3. Days are presented exclusive of skilled nursing, neonatal intensive care and psychiatric inpatient care.
All forward-looking information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations is based on management's current knowledge of factors affecting MAMSI's business. MAMSI's actual results may differ materially if these assumptions prove invalid. Significant risk factors, while not all- inclusive, are:
2. The possibility of state or Federal budget related mandates that reduce premiums for Medicaid or Medicare recipients.
During the three year period ended December 31, 1996, MAMSI and its subsidiaries (the "Company") have experienced substantial revenue growth due to increased HMO and PPO membership. The Company has achieved its membership growth by expanding its product line, which includes point- of-service, small group, indemnity health, hybrid products, Medicaid and Medicare products and through expansion into new geographic markets. Premium rates during this time have remained at or near competitive levels for the Company's marketplace. Prior to 1996, operating margins remained positive due to the control of medical expenses and, accordingly, profits and earnings per share have increased. During 1996, due to increasing medical utilization and continued downward competitive pressures on premium rates, the Company's consolidated operating margin turned slightly negative. The Company currently anticipates that there will be increases in premium rates during 1997 and that the Company's operating margins will again be positive. This is a forward-looking statement, and the Company's actual operating margins may differ from management's current expectation due to risk factors which may affect either the Company's revenues or expenses. See "Forward-Looking Information" above for a description of these risk factors.
The Company generally receives a fixed premium amount per member per month while the majority of medical expenses are variable and significantly affected by spontaneous member utilization. Even with managed care controls, unusual medical conditions can occur, such as an outbreak of influenza or a higher than normal incidence of high cost
cases (such as premature births, complex surgeries, or rare diseases). As a result, the Company's quarterly results can be materially effected and irregular. However, over the longer business cycle, the Company believes that its managed care control systems, underwriting procedures (when allowed) and network of providers will result in continued profitability.
Due to the continued escalation of health care costs and the inability of many individuals to obtain health care insurance, numerous proposals relating to health care reform have been made, and additional proposals may be introduced, in the United States Congress and the legislatures of the states in which the Company operates or may seek to operate.
Recently, the "Health Insurance Portability and Accountability Act of 1996, Public Law 104-191", commonly called the Kennedy-Kassebaum Bill for its primary sponsors, was enacted. This bill establishes certain Federal requirements for large group, small group, and individual health benefit plans, and applies not only to insurers and HMOs but also to ERISA plans.
Kennedy-Kassebaum is intended to make coverage more portable and available by limiting pre-existing condition requirements; providing special enrollment periods for employees who lose other coverage or whose family status changes; prohibiting group plans from denying an individual
coverage or charging a higher premium based on the individual's health status or history; and by guaranteeing coverage availability and renewability in certain circumstances in the small group and individual markets. Kennedy-Kassebaum also allows for the establishment of Medical Savings Accounts; increases the penalties for health care fraud and abuse; and calls for standardized health care information in order to reduce administrative costs.
The effect of Kennedy-Kassebaum will differ from state to state. In the group market, state laws remain in effect unless they prevent the application of the new federal requirements, and in the individual market, state law will govern if the Health and Human Services Secretary determines that it provides an "acceptable alternative mechanism" to the federal requirement. This means that in those states like Maryland, where state reforms have already been enacted, the legislation may have little, if any, effect in the small group market, but may have some effect on the individual market. In other states, the legislation may have a greater effect. State legislatures and regulators are hurriedly trying to understand the requirements and implications of the law.
Most of the provisions of Kennedy-Kassebaum will take effect on July 1, 1997, but some, like the provisions pertaining to Medical Savings Accounts, take effect earlier and some, like administrative simplification, take effect later.
In recent years, state legislatures in the Company's service area have been active in health care reform legislation targeted at the small group market, i.e., usually for groups of 2 to 50 employees. This small group reform is now in place in Maryland, Virginia, Delaware and North Carolina, but not in Pennsylvania, Washington, D.C. or West Virginia. Although different in many of the details, this type of legislation generally requires all HMOs and insurers that offer small group coverage to accept all small employers who apply for coverage and to guarantee coverage to their employees seeking coverage regardless of their health status. The legislation also requires renewal of these small group employer plans, limits rate renewal increases, mandates adjusted community rating and eliminates pre-existing condition limitations either entirely or within a short period of time, usually six months.
Consolidated net income (loss) of the Company was $(2,768,000) and $61,124,000 in 1996 and 1995, respectively. Net earnings (loss) per share was $(.06) in 1996 as compared to $1.28 in 1995. The reduction in earnings is primarily attributable to a significant increase in the medical loss ratio for commercial products, continuing losses in the Company's Medicare product and lower earnings from the Company's Medicaid products. The medical loss ratio increased principally due to increased member utilization. The Company has priced its health products competitively in order to increase its membership base and thereby enhance its strategic position in its marketplace. The Company currently has one of the largest HMO and managed care enrollments and also the largest network of contract providers of medical care in its service area (which includes the entire states of Maryland and Delaware, the District of Columbia, most counties and cities in Virginia, and certain areas of West Virginia, North Carolina and Pennsylvania).
