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METROPOLITAN HEALTH NETWORKS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2011, INCLUDING THE FINANCIAL
STATEMENTS AND NOTES THERETO, AS WELL AS THE FINANCIAL STATEMENTS AND NOTES THAT
APPEAR ELSEWHERE IN THIS REPORT.

                                    GENERAL

Unless otherwise indicated or the context otherwise requires, all references in
this Form 10-Q to "we," "us," "our," "Metropolitan" or the "Company" refer to
Metropolitan Health Networks, Inc. and its consolidated subsidiaries.

              CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Sections of this Quarterly Report contain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including, without limitation, statements with respect to anticipated future
operations and financial performance, growth and acquisition opportunities and
other similar forecasts and statements of expectation. We intend such statements
to be covered by the safe harbor provisions for forward-looking statements
created thereby. These statements involve known and unknown risks and
uncertainties, such as our plans, objectives, expectations and intentions, and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
the forward-looking statements. In some cases, you can identify forward-looking
statements by statements that include the words "estimate," "project,"
"anticipate," "expect," "intend," "may," "should," "believe," "seek" or other
similar expressions.

Specifically, this report contains forward-looking statements, including statements regarding the following topics:

? the ability of our provider services network ("PSN"), acting through our

contracting subsidiaries, to renew its agreements with the health plans

operated by Humana, Inc. and its subsidiaries ("Humana"), United Healthcare of

Florida, Inc. ("United"), Vista Healthplan of South Florida, Inc. and its

affiliated companies, a subsidiary of Coventry Health Care, Inc. ("Coventry"),

and Wellcare Health Plans, Inc. and its affiliated companies ("Wellcare," and,

together with Humana, United and Coventry, the "Contracting HMOs") that have

   renewable one-year terms, and to maintain all of its agreements with
   Contracting HMOs on favorable terms;



?  our ability to increase the number of customers assigned to us by the

Contracting HMOs ("Participating Customers") using our PSN, either within our

current geographic markets or in additional markets, and our ability to

Do your IULs have options like these?

realize the benefits of any such increases, including the anticipated benefits

   of economies of scale;


? our ability to accurately estimate the premium deficiency for the remaining

term of one existing agreement with a Contracting HMO other than Humana (the

"Contracting HMO Agreement") covering approximately 6,600 new Participating

   Customers added in 2012;



?  the anticipated benefits of our acquisition of Continucare Corporation
   ("Continucare");


? our intention to sell the sleep diagnostic business that we acquired in the

Continucare acquisition, and the expected timing and proceeds of such sale;

? the factors that we believe may mitigate the impact of anticipated premium

   reductions;



?  our ability to make, and the expected timing of, payments on our senior

secured first lien credit agreement (the "First Lien Credit Agreement") and

our senior secured second lien credit agreement (the "Second Lien Credit

Agreement" and, together with the First Lien Credit Agreement, the "Credit

   Facilities");




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? our ability to adequately predict and control medical expense and to make

reasonable estimates and maintain adequate accruals for estimated medical

   claims expense payable; and


? our ability to make reasonable estimates of Medicare retroactive capitation

   fee adjustments.



The forward-looking statements reflect our current view about future events and
are subject to risks, uncertainties and assumptions. We wish to caution readers
that certain important factors may have affected and could in the future affect
our actual results and could cause actual results to differ significantly from
those expressed in any forward-looking statement. The following important
factors could prevent us from achieving our goals and cause the assumptions
underlying the forward-looking statements and the actual results to differ
materially from those expressed in or implied by those forward-looking
statements:

? our ability to integrate the operations of Continucare or other entities, if

any, that we may acquire in the future, and to realize any anticipated

revenues, economies of scale, cost synergies or productivity gains in

Do your IULs have options like these?

connection with our acquisition of Continucare and any other entity, if any,

that we may acquire in the future, including the potential for unanticipated

issues, expenses and liabilities associated with those acquisitions and the

risk that Continucare or such other acquired entity, if any, fails to meet its

expected financial and operating targets;

? the potential for diversion of management time and resources in seeking to

integrate Continucare's operations;

? our potential failure to retain key employees of Continucare;

? the impact of our significantly increased levels of indebtedness entered into

in connection with the acquisition of Continucare on our funding costs,

operating flexibility and ability to fund ongoing operations with additional

borrowings, particularly in light of ongoing volatility in the credit and

   capital markets;


? the potential for dilution to our shareholders as a result of our acquisition

   of Continucare;


? our ability to operate pursuant to the terms of our Credit Facilities and to

   meet all financial covenants;



?  reductions in premium payments to Medicare Advantage plans;



?  the loss of, or a material negative amendment, to any of our significant
   contracts;


? disruptions in the PSN's or any Contracting HMO's healthcare provider network;

? failure to receive accurate and timely revenue, claim, membership and other

   information from the Contracting HMOs;



?  our ability to sell the sleep diagnostic business;



?  future legislation and changes in governmental regulations;



?  increased operating costs;


? reductions in government funding of the Medicare program and changes in the

political environment that may affect public policy and have an adverse impact

   on the demand for our services;



?  the impact of Medicare Risk Adjustments on payments we receive from
   Contracting HMOs;




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? the impact of the Medicare prescription drug plan on our operations;

Do your IULs have options like these?

? general economic and business conditions;



?  increased competition;


? the relative health of our Participating Customers;

? changes in estimates and judgments associated with our critical accounting

   policies;



?  federal and state investigations;


? our ability to successfully recruit and retain key management personnel and

   qualified medical professionals; and



?  impairment charges that could be required in future periods.



Additional information concerning these and other risks and uncertainties is
contained in our filings with the United States Securities and Exchange
Commission (the "Commission"), including the section entitled "Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2011 and in our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012 and June
30, 2012.

Forward-looking statements should not be relied upon as a prediction of actual
results. Subject to any continuing obligations under applicable law or any
relevant listing rules, we expressly disclaim any obligation to disseminate,
after the date of this Quarterly Report on Form 10-Q, any updates or revisions
to any such forward-looking statements to reflect any change in expectations or
events, conditions or circumstances on which any such statements are based.

We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report unless otherwise required by law.

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BACKGROUND

Merger Agreement

On November 3, 2012, we entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Humana and Miner Acquisition Subsidiary, Inc., a
Florida corporation and a wholly-owned subsidiary of Humana ("Merger
Subsidiary"). The Merger Agreement provides that, upon the terms and subject to
the conditions set forth in the Merger Agreement, Merger Subsidiary will merge
with and into the Company (the "Merger"), with the Company surviving the Merger
as a wholly-owned subsidiary of Humana.

Pursuant to the terms of the Merger Agreement, at the effective time of the
Merger, each issued and outstanding share of our common stock (other than shares
owned by us, Humana or Merger Subsidiary, or any of our respective subsidiaries)
will be converted into the right to receive $11.25 in cash, without interest and
less any required withholding taxes. Prior to the effective time of the Merger,
each outstanding option to purchase shares of our common stock will become fully
vested and exercisable and will be cancelled in exchange for the right to
receive an amount in cash equal to the product of (1) the total number of shares
of our common stock subject to such option, multiplied by (2) the excess, if
any, of $11.25 over the exercise price per share of such option, without
interest and less any required withholding taxes. Immediately prior to the
effective time of the Merger, each restricted share of our common stock will
become fully vested and will be converted into the right to receive $11.25 in
cash, without interest and less any required withholding taxes.

The Merger Agreement contains customary covenants, including covenants requiring
each of the parties to use its commercially reasonable efforts to cause the
transactions contemplated by the Merger Agreement to be consummated. The Merger
Agreement also contains covenants requiring us to call and hold a meeting of our
shareholders for the purpose of voting to adopt and approve the Merger Agreement
and the Merger.

