In addition, the Company leases approximately 171,000 square feet of office space in various locations within its service areas to support sales and administrative operations.
3. Days include acute and non-acute, skilled nursing, neonatal intensive care and psychiatric inpatient care. The Company ceased participation in Medicare in 1999 and Medicaid in 2000.
3. The effect on the Company due to the recent acts of terrorism and any future attacks.
5. The possibility of increased litigation, legislation or regulation (such as the numerous class action lawsuits that have been filed against managed care companies and the pending initiatives to increase health care regulation) that might increase regulatory oversight which, in turn, would have the potential for increased costs.
Another important accounting policy relates to our risk sharing contracts. Certain of the Company's larger vendors offer various forms of "risk-sharing" or "guarantees" as a part of their contractual relationship with us. These arrangements are not significant in relation to the Company's financial statements with one exception; the Company's risk-sharing arrangement with its Pharmacy Benefits Manager ("PBM"). The Company's PBM is responsible for providing administrative and technical support as well as providing the ability to process pharmacy transactions on a real time basis. The Company's current PBM is Merck-Medco Managed Care, LLC ("Merck"). As a part of its contract with us, Merck agreed to a pharmacy cost guarantee related to fiscal year 2000. We are recording the amount due under this guarantee over the contract term of three years, which commenced January 2000. The total value of the guarantee we estimated for financial statement purposes is approximately $41 million of which approximately $28 million has been recorded in our financial statements as a reduction of medical expense over the first two years of the contract. This amount is also reported in the balance sheets as a reduction of medical claims payable. A dispute between Merck and the Company has arisen over this cost guarantee which is in binding arbitration. While the Company believes it has complied with the terms of its contract with Merck, and that its financial statements are fairly stated, if the dispute is not resolved in the Company's favor, all or part of the $28 million might have to be written-off and future amounts not yet recognized might never be recognized. This in turn could increase the Company's future medical expense more than currently anticipated, which would effect the Company's overall profitability. See Note 1 to the financial statements.
final regulations on Transactions and Code Sets and Privacy and expects final regulations for Unique Identifiers and Security in 2002. These rules will apply to insurers, health maintenance organizations, providers and ERISA plans and will effect the business operations of these entities.
State legislatures are considering a variety of proposals to increase access to health care coverage. This includes expanding the eligibility rules for the Medicaid Program and tax credits for the purchase of group or individual insurance.
The administrative expense ratio decreased from 12.1 percent for the year ended December 31, 2000 to 11.7 percent for the year ended December 31, 2001. Management believes that the administrative expense ratio will be approximately 11.5% in 2002. Management's expectation concerning the administrative expense ratio is a forward-looking statement. The administrative expense ratio is affected by changes in health premiums and other revenues, development of the Company's expansion areas and increased administrative activity related to business volume.
Investment income increased from $13.5 million for the year ended December 31, 2000 to $14.8 million for the year ended December 31, 2001 primarily due to an increase in the amount of investments.
The Company's home health operations contributed $26.3 million in revenue for the year ended December 31, 2000 as compared with $23.6 million for the year ended December 31, 1999 reflecting an increase in services provided to non-affiliated companies. Fee and other revenue increased to $21.8 million for the year ended December 31, 2000 from $21.4 million for the year ended December 31, 1999. Life and short-term disability products contributed $8.0 million in revenue for the year ended December 31, 2000 as compared with $8.2 million for the year ended December 31, 1999.
The medical care ratio decreased to 86.5 percent for the year ended December 31, 2000 as compared to 87.9 percent for the year ended December 31, 1999. On a per member per month basis, medical expenses increased 8.8 percent. The decrease in the medical care ratio is due to a combination of factors including continuing efforts by the Company to implement product specific cost containment controls, continued activity in specialized subrogation areas and claims review for dual health coverage, the Company's withdrawal from state Medicaid programs, and also increased premiums per member.
The Company's cash and investment securities increased from $275.2 million at December 31, 2000 to $372.8 million at December 31, 2001, primarily due to the timing of medical expense payments which traditionally lag behind the receipt of increased premiums per member, cash received from the exercise of stock options and net income offset by the effect of treasury stock purchases. Accounts receivable increased from $90.0 million at December 31, 2000 to $105.3 million at December 31, 2001, principally due to the timing of customer payments and increases in membership. Prepaid expenses, advances and other increased from $26.4 million at December 31, 2000 to $27.2 million at December 31, 2001 due to an increase in working capital advances paid to Maryland hospitals and the prepayment of insurance policies which cover the Company's assets and business operations, offset by the decrease in income tax amounts paid in advance.
