In addition, the Company leases approximately 193,000 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.
In 1997, the "Health Insurance Portability and Accountability Act of 1996, Public Law 104- 191", commonly called ("HIPAA"), was enacted. This bill established certain requirements for insurers, health maintenance organizations and ERISA plans regarding eligibility rules for health care coverage. It also required the Federal government to establish rules governing the privacy of health care information submitted by electronic transmission. The Department of Health and Human Services (HHS) recently published draft regulations specifying rules to maintain the privacy of health care information submitted by electronic transmission. These rules, once final, will apply to insurers, health maintenance organizations and ERISA plans. Depending on the content of the final regulations, MLH and MAMSI's HMOs may need to modify current procedures for the transmission and processing of electronic claims as well as transactions occurring over the Internet.
States in the Company's service area have enacted laws regarding the internal and external review of adverse utilization review decisions. Under these laws, persons covered by insurers or HMOs (subject to state regulation) are given a right to seek a fast and fair review of these decisions, first internally by a medical director and then externally by an independent review organization and/or a state regulator. Maryland, the District of Columbia, Virginia, North Carolina and Pennsylvania have enacted such laws. West Virginia is considering similar action.
Revenue for the year ended December 31, 1999 increased approximately $129.4 million or 10.9 percent over the year ended December 31, 1998. Revenue for the year ended December 31, 1998 includes $5.7 million in gains related to the sale of certain Company owned real estate no longer required in its operations. Excluding these gains, year-over-year revenue increased 11.4 percent. A 6.9 percent increase in net average HMO and indemnity enrollment resulted in an increase of approximately $77.5 million in health premium revenue while a 4.3 percent increase in average monthly premium per enrollee, combined for all products, resulted in a $51.3 million increase in health premium revenue. The increase in HMO and indemnity enrollment is principally due to increases in the Company's commercial membership. Management believes that commercial health premiums should continue to increase over the next twelve months as the Company continues to increase its commercial membership and as new and renewing groups are charged higher premium rates due to legislatively mandated benefit enhancements and general price increases initiated by the Company. This is a forward-looking statement. See "Forward-Looking Information" for a description of the risk factors that may affect health premiums per member.
The medical care ratio decreased to 87.9 percent for the year ended December 31, 1999 as compared to 88.8 percent for the year ended December 31, 1998. On a per member per month basis, medical expenses increased 3.2 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, expanded activity in specialized subrogation areas and claims review for dual health coverage, the Company's withdrawal from the Medicare program and certain state Medicaid programs, and also increased premiums per member. The ongoing initiatives should help to control the Company's medical care ratio. The statements in this paragraph and the preceding paragraphs regarding future utilization rates, cost containment initiatives, total medical costs, future increases in health premiums per member and the Virginia Medicaid Program 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 care ratio.
Administrative expenses as a percentage of revenue ("administrative expense ratio") increased from 11.4 percent (adjusted to exclude the effect of real estate gains in revenue) for the year ended December 31, 1998 to 11.6 percent for the year ended December 31, 1999. Management believes that the administrative expense ratio will increase modestly in 2000 as additional personnel with specialized medical and other expertise who were only with the Company for part of 1999 are reflected for a full year. 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.
Consolidated net income of the Company was $9,045,000 and $14,489,000 in 1998 and 1997, respectively. Diluted earnings per share was $.20 in 1998 as compared to $.31 in 1997. This decrease in earnings is primarily attributable to a $16,500,000 non-recurring item related to the results of an audit conducted in connection with the Company's participation in the FEHBP. The audit covered the periods 1992 - 1997 with the audit findings related to years 1992 - 1994. There were no findings for the years 1995 - 1997.
Revenue from life and short-term disability products contributed $6.9 million in revenue in 1998 as compared with $5.3 million in 1997. The increase is mainly due to the products' continued popularity with customers looking for one carrier to provide all of their employee benefit needs.
Included in the Company's year-to-date 1998 results is a $16,500,000 charge related to an audit conducted by the Office of Inspector General concerning the Company's participation in the FEHBP for the years 1992 - 1997. The report's findings indicate that in the years 1992 - 1994 the FEHBP was charged rates that exceeded the then market price. The report had no findings for the years 1995-1997.
Income tax expense as a percentage of pretax income decreased from 32.4 percent in 1997 to 26.1 percent in 1998, in large part due to the relative increase of tax exempt interest income as a percentage of pretax income.