Under the Merger Agreement, if the Merger Agreement is terminated in certain
circumstances, including because our Board of Directors has changed its
recommendation that our shareholders approve and adopt the Merger Agreement and
the Merger or because we have entered into a definitive agreement (or announced
our intention to enter into a definitive agreement) to be acquired by an entity
other than Humana or one of its affiliates, we will be required to pay to Humana
a termination fee of $16 million and reimburse Humana for up to $5.3 million of
its and Merger Subsidiary's out-of-pocket expenses incurred in connection with
the Merger.

The consummation of the Merger is subject to certain conditions, including (1)
the affirmative vote of a majority of the outstanding shares of our common stock
in favor of the approval and adoption of the Merger Agreement and the Merger;
(2) the expiration or termination of applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"); (3) the absence of any law, order, injunction or other prohibition that
restrains, enjoins, prevents or makes illegal the consummation of the Merger;
(4) subject to certain materiality exceptions, the accuracy of the
representations and warranties of each party contained in the Merger Agreement;
(5) the performance by each party in all material respects of its covenants in
the Merger Agreement; and (6) the absence of any change, effect, development or
event between November 3, 2012 and consummation of the Merger that has had or
would reasonably be expected to result in a material adverse effect on the
Company.

The Merger is expected to close by the end of the first quarter of 2013.

Redemption of Series A Preferred Stock


On November 2, 2012, we delivered a notice of redemption to the holder (the
"Series A Holder") of all 5,000 of the outstanding shares of our Series A
Preferred Stock. Pursuant to the notice of redemption, we notified the Series A
Holder that we are exercising our right to redeem all of the outstanding shares
of Series A Preferred Stock held by him at a redemption price of $105 per share
($525,000) in accordance with the provisions of our Articles of Incorporation,
as amended to date. Subject to certain conditions, the redemption of the Series
A Preferred Stock is expected to occur on November 16, 2012.

Business


Our primary business is the operation of our provider services network ("PSN")
primarily through our wholly owned subsidiaries, Metcare of Florida, Inc. and
Continucare Corporation ("Continucare"), the latter of which we acquired on
October 4, 2011. Prior to 2012, the PSN provided and arranged for the provision
of healthcare services to Medicare Advantage, Medicaid and commercially insured
customers only in Florida. In 2012, the PSN expanded its operations to include
Ohio, Kentucky and Indiana. At September 30, 2012, we operated the PSN through
33 wholly-owned primary care practices, a wholly-owned oncology practice and
contracts with independent physician affiliates (each an "IPA"). As of September
30, 2012, the PSN operated throughout the Florida market including the cities of
Miami, Ft. Lauderdale, West Palm Beach, Tampa, Daytona and Pensacola, as well as
the Cincinnati, Ohio / Northern Kentucky and the Indianapolis, Indiana markets.

In August 2012, we formed a joint venture with Humana, Inc. (together with its
subsidiaries, "Humana") through which we have begun to operate in the
Cincinnati, Ohio / Northern Kentucky and Indianapolis, Indiana markets. The
joint venture, Symphony Health Partners - Midwest, LLC ("Symphony"), is owned by
our wholly-owned subsidiary, Symphony Health Partners, Inc. and Humana, with
Symphony Health Partners, Inc. being the majority owner.

In August 2012, Symphony entered into two new agreements with Humana. Pursuant
to one of these agreements, which was effective retroactive to January 1, 2012,
Symphony has agreed to manage the provision of healthcare services to Humana
Medicare Advantage members in the Cincinnati, Ohio/Northern Kentucky
market. There were approximately 7,900 Participating Customers covered under
this agreement at September 30, 2012. Through 2013, Symphony is entitled to
receive a monthly administrative fee based on the number of Humana Medicare
Advantage members covered under the agreement and a percentage of the surplus,
if any, generated under the agreement. Symphony is expected to assume partial
medical risk for the members covered under the agreement in 2014 and is expected
to assume substantially all medical risk for such members in 2015 and
thereafter.

Pursuant to the second agreement, which was effective as of August 1, 2012,
Symphony has agreed to manage the provision of healthcare services to Humana
Medicare Advantage members in the Indianapolis, Indiana market. There were
approximately 2,000 Participating Customers covered under this agreement at
September 30, 2012. Through 2013, Symphony is entitled to receive a monthly
administrative fee based on the number of Humana Medicare Advantage members
covered under the agreement and a percentage of the surplus, if any, generated
under the agreement. Symphony is expected to assume partial medical risk for the
members covered under the agreement in 2014 and is expected to assume
substantially all medical risk for such members in 2015 and thereafter.

The other material terms of these two agreements are similar to the material terms of our other managed care agreements with Humana.


In August 2012, Metcare of Florida, Inc. entered into an agreement with Humana
to manage, on a non-risk basis, the provision of healthcare services to
approximately 7,000 Medicare Advantage members covered under certain Humana
Medicare Advantage Preferred Provider Organization ("PPO") and Private
Fee-For-Service ("PFS") plans in a three year pilot program covering the 2013
through 2015 plan years. The agreement covers members in the Daytona and
Pensacola areas of Florida, including Okaloosa and Walton counties, two counties
where we did not previously have operations. We will receive a monthly
administrative fee based on the number of Humana Medicare Advantage members
covered under the agreement and a percentage of the surplus, if any, generated
under the agreement.

In October 2012, we completed the acquisition of the practice of an IPA with
which we currently contract. The practice operates two primary care offices in
Palm Beach County, Florida and provides medical care to approximately 1,100
Humana Participating Customers at September 30, 2012. As we currently provide
services to these Participating Customers under contractual arrangements with
the IPA, they are included in the total number of Participating Customers we
report at September 30, 2012.

Humana Agreements


Pursuant to our risk agreements with Humana (the "Humana Agreements"), at
September 30, 2012, the PSN provided or arranged for the provision of healthcare
services to Medicare Advantage, Medicaid and commercial customers in Florida and
has contract rights to expand its service offerings to additional Florida
counties. Our PSN assumes full financial responsibility for the provision or
management of all necessary medical care for each Participating Customer covered
by the Humana Agreements (each a "Humana Participating Customer"), even for
services we do not provide directly. For approximately 25,000 Humana
Participating Customers, our PSN and Humana share in the cost of inpatient
hospital services and the PSN is responsible for the full cost of all other
medical care provided to the Humana Participating Customers.  For the remaining
Humana Participating Customers, our PSN is responsible for the cost of all
medical care provided, including the cost of inpatient hospital services. In
return for the provision of these medical services, our PSN receives from Humana
a capitation fee for each Humana Participating Customer established pursuant to
the Humana Agreements. The amount we receive from Humana represents a
substantial percentage of the monthly premiums received by Humana from the
Centers for Medicare and Medicaid Services ("CMS") or the State of Florida with
respect to Humana Participating Customers.


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The Humana Agreements covering a majority of the Humana Participating Customers
have one-year terms, subject to automatic renewal unless either party provides
the other party notice of non-renewal 90, 120 or 180 days prior to the end of
the subject agreement's term (as applicable). The remaining Humana Agreements
have terms that extend to between August 31, 2013 and July 31, 2014, subject to
automatic renewal for additional terms of one to three years, unless either
party provides the other party notice of non-renewal 90 or 120 days prior to the
end of the subject agreement's term (as applicable).

Under several of our PSN's Humana Agreements, Humana may amend the benefit and
risk obligations and compensation rights from time to time by providing the PSN
30 days' prior written notice of the proposed amendment. Thereafter, the PSN
will generally have 30 days to object to or be deemed to have accepted the
proposed amendment. Upon receipt of such an objection, Humana may terminate the
subject agreement upon 90 days' notice. In the 13 years that we have been
working with Humana, after Humana and we have agreed upon the terms pursuant to
which we will provide services for an upcoming year, Humana has only
occasionally requested contract amendments and has never requested a contract
amendment that has materially, negatively impacted our benefit obligations, risk
obligations or compensation rights.