Medical claims payable increased from $178.7 million at December 31, 2000 to $212.0 million at December 31, 2001, primarily due to increased membership and an increase in medical expenses per member. Deferred premium revenue increased from $18.5 million at December 31, 2000 to $37.7 million at December 31, 2001 due to a change in contract period with the FEHBP and an increase in cash payments received in advance of the premium coverage period.
Additional paid-in capital increased from $296.3 million at December 31, 2000 to $349.6 million at December 31, 2001 due to an additional 2.0 million shares of the Company's stock being placed into the SCT, as well as an increase in the market value of the shares of the Company's stock held in the SCT.
The Company currently has access to total revolving credit facilities of $29.0 million which are subject to annual renewal and collateral requirements, and are used to provide short-term capital resources for routine cash flow fluctuations. At December 31, 2001, the Company's investment security balances used as collateral, which are parent company only investments, fell below the minimum collateral requirements thereby reducing the credit line availability to $24.3 million. In addition, at December 31, 2001, approximately $3.7 million was drawn against these facilities, and approximately $444,000 in letters of credit were outstanding. While no amounts have been drawn against these letters of credit, they reduce the Company's credit line availability.
Following is a schedule of the short-term capital resources available to the Company (in thousands):
The Company's major business operations are principally conducted through its HMOs and its insurance company. HMOs and insurance companies are subject to state regulations that, among other things, may require those companies to maintain certain levels of equity and risk based capital, and restrict the amount of dividends and other distributions that may be paid to their parent corporation (See Note 12 to the Consolidated Financial Statements). As of December 31, 2001, those subsidiaries of the Company were in compliance with all minimum capital and exceeded all risk based capital requirements.
During the year ended December 31, 2001, the Company repurchased an additional 2,717,900 shares of its common stock for a total cost of approximately $49.5 million. On December 31, 2001, approximately $19.3 million of unspent authorization was available for future purchases. During January 2002, the Company repurchased an additional 59,200 shares of its common stock for a total cost of approximately $1.4 million. On February 14, 2002, the Board of Directors authorized a $30 million stock repurchase program to begin immediately. This authorization was in addition to the $17.9 million of unspent funds carried forward from the September 2001 authorization.
The Company is exposed to market risk through its investment in fixed and variable rate debt securities that are interest rate sensitive. The Company does not use derivative financial instruments. The Company places its investments in instruments that meet high credit quality standards, as specified in the Company's investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer, or type of instrument. A hypothetical ten percent change in market interest rates over the next year would not materially impact the Company's financial position or cash flow. The Company has no significant market risk with regard to liabilities and does not use special purpose entities. Debt securities (most of which are exempt from Federal taxes) at December 31, 2001 mature according to their contractual terms as follows (in thousands):
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999............................... 29
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999........... 30
Selected Quarterly Financial Data for Fiscal Years 2001 and 2000 (Unaudited)................................................ 50
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company whose subsidiaries are active in managed health care and other life and health insurance related activities. MAMSI's principal markets currently include Maryland, Virginia, the District of Columbia, Delaware, West Virginia, North Carolina and Pennsylvania. MAMSI and its subsidiaries (collectively referred to as the "Company") have developed a broad range of managed health care and related ancillary products and deliver these services through health maintenance organizations ("HMOs"), a preferred provider organization ("PPO"), a life and health insurance company, home health care and home infusion services companies, a hospice company, a collections company and part ownership in an outpatient surgery center.
MAMSI delivers managed health care services principally through HMOs. The HMOs, MD- Individual Practice Association, Inc. ("M.D. IPA"), Optimum Choice,Inc.(R)("OCI"), and Optimum Choice of the Carolinas, Inc. ("OCCI") arrange for health care services to be provided to an enrolled population for a predetermined, prepaid fee, regardless of the extent or nature of services provided to the enrollees. The HMOs offer a full complement of health benefits, including physician, hospital and prescription drug services. Optimum Choice, Inc. of Pennsylvania ("OCIPA") ceased all operations in Pennsylvania during 2000.
HomeCall Hospice Services, Inc. ("HHSI") provides services to terminally ill patients and their families.
Beginning in January 2001, Alliance Recovery Services, LLC ("ARS") provides coordination of benefit collection services to TPAs and insurance companies.
The consolidated financial statements include the accounts of MAMSI and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
A significant portion of the Company's premium revenue is derived from federal, state and local government agencies, including governmental employees and Medicaid and Medicare recipients. For the years ended December 31, 2001, 2000 and 1999, approximately 10%, 8% and 8%, respectively, of premium revenue was derived from federal government agencies which is included in the All Others and Commercial Risk segments (as described in Note 14), and approximately 15%, 14% and 21%, respectively, was derived from Maryland and Virginia state and local government agencies which is included in the Commercial Risk segment (as described in Note 14).