The Company's cash and investment securities increased from $184.1 million at December 31, 1998 to $206.2 million at December 31, 1999, primarily due to the timing of medical expense payments which traditionally lag behind increased premiums per member and net income offset by the effect of treasury stock purchases. Accounts receivable increased from $79.3 million at December 31, 1998 to $83.6 million at December 31, 1999, principally due to the timing of customer payments, increases in membership and increases in the Company's home health care customer base.
Net property and equipment decreased from $45.0 million at December 31, 1998 to $43.7 million at December 31, 1999 primarily due to assets being depreciated.
Medical claims payable increased from $129.3 million at December 31, 1998 to $154.4 million at December 31, 1999, primarily due to increased membership and an increase in medical expenses per member.
Treasury stock increased from $75.6 million at December 31, 1998 to $104.1 million at December 31, 1999 due to the purchase of 3,194,940 additional shares by the Company at a total cost of $28,494,000.
The Company's major business operations are principally conducted through its HMOs and 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 restrict the amount of dividends and other distributions that may be paid to their parent corporations (See Note 12 to the Consolidated Financial Statements). As of December 31, 1999, those subsidiaries of the Company were in compliance with all minimum capital requirements.
At its October 1999 Board meeting, the Board of Directors authorized a $20 million stock repurchase program to begin November 15, 1999 and extend through June 30, 2000. As of December 31, 1999, the Company had repurchased 447,200 shares of its common stock for a total cost of approximately $3.1 million under its active stock repurchase program.
In 1997, the Company began the process of identifying, evaluating and implementing changes to computer programs necessary to address the year 2000 issue ("Y2K"). This issue affects computer systems that have time-sensitive programs that may not properly recognize the year 2000. This could have resulted in major system failures or miscalculations. The Company incurred less than $500,000 to bring its Y2K compliance program to completion. All of the Company's critical vendors indicated Y2K compliance at December 31, 1999. The year 2000 date rollover was completed by the Company without significant incident. The Company plans to continue to monitor critical systems to insure that they remain Y2K compliant.
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. Debt securities at December 31, 1999 mature according to their contractual terms as follows:
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997............................... 28
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997........... 29
Selected Quarterly Financial Data for Fiscal Years 1999 and 1998 (Unaudited)............................................... 48
MAMSI delivers managed health care services principally through HMOs. The HMOs, MD- Individual Practice Association, Inc. ("M.D. IPA"), Optimum Choice,Inc.(R)("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc. of Pennsylvania ("OCIPA") 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.
HomeCall, Inc., FirstCall, Inc. and HomeCall Pharmaceutical Services, Inc. ("HCPS") provide in-home medical care including skilled nursing, infusion and therapy to MAMSI's HMO members and other payors. In addition, HCPS provides pharmacy services to MAMSI's HMO members and other payors.
HomeCall Hospice Services, Inc. ("HCHS") began operations in December, 1996 and provides services to terminally ill patients and their families.
The excess of cost over the fair value of net assets of the acquired company in the 1994 purchase transaction is recorded as goodwill and is classified in the consolidated balance sheets as an other asset. Goodwill is amortized on a straight-line basis over 15 years.
Amounts charged for health care services are recognized as premium revenue in the month for which enrollees are entitled to receive care. Included in premium revenue are amounts due from customers that utilize the Company's capitated primary care physician network, its care coordination services and other services related to health management and who self-fund, generally up to specified limits, certain elements of medical costs, such as hospitalization and specialist physicians. Premium revenue received in advance is recorded as deferred premium revenue.
Medical expense consists principally of medical claims and capitation costs. Medical claims include payments to be made on claims reported as of the balance sheet date and estimates of health care services incurred but not reported ("IBNR") to the Company as of the balance sheet date. IBNR is estimated using an expense forecasting model that is based on historical claims incurrence patterns modified to consider current trends in enrollment, member utilization patterns, timeliness of claims submissions and other factors. This estimate includes medical costs to be incurred beyond the premium paying date that are contractually required.
Capitation costs represent monthly fixed fees to participating primary care physicians and other medical practitioners as retainers for providing continuing medical care.
The Company applies Statement of Financial Accounting Standards No. 128, "Earnings Per Share," in calculating its earnings per share. Basic earnings per common share are based upon the weighted average shares outstanding. Outstanding stock options are treated as common stock equivalents for purposes of computing diluted earnings per share. Shares held in the Company's Stock Compensation Trust (see Note 10) are excluded from the calculation of basic and diluted earnings per share.