The Company has implemented increased premium rates across essentially all of its commercial products which began to take effect in July, 1996. As the Company's contracts are generally for a one year period, increased pricing cannot be initiated until a contract reaches its renewal date. Therefore, price increases cannot be made across the Company's membership at the same time. Additionally, the Company received an approximate 2.5 percent premium rate increase in its Virginia Medicaid program and an approximate 4 percent increase in its Maryland Medicaid program, both effective July 1, 1996. Management believes that the commercial premium rate increases will have the effect of slowing down the Company's future membership growth. In addition, management reevaluated premium reimbursement rates with regard to its Medicare and Medicaid participation and reduced or eliminated certain service areas. Specifically, effective January 1, 1997, 59 counties and cities were eliminated from the Company's Medicare service area. Also effective January 1, 1997, the Company no longer participates in the mandated portion of the Virginia Medicaid program which serves Medicaid eligibles in the Tidewater area of Virginia. In addition, the Company has withdrawn from the Maryland Medicaid program due to changes to premium and benefit levels and other requirements made by the State of Maryland after it obtained an 1115 waiver and became a mandated state. As the Company is the largest provider of managed care Medicaid in Maryland, the Company will continue to provide services in 1997 until an orderly transition can be accomplished. The Company will be compensated during the transition period at a rate higher than the mandated program allows but lower than historical reimbursement. In 1996, the Company became licensed to serve portions of the Medicaid populations in West Virginia and North Carolina. The Company's future membership growth depends on several factors such as relative premium prices and product availability, future increases or decreases in the Company's service area, increased competition in the Company's service area and changes in state mandated enrollment in Medicaid HMO programs in which the Company participates. Enrollment may also decrease if the Company determines that premium reimbursement rates related to certain state Medicaid programs and the Medicare program are inadequate which might cause the Company to voluntarily withdraw from participation.
Service revenue from non-MAMSI affiliated entities earned by the Company's home health care subsidiaries contributed $20.5 million in revenue in 1996 as compared to $18.9 million for 1995. This increase is the result of increasing business volume for these subsidiaries, particularly in the home infusion area, which is largely offset by an increasing relative percentage of business conducted for MAMSI HMO and indemnity members which is eliminated in consolidation. Revenue from life and short-term disability products contributed $3.2 million in 1996
During the second quarter of 1996, the Company received a letter from the Health Care Financing Administration ("HCFA") proposing a marketing sanction in connection with the administration of its Medicare product, asserting that the Company did not comply with certain HCFA requirements. The Company contested the assertions made by HCFA and was informed early in November, 1996 that, after reviewing the Company's response to the allegations, HCFA will not pursue the imposition of sanctions as proposed in their initial letter.
financial condition to date although certain large group customers have frozen their enrollment in MAMSI until accreditation is obtained. The Company believes that increasing public awareness of the various accreditation processes will potentially cause them to have more significance in the purchase and enrollment decisions which could be detrimental to the Company if NCQA accreditation is not obtained. The Company has been reviewed again for accreditation in December of 1996. Although the Company believes that the likelihood of NCQA accreditation is good, there can be no assurance that accreditation will be received or that MAMSI will not experience disenrollment if accreditation is not ultimately received. The Company has implemented the Health Plan and Employer Data and Information Set ("HEDIS") 2.5 which represents a core set of performance measures developed by NCQA to serve the employer as a purchaser.
exceed the current level over the next year due to the continued expansion of utilization management and other personnel. Management's expectations concerning the administrative expense ratio are forward- looking statements. The administrative expense ratio is affected by changes in health premiums per member, development of the Company's expansion areas and increased administrative activity related to business volume.
Investment income increased $2.4 million or 20 percent primarily due to an increase of $1.5 million in realized gains on sales of marketable equity securities.
Consolidated net income of the Company was $61,124,000 and $54,530,000 in 1995 and 1994, respectively, an increase of 12 percent. Earnings per share increased 11 percent from $1.15 in 1994 to $1.28 in 1995. The increase in earnings is primarily attributable to an increase in membership, increased investment income from higher invested balances and realized gains, and a reduction in per member per month medical expenses (principally due to a reduction in the return of physician withhold), partially offset by a reduction in premiums per enrollee and an increase in administrative expenses principally due to additions to the Company's internal sales force, expansion into new geographic territories and the operations of the home health care subsidiaries that were purchased in late 1994.
Medical expenses as a percentage of premium revenue ("medical loss ratio") increased to 81.9 percent in 1995 as compared to 80.8 percent in 1994, principally due to a decrease in average premiums per enrollee and also higher than anticipated medical expenses in the Company's Medicare risk product. On a per member per month basis, medical expenses declined approximately .6 percent over the same period due to a reduction in the return of physician withhold, the effect of which was mostly offset by higher member utilization, particularly in the Medicare product.
