and other resources and a larger number of clients or payers than we do. In addition, some of these companies offer more services than we do. We have experienced, and expect to continue to experience, competition from new entrants into the markets in which we operate. Increased competition may result in pricing pressures, loss of or failure to gain market share or loss of clients or payers, any of which could have a material adverse effect on our operating results.

Our business could be subject to security breaches and attacks.

We provide services to individuals, including services that require us to maintain sensitive and personal client information, including information relating to their health, social security numbers and other identifying data. Therefore, our information technology systems store client information protected by numerous federal, state and foreign regulations. Further, our systems include interfaces to third-party stakeholders, often connected via the Internet. As a result of the data we maintain and third-party access, we are subject to increasing cyber security risks. The nature of our business, where services are often performed outside a secured location, adds additional risk. While we have implemented measures to detect and prevent security breaches and cyber-attacks, our measures may not be effective. Criminals are constantly devising schemes to circumvent information technology security safeguards, and other companies have recently suffered serious data security breaches. If unauthorized parties gain access to our networks or databases, they may be able to steal, publish, delete or modify our private and sensitive third-party information, including personal identification information. In addition, employees may intentionally or inadvertently cause data or security breaches that result in the unauthorized release of personal or confidential information.

Our WD Services segment has operations in many countries in Europe and these operations have access to significant amounts of sensitive personal information about individuals. In Europe, these operations are subject to European and national data privacy legislation, which imposes significant obligations on data processors and controllers with respect to such personal information. In addition, our contractual obligations with customers can require additional, stringent commitments in the handling of such information, which are subject to client audit procedures and other checks, often with severe contractual penalties in the case of breach.

As a result of any security breach, or loss or mishandling of data, we could incur liability, regulatory actions, fines, contractual deductions or litigation, which could increase our costs and have a material adverse effect on our operating results. Further, any such breach, or loss or mishandling of data could impact our business reputation and could result in the loss of contractual relationships or make it more difficult to obtain new contracts, having an adverse effect on our business and financial performance.

Regulatory Risks

We conduct business in a heavily regulated healthcare industry. Compliance with existing regulations is costly, and changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce our revenue and profitability.

The healthcare industry is subject to extensive federal and state regulation relating to, among other things:

Both federal and state government agencies have increased coordinated civil and criminal enforcement efforts related to the healthcare industry. Regulations related to the healthcare industry are extremely complex and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of those laws. The Patient Protection and Affordable Care Act has also introduced some degree of regulatory uncertainty as the industry does not know how the changes it introduces will affect many aspects of the industry. Medicare and Medicaid anti-fraud and abuse laws prohibit certain business practices and relationships related to items and services reimbursable under Medicare, Medicaid and other governmental healthcare programs, including the payment or receipt of remuneration to induce or arrange for referral of patients or recommendation for the provision of items or services covered by Medicare or Medicaid or any other federal or state healthcare program. Federal and state laws prohibit the submission of false or fraudulent claims, including claims to obtain reimbursement under Medicare and Medicaid. We have implemented compliance policies to help assure our compliance with these regulations as they become effective; however, different interpretations or enforcement of these laws and regulations in the future could subject our practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services or the manner in which we conduct our business.

Our HA Services segment operates in a heavily regulated healthcare industry, and changes to the regulatory landscape could have a material adverse effect on our results of operations and financial condition.

The CHA services industry is primarily regulated by federal and state healthcare laws and the requirements of participation and reimbursement of the MA Program established by CMS. From time to time, CMS considers changes to regulatory guidelines with respect to prospective CHAs. CMS could adopt new guidelines that may, for example, increase the costs associated with CHAs or limit the opportunities available to administer CHAs. Implementation of additional regulations on the CHA industry by CMS or other regulatory bodies could have a material adverse impact on our HA Services segment’s revenues and margins, which could have a material adverse impact on our consolidated results of operations.

In our WD Services segment, we conduct business in several countries, each with its own system of regulation. Compliance with existing regulations is costly, and changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce our revenue and profitability.

In 2014, Ingeus operated in 10 countries outside the US. Each of these countries has its own national and municipal laws and regulations, and some countries such as Australia, Germany and Switzerland, have both federal and state regulations. These laws can differ significantly from country to country. In addition, in Europe, countries (including the United Kingdom) are subject to European Union laws and rules. We have implemented compliance policies to help assure our compliance with these laws and regulations as they become effective; however, different interpretations or enforcement of these laws and regulations in the future could subject our practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services or the manner in which we conduct our business.

We could be subject to actions for false claims if we do not comply with government coding and billing rules, which could have a material adverse impact on our operating results.

If we fail to comply with federal and state documentation, coding and billing rules, we could be subject to criminal and/or civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs, which could have a material adverse impact on our operating results. In billing for our services to third-party payers, we must follow complex documentation, coding and billing rules. These rules are based on federal and state laws, rules and regulations, various government pronouncements, and on industry practice. Failure to follow these rules could result in potential criminal or civil liability under the federal False Claims Act, under which extensive financial penalties can be imposed and/or under various state statutes which prohibit the submission of false claims for services covered. Compliance failure could further result in criminal liability under various federal and state criminal or civil statutes.

In the WD Services segment, particularly in Europe, our contracts are subject to stringent claims and invoice processing regimes which vary depending on the customer and nature of the payment mechanism. Under European procurement legislation which has been implemented in each European Union member state, any conviction for fraud can result in a permanent, mandatory ban from participating in public procurement tenders. This could significantly affect our business given that most of our customers in Europe are governmental organizations. Any such breaches or deficiencies in paperwork associated with billing may also be subject to contractual claw back regimes and penalties, which can be enforced many years after the revenue has been paid by the relevant authority.

While we plan to carefully and regularly review our documentation, coding and billing practices, the rules are frequently vague and confusing and we cannot assure that governmental investigators, private insurers or private whistleblowers will not challenge our practices. Such a challenge could result in a material adverse effect on our financial position and results of operations.

If we fail to comply with the federal Anti-kickback Statute, we could be subject to criminal and civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs, all of which could have a material adverse impact on our operating results.

The federal Anti-kickback Statute prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of items or services payable by a federally funded healthcare program. Any of our financial relationships with healthcare providers will be potentially implicated by this statute to the extent Medicare or Medicaid referrals are implicated. Violations of the Anti-kickback Statute could result in substantial civil or criminal penalties, including criminal fines of up to $25,000 per violation, imprisonment of up to five years, civil penalties under the Civil Monetary Penalties Law (42 U.S.C. 1320a-7a) of up to $50,000 per violation, plus three times the remuneration involved, civil penalties under the False Claims Act of up to $11,000 for each claim submitted, plus three times the amounts paid for such claims and exclusion from participation in the Medicare and Medicaid programs. Any such penalties could have a significant negative effect on our operations. Furthermore, the exclusion, if applied to us, could result in significant reductions in our revenues, which could materially and adversely affect our business, financial condition and results of our operations. In addition, many states have adopted laws similar to the federal Anti-kickback Statute with similar penalties.

If we fail to comply with physician self-referral laws, to the extent applicable to our operations, we could experience a significant loss of reimbursement revenue.

We may be subject to federal and state statutes and regulations banning payments for referrals of patients and referrals by physicians to healthcare providers with whom the physicians have a financial relationship and billing for services provided pursuant to such referrals if any occur. Violation of these federal and state laws and regulations, to the extent applicable to our operations, may result in prohibition of payment for services rendered, loss of licenses, fines, criminal penalties and exclusion from Medicare and Medicaid programs. To the extent we do maintain such financial relationships with physicians, we rely on certain exceptions to self-referral laws that we believe will be applicable to such arrangements. Any failure to comply with such exceptions could result in the penalties discussed above.

Our WD Services segment operates internationally, which exposes the group to risks of bribery, corruption and collusive tendering practices with respect to public officials and tenders.

As an international business whose customers are largely in the public sector, the WD Services segment generally wins work through public tender processes. Various statutes, such as the UK’s Bribery Act and the Foreign Corrupt Practices Act in the US, prohibit us from providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. These statutes require us to maintain adequate record-keeping and internal accounting practices to accurately reflect our transactions. In addition, many countries in which we operate have antitrust or competition regulations which prohibit collusive tendering or bid-rigging behavior. Policies and procedures we implement to prevent bribery, corruption and anti-competitive conduct may not effectively prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our reputation, business, financial condition and results of operations. Any breach of such laws could also expose our operations in Europe to mandatory, permanent bans from public procurement processes.

We are subject to regulations relating to privacy and security of patient information. Failure to comply with privacy regulations could result in a material adverse impact on our operating results.