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 state regulatory agencies and transferred to the Company's investment securities portfolio. The unrealized loss at the date of transfer was $21,000.
The following is a summary of available-for-sale and held-to-maturity securities at December 31, 1999 and 1998:
The amortized cost and estimated fair value of debt and marketable equity securities at December 31, 1999, 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 follows APB 25 under which no compensation expense has been recognized in connection with its stock option plans. Pro forma information regarding net income and earnings per share are required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 5.2%, 5.6%, and 6.4%; volatility factors of the expected market price of the Company's common stock of .59, .42, and .42 and a weighted average life of the options of three years. The Company anticipates that it will declare no dividends.
In years 1990 through 1996, 1998 and 1999, MAMSI implemented a non-qualified stock option plan whereby options for the purchase of shares of common stock may be granted to directors, officers and employees of the Company. Unexpired authorized shares under the plans total 10,800,000. Options under the plans generally vest over a three-year period and are exercisable at 100% of the fair market value per share on the date the options are granted. The Company accounts for these stock option grants in accordance with APB 25, and, accordingly, recognizes no compensation expense for these stock option grants. Transactions relating to the plans are summarized as follows:
During 1999, the SCT purchased an additional 3,000,000 shares of the Company's common stock for approximately $31.8 million. The existing promissory note has been modified to reflect these purchases.
For financial reporting purposes, the SCT is consolidated with MAMSI. The fair market value of the shares held by the SCT is shown as a reduction to stockholders' equity in the Company's consolidated balance sheets. All transactions between the SCT and MAMSI are eliminated. The difference between the cost and fair value of common stock held in the SCT is included in the consolidated financial statements as additional paid-in capital. At December 31, 1999, 1998 and 1997, the SCT held 10,010,850, 7,023,950 and 7,959,375 shares of common stock at a fair market value of approximately $83.2, $68.9 and $101.5 million, respectively.
The Company leases certain equipment and office space under the terms of non-cancelable operating leases that expire at various dates through 2004. Rent expense relating to these operating leases approximated $3,429,000, $3,502,000 and $3,552,000 in 1999, 1998 and 1997, 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.
In 1998, a pretax charge of approximately $16.5 million, which includes approximately $4.4 million of interest, was recognized in the Company's financial statements in anticipation of negotiations relating to potential governmental claims for contracts with OPM related to an audit conducted by the Office of Inspector General concerning the Company's participation in the FEHBP for the years 1992-1997 related to findings for the years 1992-1994. In the normal course of business, OPM audits health plans with which it contracts to verify, among other things, that the premiums calculated and charged to OPM are established in compliance with the best price community rating guidelines established by OPM. OPM typically audits plans once every five or six years, and each audit covers the prior five or six year period. OPM's current practice is to audit large plans every year. 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. In early 2000, the Company settled all findings without material modification to its original charge.
M.D. IPA, OCI, OCCI, OCIPA and MLH were in compliance with state depository rules at December 31, 1999 and 1998. OCCI failed to meet its working capital requirement of $1.6 million at December 31, 1999. In February, 2000, additional capital was provided to meet this requirement. MLH was in compliance with the applicable risk-based capital requirements for life and health insurance companies at December 31, 1999 and 1998, and M.D. IPA, OCI, OCCI and OCIPA were in compliance with the applicable risk-based capital requirements at December 31, 1999. 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.
Financial instruments that potentially subject the Company to credit risk consist primarily of investments in marketable securities (including money market funds, floating rate municipal putable bonds, intermediate term municipal bonds, and common stocks) and premiums receivable. The Company receives advice through or assigns direct management of investment in securities to professional investment managers selected for their expertise in various markets, within guidelines established by the Board of Directors. These guidelines include broad diversification of investments. Concentrations of credit risk and business volume with respect to commercial premiums receivable are generally limited due to the large number of employer groups comprising the Company's customer base. As of December 31, 1999, approximately 19% of premium and home health service receivables were due from federal government agencies. The Company performs ongoing credit evaluations of customers and generally does not require collateral.
The Company has three reportable segments: Commercial risk products, Medicare 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
The sources of revenue included in the All Others category are composed primarily of Medicaid and miscellaneous. All revenue is generated within the United States.