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("Statement No. 142"), which establishes standards for financial accounting and reporting for intangible assets at acquisition and for goodwill and other intangible assets subsequent to their acquisition. Statement No. 142 is applied to existing goodwill and intangible assets for fiscal years beginning December 15, 2001. The Company anticipates adopting this Statement January 1, 2002, at which time amortization of the remaining book value of goodwill will cease. The Company does not expect the adoption of Statement No. 142 will have a material impact on its consolidated financial statements.
Capitation costs represent monthly fixed fees to participating primary care physicians and other health care practitioners as retainers for providing continuing medical care.
The Company has entered into certain long-term vendor contracts, some of which include incentives or cost guarantees designed to provide savings to the Company over several years. The Company typically accounts for the benefit derived from these incentives or guarantees ratably over the contract period as a reduction to medical expense. Because of the complexity of the Company's product offerings as well as obligations imposed under the contracts, and the timing of settlement of various contractual periods, disputes may arise as to the degree of satisfaction of the various contractual obligations which could result in material adjustments to the Company's financial statements. In the case of one of these contracts, a dispute with the Company's pharmacy benefits manager, Merck, has arisen involving approximately $41 million related to the settlement of a cost guarantee for the year 2000. If the dispute is not resolved in the Company's favor, it could be material to the Company's financial statements. The Company is recording the amount due under the cost guarantee over the three year
Coordination of benefits ("COB") results from the determination that the Company has paid for medical claims expenses for which an enrollee has duplicate coverage and for which another insurer is primarily liable. In the consolidated statements of operations, such identified amounts are classified as a reduction of hospitalization expense and, in the consolidated balance sheets, such amounts are classified as a reduction of medical claims payable.
Short-term borrowings - The carrying amount reported in the consolidated balance sheets approximates fair value.
Investments are classified into two categories (available-for-sale or held-to-maturity) and are valued based upon this designation. Securities classified as available-for-sale, which include debt and equity securities that the Company does not have the positive intent to hold to maturity, are marked to market with the resulting unrealized gain or loss reflected in other comprehensive income. Securities classified as held-to-maturity, which are debt securities that the Company has both the positive intent and ability to hold to maturity, are carried at amortized cost. The Company classifies its statutory deposits as held-to-maturity with no effect on the recorded value. All other investments are classified as available-for- sale. Management re-evaluates these designations annually. During 1999, statutory deposit investments with an amortized cost of $1,166,000 were released by the state regulatory agencies and transferred to the Company's investment securities portfolio. The unrealized loss at the date of the transfer was $21,000. There were no such transfers in 2001 and 2000.
The amortized cost and estimated fair value of debt and marketable equity securities at December 31, 2001, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
The Company has access to total revolving credit facilities of $29 million, which are subject to annual renewal and collateral requirements, and are used to provide short-term capital resources for routine cash flow fluctuations. At December 31, 2001, the Company's investment security balances used as collateral, which are parent company only investments, fell below the minimum collateral requirements thereby reducing the credit line availability to $24.3 million. Borrowings bear interest at a rate based on the Federal Funds rate plus .75% - 1.65% and are secured by certain cash balances and investment securities. At December 31, 2001, approximately $3.7 million was outstanding on one of the lines-of-credit at an interest rate of 3.42% and approximately $444,000 in letters-of-credit were outstanding, although no amounts had been drawn.
M.D. IPA, OCI, OCCI and MLH maintain reinsurance coverage to provide for reimbursement of claims in excess of certain limits. The reinsurer for health claims indemnifies either 90% of the approved per diem or fixed charge per procedure, or 80% of the eligible in and out of service area acute care medical expenses in excess of $200,000 per enrollee per year. Transplant costs conducted in an approved facility are reimbursed at either 90% or 80% of eligible charges and in non-approved facilities at 50% of eligible charges. The coverage provides reimbursement benefits for a lifetime maximum of $2,000,000 in eligible medical costs with no more than $1,000,000 in a given year. Reinsurance for life and accidental death claims generally covers all settlements in excess of $50,000 per person subject to a $950,000 maximum recovery per person for life claims and $1,000,000 per person on accidental death claims. Reinsurance recoveries for the years ended December 31, 2001, 2000 and 1999 were approximately $2,319,000, $2,044,000 and $1,566,000, respectively. In the consolidated statements of operations, reinsurance premiums are shown net of the related recoveries.