Humana may immediately terminate a Humana Agreement and/or the services of any
individual physician in our primary care physician network if: (i) the PSN's or
such physician's continued participation may adversely affect the health, safety
or welfare of any Humana customer or bring Humana into disrepute; (ii) Humana
loses its authority to do business in total or as to any limited segment or
business provided that, in the event of a loss of authority with respect to a
limited segment, Humana may only terminate a Humana Agreement as to that
segment; (iii) the PSN or such physician violates certain provisions of Humana's
policies and procedures manual; and (iv) under certain of the Humana Agreements,
the PSN or any of its physicians fails to meet Humana's credentialing or
re-credentialing criteria or is excluded from participation in any federal
healthcare program.

In addition to the foregoing termination provisions, each of the Humana
Agreements permits the PSN or Humana to terminate any such agreement upon 60 to
90 days prior written notice (subject to certain cure periods) in the event the
other party breaches other provisions of the agreement.

Under most of the Humana Agreements, our subsidiary that is party to such
agreement and its affiliated providers are generally prohibited, during the term
of the applicable agreement plus one year, from: (i) engaging in any activities
that are in competition with Humana's health insurance, HMO or benefit plans
business; (ii) having a direct or indirect interest in any provider sponsored
organization or network that administers, develops, implements or sells
government sponsored health insurance or benefit plans; (iii) contracting or
affiliating with another licensed managed care organization for the purpose of
offering and sponsoring HMO, PPO or point of service ("POS") products where such
subsidiary and/or its affiliated providers obtain an ownership interest in the
HMO, PPO or POS products to be marketed; and (iv) under certain provisions of
the Humana Agreements, entering into agreements with managed care entities,
insurance companies, or provider sponsored networks for the provision of
healthcare services to Medicare HMO, POS and/or replacement Participating
Customers at the same office sites or within five miles of the office sites
where services are provided to the Humana Plan Customers.

In addition, under the Humana Agreements covering a majority of the areas we
serve, or are eligible to serve, our subsidiary that is party to any such
agreement and/or its participating physicians and affiliated entities (including
us) are prohibited from entering into a risk contract with any non-Humana
Medicare Advantage HMO or provider sponsored organization in the counties
subject to the agreement. These restrictions lapse between January 1, 2013 and
January 1, 2015, as applicable, and are not applicable to certain previously
established contracts our subsidiaries have with non-Humana HMOs with respect to
a number of designated counties.

In addition, under each of our Humana Agreements, our subsidiary that is party
to any such agreement and/or its participating physicians and affiliated
entities (including us) are prohibited from causing groups of Medicare
Participating Customers assigned to an individual physician to disenroll from a
Humana plan and to enroll in a competing HMO plan.


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The foregoing discussion relates only to our risk agreements with Humana and
does not include the Cincinnati agreement, the Indianapolis agreement or the new
PPO and PFS agreement with Humana, each of which is described under the heading
"Background." Except as described under the heading "Background," the material
terms of those agreements are similar to the material terms of the Humana
Agreements as described above.

Agreements With Other HMOs


As of September 30, 2012, the PSN also had agreements to provide or arrange for
the provision of medical services to Participating Customers of other Medicare
Advantage plans including those offered by United, Coventry and Wellcare. The
majority of such services are provided on a risk basis pursuant to which our PSN
receives a capitated fee with respect to each of these Participating Customers.

Our agreements with United, Coventry and Wellcare have one-year terms expiring
between December 31, 2012 and September 30, 2013, subject to automatic renewal
for an additional one-year term each unless either party provides the other with
60, 90 or 120 days' notice of its intent to terminate such agreement, as
applicable. These agreements are generally subject to the same type of
amendment, termination, non-solicitation and/or non-competition provisions as
those included in the Humana Agreements.

In the third quarter of 2012, we realized a loss of $0.6 million, including a
premium deficiency reserve of $1.1 million, (under the "Contracting HMO
Agreement"). Included in the third quarter was favorable claims development from
the first half of 2012 of $1.6 million which reduced medical claims expense. On
November 6, 2012, we provided written notice to the Contracting HMO terminating
this agreement effective March 5, 2013 as we were unable to reach more favorable
contract terms with the Contracting HMO. As a result, we recorded in medical
claims expense in the third quarter of 2012 a premium deficiency of $1.1
million, which is our estimate of the loss that we will incur under the
Contracting HMO Agreement through March 5, 2013. For the nine months ended
September 30, 2012, our loss under the Contracting HMO Agreement was $5.0
million.

Our Physician Network


At September 30, 2012, the 33 primary care practices owned and operated by the
PSN were responsible for providing and arranging for medical care to 51.9% of
the PSN's Participating Customers under risk agreements.

The PSN contracts with IPAs to provide and manage care for our remaining
Participating Customers. Some of these contracts provide for payment to the
provider of a fixed per customer per month ("PCPM") amount and require the
provider to provide all the necessary primary care medical services to
Participating Customers. The monthly amount is negotiated and is subject to
change based on certain quality of service metrics. Other contracts provide for
payments on a fee-for-service basis, pursuant to which the provider is paid only
for the services provided.

Appropriate Risk Coding

We strive to ensure that our Participating Customers are assigned the proper
risk scores. Our processes include ongoing training of medical staff responsible
for coding and routine auditing of Participating Customers' charts to assure
risk-coding compliance. Participating Customers with higher risk codes generally
require more healthcare resources than those with lower risk codes. Proper
coding helps to ensure that we receive capitation fees consistent with the cost
of treating these Participating Customers. Our efforts related to coding
compliance are ongoing and we continue to dedicate considerable resources to
this important discipline.


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Insurance Arrangements


To mitigate our exposure to high cost medical claims under our risk agreements,
we have reinsurance arrangements that provide for the reimbursement of certain
customer medical expenses.  At September 30, 2012, for 59.2% of our
Participating Customers under risk agreements, we purchase reinsurance through
the HMOs with which we contract. The HMOs charge us a per customer per month fee
that limits our healthcare costs for any individual Participating Customer.
Healthcare costs in excess of an annual deductible, which generally ranges from
$30,000 to $40,000 per Participating Customer, are paid directly by the HMOs and
we are not entitled to and do not receive any related insurance recoveries.

The remaining Participating Customers are covered under one policy with an annual per customer deductible of $250,000 in 2012 and $225,000 in 2011. Reinsurance recoveries under these policies are remitted to us and are recorded as a reduction to medical claims expense.


All policies have a maximum annual benefit per customer of $1.0
million. Although we maintain insurance of the types and in the amounts that we
believe are reasonable, there can be no assurances that the insurance policies
maintained by us will insulate us from material expenses and/or losses in the
future.

Healthcare Reform Legislation


The healthcare reform legislation described below is not directly applicable to
us since we are not a Medicare Advantage plan. However, this legislation will
directly impact Medicare Advantage plans such as those offered by the Contacting
HMOs, and, therefore, are expected to indirectly affect PSNs such as ours.

The United States' healthcare system, including the Medicare Advantage program,
is subject to a broad array of laws and regulations as a result of the Patient
Protection and Affordable Care Act, which became law on March 23, 2010 as
amended by the Health Care and Education Reconciliation Act of 2010, which
became law on March 30, 2010 (collectively, the "Reform Acts"). The Reform Acts
are considered by some to be the most dramatic change to the country's
healthcare system in decades.  This legislation made significant changes to the
Medicare program and to the health insurance market overall.  Among other
things, the Reform Acts limit Medicare Advantage payment rates, stipulate a
prescribed minimum ratio for the amount of premium revenues to be expended on
medical costs, give the Secretary of Health and Human Services the ability to
deny Medicare Advantage plan bids that propose significant increases in cost
sharing or decreases in benefits, and make certain changes to Medicare Part D.
Because substantially all of our revenue is directly or indirectly derived from
reimbursements generated by Medicare Advantage health plans, any changes that
limit or reduce Medicare reimbursement levels, such as reductions in or
limitations of reimbursement amounts or rates under programs, reductions in
funding of programs, expansion of benefits without adequate funding, elimination
of coverage for certain benefits, or elimination of coverage for certain
individuals or treatments under programs, could have a material adverse effect
on our business.

