("SNP") to its eligible members in Shelby County, Tennessee (including the City of Memphis), and to operate a Voluntary Medicare Prescription Drug Plan, both beginning January 1, 2007. The contract term is through December 31, 2008, after which the contract may be renewed for successive one-year periods in accordance with its terms.
UAHC-TN's results of operations for fiscal 2008 and 2007 are best understood in the context of certain earlier events involving several of TennCare's major contracted MCOs, which ceased doing business in fiscal 2002. Beginning in February, March and April 2002, UAHC-TN unexpectedly noticed increases in its claims payments, investigated, and found that approximately 9,500 new members added in September-December 2001 represented children with special needs with medical costs over 100% of the premiums received, and that many members transferred to UAHC-TN from failed MCOs also had medical costs in excess of UAHC-TN's premiums received. Beginning in April 2002, UAHC-TN wrote to TennCare seeking risk adjustments and reimbursements to compensate UAHC-TN for such medical expenses, including for actuarially estimated claims incurred but not yet reported to UAHC-TN.
TennCare responded to its MCOs' situation generally and in some instances individually. For all its contracted MCOs generally, TennCare changed its reimbursement system to an administrative services only ("ASO") program for an 18-month stabilization period (July 1, 2002 through December 31, 2003), during which the MCOs - including UAHC-TN - had no medical cost risk (i.e., no risk for medical losses), earned fixed administrative fees and were subject to increased oversight. Through successive contractual amendments, TennCare extended the ASO reimbursement system applicable to UAHC-TN, first through June 30, 2004, then through December 31, 2004, and then through June 30, 2005.
Under two escrow agreements between the Company and TennCare, on August 5, 2005 the Company funded two escrow accounts held by TennCare at the State Treasury. Both escrow agreements recited that TennCare did not at that time assert there had been any breach of UAHC TN's TennCare contract and that the Company funded the escrow accounts as a show of goodwill and good faith in working with TennCare.
The other escrow account, in the original amount of $420,500, is security for any money damages that may be awarded to TennCare in the event of any future litigation between the parties in connection with certain pending investigations by state and federal authorities. The escrow account will terminate 30 days after the conclusion of such investigations, unless the parties earlier agree otherwise. The escrow account bears interest at a rate no lower than the prevailing commercial interest rate for savings accounts at financial institutions in Nashville, Tennessee. All amounts (including interest earnings) credited to the escrow account will belong to the Company, except to the extent, if any, they are paid to TennCare to satisfy amounts determined to be owed to TennCare as provided in the escrow agreement.
In addition, based on a subsequent regulatory evaluation conducted by the Tennessee Department of Commerce and Insurance, it was determined that TennCare overpaid UAHC-TN $0.4 million in excess of UAHC-TN's statutory net worth requirement as of June 30, 2002, based on a 2002 contractual agreement. The Company recorded a reserve in fiscal 2007 and subsequently paid this amount in fiscal 2008. These items have been reflected as "Provision for claims audit and other commitment" on our Consolidated Statements of Operations.
Total revenues increased $10.1 million (56%) to $28.2 million for the fiscal year ended June 30, 2008 compared to $18.1 million for the fiscal year ended June 30, 2007. The increase in medical premiums revenues associated with UAHC-TN's Medicare Advantage SNP product ("MA SNP") as well as an increase in modified risk revenue were offset by a decrease in fixed administrative fees.
The net MA-SNP per member per month ("PMPM") premium rate, based on an average membership of 767 for the one year ended June 30, 2008, was $1,228 for that one-year period.
Fixed administrative fees related to the MRA program were $14.5 million for the fiscal year ended June 30, 2008, a decrease of $1.0 million (7%) from fixed administrative fees of $15.5 million for the fiscal year ended June 30, 2007. The decrease in fixed administrative fees is principally due to a decrease in members.
Depreciation and amortization expense increased $0.1 million to $0.2 million for the fiscal year ended June 30, 2008 compared to $0.1 million for the fiscal year ended June 30, 2007.
Net loss was $4.0 million, or $(0.47) per basic share, for the fiscal year ended June 30, 2008, compared to net loss of $1.1 million, or $(0.14) per basic share, for the fiscal year ended June 30, 2007, an increase in the net loss of $2.9 million (262%). The increased net loss is principally due to the goodwill impairment charge of $3.5 million recorded in the third quarter of fiscal 2008 and deferred tax expense resulting from the pending expiration of the TennCare contract as further discussed in Note 12 to our Consolidated Financial Statements in Item 15 below. The decrease was offset by the increase in the variable administrative fees and Medicare premiums related to our MA SNP. Excluding the goodwill impairment charge and the increase of the deferred tax asset valuation allowance, net income would have been $1.4 million for fiscal year ended June 30, 2008.
The net MA-SNP per member per month ("PMPM") premium rate, based on an average membership of 155 for the six months ended June 30, 2007, was $979 for that six-month period.
Fixed administrative fees related to the MRA program were $15.5 million for the fiscal year ended June 30, 2007, a decrease of $1.1 million (6%) from fixed administrative fees of $16.6 million for the fiscal year ended June 30, 2006. The decrease in fixed administrative fees is principally due to a decrease in members.
