Oxford occupies as its principal executive offices approximately 210,000 square feet of office space at 800 Connecticut Avenue, Norwalk, Connecticut under two long-term leases expiring February 28, 1999 through February 28, 2001. Additionally, the Company has long-term leases to occupy (a) approximately 115,000 square feet of sales and administrative office space at 1133 Avenue of the Americas in New York City expiring July 31, 2009; (b) approximately 39,000 square feet of sales office space in Melville, Long Island, New York expiring June 30, 2002; (c) approximately 127,000 square feet of sales office space in Edison, New Jersey expiring December 1, 1999 through March 31, 2002; (d) approximately 180,000 square feet of administrative office space in two locations in Nashua, New Hampshire expiring May 31, 2003 through June 30, 2004; (e) approximately 58,000 square feet of sales and administrative office space in Philadelphia, Pennsylvania expiring April 30, 2009; (f) approximately 363,000 square feet of sales and administrative office space in White Plains, New York expiring November 30, 2004; (g) approximately 352,000 square feet of administrative office space in two locations in Trumbull, Connecticut expiring February 28, 2003 through May 31, 2003; (h) approximately 121,000 square feet of administrative office space in Hooksett, New Hampshire expiring November 30, 2002; (i) approximately 183,000 square feet of administrative office space in Milford, Connecticut expiring January 31, 2006; (j) approximately 22,000 square feet of office space in Mullingar, Ireland expiring September 30, 2006; (k) approximately 76,000 square feet of office space in Hidden River, Florida expiring January 12, 2008; (l) approximately 31,000 square feet of office space in Rosemont, Illinois, expiring April 30, 2004; (m) approximately 43,000 square feet of office space in Woodbridge, New Jersey, expiring March 31, 2006; (n) approximately 46,000 square feet of office and warehouse space in Edison, New Jersey, expiring April 30, 2005; and (o) approximately 13,000 square feet of sales and administrative office space in Chicago, Illinois, expiring December 31, 2000.
The statement of earnings data and balance sheet data set forth below for each year in the five-year period ended December 31, 1997, have been derived from the audited consolidated financial statements of the Company The information below has been restated to reflect the merger in July 1995 with OakTree Health Plan, Inc in a pooling of interests transaction (see note 8 to consolidated financial statements) and is qualified by reference to and should be read in conjunction with the consolidated financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein
(1) Per share amounts and weighted average number of common share amounts have been restated to reflect the two-for-one stock splits in 1993, 1995 and (2) Defined as health care services expense as a percentage of premiums earned
The Company's revenues consist primarily of commercial premiums derived from its Freedom Plan and Liberty Plan, health maintenance organization ("HMO"), preferred provider organizations ("PPOs") and dental plan products, reimbursements under government contracts relating to its Medicare and Medicaid programs, third-party administration fee revenue for its self-funded plan services (which is stated net of direct expenses such as third-party reinsurance premiums) and investment income.
Health care services expense primarily comprises payments to physicians, hospitals and other health care providers under fully insured health care business and includes an estimated amount for incurred but not reported claims ("IBNR"). The Company estimates IBNR expense based on a number of factors, including prior claims experience. The actual expense for claims attributable to any period may be more or less than the amount of IBNR reported. The Company's results for the year ended December 31, 1997 were adversely affected by additions to the Company's reserves for IBNR in the third and fourth quarters. See "Liquidity and Capital Resources."
The following table provides certain statement of operations data expressed as a percentage of total revenues and the medical-loss ratio for the years indicated:
The medical-loss ratio for 1997 reflects significant additions to the Company's reserves recorded in 1997. A portion of the reserve additions in 1997 represent revisions to estimates for claims incurred in prior years. Accordingly, the medical-loss ratios on an incurred basis would be different from those shown above.
premium rates during 1997. Average premium rates of Medicare programs in 1997 were 4.3% higher than in 1996.
In March 1998, the Company filed with the New York State Insurance Department ("NYSID") proposed rate increases of 50% and 64%, respectively for its New York mandated individual HMO and point of service plans (the "New York Mandated Plans") as a result of rapidly rising medical costs in those plans. The Company believes it experiences significant selection bias in these plans which are chosen, on average, by individuals that require more health care services than the average commercial population. The Company had 40,700 members in the mandated HMO and 15,300 members in the mandated point of service plan as of December 31, 1997. Revenues and operating results for 1998 would be adversely affected if the NYSID does not approve the rates requested or approves lesser increases. In addition, the Company expects that, if granted, significant rate increases in these plans will result in membership attrition, which would reduce revenues and could increase adverse selection bias. The Company is working cooperatively with the NYSID with respect to the requested rate increases and other measures to provide affordable health plans in the individual market. However, no assurances can be given that the NYSID will approve these rate increases.
In 1997, the Clinton Administration and Congressional leadership reached an agreement on legislation aimed at balancing the Federal budget, which includes provisions for $115 billion in savings from Medicare programs over the next five years. This agreement was enacted into law as the Balanced Budget Act of 1997 (the "1997 Act"). The legislation changes the way health plans are compensated for Medicare members by eliminating over five years amounts paid for graduate medical education and increasing the blend of national cost factors applied in determining local reimbursement rates over a six-year phase-in period. Both changes will have the effect of reducing reimbursement in high cost metropolitan areas with a large number of teaching hospitals, such as the Company's service areas; however, the legislation includes provision for a minimum increase of 2% annually in health plan Medicare reimbursement for the next five years. The legislation also provides for expedited licensure of provider-sponsored Medicare plans and a repeal in 1999 of the rule requiring health plans to have one commercial enrollee for each Medicare or Medicaid enrollee. These changes could have the effect of increasing competition in the Medicare market.
could significantly and adversely affect the Company's Medicare premium ratio going forward. President Clinton has proposed expanding Medicare coverage to individuals between the ages of 55 and 64. There is significant opposition to his proposal, and the Company cannot predict the outcome of the legislative process or the impact of the proposal on the Company's results of operations. In addition, long-term structural changes to the Medicare program are currently being considered by a newly appointed National Bipartisan Commission on the Future of Medicare. This Commission is required to submit a report to the President and Congress by March 1, 1999.
The Company does not anticipate revenue growth at the level of prior years in its Medicare programs because the Company's priority in 1998 will be to attempt to strengthen its service and system infrastructure and mitigate operating losses. Medicare enrollment could also be adversely affected, perhaps substantially so, by customer concern over recently publicized operating losses and provider dissatisfaction, changes to the Company's Medicare provider network in certain counties and medical management policies designed to better control medical costs and HCFA's recent site examination of the Company, among other factors. See "Business-Government Regulation".
Net investment income for the year ended December 31, 1997 increased to $61.2 million from $42.4 million in 1996. This was principally due to significantly greater realized capital gains in 1997 when compared with 1996. The Company incurred interest expense of approximately $11.1 million during 1997 (which reduces net investment and other income) for payment of interest on delayed claims in accordance with the Company's interest payment policy and applicable law. Final reconciliation with providers may result in higher levels of interest expense. The Company's future results will continue to reflect interest payments by the Company on delayed claims as well as interest expense on outstanding indebtedness incurred in 1998. See "Business - Recent Developments-Financings".
Health care services expense stated as a percentage of premiums earned (the "medical-loss ratio") was 94.0% for the year ended December 31, 1997 compared with 80.1% for the year ended December 31, 1996. Overall per member per month revenue in 1997 was substantially unchanged from 1996, however, overall per member per month health care services expenses increased 16.9% to $181.38 in 1997 from $155.16 in 1996. Software and hardware problems experienced in the conversion of a portion of the Company's computer system in September 1996 resulted in significant delays in the Company's payment of provider claims and adversely affected payment accuracy. Medical costs for 1997 reflect additions to the Company's reserves for IBNR in the third and fourth quarters aggregating $327 million. These additions represent revisions to estimates of the Company's incurred medical costs based on information gained in the process of reviewing and reconciling previously delayed claims and claims paid or denied in error. A portion of the reserve additions represent revisions to estimates for claims incurred in prior years. The Company's paid and received claims data and revised estimates show significant increases in medical costs in 1996 and 1997 in the Company's Medicare, Medicaid and New York Mandated Plans. The Company estimates that its per member per month medical costs increased 13.1% in 1996 and 21.4% in 1997 in its Medicare programs. In its New York Mandated
Effective January 1, 1997, the New York Health Care Reform Act of 1996 (the "Act") requires that the Company make payments to state funding pools to finance hospital bad debt and charity care, graduate medical education and other state programs under the Act. Previously, hospital bad debt and charity care and graduate medical education were financed by surcharges on payments to hospitals for inpatient services. As contemplated by the Act, the Company has substantially completed the negotiation of adjustments to rates paid to network hospitals in New York to reflect elimination of these surcharges. These adjustments are generally effective as of January 1, 1997, but they are not expected to result in savings equal to the cost of the surcharges. Accordingly, the Company has filed for increases of between 2% and 3.2% in certain of its commercial premium rates in New York in addition to normal trend increases in view of the increases in costs attributable to the Act. See "Government Regulation;".
expense, broker commissions, marketing expenses and depreciation. Payroll and benefits expense increased $87.5 million in 1997 primarily due to an increase in the size of the Company's work force to approximately 7,200 employees at the end of 1997 from approximately 5,000 employees at the end of 1996. The additional employees were hired primarily in the areas of health services, member services, management information systems and marketing. Broker commissions increased by $47.8 million in 1997 due to the increase in premiums. Marketing expenses other than payroll and benefits increased by $15.7 million in 1997 as the Company implemented programs to market its products in a highly competitive environment in several markets. Depreciation expense was $17.1 million higher than in 1996 as a result of $101.9 million of capital expenditures during 1997. The Company expects that results for 1998 will continue to be adversely affected by high administrative costs, including substantial consulting and other costs associated with strengthening its operations. The Company also currently expects to record a nonrecurring charge of between $20 million and $25 million in the first quarter of 1998 to account for severance and other costs which the Company expects to incur in connection with restructuring certain administrative and management functions. Administrative costs in future periods will also be affected by the costs associated with responding to regulatory inquiries and investigations and defending pending securities class action and shareholder derivative litigation, including fees and disbursements of counsel and other experts, to the extent such costs are not reimbursed under existing policies of insurance. See "Legal Proceedings".