There are numerous steps required to implement the Reform Acts, and Congress may
seek to alter or eliminate some of their provisions.  In June 2012, the United
States Supreme Court upheld most of the provisions of the Affordable Care Act,
including the health insurance mandate. While Federal regulatory agencies are
moving forward with implementation of the provisions of the Reform Act, Congress
is attempting to pass legislation which would reverse the Reform
Acts. Furthermore, various health insurance reform proposals are also emerging
at the state level. Due to the unsettled nature of these reforms and the
numerous steps required to implement them, we cannot predict to what extent (if
at all) Congress will succeed in limiting or reversing the Reform Acts, whether
(and if so, what) additional health insurance reforms will be implemented at the
Federal or state level and/or the effect that any future legislation or
regulation will have on our business.

For additional information on the Reform Acts see "Business - Healthcare Reform
Legislation in 2011 and 2010" included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2011 and the Risk Factor captioned "Risk Factors
- Reductions in Funding for Medicare Programs and Other Provisions Under the
Recent Healthcare Reform Legislation…" included in Part II, Item 1A of this
Quarterly Report on Form 10-Q.


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CRITICAL ACCOUNTING POLICIES


A description of our critical accounting policies is contained in our Annual
Report on Form 10-K for the year ended December 31, 2011. Included within these
policies are certain policies that contain critical accounting estimates and,
therefore, have been deemed to be "critical accounting policies." Critical
accounting estimates are those which require management to make assumptions
about matters that were uncertain at the time the estimate was made and for
which the use of different estimates, which reasonably could have been used, or
changes in the accounting estimates that are reasonably likely to occur from
period to period, could have a material impact on the presentation of our
financial condition, changes in financial condition or results of operations.

ACQUISITION OF CONTINUCARE


We closed on the acquisition of Continucare on October 4, 2011. We paid an
aggregate of $404.4 million in cash and issued an aggregate of 2.5 million
shares of our common stock, valued at $11.5 million, to Continucare's
stockholders and option holders in consideration for their shares of Continucare
common stock and options to purchase shares of Continucare common stock.  At the
date of acquisition, Continucare provided and managed care for approximately
36,400 Participating Customers through its 19 medical centers and contracted
IPAs. Continucare also operated a sleep diagnostic business. Substantially all
of Continucare's revenues were derived from managed care agreements with Humana,
United, Coventry and Wellcare.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30, 2011


Summary

Net income for the third quarter of 2012 was $9.3 million compared to $6.0
million in the third quarter of 2011, an increase of $3.3 million or 55.0%. In
the third quarter of 2012, we realized the tax benefits related to the
elimination of $0.8 million of prior years' accrued uncertain tax positions for
years that are no longer subject to audit. In the third quarter of 2011, we
incurred pre-tax expenses of $2.1 million associated with the Continucare
acquisition.

Basic and diluted earnings per share were $0.22 and $0.21, respectively, for the
third quarter of 2012 as compared to $0.15, basic, and $0.14, diluted, for the
same period in 2011. Diluted and basic earnings per share in 2012 were increased
by $0.02 per share as a result of the elimination of prior years' accrued
uncertain tax positions for years that are no longer subject to audit. The after
tax impact of the Continucare transaction costs reduced basic and diluted
earnings per share by $0.03 in 2011. Basic and diluted earnings per share from
income from continuing operations was $0.21 and $0.20 for the third quarter of
2012 as compared to $0.15, basic, and $0.14, diluted, for the same period in
2011. Basic and diluted earnings from discontinued operations for the third
quarter of 2012 were $0.01 per share.

In the third quarter of 2012, we realized a loss of $0.6 million, including a
premium deficiency reserve of $1.1 million, on an agreement with a Contracting
HMO (the "Contracting HMO Agreement") covering approximately 6,600 new
Participating Customers added in 2012. Included in the third quarter was
favorable claims development from the first half of 2012 of $1.6 million which
reduced medical claims expense. On November 6, 2012, we provided written notice
to the Contracting HMO terminating this agreement effective March 5, 2013 as we
were unable to reach more favorable contract terms with the Contracting HMO. As
a result, we recorded in medical claims expense in the third quarter of 2012 a
premium deficiency of $1.1 million, which is our estimate of the loss that we
will incur under the Contracting HMO Agreement through March 5, 2013. For the
nine months ended September 30, 2012, our loss under the Contracting HMO
Agreement was $5.0 million.

Revenue for the third quarter of 2012 was $191.1 million compared to $92.7
million for the third quarter of 2011, an increase of $98.4 million or
106.1%. The increase in revenue was primarily attributable to Participating
Customers added with the acquisition of Continucare, the net addition of new
Participating Customers under risk arrangements since December 31, 2011 and an
increase in the average risk scores of our Participating Customers.

Total medical expense for the third quarter of 2012 was $152.8 million compared
to $74.4 million for the third quarter of 2011, an increase of $78.4 million or
105.4%. This increase is primarily attributable to the addition of the
Continucare Participating Customers, the medical costs associated with the net
addition of new Participating Customers under risk arrangements in 2012, the
addition of the 19 Continucare medical practices and an increase in benefits,
utilization and medical cost inflation. Total medical expense was partially
offset by favorable prior period medical claims development of $1.3 million and
$2.0 million in the third quarter of 2012 and 2011, respectively, as well as the
impact of the decrease in the aggregate customer months during the third quarter
of 2011.


                                       23
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Gross profit was $38.3 million for the third quarter of 2012 as compared to $18.3 million for the same quarter in 2011, an increase of $20.0 million or 109.3%.


The medical expense ratio ("MER"), which is computed by dividing total medical
expense by revenue, represents a statistic used to measure gross profit. In the
third quarter of 2012 our MER was 79.9%, compared to 80.3% for the third quarter
of 2011.Excluding the revenue and medical costs associated with the Contracting
HMO Agreement our MER for the third quarter of 2012 would have been 77.9%.

Operating expenses increased to $16.9 million for the third quarter of 2012 as
compared to $6.6 million for the same period in 2011, an increase of $10.3
million or 156.1%. The increase in operating expenses is primarily due to the
additional expenses of Continucare and an increase in amortization expense of
$3.1 million, related to the amortizable intangible assets recorded with the
Continucare acquisition.

Other expense increased by $6.1 million due primarily to an increase in interest
expense of $8.1 million for the third quarter of 2012 related to the debt used
to finance the Continucare acquisition. We expensed $2.1 million of transaction
costs in the third quarter of 2011 that were associated with our acquisition of
Continucare.

Income before income taxes from continuing operations for the third quarter of
2012 was $13.4 million as compared to income before income taxes for the third
quarter of 2011 of $9.8 million. The primary reasons for the increase are
discussed above.

In the third quarter of 2012, we realized the tax benefits related to the
elimination of $0.8 million of prior years' accrued uncertain tax positions for
years that are no longer subject to audit, which lowered our effective income
tax rate.

Income from discontinued operations for the third quarter of 2012 was $0.2 million. This amount represents the income realized by the sleep diagnostic business, net of income tax expense.

Customer Information


The table set forth below provides (i) the total number of customers to whom we
were providing healthcare services as of September 30, 2012 and 2011 and (ii)
the aggregate customer months for the third quarter of both 2012 and
2011. Customer months are the aggregate number of months of healthcare services
we have provided to customers during a period of time.