There are numerous federal and state regulations addressing patient information privacy and security concerns. In particular, the federal regulations issued under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) contain provisions that:

Compliance with state and federal laws and regulations is costly and requires our management to expend substantial time and resources. Further, the HIPAA regulations and state privacy laws expose us to increased regulatory risk, as the penalties associated with a failure to comply, even if unintentional, could have a material adverse effect on our results of operations.

           We have an internal committee to maintain our privacy and security policies regarding client information in compliance with HIPAA. This committee is responsible for training our employees, including our regional and local managers and staff, to comply with HIPAA and monitoring compliance with the policy. The costs associated with our ongoing compliance could be substantial, which could negatively impact our results of operations.

Our WD Services segment has operations in many countries in Europe and these operations have access to significant amounts of sensitive personal information about individuals. In Europe, these operations are subject to European and national data privacy legislation which imposes significant obligations on data processors and controllers with respect to such personal information. Some countries, such as France and Germany, have particularly strong privacy laws which impose even greater obligations on people handling personal information. There are proposed amendments being suggested to European data privacy legislation which could significantly increase the fines for any breaches. In addition to fining powers, information privacy regulators in Europe have significant powers to require organizations that breach regulations to put in place measures to ensure that such breaches do not occur again, and require businesses to stop processing personal information until the required measures are in place. Such orders could significantly impact our business given we are required to handle personal information as part of our service delivery model.

As a government contractor, we are subject to an increased risk of litigation and other legal actions and liabilities.

As a government contractor, we are subject to an increased risk of investigation, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities that are not as frequently experienced by companies that do not provide government sponsored services. Companies providing government sponsored services can also become involved in public inquiries which can lead to negative media speculation or potential cancellation or termination of contracts. In our WD Services segment in Europe, European procurement regulations in force in each European Union member state require public procurement authorities to impose a permanent, mandatory ban for participation in public procurement where companies are found guilty of fraud or certain other criminal offenses. Authorities can also exercise their discretion to blacklist companies where they believe they have been involved in acts of gross misconduct. The occurrence of any of these actions, regardless of the outcome, could disrupt our operations and result in increased costs, and could limit our ability to obtain additional contracts in other jurisdictions.

The US federal government may refuse to grant consents or waivers necessary to permit for-profit entities to perform certain elements of government programs.

Under current law, in order to privatize certain functions of government programs, the federal government must grant a consent or waiver to the petitioning state or local agency. If the federal government does not grant a necessary consent or waiver or withdraws approval of any granted waiver, the state or local agency will be unable to contract with a for-profit entity, such as us, to provide service. Failure by state or local agencies to obtain consents or waivers could adversely affect our continued business operations and future growth.

Our business could be adversely affected by future legislative changes that hinder or reverse the privatization of human services, NET services or WD services.

The market for certain of our services depends largely on government sponsored programs. These programs can be modified or amended at any time. Moreover, part of our growth strategy includes aggressively pursuing opportunities created by government initiatives to privatize the delivery of human services, NET services and WD services. However, there are opponents to the privatization of these services and, as a result, future privatization is uncertain. If additional privatization initiatives are not proposed or enacted, or if previously enacted privatization initiatives are challenged, repealed or invalidated, there could be a material adverse impact on our operating results.

Our business is subject to licensing regulations and other regulatory provisions, including regulatory provisions governing surveys and audits. Changes to, or violations of, these regulations could negatively impact our revenues.

In many of the locations where we operate, we are required by local laws (both US and foreign) to obtain and maintain licenses. The applicable state and local licensing requirements govern the services we provide, the credentials of staff, record keeping, treatment planning, client monitoring and supervision of staff. The failure to maintain these licenses or the loss of a license could have a material adverse impact on our business and could prevent us from providing services to clients in a given jurisdiction. Most of our contracts are subject to surveys or audit by our payers. We are also subject to regulations that restrict our ability to contract directly with a government agency in certain situations. Such restrictions could affect our ability to contract with certain payers, and could have a material adverse impact on our results of operations.

Financial Risks

Changes in budgetary priorities of the government entities that fund the services we provide could result in our loss of contracts or a decrease in amounts payable to us under our contracts.

Our revenue is largely derived from contracts that are directly or indirectly paid or funded by government agencies. All of these contracts are subject to legislative appropriations and state or national budget approval. The availability of funding under our contracts with state governments is dependent in part upon federal funding to states. Changes in Medicaid methodology may further reduce the availability of federal funds to states in which we provide services. Among the alternative Medicaid funding approaches that states have explored are provider assessments as tools for leveraging increased Medicaid federal matching funds. Provider assessment plans generate additional federal matching funds to the states for Medicaid reimbursement purposes, and implementation of a provider assessment plan requires approval by the Centers for Medicare and Medicaid Services in order to qualify for federal matching funds. These plans usually take the form of a bed tax or a quality assessment fee, which were historically required to be imposed uniformly across classes of providers within the state, except that such taxes only applied to Medicaid health plans.

However, the Deficit Reduction Act of 2005, or Deficit Reduction Act, requires states that desire to impose provider taxes to impose taxes on all MCOs, not just Medicaid MCOs. This uniformity requirement as it relates to taxing all MCOs may make states more reluctant to use provider assessments as a vehicle for raising matching funds and, thus, reduce the amount of funding that the states receive and have available. Moreover, under the Deficit Reduction Act, states may be allowed to reduce the benefits provided to certain Medicaid enrollees, which could affect the services that states contract for with us. We cannot make any assurances that these Medicaid changes will not negatively affect the funding under our contracts. As funding under our contracts is dependent in part upon federal funding, such funding changes could have a significant effect upon our business.

Currently, many of the US states and overseas countries in which we operate are facing budgetary shortfalls or changes in budgetary priorities. In addition, in some states eligibility requirements for human services clients have been tightened to stabilize the number of eligible clients and in certain instances states have implemented or are considering implementing a single point of access to care or a managed care model, which reduces the size of our potential market in those states. While many of these states are dealing with budgetary concerns by shifting costs from institutional care to home and community based care such as we provide, there is no assurance that this trend will continue.

Likewise, in many of the overseas countries addressed by our WD Services segment, a continued focus on austerity measures following the global financial crisis to reduce national and local budget deficits could lead to further spending cuts or changes to welfare arrangements. This may make availability of funding for outsourcing of such services more difficult to obtain from relevant government departments, which may lead to more challenging terms and conditions including pressure on prices or volumes of services provided.

Consequently, a significant decline in government expenditures, shift of expenditures or funding away from programs that call for the types of services that we provide, or change in government contracting or funding policies could cause payers to terminate their contracts with us or reduce their expenditures under those contracts, either of which could have a negative impact on our operating results. 

We derive a significant amount of our revenues from a few payers, which puts us at risk. Any changes in the funding, financial viability or our relationships with these payers could have a material adverse impact on our results of operations.

We generate a significant amount of our revenues in our segments from a few payers under a small number of contracts. For example, for the years ended December 31, 2014, 2013 and 2012, we generated approximately 48.2%, 48.0% and 48.5%, respectively, of our total revenue from our top ten payers. Additionally, our top five payers related to our NET Services operating segment represent, in the aggregate, approximately 43.2%, 43.6% and 43.2%, respectively, of our NET Services operating segment revenue for the years ended December 31, 2014, 2013 and 2012. The top five payers related to our Human Services operating segment represent, in the aggregate, approximately 37.0%, 38.0% and 38.5%, respectively, of our Human Services operating segment revenue for the years ended December 31, 2014, 2013 and 2012. The top payer related to our WD Services operating segment represented 68.0% of our WD Services operating segment revenue for the period from May 31, 2014 to December 31, 2014. Additionally, the top payer related to our HA Services operating segment represented 43.2% of our HA Services operating segment revenue for the period from October 23, 2014 to December 31, 2014. The loss of, reduction in amounts generated by, or changes in methods or regulations governing payments for our services under these contracts could have a material adverse impact on our revenue and results of operations.

Changes to the fee structure in our workforce development contracts with the UK Department of Work & Pension could have a material effect on our operating results.

Approximately 68.0% of Ingeus’s revenues for the period from May 31, 2014 to December 31, 2014 are derived from seven standardized regional contracts with the Department of Work & Pension (“DWP”) under the Work Programme, whereby services are provided to long-term unemployed individuals to place them into jobs. Under the terms of the contracts with DWP, effective July 1, 2014, the fee structure has changed, eliminating certain upfront payments and discounting certain other fees. As a result, going forward, Ingeus will receive the majority of its revenue under these contracts only upon demonstrating the client’s continued employment for a substantial period of time and upon achievement of incentive measures over the defined measurement periods. However, a substantial portion of the total cost of providing services to clients is incurred in the period between referral and job placement. The loss of, continued reduction in amounts generated by, or changes in methods or regulations governing payments for our services under these contracts with DWP could have a material adverse impact on our WD Services segment’s revenue and margins, which could have a material adverse impact on our consolidated results of operations.

