(b) The medical cost ratio is calculated as health care services expense as a percentage of premium revenue.
(c) The general and administrative expense ratio is calculated as general and administrative expense as a percentage of total revenue.
The following presents our management's discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. You should read this discussion in conjunction with the Consolidated Financial Statements and Notes thereto and the information set forth under "Factors That May Affect Future Results of Operations" of Part I, Item I, "Business" and under "Legal Proceedings" of Part I, Item 3 of this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from those anticipated in these forward-looking statements.
Our self-funded segment has had significantly greater operating margins than our underwritten segment over the past five years. For example, in 2000 our underwritten segment had revenues of $940.1 million and operating income of $10.6 million, while our self-funded segment had revenues of $117.9 million and operating income of $40.3 million. We have focused on improving our underwritten segment's operating margins over time through focused pricing and medical cost management initiatives. From 1998 to 2000, we have improved our underwritten segment operating margins from -3.0% to 1.1%. See Note 14, "Segment information," to our Consolidated Financial Statements included in Part I, Item 8 of this Annual Report.
Our net income and earnings per share for all of 2000, and the comparable results for prior periods, reflect the November 30, 2000 reorganization, which included the merger of Old RightCHOICE with its parent, Blue Cross and Blue Shield of Missouri. Prior to the reorganization, Blue Cross and Blue Shield of Missouri owned 14,962,500 shares, or approximately 80%, of Old RightCHOICE's 18.7 million shares, with the remaining 3.7 million shares owned by the public minority stockholders. The reorganization was accounted for in a manner similar to a pooling of interests, except for the exchange of the 3.7 million shares held by the public minority stockholders, which was accounted for as a purchase. The results of our operations up to and including November 2000 reflect a charge against earnings for the public minority stockholders' interest, and the weighted average common shares used to compute basic earnings per share includes only the 14,962,500 shares owned by Blue Cross and Blue Shield of Missouri, and not the additional 3.7 million shares owned by the public minority stockholders. The Missouri Foundation
The following table sets forth revenue by funding type and product group for the years ended December 31, 2000, 1999, and 1998:
The following table sets forth selected operating ratios. The medical cost ratio reflects health care services expense as a percentage of premium revenue. All other ratios are shown as a percentage of total revenues:
The following table sets forth the number of members by funding type and product group:
(1) Approximately 86,000 of our workers' compensation members are also included in the member counts for our other ASO products as of December 31, 2000.
Premium revenue increased $121.8 million, or 14.9%, to $939.3 million in 2000 from $817.5 million in 1999. As described below, components of premium revenue were affected by shifts in product mix, rate increases and other factors. As a result, such increase in premium revenue may not be indicative of future periods. We will continue to strive to establish premium rates based on anticipated health care costs. Depending on future competition, customer acceptance of premium increases, future health care cost trends and other factors, we cannot provide any assurances that we will be able to price the products of our subsidiaries in excess of health care cost trends.
In the past year, several of our competitors have announced their intention to exit the Missouri market, which is our primary sales area. A reduction in the number of competitors for the Missouri market share has had a positive impact on our ability to attract and maintain membership. We cannot, however, provide any assurances that we will continue to attract or retain membership. Our membership has also benefited from our participation in the BlueCard(R) PPO program. The BlueCard(R) PPO program allows our Alliance PPO and POS members access to Blue Cross and Blue Shield plans' providers throughout essentially all of the United States and 200 countries worldwide.
POS premium revenue, which includes our AllianceChoice group and individual products, increased $30.8 million, or 18.4%, to $198.2 million in 2000 from $167.4 million in 1999 -- $15.7 million of the increase due to a 9.4% increase in net premium rates and $15.1 million of the increase resulting from an 8.2% increase in member months. Net premium rates increased due in part to our premium renewal rate increases, which are affected by medical cost inflation, changes in deductibles, the timing of group renewals throughout the year and product mix changes.
