The Company's management believes that, barring unforeseen circumstances, the Company's operating results on a consolidated basis will continue to be profitable during 1998, primarily because of the operations of CompManagement and CompManagement Health Systems. Health Power HMO's operating results have been and may continue to be adversely affected by the potential occurrence of various factors, such as decreases in capitation rates from ODHS, increases in health care cost, decreases in the size of the Medicaid population, and increases in reserve estimates. While the Company does not anticipate capitation rate reductions from ODHS in 1998, as was experienced in 1995 and 1996, it anticipates only a slight increase in such rates to occur during the second half of 1998. However, there can be no assurance that health care costs will not increase at a rate in excess of such capitation rate increases. Furthermore, because of favorable economic conditions, Ohio has experienced, and continues to experience, a decrease in the number of eligible Medicaid recipients. This decrease in the number of eligible Medicaid recipients may continue to negatively impact Health Power HMO in 1998. Finally, there can be no assurance that reserve estimates will not be subject to adjustments during 1998. Based upon the foregoing factors and the Company's most recent operating projections, it is uncertain at this time whether the operations of Health Power HMO will be profitable in 1998.
The Consolidated Financial Statements, including the Notes to Consolidated Financial Statements and the Report of Independent Accountants, appear following this page. Supplemental data is omitted because it is not applicable to the Company.
D. CASH EQUIVALENTS: It is the policy of the Company to classify investments with original maturities of three months or less as cash equivalents. Cash equivalents at December 31, 1997 include $6,555,000 deposited in an overnight sweep account and $96,716 invested in a money market fund.
F. REVENUES: Commercial and Medicaid revenues consist primarily of amounts earned under contracts with commercial groups and the Ohio Department of Human Services (ODHS) for Medicaid recipients. Such amounts are recognized when earned. Amounts received prior to the month of service are recorded as deferred revenues. Effective February 24, 1997, the Company gave notice to cancel its contract to provide services for a commercial group in the Dayton area; therefore, health care coverage for that group ceased on March 1, 1997. This group accounted for approximately 15% of the HMO's commercial revenue during 1996. In addition, effective December 1, 1997, the State of Ohio commercial group coverage for the remaining Columbus and Cincinnati areas were cancelled. For the year ended December 31, 1997, commercial group premiums from the State of Ohio approximated 63% of the Company's commercial revenues.
The Company's Medicaid revenue is derived from a contract with the ODHS. The Company's current contract with ODHS expires September 30, 1998. Management expects the ODHS contract to be renewed for the 1998-1999 contract year.
Rental expense was approximately $967,040, $577,756 and $549,824, for 1997, 1996 and 1995, respectively, which includes $60,460 paid to affiliates for 1995.
In June 1997, the General Assembly of the State of Ohio passed legislation which, among other things, requires HMOs that provide both basic and supplemental health care services to maintain, as of January 1, 1998, statutory net worth in an amount such that admitted assets are equal to at least one hundred ten percent of liabilities, but in no event less than $1,700,000, and deposits to be maintained with the Ohio Department of Insurance of $400,000. The HMOs are permitted to phase-in the minimum statutory net worth requirement over a three-year period, beginning January 1, 1998. In addition, the law permits a phase-in of the deposits to be maintained, however, the Company's HMO has met this deposit requirement at December 31, 1997. At January 1, 1998, the Company's HMO did not meet the new statutory net worth requirements.