At December 31, 2001, the Company has state net operating loss carryforwards of $97,014,000 that expire in various years beginning in 2006. The losses were generated by certain operating subsidiaries of the Company, in the normal course of their business.
The Company records a valuation allowance for deferred tax assets when in management's judgment that it is more likely than not that all or a portion of a deferred tax asset will not be realized. At December 31, 2001 and 2000, the Company recorded a valuation allowance related to state net operating loss carryforwards.
The Company has a defined contribution 401(k) savings plan covering all full-time employees. Employees are allowed to contribute up to 23% of their pretax earnings annually up to a maximum contribution of $10,500 and the Company makes a matching contribution of 50% on the first 4% of contributions made by employees. Only Company contributions may be invested in MAMSI stock. Employee contributions can be invested in a variety of mutual funds. Employees vest immediately in the employee contributions and ratably over five years in the Company contributions. During 2001, 2000 and 1999, the Company's contribution to the 401(k) plan aggregated $1,202,000, $1,264,000 and $1,056,000, respectively.
Pursuant to the employment contracts entered into by the Company with certain key executives, effective in 2000, each executive is entitled to supplemental retirement income benefits based upon years of service and attained salary levels. The Company is accruing for the liability under these contracts based on an estimated present value calculation of the future benefits payable to each executive. Expense recognized related to this benefit was $5,783,000 and $2,866,000 for the years ended December 31, 2001 and 2000, respectively.
The Company has an incentive compensation plan whereby managers receive bonuses based upon the annual operating results of the Company. During 2001, 2000 and 1999, incentive compensation expense was approximately $9,000,000, $6,956,000 and $4,200,000, respectively, which was paid to employees in February 2002, 2001 and 2000, respectively.
The following table sets forth the computation of basic and diluted earnings per share:
During 2001, the SCT purchased an additional 2,000,000 of the Company's common stock for approximately $36.5 million. The existing promissory note has been modified to reflect these purchases.
The Company leases certain equipment and office space under the terms of non-cancelable operating leases that expire at various dates through 2006. Rent expense relating to these operating leases approximated $4,393,000, $3,470,000 and $3,429,000 in 2001, 2000 and 1999, respectively.
M.D. IPA contracts with OPM to provide or arrange health services under the FEHBP. The contract with OPM and applicable government regulations establish premium rating requirements for the FEHBP. The premiums established under the OPM contract are subject to periodic review and audit to determine, if they were established in compliance with the community rating and other requirements under the program. OPM typically audits plans once every five or six years, and each audit covers the prior five or six year period. While the government's initial on-site audits are usually followed by a post-audit briefing as well as a preliminary audit report in which the government indicates its preliminary results, final resolution and settlement of the audits can take two to three years. The results of these audits could result in material adjustments to the Company's financial statements. The Company has been audited through 1999. There were no significant findings related to 1999.
financial statement purposes and additional amounts the Company believes it is entitled to under the Agreement. The Company believes that the dispute will be resolved in its favor. If the matter is not resolved in the Company's favor, the effect could be material to the Company's financial statements. See Note 1.
M.D. IPA, OCI, OCCI, OCIPA and MLH were in compliance with state depository rules at December 31, 2001 and 2000. OCCI was in compliance with its working capital requirement of $1.6 million at December 31, 2001 and 2000. M.D. IPA, OCI, OCCI, OCIPA and MLH exceeded the highest risk-based capital requirements at December 31, 2001 and 2000. These MAMSI subsidiaries must notify state regulators before the payment of any dividends to MAMSI and, in certain circumstances, must receive positive affirmation prior to such payment.
The Company has two reportable segments: Commercial risk products and Preferred Provider Organizations ("PPO"). Commercial risk products include traditional HMO and point-of-service health care plans as well as hybrid products. Traditional products provide for the provision of comprehensive medical care to enrollees for a fixed, prepaid premium regardless of the amount of care provided. Hybrid products offer the ability to tailor employee health care offerings by varying benefit designs, funding methods and insurance risk. These products combine the use of capitated physicians to serve as care coordinators, employer funding of specialist and institutional claims on an "as paid" basis with MAMSI's underwriting of risk on a specific and/or aggregate stop loss basis. MAMSI offers access to its preferred provider network of physicians to employers and insurance companies in association with various health plans. PPOs allow enrollees to receive care from a network of participating physicians and health care practitioners who agree to provide services at contractually negotiated rates in exchange for increased patient volume. A PPO does not assume insurance risk from medical utilization and it is not the claims payor.
The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes, not including income from the Company's investment portfolio. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Changes in accumulated other comprehensive income related to changes in unrealized gains (losses) on securities, net-of-tax, were as follows: