------------------------------------------------------------------------ --THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------------------------
Medical expenses as a percentage of health premium revenue ("medical loss ratio") increased to 92.4 percent in 1996 as compared to 81.9 percent for 1995 and, on a per member per month basis, medical expenses increased 12.8 percent. This significant increase is due to a combination of factors including lower commercial premiums charged due to competitive forces, higher than expected utilization by commercial members, cost increases due to legislatively mandated benefits and extremely high medical expenses related to the Company's Medicare enrollment. The medical cost factor of total medical costs may stabilize or only increase slightly from the current level over the next twelve months due to continuing efforts by the Company to implement product specific cost containment controls, expanded activity in specialized subrogation areas and claims review for dual health coverage, the adoption of regionalized and product specific fee maximums for health services, and the identification and possible termination of certain providers and specialists from the delivery network following a continuing, intensified peer review analysis. Additionally, the Company has greatly expanded its initial health assessments of new Medicare members after they have enrolled and also increased its Medicare case management personnel. The Company has also reduced the service area in which it offers its Medicare risk plan. This reduction in service area, effective January 1, 1997, primarily targets those areas where the current Medicare reimbursement is insufficient to support the Company's participation. These initiatives should help to control and reduce the cost of high cost cases which are driving the excessive medical loss ratio in the Medicare line of business. The overall medical loss ratio is expected to stabilize and decrease slowly from the current level over the next twelve months due to the combined effects of expanded utilization and case management efforts, continuing cost containment efforts, increases in health premiums, and the continuing analysis of expansion area and product line profitability. The statements in this paragraph regarding future utilization rates, cost containment initiatives, total medical costs and future increases in health premiums per member are forward-looking statements. See "Forward-Looking Information" above for a description of risk factors that may affect medical expenses per member and the medical loss ratio.
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994............................... 27
Borrowings bear interest at a rate based on either the bank's prime rate or the Federal Funds rate plus .75% and are secured by certain cash balances and short-term investments. At December 31, 1996, approximately $1.97 million was outstanding on one of the lines-of- credit at an interest rate of 7.91% and approximately $225,000 was outstanding in letters-of-credit.
The Company has a defined contribution 401(k) savings plan covering all full-time employees. Employees are allowed to contribute up to 10% of their pre-tax earnings annually and the Company makes a matching contribution of 50% on the first 4% of contributions made by employees. Employees vest immediately in the employee contributions and ratably over six years in the Company contributions. During 1996, 1995 and