Our contracts in certain of our segments are in many instances short-term in nature, and can also be terminated prior to expiration, without cause and without penalty to the payers. There can be no assurance that they will survive until the end of their stated terms, or that upon their expiration these contracts will be renewed or extended. Disruptions to our contracts could have a material adverse impact on our results of operations.

Most of our Human Services contracts contain base periods of only one year. While some of them also contain options for renewal, usually successive six month or one year terms, payers are not required to extend their contracts into these option periods. In addition, a significant number of our Human Services contracts not only allow the payer to terminate the contract immediately for cause (such as for our failure to meet our contract obligations) but also permit the payer to terminate the contract at any time prior to its stated expiration date. In most cases the payer may terminate the Human Services or NET Services contracts without cause, at will and without penalty to the payer, either immediately or upon the expiration of a short notice period in the event government appropriations supporting the programs serviced by the contract are reduced or eliminated. The failure of payers to renew or extend significant contracts or their early termination of significant contracts could adversely affect our financial performance. We cannot anticipate if, when or to what extent a payer might terminate its contract with us prior to its expiration or fail to renew or extend its contract with us. 

Our contracts are subject to audit and modification by the payers with whom we contract, at their sole discretion.

Our business depends on our ability to successfully perform under various government funded contracts. Under the terms of these contracts, payers can review our performance, as well as our records and general business practices at any time, and may, in their discretion:

If payers have significant audit findings, or if they make material modifications to our contracts, it could have a material adverse impact on our results of operations.

A loss of our status as a licensed provider in any jurisdiction where we operate could result in the termination of a number of our contracts, which could negatively impact our revenues.

Our status as a licensed provider of health services is subject to periodic renewal, review and examination by various federal, state, local and other governmental agencies. If we lost our status as a licensed provider in any jurisdiction, the contracts under which we provide services in that jurisdiction could be subject to termination. Moreover, such an event could constitute a violation of provisions of our contracts in other jurisdictions, resulting in further contract terminations. 

If we fail to satisfy our contractual obligations, we could be liable for damages and financial penalties, and it could harm our ability to keep our existing contracts or obtain new contracts.

Our failure to comply with our contract obligations could, in addition to providing grounds for immediate termination of the contract for cause, negatively impact our financial performance and damage our reputation, which, in turn, could have a material adverse effect on our ability to maintain current contracts or obtain new ones. Our failure to meet contractual obligations could also result in substantial actual and consequential financial damages. The termination of a contract for cause could, for instance, subject us to liabilities for excess costs incurred by a payer in obtaining similar services from another source. In addition, our contracts require us to indemnify payers for our failure to meet standards of care, and some of them contain liquidated damages provisions and financial penalties that we must pay if we breach these contracts.

If we fail to estimate accurately the cost of performing certain contracts, we may experience reduced or negative margins.

Under our FFS contracts, we receive fees based on our interactions with government sponsored clients. To earn a profit on these contracts, we must accurately estimate costs incurred in providing services. Our risk on these contracts is that our client population is not large enough to cover our fixed costs, such as rent and overhead. Our FFS contracts are not reimbursed on a cost basis and therefore, if we fail to estimate our costs accurately, we may experience reduced margins, or even losses on these contracts.

Additionally, approximately 84.1%, 83.4% and 83.3% of our NET services revenue during 2014, 2013 and 2012, respectively, was generated under capitated contracts with the remainder generated through FFS and flat fee contracts. Under most of our capitated contracts, we assume the responsibility of managing the needs of a specific geographic population by contracting out transportation services to local van, cab and ambulance companies on a per ride or per mile basis. We use a “pricing model” to determine applicable contract rates, which takes into account factors, such as estimated utilization, state specific data, previous experience in the state and/or with similar services, estimated volume and availability of mass transit. The amount of the fixed per member, per month fee is determined in the bidding process, but predicated on actual historical transportation data for the subject geographic region (provided by the payer), actuarial work performed in-house as well as by third party actuarial firms and actuarial analyses provided by the payer. If the utilization of our services is more than we estimated, the contract may be less profitable than anticipated, or may not be profitable at all.

We record revenue from cost-based service contracts based on a combination of direct costs, indirect overhead allocations, and stated contractual margins on those costs. We may be required to subsequently refund a portion of the excess funds, if any.

Our cost-based service contracts require us to account for contingencies such as excess cost per service over the allowable contract rate and/or an insufficient number of encounters. In cases where funds paid to us exceed the allowable costs to provide services under the contracts, we may be required to pay back the excess funds. While we believe we have adequately reserved for potential refund amounts, the final settlement of certain contract reimbursements can sometimes occur at a significantly later date than the period services were provided. It is possible that we are unaware of certain potential refunds until they occur which could have a material adverse impact on our operating results. Approximately 19.0%, 20.3% and 18.6% of our Human Services segment revenues or approximately 4.8%, 6.4% and 6.0% of our consolidated revenues for the years ended December 31, 2014, 2013 and 2012, respectively, were derived from cost-based service contracts.

Our results of operations will continue to fluctuate due to seasonality.

Our quarterly operating results and operating cash flows normally fluctuate as a result of seasonal variations in our business. In our Human Services operating segment, lower client demand for our home and community based services during the holiday and summer seasons generally results in lower revenue during those periods; however, our expenses related to the Human Services operating segment do not vary significantly with these changes. As a result, our Human Services operating segment typically experiences lower operating margins during the holiday and summer seasons. Our NET Services operating segment experiences fluctuations in demand for our NET services during the summer, winter and holiday seasons. Due to higher demand in the summer months and lower demand in the winter and holiday seasons, coupled with a fixed revenue stream based on a per member per month based structure, our NET Services operating segment typically experiences lower operating margins in the summer season and higher operating margins in the winter and holiday seasons. Our HA Services operating segment generally experiences higher CHA volume in the second half of the calendar year as demand accelerates for annual CHAs toward year-end. We expect quarterly fluctuations in operating results and operating cash flows to continue as a result of the seasonal demand for all of these services. As we enter new markets and expand our business, we could be subject to additional seasonal variations.

Our reported financial results could suffer if there is an impairment of goodwill or other intangible assets.

           Goodwill may be impaired if the estimated fair value of one or more of our reporting units is less than the carrying value of the respective reporting unit. Because we have grown in part through acquisitions, goodwill and other intangible assets represent a significant portion of our assets. We perform an analysis on our goodwill balances to test for impairment on an annual basis. Similarly, interim impairment tests may also be required in advance of our annual impairment test if events occur or circumstances change that would more likely than not reduce the fair value, including goodwill, of one or more of our reporting units below the reporting unit’s carrying value. Such circumstances could include but are not limited to: (1) loss of significant contracts, (2) a significant adverse change in legal factors or in the climate of our business, (3) unanticipated competition, (4) an adverse action or assessment by a regulator, or (5) a significant decline in our stock price. If events occur or circumstances change, we may be required to record an impairment adjustment to our goodwill or other intangible assets which could have a material adverse impact on our results of operations and financial position.

We may incur costs before receiving related revenues, which could result in cash shortfalls.

When we are awarded a contract to provide services, we may incur expenses before we receive any contract payments. These expenses include leasing office space, purchasing office equipment and hiring personnel. As a result, in certain large contracts where the government does not fund program start-up costs, we may be required to invest significant sums of money before receiving related contract payments. In addition, payments due to us from payers may be delayed due to billing cycles or as a result of failures to approve government budgets in a timely manner. Moreover, especially under FFS arrangements, any resulting cash shortfall could be exacerbated if we fail to either invoice the payer or to collect our fee in a timely manner. This could have a material adverse impact on our ongoing operations and our financial position.

We have a substantial amount of debt, which could impair our financial condition.

We have a significant amount of indebtedness. As of December 31, 2014, we had approximately $575.2 million of total indebtedness and approximately $30.3 million of available letter of credit and borrowing capacity under our credit facilities. Our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. Our substantial indebtedness could have other important consequences on our business. For example, it could:

Our ability to satisfy and manage our debt obligations depends on our ability to generate cash flow and on overall financial market conditions. To some extent, this is subject to prevailing economic and competitive conditions and to certain financial, business and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow from operations to permit us to pay principal, premium, if any, or interest on our debt obligations. If we are unable to generate sufficient cash flow from operations to service our debt obligations and meet our other cash needs, we may be forced to reduce or delay capital expenditures, sell or curtail assets or operations, seek additional capital, or seek to restructure or refinance our indebtedness. If we must sell or curtail our assets or operations, it may negatively affect our ability to generate revenue.