Effective December 31, 2000, we terminated our participation in two HMO products, the Missouri Consolidated Health Care Plan and Blue Horizons Medicare HMO. Membership in the Missouri Consolidated Health Care Plan increased by 1,007 members to 40,492 members from December 31, 1999 to December 31, 2000. Effective January 1, 2000, the Missouri Consolidated Health Care Plan premium rates increased by approximately 12% pursuant to a contract amendment. Total revenue during 2000 for the Missouri Consolidated Health Plan was $59.1 million, and our 2000 medical cost ratio for this group exceeded 100% (excluding any benefit from the loss reserve). Excluding the Missouri Consolidated Health Care Plan, membership in our HMO products decreased over the same time period by 6,084 members, partially due to a reduction in Blue Horizons Medicare HMO members from 4,914 to 2,132.
Medicare supplement premium revenue decreased by $3.2 million, or 3.5%, to $89.1 million in 2000 from $92.3 million in 1999 -- $7.5 million of the decrease resulting from a 7.8% decrease in member months, partially offset by a $4.3 million increase due to a 4.7% increase in net premium rates.
Managed indemnity premium revenue decreased by $1.3 million, or 31.9%, to $2.8 million in 2000 from $4.1 million in 1999, primarily as a result of a 28.0% decline in member months. Member month declines are consistent with our strategy to move toward more managed health care products. With the exception of a short-term medical product, we no longer sell managed indemnity products, but we continue to renew coverage for those members who wish to remain in these managed indemnity programs.
Fees and other income from ASO, self-funded network services and life insurance commission revenues increased $16.1 million, or 15.7%, to $118.7 million in 2000 from $102.6 million in 1999. These increases are primarily due to increased 2000 revenues of $13.3 million from HealthLink, our network rental and managed care service subsidiary. HealthLink's increase in revenues was partially due to expansion into new territories as well as membership growth in HealthLink's managed health care and workers' compensation programs and increases in client access fees. In addition, our BlueCard(R) PPO and National Account ASO revenues increased by $4.3 million due to a 15.6% increase in member months. Our administrative service revenue decreased by $2.1 million in 2000 as compared to 1999 due to the termination of an administrative fee contract between us and another unaffiliated Blue Cross and Blue Shield licensee. This contract, under which we provided electronic data processing services, was terminated in June 1999.
Rental income related to non-affiliated tenants increased $0.3 million, or 13.7%, to $2.8 million in 2000 from $2.5 million in 1999.
Our general and administrative expense ratio, excluding depreciation and amortization, decreased to 17.1% for 2000 compared to 18.1% in 1999. This ratio represents general and administrative expenses, excluding depreciation and amortization, divided by total revenues. The decrease of 1.0% reflected increased economies of scale associated with premium and revenue growth in 2000.
previously described. Operating expenses for our other segment increased $0.2 million, or 4.1%, to $4.9 million in 2000 from $4.7 million in 1999.
Operating income for our underwritten segment increased $15.5 million to $10.6 million in 2000 from a loss of $4.9 million in 1999. The significant improvement was due to enrollment growth and improved pricing for our underwritten products.
Operating income for our self-funded segment increased $10.1 million, or 33.5%, to $40.3 million in 2000 from $30.2 million in 1999. This improvement is due primarily to HealthLink's continued profit growth from increased membership and regional expansion. HealthLink's operating income increased by $8.2 million in 2000 as compared to 1999. HealthLink's operating income is inclusive of $2.7 million and $2.8 million in 2000 and 1999, respectively, for amortization expenses related to goodwill and other intangible assets that were acquired through our acquisition of HealthLink in 1995.
Our effective income tax provision rate was 39.4% and 39.9% for 2000 and 1999, respectively. Our effective tax provision rates for 2000 and 1999 were affected by non-deductible goodwill amortization, among other things. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Based upon all the available evidence, we believe it is more likely than not that we will realize our deferred tax assets as of December 31, 2000, and, accordingly, no valuation allowance has been provided against such assets as of December 31, 2000.