                                                                 

Participating Customer Percentage Increase

                           Participating Customers at             Months In The Quarter           In Participating
                                  September 30,                    Ended September 30,             Customer Months
                            2012                2011              2012             2011
Risk arrangements              70,400              34,400          211,400          102,600              106.0%
Non-risk arrangements          17,100                   -           51,000                -                N/A
                               87,500              34,400          262,400          102,600              155.8%


The following table sets forth the number of Participating Customers by program at September 30, 2012 and September 30, 2011:

                              Participating Customers         Percentage Increase
                                  at September 30,             In Participating
                                2012             2011              Customers
       Medicare Advantage         71,600          34,400              108.1%
       Medicaid                   13,400               -                N/A
       Commercial                  2,500               -                N/A
                                  87,500          34,400              154.4%




                                       24
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The increase in total customer months under risk arrangements for the third
quarter of 2012 as compared to the same period in 2011 is primarily a result of
the Participating Customers added with the Continucare acquisition and the net
addition of new Participating Customers under risk arrangements in 2012. Changes
in our customer base are also a result of new enrollments and/or transfers from
other physician's practices and individuals aging into Medicare and becoming a
Participating Customer, reduced by disenrollments, deaths, Participating
Customers moving from the covered areas, Participating Customers transferring to
another physician practice or Participating Customers making other insurance
selections.

The increase in customer months under non-risk arrangements is a result of the Continucare acquisition and the addition of the Cincinnati and Indianapolis contracts with Humana.

Revenue

The most significant component of our revenue is generated from Medicare Advantage risk arrangements with the Contracting HMOs. Medicare risk revenue increased by $88.5 million, or 96.1%, during the third quarter of 2012 as compared to the same period in 2011. The increase in revenue is primarily attributable to Participating Customers added with the acquisition of Continucare, the net addition of new Participating Customers under risk arrangements in 2012 and increased risk scores for our Participating Customers.


Our PCPM Medicare risk revenue increased by $82 for the third quarter of 2012
compared to the same period in 2011. The increase in our PCPM revenue was
primarily generated by the acquisition of Continucare, which realizes higher
rates in Miami-Dade County, Florida than we realize in our other service areas,
and increases in our capitation payments as a result of changes in the Medicare
risk adjustment scores of our Participating Customers.

There was no material difference between the estimated final settlement for 2011
of $2.7 million and the final settlement that was received in the third quarter
of 2012. At December 31, 2010, we recorded a $2.2 million receivable
representing our estimate of the final retroactive MRA capitation fee for
2010. In August 2011, we were notified that the final settlement was $1.0
million. The difference of $1.2 million reduced revenue in the third quarter of
2011.

Fee-for-service revenue represents amounts earned from medical services provided
to non-Participating Customers in our owned medical practices. Fee-for-service
revenue represents less than 0.5% of our total revenue for the three months
ended September 30, 2012 and September 30, 2011.

Total Medical Expense


Total medical expense represents the estimated total cost of providing medical
care and is comprised of two components, medical claims expense and medical
practice costs. Medical claims expense is recognized in the period in which
services are provided and includes an estimate of our obligations for medical
services that have been provided to our Participating Customers but for which we
have neither received nor processed claims.  Medical claims expense includes
such costs as inpatient and outpatient services, pharmacy benefits and physician
services by providers other than the IPAs and physician practices owned by the
PSN (collectively "Non-Affiliated Providers"). Medical practice costs represent
the operating costs of the physician practices owned by the PSN.

We develop our estimated medical expense payable using an actuarial process that
is consistently applied. The actuarial process develops a range of estimated
medical claims expense payable and we record the amount in the range that is our
best estimate of the ultimate liability. Each period, we re-examine previously
recorded medical claims expense payable estimates based on actual claim
submissions and other changes in facts and circumstances. As medical claims
expense payable recorded in prior periods becomes more exact, we adjust the
amount of the estimate and include the change in medical claims expense in the
period in which the change is identified. In each reporting period, our
operating results include a change in medical expense from the effects of more
completely developed medical claims expense payable estimates associated with
previously reported periods. While we believe our estimated medical claims
expense payable is adequate to cover future claims payments required, such
estimates are based on our claims experience to date and various management
assumptions. Therefore, the actual liability could differ materially from the
amount recorded.


                                       25
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Total medical expense and the MER are as follows (in thousands):


                                                        Three Months Ended 

September 30,

                                                           2012             

2011

Estimated medical expense for the period,
excluding prior period claims development            $         154,093       $        76,357
(Favorable) prior period medical claims
development in current period based on actual
claims submitted                                                (1,271 )              (1,992 )
Total medical expense for period                     $         152,822      

$ 74,365


Medical Expense Ratio for period                                  79.9 %                80.3 %



Favorable claims development is a result of actual medical claim cost for prior periods being less than the original estimated cost which reduces the total reported medical expense and the MER in the reporting period.


The reported MER is impacted by both revenue and expense. Periodically we
receive retroactive adjustments of the capitation fees paid to us. Retroactive
adjustments of prior periods' capitation fees that are recorded in the current
period impact the MER of that period. If the retroactive adjustment increases
revenue then the impact reduces the MER for the period. Conversely, if the
retroactive adjustment reduces revenue, then the MER for the period is
higher. These retroactive adjustments include, among other things, the mid-year
and annual retroactive MRA capitation fee adjustments and settlement of Part D
program capitation fees. Actual medical claims expense usually develops
differently than originally estimated.

Because the risk agreements provide that the PSN is financially responsible for
all medical services provided to the Participating Customers, medical claims
expense includes the cost of medical services provided to Participating
Customers by providers other than the physician practices owned by the PSN.

Total medical expense for the third quarter of 2012 increased by $78.4 million,
or 105.4%, to $152.8 million from $74.4 million for the third quarter of
2011. Medical claims expense, which is the largest component of medical services
expense, increased by $68.9 million, or 99.3%, to $138.3 million for the third
quarter of 2012 from $69.4 million for the same period in 2011, primarily due to
the acquisition of Continucare and the net addition of new Participating
Customers under risk arrangements in 2012.

Our PCPM Medicare risk expense increased by $38 for the third quarter of 2012
compared to the same period in 2011. The increase in our PCPM expense was
primarily generated by the acquisition of Continucare. The counties in which
Continucare operates, particularly Miami-Dade County, Florida, have higher costs
than those in most of the counties in which we had operated prior to the
acquisition of Continucare.

The MER for the third quarter of 2012 was 79.9%, compared to 80.3% for the third
quarter of 2011. Excluding the revenue and medical costs associated with the
Contracting HMO Agreement, our MER for the third quarter of 2012 would have been
77.9%.

Medical practice costs include the salaries, taxes and benefits of the PSN's
employed health professionals and staff providing primary care services and the
costs associated with the operations of our wholly-owned medical
practices. Medical practice costs increased by $9.6 million, or 195.9%, to $14.5
million for the third quarter of 2012 from $4.9 million for the third quarter of
2011. The increase in medical practice costs was primarily a result of our
acquisition of Continucare, which has 19 wholly-owned centers.

At September 30, 2012, we determined that the range for estimated medical claims
payable was between $44.1 million and $45.6 million and we recorded a liability
of $44.7 million. Based on historical results, we believe that the approximate
actuarial mid-point of the range continues to be the best estimate within the
range of the PSN's ultimate liability.


                                       26
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Operating Expenses

The following table provides information regarding the various items which comprise operating expenses (dollar amounts in thousands).


                                          Three Months Ended September 30,                                %
                                            2012                     2011             Increase         Change
Payroll, payroll taxes and benefits   $           8,688         $         4,078     $      4,610        113.0%
Percentage of total revenue                         4.5 %                   4.4 %
General and administrative                        4,604                   2,048            2,556        124.8%
Percentage of total revenue                         2.4 %                   2.2 %
Marketing and advertising                           387                     336               51         15.2%
Percentage of total revenue                         0.2 %                   0.4 %
Amortization of intangible assets                 3,186                      96            3,090        3218.8%
Percentage of total revenue                         1.7 %                   0.1 %
Total operating expenses              $          16,865         $         6,558     $     10,307        157.2%


Payroll, Payroll Taxes and Benefits


Payroll, payroll taxes and benefits include salary and related costs associated
with our corporate level executives, administrative, transportation and call
center personnel. The increase in 2012 is primarily a result of the inclusion of
Continucare's executive, administrative, transportation and call center payroll,
payroll taxes and benefits of $3.7 million and an increase in payroll expense of
$0.7 million for the three months ended September 30, 2012 compared to the same
period in 2011.