revenue in the Company's Medicaid programs. Overall per member per month revenue increased 4.3% to $193.67 in 1996 from $185.69 in 1995 while overall per member per month health care services expenses increased 7.8% to $155.16 in 1996 from $143.99 in 1995. As stated above, additions to reserves for IBNR recorded in the third and fourth quarter of 1997 represent, in part, revisions to estimated costs for 1996. Based on the revised estimates, medical costs for 1996 would be higher than those shown.
Marketing, general and administrative expenses increased 46.6% to $477.4 million in 1996 from $325.6 million in 1995 which, as a percentage of operating revenues, was 15.7% in 1996 compared with 18.7% in 1995. The increase in marketing, general and administrative expenses was attributable to the Company's rapid membership growth and the costs associated with continuing development and expansion into new markets and the expansion of the Medicaid Healthy Start and Oxford Medicare Advantage programs. The other areas of increased expense were payroll and benefits expense, broker commissions, marketing expenses and depreciation. Payroll and benefits expense increased $74.4 million in 1996 primarily due to an increase in the size of the Company's work force to over 5,000 employees at the end of 1996 from approximately 4,000 employees at the end of 1995. The additional employees were hired primarily in the areas of marketing, management information systems, health services and member services. Broker commissions increased by $23.8 million in 1996 due to the increase in premiums earned. Marketing expenses other than payroll and benefits increased by $5.4 million in 1996 reflecting the Company's continuing commitment to aggressively market its products in a highly competitive environment. Depreciation expense was $18.5 million higher than in 1995 as a result of $48.3 million of capital expenditures during 1996.
abilities to make dividend payments, loans or other transfers of cash to the parent company, which limit the ability of the Company to use cash generated by subsidiary operations to pay the obligations of the parent, including debt service and other financing costs.
The Company's medical costs payable, before netting advance claim payments of $203 million, was $965.9 million as of December 31, 1997 (including $859.0 million for IBNR) compared with and $624.4 million as of December 31, 1996 (including $551.1 million for IBNR). The increase in medical costs payable reflects additions to the Company's medical claim reserves during the third and fourth quarters of 1997 totaling $327 million.
The Company estimates the amount of its IBNR reserves using standard actuarial methodologies based upon historical data, including the average intervals between the date services are rendered and the date claims are paid and between the date services are rendered and the date claims are received by the Company, expected medical cost inflation, seasonality patterns and increases in membership. The liability is also affected by shared risk arrangements under Private Practice Partnerships ("Partnership"). In determining the liability for medical costs payable, the Company accounts for the financial impact of the experience of risk-sharing Partnership providers (who may be entitled to credits from Oxford for favorable experience or subject to deductions for accrued deficits) and, in the case of Partnership providers subject to deficits, has established reserves to account for delays or other impediments to recovery of those deficits. The Company believes that its reserves for medical costs payable are adequate in order to satisfy its ultimate claim liability. However, the Company's rapid growth, delays in paying claims, paying or denying claims in error and changing speed of payment may affect the Company's ability to rely on historical information in making medical costs payable reserve estimates.
The Company expects that additional capital contributions to the subsidiaries will be required as the result of expected operating losses in 1998. Further, additional capital contributions will be required if there is an increase in the nonadmissible assets of the Company's subsidiaries or a need for reserve strengthening as the result of regulatory action or otherwise. See "Business--Government Regulation". Additional capital will also be required to fund capital expenditures and repay the Bridge Notes which mature on February 6, 1999.
In connection with the debt financing required as a condition to the investment under the Investment Agreement, the Company has engaged DLJ to act as arranger for a senior secured term loan and as placement agent for a senior unsecured financing, in the aggregate amount of $350 million. These transactions are subject to the negotiation and execution of definitive agreements, which are expected to contain various conditions, including, among others, receipt of regulatory approvals and absence of material adverse change, and the senior unsecured financing is also subject to placement of the financing with investors. The terms of these transactions will depend on market conditions and other factors beyond the Company's control. There can be no assurance that definitive agreements will be executed or, if such agreements are executed, that the conditions specified therein will be satisfied.
The investment under the Investment Agreement and the debt financings described in the proceeding paragraph are herein collectively called the "Proposed Financing".
The Company is communicating with certain material vendors to determine the extent to which the company may be vulnerable to such vendors' failure to resolve their own "Year 2000" issues. The Company will attempt to mitigate its risk with respect to the failure of such vendors to be "Year 2000" complaint. The effect, if any, is not reasonable estimable at this time.