trol future health care costs. We base the premiums we charge, at least in part, on our estimate of expected health care costs over the applicable premium period. Factors that may cause health care costs to exceed our estimates include:  

• an increase in the cost of health care services and supplies, including pharmaceuticals;  
• higher than expected utilization of health care services;  
• periodic renegotiation of hospital, physician and other provider contracts;  
• the occurrence of catastrophes or epidemics;  
• changes in the demographics of our members and medical trends affecting them;  
• general inflation or economic downturns;  
• new mandated benefits or other regulatory changes that increase our costs; and  
• other unforeseen occurrences.  

In addition, medical claims payable in our financial statements include our estimated reserves for incurred but not reported and unpaid claims, which we call IBNR. The estimates for submitted claims and IBNR are made on an accrual basis. We believe that our reserves for IBNR are adequate to satisfy our medical claims liabilities, but we cannot assure you of this. Any adjustments to our IBNR reserves could adversely affect our results of operations.  

Our results of operations will be adversely affected if we are unable to increase premiums to offset increases in our health care costs.  

Our results of operations depend on our ability to increase premiums to offset increases in our health care costs. Although we attempt to base the premiums we charge on our estimate of future health care costs, we may not be able to control the premiums we charge as a result of competition, government regulations and other factors. Our results of operations could be adversely affected if we are unable to set premium rates at appropriate levels or adjust premium rates in the event our health care costs increase.  

A reduction in the number of members in our health plans could adversely affect our results of operations.  

A reduction in the number of members in our health plans could adversely affect our results of operations. Factors that could contribute to the loss of membership include:  

• reductions in the number of employers offering health care coverage;  
• reductions in work force by existing customers;  
• increases in premiums or benefit changes;  
• benefit changes or reductions in premiums by our competitors;  
• our exit from a market or the termination of a health plan; and  
• negative publicity and news coverage relating to our company or the managed health care industry generally.  

Our growth strategy is dependent in part upon our ability to acquire additional health plans and successfully integrate those plans into our operations.  

An important part of our growth strategy is to grow through the acquisition of additional health plans. During the last several years, we have significantly increased our membership through a number of acquisitions, including the acquisition of certain health plans from Principal in April 1998. We cannot assure you that we will be able to continue to locate suitable acquisition candidates, successfully integrate the plans we acquire and realize anticipated operational improvements and cost savings. The plans we acquire also may not achieve our anticipated levels of profitability. Our future growth rate will be adversely affected if we are not able to successfully complete acquisitions.  

Competition in our industry may limit our ability to attract new members or to increase or maintain our premium rates, which would adversely affect our results of operations.  

We operate in a highly competitive environment that may affect our ability to attract new members and increase premium rates. We compete with other health plans for members. We believe the principal factors influencing the choice among health care options are:

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