In addition, on February 11, 2015 and March 12, 2015, we issued $65.5 million and $15.8 million, respectively, of convertible preferred stock. The terms of the convertible preferred stock require us to pay mandatory quarterly dividends, either in cash or through an increase in the stated value of such stock. Our ability to satisfy and manage our obligations under our outstanding preferred stock depends, in part, on our ability to generate cash flow and on overall financial market conditions and the other factors discussed above.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to fund our day-to-day operations or to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations.

Our credit facility restricts our ability to dispose of assets and use the proceeds from any such dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.

Our variable-rate indebtedness exposes us to interest rate risk, which could cause our debt service obligations

to increase significantly.

Borrowings under our credit facility are subject to variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on our variable-rate indebtedness would increase and our net income would decrease, even though the amount borrowed under the facilities remained the same. As of December 31, 2014, we had $510.6 million outstanding variable-rate borrowings under our credit facility. Borrowings under our credit facilities accrue interest at LIBOR plus 3.0% per annum as of December 31, 2014. An increase of 1% in the LIBOR rate would cause an increase in interest expense of up to $17.0 million over the remaining term of the Amended and Restated Credit Agreement, which matures in 2018.

Restrictive covenants in our credit facility may limit our current and future operations, particularly our ability to respond to changes in our business or to pursue our business strategies.

The terms contained in the agreements that govern certain of our indebtedness, and the agreements that govern any future indebtedness of ours may include, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to take actions that we believe may be in our best interest. These agreements, among other things, limit our ability to:

• incur additional debt;

• provide guarantees in respect of obligations of other persons;

• issue redeemable stock and preferred stock;

• pay dividends or distributions or redeem or repurchase capital stock;

• make loans, investments and capital expenditures;

• enter into transactions with affiliates;

• create or incur liens;

• make distributions from our subsidiaries;

• sell assets and capital stock of our subsidiaries;

• make acquisitions; and

• consolidate or merge with or into, or sell substantially all of our assets to, another person.

A breach of the covenants or restrictions could result in a default under the applicable indebtedness. Such default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross acceleration or cross-default provision applies. In the event our lenders and note holders accelerate the repayment of our borrowings, we cannot assure that we and our subsidiaries would have sufficient assets to repay such indebtedness.

Our use of a reinsurance program to cover certain claims for losses suffered and costs or expenses incurred could negatively impact our business.

We are reinsured with regard to a substantial portion of our automobile, general liability, professional liability and workers’ compensation insurance. We also reinsure the general liability, professional liability, workers’ compensation insurance, automobile liability and automobile physical damage of various members of the network of subcontracted transportation providers and independent third parties over various policy years under reinsurance programs through our two wholly-owned captive insurance subsidiaries. Although, effective February 15, 2011, we did not renew our reinsurance agreement and will not assume liabilities for policies that cover the general liability, automobile liability, and automobile physical damage coverage of our independent third party transportation providers after that date, we will continue to administer existing policies for the foreseeable future and resolve remaining and future claims related to these policies. In the event that actual reinsured losses increase unexpectedly or exceed actuarially determined estimated reinsured losses under the program, the aggregate of such losses could materially increase our liability and adversely affect our financial condition, liquidity, cash flows and results of operations. In addition, as the availability to us of certain traditional insurance coverage diminishes or increases in cost, we will continue to evaluate the levels and types of insurance we include in our self-insurance program. Any increase to this program increases our risk exposure and therefore increases the risk of a possible material adverse effect on our financial condition, liquidity, cash flows and results of operations.

Any acquisition that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value or have a material adverse impact on our operating results.

We have made, and anticipate that we will continue making, strategic acquisitions as part of our growth strategy. We have made a number of acquisitions since our inception. The success of these and other acquisitions depends in part on our ability to integrate acquired companies into our business operations. There can be no assurance that the companies acquired will continue to generate income at the historical levels on which we based our acquisition decisions, that we will be able to maintain or renew the acquired companies’ contracts, that we will be able to realize operating and economic efficiencies upon integration of acquired companies, or that the acquisitions will not adversely affect our results of operations or financial condition.

We continually review opportunities to acquire other businesses that would complement our current services, expand our markets or otherwise offer prospects for growth. In connection with our acquisition strategy, we could issue stock that would dilute existing stockholders’ percentage ownership, or we could incur or assume substantial debt or contingent liabilities. Acquisitions involve numerous risks, including, but not limited to, the following:

• challenges assimilating the acquired operations;

• unanticipated costs and known and unknown legal or financial liabilities associated with an acquisition;

• diversion of management’s attention from our core businesses;

• adverse effects on existing business relationships with customers;

• entering markets in which we have limited or no experience;

• potential loss of key employees of purchased organizations;

• the incurrence of excessive leverage in financing an acquisition;

• failure to maintain and renew contracts of the acquired business;

• unanticipated operating, accounting or management difficulties in connection with an acquisition; and

• dilution to our earnings per share.

We cannot assure you that we will be successful in overcoming problems encountered in connection with any acquisition and our inability to do so could disrupt our operations and adversely affect our business.

International Risks

There are risks associated with our international operations that are different from the risks associated with our operations in the US, and our exposure to the risks of a global market could hinder our ability to maintain and expand international operations.

We have operation centers in Australia, Canada, France, Germany, Poland, Saudi Arabia, South Korea, Spain, Sweden, Switzerland, the United Kingdom and the US. In implementing our international strategy, we may face barriers to entry and competition from local companies and other companies that already have established global businesses, as well as the risks generally associated with conducting business internationally. The success and profitability of international operations are subject to numerous risks and uncertainties, many of which are outside of our control, such as:

• political or economic instability;

• changes in governmental regulation or taxation;

• currency exchange fluctuations;

• difficulties and costs of staffing and managing operations in certain foreign countries;

• work stoppages or other changes in labor conditions; and

• taxes and other restrictions on repatriating foreign profits back to the US

In addition, changes in policies and/or laws of the US or foreign governments resulting in, among other changes, higher taxation, tariffs or similar protectionist laws could reduce the anticipated benefits of international operations and could have a material adverse effect on our results of operations and financial condition. We have currency exposure arising from both sales and purchases denominated in foreign currencies, including intercompany transactions outside the US, and we currently do not conduct hedging activities. We cannot predict with precision the effect of future exchange-rate fluctuations on our business and operating results, and significant rate fluctuations could have a material adverse effect on results of operations and financial condition.

We operate and are in a taxable income position in multiple tax jurisdictions, and face the risk of double taxation if one jurisdiction does not acquiesce to the tax claims of another jurisdiction.

We currently operate in the US and eleven foreign countries and are subject to income taxes in those countries and the specific states and/or provinces where we operate. In the event one taxing jurisdiction disagrees with another taxing jurisdiction, we could experience temporary or permanent double taxation and increased professional fees to resolve taxation matters.

Item 1B.  Unresolved Staff Comments. 

None.

Item 2.    Properties. 

We lease our approximately 11,000 square foot corporate office building in Tucson, Arizona under a five-year lease, with two additional three year renewal options. The lease is currently in its fifth year. The monthly base rental payment under this lease as of December 31, 2014 in the amount of approximately $18,000 is subject to an annual Consumer Price Index adjustment increase over the initial term of the lease. We also lease office space for other administrative services in Tucson. The lease terms vary and are in line with market rates. In connection with the performance of our contracts, our NET Services segment leases approximately 40 offices, our Human Services segment leases approximately 280 offices, our WD Services segment leases approximately 170 offices and our HA Services segment leases approximately three offices. The lease terms vary and are generally at market rates.

In the Human Services segment, we acquired a 5,760 square foot office building in Pottsville, Pennsylvania in connection with the acquisition of Providence Community Services, Inc. (formerly known as Pottsville Behavioral Counseling Group, Inc.), which is free of any mortgage. Additionally, with the acquisition of The ReDCo Group, Inc. (“ReDCo”) we acquired approximately 40 buildings in Pennsylvania which are free from any mortgages.

In 2010, we purchased land and a 46,188 square foot four-story shell building adjacent to our corporate office for cash. We utilize the building for certain information technology operations, and sublease or have sold other space within the building. We believe that our properties are adequate for our current business needs, and believe that we can obtain adequate space, if needed, to meet our foreseeable business needs.

Although we believe we are not currently a party to any material litigation, we may from time to time become involved in litigation relating to claims arising from our ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

Not applicable.

PART II

Market for our common stock

Our common stock, $0.001 par value per share, our only class of common equity, has been quoted on NASDAQ under the symbol “PRSC” since August 19, 2003. Prior to that time there was no public market for our common stock. As of March 10, 2015, there were 52 holders of record of our common stock. The following table sets forth the high and low sales prices per share of our common stock for the period indicated, as reported on NASDAQ Global Select Market:

Stock Performance Graph

The following graph shows a comparison of the cumulative total return for our common stock, NASDAQ Health Index and Russell 2000 Index assuming an investment of $100 in each on December 31, 2009.

Dividends

We have not paid any cash dividends on our common stock and do not plan to pay dividends on our common stock in the foreseeable future. In addition, our ability to pay dividends is prohibited by the terms of our credit agreement. The payment of future cash dividends, if any, will be reviewed periodically by the Board and will depend upon, among other things, our financial condition, funds from operations, the level of our capital and development expenditures, any restrictions imposed by present or future debt instruments and changes in federal tax policies, if any.

Issuer Purchases of Equity Securities

_______________________

Equity Compensation Plan Information

The following table provides certain information as of December 31, 2014 with respect to our equity based compensation plans.

The following table sets forth selected consolidated financial data, other financial data and other operating data. The selected consolidated financial data for the years ended December 31, 2014, 2013 and 2012 and as of December 31, 2014 and 2013 are derived from our audited consolidated financial statements included elsewhere in this report. The selected consolidated financial data for the years ended December 31, 2011 and 2010 and as of December 31, 2012, 2011 and 2010 are derived from our audited consolidated financial statements that are not included in this report. This information should be read in conjunction with our consolidated financial statements and the related notes, and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all of which are included elsewhere in this report.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6, “Selected Financial Data” and our consolidated financial statements and related notes included in Item 8 of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth in Item 1A, entitled, “Risk Factors” and elsewhere in this report may cause actual results to differ materially from those projected in the forward-looking statements.

Overview of Our Business

We arrange for and manage non-emergency transportation (“NET”) services, and provide behavioral health and other human services, workforce development (“WD”) services and health assessment (“HA”) services. In response to the large and growing population of eligible beneficiaries of government sponsored services, increasing pressure on governments to control costs and increasing acceptance of privatized human services and managed care solutions, we have grown both organically and through strategic acquisitions, including the acquisitions of Ingeus and Matrix during the second and fourth quarters, respectively, of 2014.

As of December 31, 2014, we had approximately 21.5 million individuals eligible to receive services under our NET business segment, and provide services directly to approximately 63,100 clients under our Human Services segment. Additionally, we have provided services to nearly 185,600 clients under our WD Services segment, and provided comprehensive health assessment (“CHA”) services across the US during 2014. Our NET Services segment provided services from approximately 40 locations in 39 states and the District of Columbia as of December 31, 2014. Our Human Services segment provided services from nearly 330 locations in 24 states, the District of Columbia, and three provinces in Canada as of December 31, 2014. Our WD Services segment provided services from over 170 locations in Australia, France, Germany, Poland, Saudi Arabia, South Korea, Spain, Sweden, Switzerland and the United Kingdom as of December 31, 2014. Our HA Services segment provided services is 33 states with approximately 800 nurse practitioners as of December 31, 2014.

How We Grow our Business and Evaluate our Performance

Our business has grown internally through organic expansion into new markets and existing markets, increases in the number of clients served under contracts that we or the entities we manage are awarded, and through strategic acquisitions. With respect to our Human Services and WD Services business segments, we typically pursue organic expansion into markets that are contiguous to our existing markets or where we believe we can quickly establish a significant presence. When we expand organically into new markets, we typically have no clients or perform no management services in those markets historically, and are required to incur start-up costs including building or lease costs, required permits and costs to attract and train initial personnel. These costs are typically expensed as incurred, and our new offices often expect to incur losses for a period of time until we adequately grow our revenue from clients. These initial losses are built in to our bid models and forecasts, and are typically expected to be recouped on average over the life of the operation.

We continue to selectively identify and pursue strategic acquisitions of attractive businesses that are complementary to our business strategies and current services and businesses in markets where we see opportunities for our existing services but where we lack the contacts or market knowledge to make a successful organic entry.

In managing our business, we focus on several key performance indicators that are specific to the markets that we operate in. Specifically, we focus on the number of clients served and the average rates we receive for our services, as those particular metrics are the key drivers of our revenue performance. We also focus on our employee costs and number of employees, outsourced transportation costs by contract, and cost per job placement as these items are our most significant operating costs and the key to controlling our operating margins. In addition, we monitor EBITDA and Adjusted EBITDA as key performance indicators of our financial performance. We intend to continue to focus on these and additional measures going forward, and make changes in our cost structure where necessary to achieve our financial and operational goals. We will also leverage our technology platforms where possible, and expand our shared services capability.

How We Earn our Revenue

NET Services

We provide NET management services under contracts with state Medicaid and local agencies, hospital systems or private managed care organizations (“MCOs”). Most of our contracts for NET management services are capitated. This means that we are paid on a per member, per month basis for each eligible member. We do not direct bill for services under capitated contracts as revenue is based on the number of eligible members.

Human Services

Our Human Services revenue is primarily derived from provider contracts with state and local government agencies and government intermediaries, health maintenance organizations (“HMOs”) and to a lesser extent, commercial insurers. The government entities that pay for our services include welfare, child welfare and justice departments, public schools and state Medicaid programs. For the majority of the contracts where we provide human services directly, we are paid on a fee for service (“FFS”) basis. In other such arrangements, we receive a set monthly amount or we are paid amounts equal to the costs we incur to provide agreed upon services.

WD Services

With the acquisition of Ingeus in May, 2014, we now provide workforce development services on a global basis that include resume and job interview skills, networking and job placement services and technical job training through internally staffed resources. Our client base for workforce development services is broad and includes long-term unemployed, disabled, and unskilled individuals, as well as individuals that cope with medical illnesses, are newly graduated from educational institutions, and those that have been released from incarceration after an extended length of time. We contract primarily with government entities that seek to reduce the unemployment rate generally, or for targeted population cohorts. We are paid largely based on job placement and job sustainment success, but are also paid attachment fees based on the admission of clients into our programs, as well as incentive fees that are usually paid at the end of defined measurement periods based on direct and indirect variables. We bill according to contractual terms, typically after proof of services have been achieved.

Approximately 68.0% of Ingeus’s revenues from May 30, 2014 to December 31, 2014 were derived from seven standardized regional contracts with the Department of Work and Pension (“DWP”) under the Work Programme, whereby services are provided to long-term unemployed individuals to place them into jobs. Under these contracts, which commenced on April 2011 and continue through March 2016 with an additional two-year service period, Ingeus has historically been paid a fixed amount for each referred client as follows:

• Attachment fees, which ceased on July 1, 2014, which were typically upfront payments that were payable when a client was referred and entered the system;

• Job placement fees, which are typically payable when a client is employed, or job outcome fees, which are typically payable when a client is employed, and remains employed for a specified period of time;

• Sustainment fees, which are typically payable upon certain employment tenure milestones (for example, demonstrated continuing employment for up to 24 months); and

• Incentive payments, which are based on the achievement of certain global measures over four annual measurement periods commencing April 1, 2014.

As noted above, attachment fees are no longer payable under the DWP contracts. As a result, going forward, Ingeus will receive the majority of its revenue under these contracts only upon demonstrating the clients’ continued employment for a substantial period of time and upon achievement of incentive measures over the defined measurements periods. However, a substantial portion of the total cost of providing services to clients is incurred in the period between initial referral and job placement. In general, under the DWP contract and most of its other current contracts, Ingeus invests significant sums of money in personnel, leased office space, purchased or developed technology and other costs prior to commencing services. It is expected that future contacts will be structured in a similar fashion. In addition, Ingeus does and may in the future incur service delivery costs for significant periods of time before they receive payments under those contracts, leading to variability in Ingeus financial performance between quarters and for comparative periods.

HA Services

With the acquisition of Matrix in October, 2014, we contract with health plans to provide CHA for their Medicare Advantage (“MA”) members that meet certain pre-determined criteria as defined by the providers. A comprehensive health assessment is a comprehensive physical examination of an individual performed by one of our physicians or nurse practitioners (“NPs”). The health plans use the assessment reports created from the CHA examinations to impact care management of the MA member, and to accurately report the cost of care of those members.

We have also introduced new product lines, including in-home screenings, Medication Therapy Management (“MTM”), and analytic and physician services. Additionally, we contract directly with health plans and offer care management and quality measure software for customer use.