General and Administrative

This increase in general and administrative expenses for the third quarter of
2012 is primarily a result of the inclusion of $1.7 million of Continucare's
general and administrative costs. Legal and accounting fees increased by $0.5
million for the third quarter of 2012 compared to the third quarter of 2011
primarily as a result of increased professional fees associated with the larger
combined organization.

Marketing and Advertising

Marketing and advertising costs increased for the third quarter of 2012 compared
to the third quarter of 2011 due primarily to the inclusion of Continucare's
marketing and advertising costs.

Amortization of Intangibles

The increase in amortization is a result of the intangible assets acquired in connection with the acquisition of Continucare.

Other Expense


We recognized other expense of $8.1 million for the third quarter of 2012
compared to other expense of $2.0 million for the same period in 2011. For the
third quarter of 2012, we incurred $8.1 million of interest expense related to
the debt incurred in connection with the Continucare acquisition. For the third
quarter of 2011, we recorded transaction costs associated with the Continucare
transaction of $2.1 million.

Income taxes


Our estimated effective income tax rate was 32.6% and 38.6% for the third
quarter of 2012 and 2011, respectively.  In the third quarter of 2012, we
realized the tax benefits related to the elimination of $0.8 million of prior
years' accrued uncertain tax positions for years that are no longer subject to
audit, which lowered our effective income tax rate.


                                       27
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COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30, 2011


Summary

Net income for the nine months ended September 30, 2012 was $20.1 million
compared to $19.9 million for the nine months ended September 30, 2011. Net
income for 2012 was positively impacted by the elimination of $0.8 million of
prior years' accrued uncertain tax positions for years that are no longer
subject to audit. Net income for the nine months ended September 30, 2012 was
negatively impacted by the $5.0 million pre-tax loss from the Contracting HMO
Agreement. Net income in 2011 was reduced by CNU pre-tax transaction costs of
$3.1 million.

For the nine months ended September 30, 2012, our loss under the Contracting HMO
Agreement was $5.0 million which included a premium deficiency of $1.1 million
recorded in the third quarter as described below. On November 6, 2012, we
provided written notice to the Contracting HMO terminating this agreement
effective March 5, 2013 as we were unable to reach more favorable contract terms
with the Contracting HMO. As a result, we recorded in medical claims expense in
the third quarter of 2012 a premium deficiency of $1.1 million, which is our
estimate of the loss that we will incur under the Contracting HMO Agreement
through March 5, 2013.

Basic and diluted earnings per share were $0.46 and $0.44, respectively, for the
nine months ended September 30, 2012 as compared to $0.50 and $0.47,
respectively, for the same period in 2011. Basic and diluted earnings from
continuing operations for the nine months ended September 30, 2012 were $0.45
and $0.43 per share, respectively. The after tax impact of the $5.0 million loss
from the Contracting HMO Agreement reduced basic and diluted earnings per share
in 2012 by $0.06. The after tax impact of the Continucare transaction costs
reduced basic and diluted earnings per share by $0.05 in 2011. Basic and diluted
earnings from discontinued operations for the nine months ended September 30,
2012 were $0.01 per share.

Revenue for the nine months ended September 30, 2012 was $579.8 million compared
to $284.7 million for the nine months ended September 30, 2011, an increase of
$295.1 million or 103.7%.  The increase in revenue was primarily attributable to
Participating Customers added with the acquisition of Continucare, the net
addition of new Participating Customers under risk arrangements in 2012 and an
increase in the average risk scores of our Participating Customers. Revenue in
2011 was reduced by the final estimated retroactive MRA premium receivable for
2010 being $1.2 million lower than had been estimated.

Total medical expense for the nine months ended September 30, 2012 was $475.2
million compared to $230.6 million for the nine months ended September 30, 2011,
an increase of $244.6 million or 106.1%. This increase is primarily attributable
to the medical costs associated with the net addition of new Participating
Customers under risk arrangements in 2012, the higher than expected medical
claims expense under the Contracting HMO Agreement, the addition of the 19
Continucare medical practices and an increase in benefits, utilization and
medical cost inflation.

Gross profit was $104.7 million for the nine months ended September 30, 2012 as compared to $54.1 million for the same period in 2011, an increase of $50.6 million or 93.5%.


Our MER was 82.0% for the nine months ended September 30, 2012, as compared to
MER of 81.0% for the nine months ended September 30, 2011. Excluding the revenue
and medical costs associated with the Contracting HMO Agreement, our MER for the
first nine months of 2012 would have been 79.6%.


                                       28
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Operating expenses increased to $49.6 million for the nine months ended September 30, 2012 as compared to $19.2 million for the same period in 2011, an increase of $30.4 million or 158.3%. The increase in operating expenses is primarily due to the additional expenses of Continucare and an increase in amortization expense of $9.3 million related to the amortizable intangible assets recorded in the Continucare acquisition.


Other expense increased by $21.9 million due primarily to an increase in
interest expense of $24.4 million for the nine months ended September 30, 2012
related to the debt used to finance the Continucare acquisition. We expensed
$3.1 million of transaction costs in the nine months ended September 30, 2011
that were associated with our acquisition of Continucare.

Income before income taxes from continuing operations for the nine months ended September 30, 2012 and 2011 was $30.7 million and $32.4 million, respectively. The primary reasons for the decrease are discussed above.


In the third quarter of 2012, we realized the tax benefits related to the
elimination of $0.8 million of prior years' accrued uncertain tax positions for
years that are no longer subject to audit, which lowered our effective income
tax rate.

Income from discontinued operations was $0.5 million for the nine months ended September 30, 2012. This amount represents income realized by the sleep diagnostic business during the nine months ended September 30, 2012, net of income tax expense.

Customer Information


The table set forth below provides (i) the total number of customers to whom we
were providing healthcare services as of September 30, 2012 and 2011 and (ii)
the aggregate customer months for the nine months ended September 30, both 2012
and 2011. Customer months are the aggregate number of months of healthcare
services we have provided to customers during a period of time.

                                                                          Participating Customer Months          Percentage Increase
                                   Participating Customers at               For The Nine Months Ended             In Participating
                                          September 30,                           September 30,                    Customer Months
                                    2012                2011               2012                  2011
Risk arrangements                      70,400              34,400             630,700               307,600              105.0%
Non-risk arrangements                  17,100                   -             148,400                     -                N/A
                                       87,500              34,400             779,100               307,600              153.3%



The increase in total customer months under risk arrangements for the nine
months ended September 30, 2012 as compared to the same period in 2011 is
primarily a result of the Participating Customers added with the Continucare
acquisition and the net addition of new Participating Customers under risk
arrangements in 2012. Changes in our customer base are also a result of new
enrollments and/or transfers from other physician's practices, and individuals
aging into Medicare and becoming a Participating Customer, reduced by
disenrollments, deaths, Participating Customers moving from the covered areas,
Participating Customers transferring to another physician practice or
Participating Customers making other insurance selections.

The increase in customer months under non-risk arrangements is a result of the
Continucare acquisition and the addition of the Cincinnati and Indianapolis
contracts with Humana. The Participating Customer months for the nine months
ended September 30, 2012 include the retroactive impact on customer months as a
result of the retroactive effective date of the Cincinnati contract with Humana.

Revenue


The most significant component of our revenue is the revenue generated from
Medicare Advantage risk arrangements with the Contracting HMOs. Medicare risk
revenue increased by $266.6 million, or 94.1%, during the nine months ended
September 30, 2012 as compared to the same period in 2011. The increase in
revenue is primarily attributable to Participating Customers added with the
acquisition of Continucare, the net addition of new Participating Customers
under risk arrangements in 2012 and increased risk scores for our Participating
Customers.