In the first quarter of 1999, we adopted the Accounting Standards Executive Committee Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." The SOP requires that certain costs of start-up activities, including organization costs, should be expensed as incurred. Our adoption of this SOP resulted in a $1.3 million expense write-off ($1.1 million, net of tax) in 1999 relating to costs incurred in 1998 for legal, consulting, accounting and other fees related to our reorganization. We have reported the cumulative effect of this accounting change in our 1999 statement of income.
from dental products that are priced below our dental product. The large net premium rate increases primarily relate to our pharmacy products and correspond to the high levels of prescription utilization and trends that our company, as well as the industry as a whole, have experienced in recent years.
Rental income related to non-affiliated tenants remained unchanged at $2.5 million in 1999 and 1998.
Commission expense increased by $1.1 million, or 3.4%, to $32.5 million in 1999 from $31.4 million in 1998. Our commission expense ratio decreased to 3.5% for 1999 compared to 3.6% in 1998.
General and administrative expenses, excluding depreciation and amortization, increased $7.3 million, or 4.5%, to $167.4 million in 1999 from $160.1 million in 1998. Our general and administrative expense ratio, excluding depreciation and amortization, decreased to 18.1% in 1999 compared to 18.5% in 1998. This increase in these expenses is partially attributable to HealthLink's geographic and member expansion efforts. In addition, we incurred general and administrative expenses of $3.8 million in 1999 for costs related to our reorganization which was completed on November 30, 2000. See description of the reorganization in Note 1, "Organization" of the Notes to Consolidated Financial Statements of Part II, Item 8, which is incorporated herein by reference.
Operating loss for our underwritten segment decreased $18.6 million, or 79.1%, to $4.9 million in 1999 from $23.5 million in 1998. The significant improvement is due to our aforementioned successful pricing strategies and cost management efforts.
Operating income for our self-funded segment increased $10.2 million, or 51.1%, to $30.2 million in 1999 from $20.0 million in 1998. This improvement is due primarily to HealthLink's continued profit growth from increased membership and regional expansion. HealthLink's operating income increased by $7.7 million in 1999 as compared to 1998. HealthLink's operating income is inclusive of $2.8 million and $2.8 million in 1999 and 1998, respectively, for amortization expenses related to goodwill and other intangible assets that were acquired through our acquisition of HealthLink in 1995. The improvement is also due in part to the increase in BlueCard(R) PPO and National Account membership, as previously described.
Other, net expenses decreased $0.7 million, or 15.0%, to $4.1 million in 1999 from $4.8 million in 1998, partially due to a reduction in the total amount of debt outstanding under our credit facility. In addition, our share of the earnings of The EPOCH Group, L.C. increased by $0.3 million in 1999 as compared to 1998.
The charge for minority interest increased $2.3 million, or 204.3%, to $3.4 million in 1999 from $1.1 million in 1998, due to the increase in Old RightCHOICE's earnings in 1999 as compared to Old RightCHOICE's earnings in 1998.
Our net income for 1999 increased $13.6 million, or 264.2% to $18.8 million in 1999 from $5.2 million for 1998, as a result of the factors noted above. Basic and diluted earnings per share for 1999 were $1.26 and $1.25, respectively, compared to basic and diluted earnings per share for 1998 of $0.35 and $0.34, respectively. Basic and diluted earnings per share for the years ended December 31, 1999 and 1998 are based upon weighted average shares outstanding of 15.0 million.
Our working capital as of December 31, 2000 was $143.4 million, an increase of $38.8 million from $104.6 million as of December 31, 1999. The increase is partially attributable to the net income of $35.5 million in 2000. Net income for 2000 includes the charge for public minority interest of $6.4 million. Depreciation and amortization expenses related to noncurrent assets was $20.6 million. We capitalized $9.0 million of costs for property and equipment purchases, $5.5 million of which relates to capitalized information and operations strategy development costs. We sold our Southwest Missouri regional office building in May 2000 for $3.6 million realizing a gain on sale of $0.7 million. Our unrealized depreciation of investments available for sale (net of tax) decreased (improved) by $3.0 million in 2000. In addition, during 2000, we repaid $8.0 million of the debt from our credit facility as well as $4.6 million of debt related to capital leases. We also paid approximately $13 million to The Missouri Foundation For Health in conjunction with our reorganization on November 30, 2000. The reorganization is described in Note 1, "Organization" of the Notes to Consolidated Financial Statements of Part II, Item 8, which is incorporated herein by reference.