Critical Accounting Policies and Estimates

General

In preparing our financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) we are required to make estimates and judgments that affect the amounts reflected in our financial statements. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. However, actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are those policies most important to the portrayal of our financial condition and results of operations. These policies require our most difficult, subjective or complex judgments, often employing the use of estimates about the effect of matters inherently uncertain. Our most critical accounting policies pertain to revenue recognition, accounts receivable and allowance for doubtful accounts, accounting for business combinations, goodwill and other intangible assets, accrued transportation costs, loss reserves for certain reinsurance and self-funded insurance programs, stock-based compensation and income taxes.

Revenue Recognition

NET Services segment

Capitation contracts. The majority of our NET services revenue is generated under capitated contracts where we assume the responsibility of meeting the covered transportation requirements of a specific geographic population for a fixed amount per period. Revenues under capitation contracts with our payers are based on per-member monthly fees for an estimated number of participants in the payer’s program.

FFS contracts. Revenues earned under FFS contracts are recognized when the service is provided. Revenue under these types of contracts is based upon contractually established billing rates, less allowance for contractual adjustments. Estimates of contractual adjustments are based upon payment terms specified in the related agreements.

Flat fee contracts.    Revenues earned under flat fee contracts are recognized ratably over the covered service period. Revenues under these types of contracts are based upon contractually established monthly flat fees that do not fluctuate with any changes in the membership population that can receive our services.

Human Services segment

FFS contracts. Revenue related to services provided under FFS contracts is recognized at the time services are rendered. Such services are provided at established billing rates.

As services are rendered, contract-specific documentation is prepared describing each service, time spent, and billing code to determine and support the value of each service provided and billed. The timing and amount of collection are dependent upon compliance with the billing requirements specified by each payer. Failure to comply with these requirements could delay the collection of amounts due to us under a contract or result in adjustments to amounts billed.

The performance of our contracts is subject to the condition that sufficient funds are appropriated, authorized and allocated by each state, city or other local government. If sufficient appropriations, authorizations and allocations are not provided by the respective state, city or other local government, we are at risk for uncollectible amounts or immediate termination or renegotiation of the financial terms of our contracts.

Cost-based service contracts. Revenues from our cost-based service contracts are recorded based on a combination of allowable direct costs, indirect overhead allocations, and stated allowable margins on those incurred costs. These revenues are compared to annual contract budget limits and, depending on reporting requirements, reductions of revenue may be recorded for certain contingencies. We annually submit projected costs for the coming year, which assist the contracting payers in establishing the annual contract amount to be paid for services provided under the contracts. We submit monthly cost reports which are used by the payers to determine the need for any payment adjustments. Completion of the cost report review process may range from one month to several years. In cases where funds paid to us exceed the allowable costs to provide services under contract, we may be required to repay amounts previously received.

Our cost reports are generally audited by payers annually. We periodically review our provisional billing rates and allocation of costs and provide for estimated payment adjustments. We believe that adequate provisions have been made in our consolidated financial statements for any material adjustments that might result from the outcome of any cost report audits. Differences between the amounts provided and the settlement amounts are recorded in our consolidated statement of income in the year of settlement. Such settlements have historically not been material.

Annual block purchase contract. Our annual block purchase contract requires us to provide or arrange for behavioral health services to eligible populations of beneficiaries as defined in the contract. We must provide a complete range of behavioral health clinical, case management, therapeutic and administrative services. We are obligated to provide services only to those clients with a demonstrated medical necessity. Our annual funding allocation amount may be increased when our patient service encounters exceed the contract amount; however, such increases are subject to government appropriation. There is no contractual limit to the number of eligible beneficiaries that may be assigned to us, or a specified limit to the level of services that may be provided to these beneficiaries if the services are deemed to be medically necessary. Therefore, we are at-risk if the costs of providing necessary services exceed the associated reimbursement.

The terms of the contract may be reviewed prospectively and amended as necessary to ensure adequate funding of our contractual obligations; however, there is no assurance that amendments will be approved or that funding will be adequate.

Workforce Development Services Segment

Revenues from our workforce development services are generated from providing resume and job interview skills, networking and job placement services, and technical job training through internally staffed or outsourced resources.

Our revenue is largely based on successful job placement and sustainment outcomes. While the specific terms vary by contract and country, we generally receive four types of revenue streams under our contracts with government entities: attachment fees, job placement/job outcome fees, sustainment fees and incentive fees. Attachment fees are typically upfront payments that are payable when a client enters the program. Job placement fees are typically payable when a client is employed, and job outcome fees are typically payable when a client is employed and remains employed for a specified period of time. Sustainment fees are typically payable upon certain employment tenure milestones, such as monthly payments for sustained employment past a specified time period. Finally, incentive fees are typically based upon a calculation that includes a variety of factors and inputs, such as average sustainment rates and client referral rates, and is often cumulative in nature.

Revenue generally is recognized ratably over the period from attachment to when services are provided, as is the case for attachment fees, or when certain milestones are achieved, as is the case with job placement/job outcome fees, and sustainment fees. Incentive fees are generally recognized when the revenue is fixed and determinable, frequently at the end of the cumulative calculation period, unless the contractual terms allow for earned payments on a fixed or ratable basis.

Health Assessment Services Segment

The HA Services segment contracts with health plans to provide clinical assessments for their MA members that meet certain pre-determined criteria as defined by the providers. Revenue is recognized in the period in which the services are rendered.

Deferred Revenue

At times we may receive funding for certain services in advance of services being rendered, or the revenue being realizable. These amounts are reflected in the accompanying consolidated balance sheets as deferred revenue until the services are rendered, or the revenue is realizable.

Accounts Receivable and Allowance for Doubtful Accounts

Clients are referred to us primarily through governmental programs and by commercial insurance companies, and we only provide services at the direction of a payer under a contractual arrangement. These circumstances have historically minimized any uncollectible amounts for services rendered. However, not all amounts recorded as accounts receivable will ultimately be collected.

We record all accounts receivable amounts at their contracted amount, less an allowance for doubtful accounts. We maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to cover the risk that an account will not be collected. We regularly evaluate our accounts receivable, especially receivables that are past due, and reassess our allowance for doubtful accounts based on specific client collection issues. In circumstances where we are aware of a specific payer’s inability to meet its financial obligation, we record a specific addition to our allowance for doubtful accounts to reduce the net recognized receivable to the amount we reasonably expect to collect.

Our write-off experience for 2014, 2013 and 2012 was less than 1.0% of revenue.

Accounting for Business Combinations, Goodwill and Other Intangible Assets

When we consummate an acquisition we separately value all acquired identifiable intangible assets apart from goodwill in accordance with Accounting Standards Codification, or ASC, Topic 805 - Business Combinations. We analyze the carrying value of goodwill at the end of each fiscal year through an impairment analysis performed in the first quarter of the following year. When analyzing goodwill for impairment we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test described below. If we determine, based on a qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we would calculate the fair value of the reporting unit and perform the two-step quantitative goodwill impairment test. In connection with our year-end asset impairment test, we reconcile the aggregate fair value of our reporting units to our market capitalization including a reasonable control premium. As part of this annual impairment test, we also compare the fair value of each reporting unit with its carrying value, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, there is an indication of impairment. If an indication of impairment is identified, the impairment loss, if any, is measured by comparing the implied fair value of the reporting unit’s goodwill with its carrying value. In calculating the implied fair value of the reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other identifiable assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying value of goodwill exceeds its implied fair value.

Similarly conducted interim impairment tests may also be required in advance of our annual impairment test if events occur or circumstances change that would more likely than not reduce the fair value, including goodwill, of one or more of our reporting units below the reporting unit’s carrying value. Such circumstances could include but are not limited to: (1) loss of significant contracts, (2) a significant adverse change in regulations applicable to our business or in the climate of our business, (3) unanticipated competition, (4) an adverse action or assessment by a regulator, or (5) a significant decline in our stock price.

In determining whether or not we had goodwill impairment to report for the years ended December 31, 2014, 2013 and 2012, we considered both a market-based valuation approach and an income-based valuation approach when estimating the fair values of our reporting units with goodwill balances as of such dates. The valuation methodology applied in 2014 was consistent with our methodology in 2013 and 2012. Under the market approach, the fair value of the reporting unit is determined using one or more methods based on current values in the market for similar businesses. Under the income approach, the fair value of the reporting unit is based on the cash flow streams expected to be generated by the reporting unit over an appropriate period and then discounting the cash flows to present value using an appropriate discount rate. The income approach is dependent on a number of significant management assumptions, including estimates of future revenue and expenses, growth rates and discount rates. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans with regard to our operations. To the extent additional information arises, market conditions change or our strategies change, it is possible that our conclusion regarding whether existing goodwill is impaired could change and result in a material adverse effect on our consolidated financial position or results of operations.