Variable administrative fees resulting from MRA were $0.5 million for the fiscal year ended June 30, 2007 compared to $0.4 million for the fiscal year ended June 30, 2006. The $0.5 million MRA revenue received in fiscal 2007 relates to the fourth quarter of fiscal 2006. UAHC-TN received notice from TennCare that it earned additional MRA revenue of $0.2 million, $0.2 million, and $0.5 million, respectively, for its performance for the first, second and fourth quarters of fiscal 2006.
costs, and estimates of future payments of claims provided for services rendered prior to the end of the reporting period (such estimates of medical claims incurred but not reported are also known as "IBNR"). The IBNR was primarily based on medical cost estimates from historical data provided by CMS and emerging medical claims experience together with current factors using accepted actuarial methods. As UAHC-TN gains more claims experience for its Medicare Advantage members, less reliance will be placed on medical cost estimates based on historical data provided by CMS. The percentage of such medical expenses to medical premiums revenues for MA-SNP -- the medical loss ratio ("MLR") -- was 90% for the fiscal year ended June 30, 2007.
Loss from operations before income taxes was $1.1 million for the fiscal year ended June 30, 2007 compared to earnings from operations before income taxes of $1.5 million for the fiscal year ended June 30, 2006. Such decrease in earnings from operations of $2.6 million, or $0.32 per basic share, is principally due to a provision for claims audit and other commitment, a decrease in administrative fee revenue and an increase in general and administrative expenses related to the launch of our MA-SNP.
Net cash from operating activities was $5.5 million in fiscal 2008 compared to net cash from operating activities of $1.5 million in fiscal 2007. Investing activities in fiscal 2008 included the
Cash flow was $1.8 million for the fiscal year ended June 30, 2008, compared to $4.6 million for the prior fiscal year.
Cash and marketable securities increased by $5.3 million at June 30, 2008 compared to June 30, 2007 primarily due to the purchase of marketable securities.
The Company's wholly owned subsidiary, UAHC-TN, had a required minimum net worth requirement using statutory accounting practices of $7.2 million at June 30, 2008. UAHC-TN had excess statutory net worth of approximately $7.6 million at June 30, 2008. The net worth and depository requirement will be in effect through the contract termination date of June 30, 2009, or sooner, if so approved by the Tennessee Department of Commerce and Insurance. At such time, UAHC-TN, must continue to maintain net worth requirements of at least $1.5 million as statutory reserves for its ongoing Medicare operations.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program, which entailed changes to TennCare's contracts with MCOs, including UAHC-TN. During that period, MCOs were generally compensated for administrative services only (commonly called "ASO"), earned fixed administrative fees, were not at risk for medical costs in excess of targets established based on various factors, were subject to increased oversight, and could incur financial penalties for not achieving certain performance requirements. Through successive contractual amendments, TennCare extended the ASO reimbursement system applicable to UAHC-TN, first through June 30, 2004, then through December 31, 2004, and then through June 30, 2005.
The larger escrow account, which has expired, was in the original amount of $2,300,000 and was security for repayment to TennCare of any overpayments to UAHC-TN that might be determined by a state regulatory audit of all UAHC-TN processed claims. UAHC-TN was notified in late fiscal 2007 that UAHC-TN may have incorrectly received an overpayment of $1.1 million for medical claims as a result of a discrepancy in the pricing methodology. In August 2007, the Company received $1,289,851 plus accumulated interest earnings back from the $2,300,000 escrow account. In November 2007, the remaining $1,010,149 account balance was paid to TennCare for claims discrepancies found in the audit by the Tennessee Department of Commerce and Insurance.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("FASB 157"). FASB 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of FASB 157, guidance for applying fair value was incorporated in several accounting pronouncements. FASB 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. FASB 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under FASB 157, fair value measurements are disclosed by level within that hierarchy. While FASB 157 does not add any new fair value measurements, it does change what had been current practice. Such changes include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. FASB 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not determined the impact of adopting FASB 157 on its financial statements.
In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 ("FSP 157-2"), which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities. Therefore, the Company has delayed application of SFAS 157 to its nonfinancial assets and nonfinancial liabilities, which include assets and liabilities acquired in connection with a business combination, goodwill, intangible assets and asset retirement obligations, until January 1, 2009. The Company is currently evaluating the impact of SFAS 157 for nonfinancial assets and liabilities on the Company's financial position and results of operations.
In May, 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 162, "The Hierarchy of Generally Accepted Accounting Principles," ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board's amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The FASB has stated that it does not expect SFAS No. 162 will result in a change in current practice. The application of SFAS No. 162 will have no effect on the Company's financial position, results of operations or cash flows.
In May 2008, FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement) ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years after December 15, 2008, and must be applied on a retrospective basis. Early adoption is not permitted. We are assessing the potential impact of this FSP on our convertible debt issuances.
In June 2008, FASB ratified EITF No. 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock ("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early application is not permitted. We are assessing the potential impact of this EITF on our financial condition and results of operations.