Our PCPM Medicare risk revenue increased by $78 for the nine months ended
September 30, 2012 compared to the same period in 2011. The increase in our PCPM
revenue is primarily generated by the acquisition of Continucare, which realizes
higher rates in Miami-Dade County, Florida than we realize in our other service
areas, and increases in our capitation payments as a result of changes in the
Medicare risk adjustment scores of our Participating Customers.


                                       29
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There was no material difference between the estimated final settlement for 2011
of $2.7 million and the final settlement that was received in the third quarter
of 2012. At December 31, 2010, we recorded a $2.2 million receivable
representing our estimate of the final retroactive MRA capitation fee for
2010. In August 2011, we were notified that the final settlement was $1.0
million. The difference of $1.2 million reduced revenue in the third quarter of
2011.

Fee-for-service revenue represents amounts earned from medical services provided
to non-Participating Customers in our owned medical practices. Fee-for-service
revenue represented less than 0.5% of our total revenue for the nine months
ended September 30, 2012 and September 30, 2011.

Total Medical Expense

Total medical expense and the MER are as follows (in thousands):


                                                         Nine Months Ended 

September 30,

                                                           2012             

2011

Estimated medical expense for the period,
excluding prior period claims development            $        477,337       $        233,862
(Favorable) prior period medical claims
development in current period based on actual
claims submitted                                               (2,183 )               (3,281 )
Total medical expense for period                     $        475,154       

$ 230,581


Medical Expense Ratio for period                                 82.0 %                 81.0 %



Favorable claims development is a result of actual medical claim cost for prior periods developing lower than the original estimated cost which reduces the reported medical expense and the MER in the reporting period.


Total medical expense for the nine months ended September 30, 2012 increased by
$244.6 million, or 106.1%, to $475.2 million from $230.6 million for the nine
months ended September 30, 2011. Medical claims expense, which is the largest
component of medical services expense, increased by $215.1 million, or 99.3%, to
$431.7 million for the nine months ended September 30, 2012 from $216.6 million
for the same period in 2011, primarily due to the acquisition of Continucare,
the net addition of new Participating Customers under risk arrangements added in
2012 and the higher than expected medical claims expense under the Contracting
HMO Agreement.

Our PCPM Medicare risk expense increased by $45 for the nine months ended
September 30, 2012 compared to the same period in 2011. The increase in our PCPM
expense was primarily generated by the acquisition of Continucare and the higher
than expected medical claims expense under the Contracting HMO Agreement. The
counties in which Continucare operates, particularly Miami-Dade County, Florida,
have higher costs than those in most of the counties in which we had operated
prior to the acquisition of Continucare.

The MER for the nine months ended September 30, 2012 was 82.0%, compared to MER
of 81.0% for the nine months ended September 30, 2011.  Excluding the revenue
and medical costs associated with the Contracting HMO Agreement our MER for the
first nine months of 2012 would have been 79.6%.

Medical practice costs include the salaries, taxes and benefits of the PSN's
employed health professionals and staff providing primary care services, and the
costs associated with the operations of our wholly-owned medical
practices. Medical practice costs increased by $29.5 million, or 210.7%, to
$43.5 million for the nine months ended September 30, 2012 from $14.0 million
for the nine months ended September 30, 2011. The increase in medical practice
costs was primarily a result of our acquisition of Continucare, which has 19
wholly-owned centers.


                                       30
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Operating Expenses

The following table provides information regarding the various items which comprise operating expenses (dollar amounts in thousands).


                                         Nine Months Ended September 30,                              %
                                           2012                  2011             Increase         Change
Payroll, payroll taxes and benefits   $        25,546       $        12,039     $     13,507           112.2 %
Percentage of total revenue                       4.4 %                 4.2 %
General and administrative                     13,686                 6,389            7,297           114.2 %
Percentage of total revenue                       2.4 %                 2.2 %
Marketing and advertising                         771                   456              315            69.1 %
Percentage of total revenue                       0.1 %                 0.2 %
Amortization of intangible assets               9,560                   289            9,271          3208.0 %
Percentage of total revenue                       1.6 %                 0.1 %
Total operating expenses              $        49,563       $        19,173     $     30,390           158.5 %


Payroll, Payroll Taxes and Benefits


Payroll, payroll taxes and benefits include salary and related costs associated
with our corporate level executives, administrative, transportation and call
center personnel. The increase in 2012 is primarily a result of the inclusion of
Continucare's executive, administrative, transportation and call center payroll,
payroll taxes and benefits of $11.1 million. We also realized an increase in
share-based compensation of $0.8 million, primarily due to the addition of
certain Continucare employees to the plan and an increase in payroll expense of
$1.5 million for the nine months ended September 30, 2012 compared to the same
period in 2011.

General and Administrative

This increase in general and administrative expenses for the nine months ended
September 30, 2012 is primarily a result of the inclusion of $4.9 million of
Continucare's general and administrative costs. Legal and accounting
fees increased by $1.8 million for the nine months ended September 30, 2012 when
compared to the same period in 2011 primarily as a result of the preparation and
filing of a "shelf" registration statement and related materials, non-recurring
projects and increased professional fees associated with the larger combined
organization.

Marketing and Advertising

Marketing and advertising costs increased in the nine months ended September 30,
2012 compared to the nine months ended September 30, 2011 due primarily to the
inclusion of Continucare's marketing and advertising costs.

Amortization of Intangibles

The increase in amortization is a result of the intangible assets acquired in connection with the acquisition of Continucare.

Other Expense


We recognized other expense of $24.4 million and $2.5 million for the nine
months ended September 30, 2012 and 2011, respectively. The increase in other
expense is primarily due to $24.4 million of interest expense related to the
debt incurred in connection with the Continucare acquisition. For the nine
months ended September 30, 2011 we recorded transaction costs associated with
the Continucare transaction of $3.1 million.

Income taxes


Our estimated effective income tax rate was 36.0% for the nine months ended
September 30, 2012 and 38.5% for the nine months ended September 30, 2011.  In
the third quarter of 2012, we realized the tax benefits related to the
elimination of $0.8 million of prior years' accrued uncertain tax positions for
years that are no longer subject to audit, which lowered our effective income
tax rate.


                                       31
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LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents


Cash, cash equivalents and short-term investments at September 30, 2012 totaled
$54.8 million as compared to $18.3 million at December 31, 2011, an increase of
$36.5 million. As of September 30, 2012, we had working capital of $59.5 million
as compared to working capital of $43.2 million at December 31, 2011, an
increase of $18.0 million or 41.7%. Our total stockholders' equity was $128.3
million at September 30, 2012 and $104.6 million at December 31, 2011.

Net cash provided by operating activities during the nine months ended September
30, 2012 was $52.9 million. The most significant sources of cash from operating
activities were:

            ?  net income, including non-cash items, of $39.0 million;
            ?  a decrease in due from HMOs, net, of $9.9 million;
            ?  an increase in due to HMO, net, of $7.3 million; and
            ?  an increase in accrued interest payable of $4.3 million.



These sources of cash were partially offset by a decrease in accrued payroll and
payroll taxes of $1.4 million as a result of the payment in 2012 of the employee
bonuses which were accrued at December 31, 2011.

Net cash used in investing activities for the nine months ended September 30, 2012 was $3.6 million which primarily related to capital expenditures.


Net cash used by financing activities for the nine months ended September 30,
2012 was $12.8 million. This was primarily a result of the repayment of the $5.0
million of borrowings under the revolving loan facility and principal payments
made of $8.4 million under our First Lien Term Loan Facility (see below). These
uses were partially offset by the excess tax benefits from stock based
compensation of $1.5 million.