Net cash provided by operations totaled $45.8 million for the year ended December 31, 2000 as compared to $58.4 million for the year ended December 31, 1999. For 2000, our net income was $35.5 million, which included $20.6 million of depreciation and amortization expenses and $7.3 million related to the net reduction in the Missouri Consolidated Health Care Plan contract loss reserve. In addition, receivables, accounts payable and accrued expenses, medical claims payable, and unearned premiums were affected by the timing of operating cash payments and receipts as well as changes in membership and premium rates and claims payments. Receivables increased by $36.8 million in part due to an increase of $9.3 million related to HealthLink receivables, rate increases related to our underwritten products, and other timing factors. This increase in receivables was offset in part by an increase in unearned premiums of $5.7 million. Accounts payable and accrued expenses increased by $14.5 million
Under applicable state regulations, some of our subsidiaries are required to retain cash generated from their operations. After giving effect to these restrictions, we had approximately $64.4 million in cash and investments available for general corporate purposes without regulatory approval at December 31, 2000.
In 2001, we anticipate that we will expend approximately $13 million to $14 million, of which $8 million to $9 million will be capitalized, related to our information and operations strategy project. We anticipate that we will expend approximately $4 million to $5 million, of which approximately $2 million to $3 million will be capitalized, to prepare for compliance with the Health Insurance Portability and Accountability Act. We anticipate that we will expend approximately $2 million to $3 million, of which approximately $1 million to $2 million will be capitalized, on various internet initiatives. We expect to continue to pay annual license fees of approximately $1 million related to our licenses from the Blue Cross Blue Shield Association to use the Blue Cross and Blue Shield service marks. However, the amount of the license fees may vary from year to year based on our total revenue as compared to that of all Blue Cross and Blue Shield licensees as well as changes adopted by the Blue Cross Blue Shield Association to its overall formulas for computing the license fees.
Health care costs in the United States have increased more rapidly than the national consumer price index in recent years and that trend is expected to continue. Our pricing strategy is designed to anticipate medical cost trends. As an additional effort to lessen the impact of health care cost inflation on our premiums, we have implemented certain programs including the three-tier copayment levels for pharmacy coverages and various deductible and copayment options for medical coverages and programs such as the Physician Group Partners Program(R). However, we cannot provide any assurances that our efforts to reduce the impact of medical cost inflation will be effective or that premium increases will equal or exceed increasing health care costs.
The United States Department of Health and Human Services has issued rules, as mandated by the Health Insurance Portability and Accountability Act of 1996, known as HIPAA, which would, among other things, impose security and privacy requirements with respect to individually identifiable patient data, including a member's transactions with health care providers and payors, as well as requirements for the standardization of certain electronic transaction code sets and provider identifiers. We anticipate expending approximately $4 million to $5 million in 2001, of which approximately $2 million to $3 million will be capitalized, related to our efforts to comply with the electronic transaction code sets and provider identifier standards. We have not fully assessed the additional financial impact related to compliance with security and patient information privacy standards. Since issuing the standards in December 2000, the Department of Health and Human Services has postponed the effective date until April 2001 and the compliance date until April 2003, and provided for an additional comment period. In addition, final security regulations have not been issued. We believe, however, the additional financial impact could be material.
In June 1998, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. SFAS No. 133 is effective for all fiscal years beginning after June 15, 2000, as extended by SFAS No. 137. Earlier application of SFAS No. 133 is encouraged but should not be applied retroactively to financial statements of prior periods. We believe that the adoption of SFAS No. 133 will not have a material impact on our financial position or results of operations. We have minimal use of derivatives as defined by SFAS No. 133 and do not use derivatives for hedging activities.