In conjunction with our annual review of goodwill impairment as of December 31, 2014, we performed the two-step impairment analysis and determined that goodwill was impaired for two of our Human Services segment reporting units. The goodwill impairment in the Maple Star reporting unit was attributable to declines in forecasted referrals, leading to a decline in projected future cash flows of the entity. We recorded an impairment charge of $3.8 million related to the Maple Star reporting unit. The impairment for the second reporting unit was attributable to lower than expected performance during 2014 in the Providence of Idaho reporting unit, as well as a lower than expected projections in future years. An impairment charge of $2.8 million was recorded related to the Providence of Idaho reporting unit.

Additionally, based on a triggering event for one of our other Human Services segment reporting units, we recorded a goodwill impairment charge of approximately $0.3 million prior to conducting our annual asset impairment test.

Also in conjunction with its annual review of goodwill impairment as of December 31, 2014, the Company performed the two-step analysis of its Ingeus reporting unit. After completing step one, the Company concluded the fair value of the reporting unit was less than its carrying value, requiring the Company to proceed to the second step of the two-step goodwill impairment test. As part of the Step 2 analysis, the Company analyzed its long-term assets, including property, plant and equipment, and its intangible assets. Based on this review, it was determined that the undiscounted cash flows from the reporting unit exceeded its carrying value. However, in determining the implied fair value of goodwill for the Ingeus reporting unit, the assigned fair value of the Ingeus reporting unit’s intangible assets as of December 31, 2014 was $13.7 million less than the carrying value. In accordance with ASC 350, the assignment of fair value to the assets and liabilities of the reporting unit is solely for the purpose of testing goodwill for impairment, the assets and liabilities of the reporting unit are not written up or down as a result of the allocation process. Based on the two-step analysis described above, the Company concluded the implied fair value of the Ingeus reporting unit goodwill exceeded its carrying value by $18.5 million. Accordingly, the Company concluded there was no impairment in its Ingeus reporting unit goodwill, and did not recognize any charges related to goodwill impairment as of December 31, 2014. 

The Company believes the assumptions used in our discounted cash flow analysis are appropriate and result in reasonable estimates of the implied fair value of each reporting unit. We further believe the most significant assumptions used in our analysis are the expected revenue growth, margins and overall profitability of its reporting units. However, we may not meet our revenue growth and profitability targets, working capital needs and capital expenditures may be higher than forecast, changes in credit or equity markets may result in changes to our discount rate and general business conditions may result in changes to our terminal value assumptions for our reporting units. The amount of goodwill associated with Ingeus was $32.9 million at December 31, 2014.

As of December 31, 2014, other than the Human Services segment reporting units discuss above, the fair values of our reporting units subject to quantitative testing substantially exceeded their carrying values.

Based on our annual asset impairment test completed as of December 31, 2013 and 2012 we determined that no goodwill was impaired as of such dates. However, in 2013, we recorded a goodwill impairment charge of approximately $0.5 million as of June 30, 2013.

In connection with our acquisitions, we calculate the fair value of any management contracts, customer relationships, restrictive covenants, trademarks and trade names, software licenses and developed technology. We assess whether any relevant factors limit the period over which acquired assets are expected to contribute directly or indirectly to future cash flows for amortization purposes and determine an appropriate useful life for acquired customer relationships based on the expected period of time we will provide services to the payer. While we use discounted cash flows to value intangible assets, we have elected to use the straight-line method of amortization to determine amortization expense. If applicable, we assess the recoverability of the unamortized balance of our long-lived assets based on undiscounted expected future cash flows. If the review indicates that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of any long-lived asset is recognized as an impairment loss.

As of December 31, 2014 and 2013, we determined that there was no impairment of intangible assets.

Accrued Transportation Costs

Transportation costs are estimated and accrued in the month the services are rendered by contracted transportation providers, and are determined using gross reservations for transportation services less cancellations, and average costs per transportation service by customer contract. Average costs per contract are determined by historical cost trends. Actual costs relating to a specific accounting period are monitored and compared to estimated accruals. Adjustments to those accruals are made based on reconciliations with actual costs incurred.

Loss Reserves for Certain Reinsurance and Self-Funded Insurance Programs

We reinsure a substantial portion of our NET Services’ and Human Services’ automobile, general and professional liability and workers’ compensation costs under reinsurance programs through our wholly-owned subsidiary Social Services Providers Captive Insurance Company (“SPCIC”). SPCIC is a licensed captive insurance company domiciled in the State of Arizona. SPCIC maintains reserves for obligations related to our reinsurance programs for our automobile, general and professional liability and workers’ compensation coverage.

As of December 31, 2014 and 2013, SPCIC had reserves of approximately $12.8 million and $10.6 million, respectively, for the automobile, general and professional liability and workers’ compensation programs.

In addition, we own Provado Insurance Services, Inc. (“Provado”), a licensed captive insurance company domiciled in the State of South Carolina. Provado historically provided reinsurance for policies written by a third party insurer for general liability, automobile liability, and automobile physical damage coverage to various members of the network of subcontracted transportation providers and independent third parties within our NET Services operating segment. Effective February 15, 2011, Provado has not renewed its reinsurance agreement and will not assume additional liabilities for policies commencing thereafter. It continues to administer existing policies for the foreseeable future and to resolve remaining and future claims related to these policies.

Provado maintains reserves for obligations related to the reinsurance programs for general liability, automobile liability, and automobile physical damage coverage. As of December 31, 2014 and 2013, Provado had reserves of approximately $1.4 million and $1.9 million, respectively.

We utilize analyses prepared by third party administrators and independent actuaries based on historical claims information with respect to the general and professional liability coverage, workers’ compensation coverage, automobile liability, and automobile physical damage to determine the amount of required reserves.

We also maintain a self-funded health insurance program provided to our NET Services’ and Human Services’ employees. With respect to this program, we consider historical and projected medical utilization data when estimating our health insurance program liability and related expense as well as using services of a third party administrator. As of December 31, 2014 and 2013, we had approximately $2.0 million and $1.9 million, respectively, in reserve for our self-funded health insurance programs.

We regularly analyze our reserves for incurred but not reported claims, and for reported but not paid claims related to our reinsurance and self-funded insurance programs. We believe our reserves are adequate. However, significant judgment is involved in assessing these reserves such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and any resulting adjustments are included in expense once a probable amount is known. There were no significant prior period adjustments recorded in the periods covered by this report.

Stock-Based Compensation

We follow the fair value recognition provisions of ASC Topic 718 - Compensation-Stock Compensation (“ASC 718”), which requires companies to measure and recognize compensation expense for all share based payments at fair value. With respect to stock option awards, the fair value is estimated on the date of grant using the Black-Scholes option-pricing formula and amortized over the option’s vesting periods. The Black-Scholes option-pricing formula requires us to make assumptions for the expected dividend yield, stock price volatility, life of options and risk-free interest rate.

We follow the short-cut method prescribed by ASC 718 to calculate our pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of ASC 718 (“APIC pool”). There was no effect on our financial results for 2014, 2013 or 2012 related to the application of the short-cut method to determine our APIC pool balance.

Income Taxes

Deferred income taxes are determined by the liability method in accordance with ASC Topic 740 - Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance which includes amounts for net operating loss and tax credit carryforwards for which we have concluded that it is more likely than not that these net operating loss and tax credit carryforwards will not be realized in the ordinary course of operations. We recognize interest and penalties related to income taxes as a component of income tax expense.

Foreign currency translation

Local currencies generally are considered the functional currencies outside the US. Assets and liabilities for operations in local-currency environments are translated at month-end exchange rates of the period reported. Income and expense items are translated at the average exchange rate for each applicable month. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

Results of operations

Segment reporting.    Our financial operating results are organized and reviewed by our chief operating decision maker along our service lines in four reportable segments: NET Services, Human Services, WD Services and HA Services. We operate these reportable segments as separate divisions and differentiate the segments based on the nature of the services they offer.

Consolidated Results

      The following table sets forth the percentage of consolidated total revenues represented by items in our consolidated statements of income for the periods presented:

Overview of trends of our results of operations for 2014

Our NET Services revenues for 2014 as compared to 2013 were favorably impacted by new contracts and expansion in certain markets. The results of operations for 2014 as compared to 2013 included an increase in revenue of 14.8% due primarily to new business, while the cost of transportation as a percentage of non-emergency transportation services revenue decreased to 90.5% during 2014 as compared to 92.2% during 2013, due primarily to lower utilization of transportation services than historical trends.