Redemption of Series A Preferred Stock


On November 2, 2012, we delivered a notice of redemption to the holder (the
"Series A Holder") of all 5,000 of the outstanding shares of our Series A
Preferred Stock. Pursuant to the notice of redemption, we notified the Series A
Holder that we are exercising our right to redeem all of the outstanding shares
of Series A Preferred Stock held by him at a redemption price of $105 per share
($525,000) in accordance with the provisions of our Articles of Incorporation,
as amended to date. Subject to certain conditions, the redemption of the Series
A Preferred Stock is expected to occur on November 16, 2012

Adjusted EBITDA From Continuing Operations


The following table presents our Adjusted EBITDA from continuing operations
(Non-GAAP measure) for the nine months ended September 30, 2012 and 2011, as
well as a reconciliation of Adjusted EBITDA from continuing operations to the
reported income from continuing operations for such periods (in thousands):

                                     Three Months Ended September 30,       

Nine Months Ended September 30,

                                        2012                  2011                2012                  2011
Income from continuing
operations                         $         9,024       $         5,996     $        19,618       $        19,889
Income tax expense                           4,367                 3,767              11,045                12,464
Net interest expense (income)                8,069                   (96 )            24,425                  (559 )
Depreciation and amortization                4,142                   320              12,310                 1,062
Share-based compensation                       850                   613               2,749                 1,941
Adjusted EBITDA from continuing
operations                         $        26,452       $        10,600     $        70,147       $        34,797



Adjusted EBITDA from continuing operations is not defined under U.S. GAAP and it
may not be comparable to similarly titled measures reported by other companies.
We use Adjusted EBITDA from continuing operations, along with other U.S. GAAP
measures, as a measure of profitability because Adjusted EBITDA from continuing
operations helps us to compare our performance on a consistent basis by removing
from our operating results from continuing operations the impact of our capital
structure, the accounting methods used to compute depreciation and amortization
and the effect of non-cash share-based compensation expense. We believe Adjusted
EBITDA from continuing operations is useful to investors as it is a widely used
measure of performance and the adjustments we make to Adjusted EBITDA from
continuing operations provide further clarity on our profitability. We remove
the effect of non-cash share-based compensation from our income which can vary
based on share price, share price volatility and expected life of the equity
instruments we grant. In addition, this share-based compensation expense does
not result in cash payments by us. Adjusted EBITDA from continuing operations
has limitations as a profitability measure in that it does not include the
interest expense on our debt, our provisions for income taxes, the effect of our
expenditures for capital assets, and the effect of non-cash share-based
compensation expense.


                                       32
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Credit Facilities


We entered into a senior secured First Lien Credit Agreement and a secured
Second Lien Credit Agreement on October 4, 2011.  These facilities are
guaranteed jointly and severally by substantially all of our existing and future
subsidiaries (the "Guarantors") and are secured by a first-priority and
second-priority security interest, respectively, in substantially all of our and
the Guarantors' existing and future assets

First Lien Credit Agreement


The First Lien Credit Agreement provides for a $240.0 million first lien term
loan facility and a $40.0 million revolving loan facility (including
subfacilities for up to $15.0 million for letters of credit and $5.0 million for
same day, "swingline," borrowings). These loans bear interest at a variable rate
that is currently equal to 7.0% for term loan borrowings and 6.5% for revolving
loan borrowings. As of September 30, 2012, we had $231.6 million outstanding
under our first lien term loan facility. While no amount was outstanding under
our revolving loan facility, letters of credit against the revolving loan
facility at September 30, 2012 reduced our available borrowing capacity under
the revolving loan facility to $34.3 million.

Borrowings under the First Lien Term Loan Facility are subject to quarterly
principal amortization at the following rates: 5.0% of the $240.0 million
principal amount the first year, 7.5% the third year, 10.0% the third year, and
12.5% for each of the fourth and fifth years. The balance of all borrowings
under the first lien term loan facility is due and payable on the maturity date
of October 4, 2016.

We may prepay the term loans or permanently reduce the revolver commitment under
the First Lien Facilities at any time without penalty. Commencing for the year
ended December 31, 2012, we will also be required to make prepayments on an
annual basis (subject to certain basket amounts and exceptions), in an amount
equal to 75.0% of our excess cash flow (defined as cash flow less scheduled
principal and interest payments, cash taxes, and any increase in working
capital, plus any decrease in working capital) less any voluntary prepayments
made during the applicable year, with a reduction to 50.0% based on achievement
of a total leverage ratio (defined as the ratio of our aggregate outstanding
indebtedness to our adjusted income before share-based compensation, interest,
taxes, depreciation and amortization) not exceeding 2.00x as of the last day of
each year. We also must make prepayments of 25-50% of the net proceeds from
publicly offered equity issuances as well as 100% of the net proceeds from asset
sales, debt issuances (other than to the extent permitted under the First Lien
Credit Agreement) and extraordinary receipts, as defined.

The First Lien Credit Agreement includes customary restrictive covenants,
subject to certain basket amounts and exceptions, including covenants limiting
our ability to incur or amend certain types of indebtedness and liens; merge
with, make an investment in or acquire any property or assets of another
company; make capital expenditures; pay cash dividends; repurchase shares of our
outstanding stock; make loans; dispose of assets (including the equity
securities of our subsidiaries); or prepay the principal on any subordinate
indebtedness. Subject to certain terms and conditions, we have the right to make
up to $15.0 million of stock repurchases during the term of the credit
facilities, generally not to exceed $5.0 million in any year, and make up to
$100.0 million of acquisitions, generally not to exceed $50.0 million in any one
year. The First Lien Credit Agreement also requires us to maintain certain total
leverage ratios (defined above), senior leverage ratios (defined above) and
fixed charge coverage ratios (defined as the ratio of our free cash flow to our
fixed charges (interest, scheduled principal payments, earnout, stock
repurchases from officers, directors and employees) during the term of the
agreement, tested quarterly.

Second Lien Credit Agreement


The Second Lien Credit Agreement provides for a $75.0 million second lien term
loan facility. This loan bears interest at a variable rate that is currently
equal to 13.5%. As of September 30, 2012, we had $75.0 million outstanding under
our second lien term loan facility. Borrowings under the Second Lien Credit
Agreement are generally due and payable on the maturity date, October 4, 2017.

Prior to the repayment of all borrowings under the First Lien Credit Agreement,
we may not prepay any borrowings under the Second Lien Credit Agreement without
the prior consent of the First Lien Lenders. To the extent a prepayment of
borrowings under the Second Lien Credit Agreement is permitted, we will be
required to pay prepayment penalties of 2-5% and, if the prepayment is made
prior to May 4, 2013, we will be required to pay a make-whole payment equal to
the estimated, discounted net present value of any interest payments that would
have been made on or prior to such date but are avoided as a result of the
prepayment.


                                       33
--------------------------------------------------------------------------------


After May 4, 2013, and provided all borrowings under the First Lien Credit
Agreement have been repaid and the facility has been terminated, we will,
subject to certain basket amounts and exceptions, be required to make mandatory
prepayments to the Second Lien Lenders on substantially the same terms and
conditions as mandatory prepayments are required under the First Lien Credit
Agreement. Mandatory prepayments as a result of asset sales or debt or equity
issuances will be subject to the prepayment charges described in the preceding
paragraph.

The Second Lien Credit Agreement contains substantially the same negative
covenants and financial covenants (other than the senior leverage ratio) as the
First Lien Credit Agreement, except that the permitted basket amounts in the
Second Lien Credit Agreement are generally higher than under the First Lien
Credit Agreement and the financial covenants ratios are 10-15% less restrictive
than under the First Lien Credit Agreement.

Interest Rate Cap


Effective December 4, 2011, we entered into an interest rate cap agreement
pursuant to which we will be entitled to receive certain payments in the event
the LIBOR rate on the First and Second Lien Credit Agreements exceeds 1.5%. The
notional amount of the interest rate cap, which expires on September 30, 2014,
is $153.3 million at September 30, 2012 and will decrease to $134.1 million over
the life of the agreement. The effect of this interest rate cap is to hedge our
risk of a rise in the LIBOR rate above 1.5% with respect to a portion of the
outstanding indebtedness under the First Lien Credit Agreement and the Second
Lien Credit Agreement equal to the notional amount of the cap.

OFF-BALANCE SHEET ARRANGEMENTS


We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
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