Our Human Services revenues for 2014 as compared to 2013 increased 6.2% and were favorably impacted by contracts that began in 2013 and were fully implemented in 2014. Client service payroll and related costs also increased in 2014 from 2013 by 7.4%. However, we experienced a 44.0% increase in client service purchased services costs in 2014 compared to 2013. This increase in client services purchased service costs was due to higher than expected foster care expenses in our Texas contract, which was terminated during the third quarter of 2014.

Our WD Services revenues for 2014 were $179.3 million. Workforce development service expenses comprised 89.3% of workforce development services revenue. We expect this ratio will fluctuate from period to period based upon contract milestones and start-up costs of most workforce development contracts. Our WD Services results include the time period of May 30, 2014 to December 31, 2014.

Our HA Services revenues for 2014 were $43.3 million. Health assessment service expenses comprised 81.2% of health assessment services revenue. Our HA Services results include the time period of October 23, 2014 to December 31, 2014.

We also experienced increases in general and administrative expenses, depreciation and amortization, and interest expense as a result of our acquisitions of Ingeus and Matrix during the year and the related debt incurred to fund the acquisitions. In addition, we experienced a reduction of expenses related to an adjustment in the estimated fair value of contingent consideration related to the Ingeus acquisition as of December 31, 2014. 

Year ended December 31, 2014 compared to year ended December 31, 2013

Revenues

Service revenue is comprised of the following (in thousands):

Non-emergency transportation services. Non-emergency transportation services revenues were as follows (in thousands):

The major drivers of the increase in NET Services revenues in 2014 include increased membership under our New Jersey contract, a new contract with the state of Rhode Island, additional lives added under both new and expanded contracts in Michigan, implementation of various new managed care contracts across the country, and expansion of our contract with the states of Maine and Texas. Additional membership increases were experienced in a number of other states such as Delaware, Georgia, Nevada and South Carolina. This revenue growth was partially offset by the elimination of our contracts in Wisconsin, Mississippi, and Hartford, Connecticut.

A significant portion of this revenue was generated under capitated contracts where we assumed the responsibility of meeting the covered transportation requirements of beneficiaries residing in a specific geographic region for fixed payment amounts per beneficiary. Due to the fixed revenue stream and variable expense structure of our NET Services operating segment, expenses related to this segment vary with seasonal fluctuations. We expect our operating results will continue to fluctuate on a quarterly basis.

Human services. Human services revenues are comprised of the following (in thousands):

Home and community based services. Home and community based services revenue increased in 2014 from 2013 primarily due to revenue derived from an acquired entity in Idaho of approximately $6.3 million and an acquired entity in Massachusetts of approximately $2.3 million. Additionally, significant growth in Maine and Delaware have had a favorable impact on revenue.

Foster care services. Our foster care services revenues increased in 2014 from 2013 primarily as a result of our foster care contract in Texas that began in 2013. Although we generated increased foster care service revenue under this contract, costs under the contract were higher than expected, and as such, we exited the contract in 2014. We expect to see a decline in foster care services revenue in 2015 as compared to 2014.

Management fees. The exit of, and changes to, certain management service agreements resulted in decreased management fees in 2014 as compared to 2013. We do not expect management fee revenue to be a significant portion of our business going forward.

Workforce development services. WD Services revenue was as follows (in thousands):

WD services revenue represents revenue attributable to Ingeus, which we acquired on May 30, 2014. The 2014 revenue includes seven months of revenue derived from providing international outsourced employability programs.

Health assessment services. HA Services revenue was as follows (in thousands):

HA services revenue represents revenue attributable to Matrix, which we acquired on October 23, 2014. The 2014 revenue includes revenue from October 23, 2014 to December 31, 2014 primarily derived from providing CHAs.

Operating expenses

Service Expense.

Service expense is comprised of the following (in thousands):

Cost of non-emergency transportation services. Non-emergency transportation services expenses included the following for 2014 and 2013 (in thousands):

Purchased services. We subcontract with third party transportation providers to provide non-emergency transportation services to our clients. The increase in purchased services for 2014 compared to 2013 is attributable to additional purchased service costs for our expanded business and new contracts covering Hawaii, Kansas, Louisiana, Maine, Michigan, New Mexico, Ohio, Texas, Rhode Island, New York, and Utah, as well as further expansion in the California commercial and managed care markets. These increases were partially offset by decreases related to the termination of a contract with the City of Hartford, several managed care contracts, our Wisconsin contracts, and the State of Mississippi Medicaid and End Stage Renal contracts. Additional decreases in purchase services costs were caused by the transition to an administrative services only contract in Connecticut and reduced transportation utilization due to inclement weather. As a percentage of NET Services revenue, purchased services decreased to approximately 74.4% for 2014, from 76.8% for 2013. This decline in purchased service expense as a percent of NET Services revenue is due to the membership expansion in existing contracts with lower utilization levels than the historical trend.   

Payroll and related costs. The increase in payroll and related costs of our NET Services segment for 2014 as compared to 2013 was due to the hiring of additional staff for new contracts in Maine, Texas and Utah, expansion efforts across several other markets, and additional staffing needed for expansion of the California ambulance commercial and managed care lines of business. Additional hiring of staff is also reflected in the last quarter of 2014 in implementing contracts that have gone live in first quarter of 2015. Payroll and related costs, as a percentage of NET Services revenue, increased to 12.6% for 2014 from 12.0% for 2013, due to the addition of call center staff to ensure our compliance with administrative and intake response time requirements of some of our new contracts, as well as the transition of the Connecticut contract from a full risk contract to administrative services only contract. All of these activities resulted in higher payroll and related costs as a percentage of consolidated revenue.

Other operating expenses. Other operating expenses increased for 2014 as compared to 2013 primarily due to additional business taxes in expanding markets, travel and implementation cost related to new business as well as costs related to the deployment of our new centralized reservation system. During 2014, the NET Services segment undertook a redesign of its reservation system architecture transitioning from individual market switches to one centralized hub offering greater efficiencies as well as standard consistency throughout our segment. This involved a deployment schedule of over nine months which commenced in July 2014 and contributed to higher travel and implementation cost for the segment. Other operating expenses as a percentage of NET Services revenues were 3.5% for 2014 and 3.3% for 2013.

Stock-based compensation. Stock-based compensation expense was approximately $0.6 million and $1.1 million for 2014 and 2013, respectively. This item was primarily comprised of the amortization of the fair value of stock options and restricted stock awarded to employees of our NET Services segment under our 2006 Plan, as well as benefits and costs related to performance restricted stock units granted to an executive officer and a key employee.

Human service expense.  Human service expense included the following for the years ended December 31, 2014 and 2013 (in thousands):

Payroll and related costs. Approximately $7.2 million of the increase in payroll and related costs is attributable to two human services businesses acquired during 2014. The remaining increase in payroll and related costs from 2013 to 2014 is primarily due to costs related to the termination of an executive officer and increased headcount in certain markets, including North Carolina, Maine, Virginia and Delaware. Payroll and related costs as a percentage of revenue of our Human Services segment were 65.9% for 2014 and 65.1% for 2013.

Purchased services. We incur a variety of support service expenses in the normal course of our domestic business, including foster parent payments, pharmacy payments and out-of-home placements. In addition, we subcontract with a network of providers for a portion of the legacy workforce development services we provide. In 2014, we experienced an increase in foster parent payments of approximately $15.6 million. This increase was primarily related to our contract in Texas that began in 2013 and was terminated in the third quarter of 2014. We additionally incurred approximately $1.4 million less in expenses for out-of-home placements in 2014, primarily due to decreased utilization in Arizona. Expenses related to workforce development also decreased approximately $1.3 million from 2013 due primarily to the reclassification of certain cost reimbursements to other operating expenses. Purchased services, as a percentage of our Human Services segment revenues increased to 10.7% for 2014, up from 7.9% for 2013 due to the impact of foster parent payments relative to the level of related revenue.

Other operating expenses. Other operating expenses, as a percentage of revenue of our Human Services segment, increased to 15.2% for 2014 from 14.7% for 2013.

Stock-based compensation. Stock-based compensation for 2014 includes a benefit from the forfeiture of stock related awards for a terminated executive officer. For both periods, this item includes the amortization of the fair value of stock options and restricted stock awarded to key employees under our 2006 Plan, as well as benefits and costs related to performance restricted stock units.

Workforce development service expense.    Workforce development service expense, for our WD Services segment, was as follows (in thousands):