The Company's cash and short-term investments decreased from $215.6 million at December 31, 1995 to $155.4 million at December 31, 1996, primarily due to purchases of MAMSI common stock under the Company's stock repurchase program, the Company's 1996 net loss and the acceleration of claims payments. Accounts receivable increased from $61.3 million at December 31, 1995 to $77.0 million at December 31, 1996. This $15.7 million increase is primarily due to the increase in membership during 1996 combined with a lower than normal balance in receivables at December 31, 1995 due to a higher relative volume of payments made by employer groups during the last month of the year.
Prepaid expenses, advances and other current assets increased from $9.0 million at December 31, 1995 to $32.3 million at December 31, 1996, principally due to estimated tax refunds for net operating loss carrybacks available for certain MAMSI subsidiaries and other reductions in estimated tax liabilities related to the net loss for the year plus certain other tax deductions not related to book income. Statutory deposits decreased from $10.5 million at December 31, 1995 to $9.1 million at December 31, 1996 due to the release by state regulatory authorities of certain deposits related to an affiliated HMO that was merged into M.D. IPA in 1993.
Short-term investments are marked to market at the end of every quarter and the resulting unrealized gain or loss is reflected in the ending stockholders' equity balance. Accordingly, stockholders' equity at December 31, 1996 reflects an unrealized gain of $.3 million, net of tax, on the Company's short-term investments primarily due to the impact of falling interest rates on the market value of the Company's debt securities.
Medical claims payable increased from $108.5 million at December 31, 1995 to $118.6 million at December 31, 1996 primarily due to increased membership, increased member utilization and related claims accruals.
The Company currently has access to total revolving credit facilities of $24.0 million, which is used to provide short-term capital resources for routine cash flow fluctuations. At December 31, 1996, approximately
Cash and cash equivalents $ 4,065 $ 10,874 Short-term investments 151,359 204,734 Working capital advances to Maryland hospitals 6,432 4,053 -------- --------- Total available liquid assets 161,856 219,661 Credit line availability 21,802 7,880 -------- --------- Total short-term capital resources $ 183,658 $ 227,541 ========= =========
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994........... 26
Selected Quarterly Financial Data for Fiscal Years 1996 and 1995 (Unaudited)............................................... 43
For the years ended December 31, 1996 and 1995, marketable equity available-for-sale securities with a fair value at the date of sale of $53,037,000 and $30,676,000, respectively, were sold. The gross realized gains on such sales totaled $8,971,000 and $5,943,000, and the gross realized losses totaled $3,072,000 and $1,149,000 for each of the respective periods. Realized gains and losses are included in investment income. Other sales of short-term investments consisted principally of redemptions from municipal bond funds.
The amortized cost and estimated fair value of debt and marketable equity securities at December 31, 1996, 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.
Medical recoverables consist of refunds identified on paid claims that will be collected in the following year. This amount has been recorded as a reduction of medical expense in the consolidated statements of operations. Other receivables consist primarily of amounts due for reinsurance recoveries and pharmacy rebates.
On September 1, 1995, the Company paid off in full, from available cash, its mortgage note payable amounting to approximately $5.0 million.
The noncurrent portion of notes at December 31, 1996 mature in future years as follows (in thousands):
M.D. IPA, OCI, OCCI, OCIPA and MAMSI Life maintain reinsurance coverage to provide for reimbursement of claims in excess of certain limits. Reinsurance for health claims generally covers 80% of all hospital costs in excess of a deductible amount per enrollee per year (subject to a $2,000,000 maximum lifetime reinsurance limit per person) but excludes coverage of costs in excess of certain per diem rates. The deductible per enrollee was raised from $100,000 to $200,000 effective October 1, 1994. Reinsurance for life and accidental death claims generally covers all settlements in excess of $50,000 per person subject to a $1,000,000 maximum recovery per person. Reinsurance recoveries for the years ended December 31, 1996, 1995 and 1994 were approximately $2,288,000, $128,000 and $3,029,000, respectively. In the consolidated statements of operations, reinsurance premiums are shown net of the related recoveries.
Total tax deposits made by the Company in 1996, 1995 and 1994 were approximately $10,320,000, $27,266,000 and $25,191,000, respectively.
Prior to July 1, 1996, contracts with participating physicians allowed for withholdings generally ranging from 5% to 15% from primary care physicians and participating specialists on capitation and fee-for- service payments. The withheld amounts ultimately paid back to providers is generally less than the total amount withheld. Withheld liabilities and related medical expenses were reduced by $14,535,000, $22,802,000 and $8,719,000 in 1996, 1995 and 1994, respectively, to reflect amounts not returned to providers. Commencing July 1, 1996, the Company, pursuant to state law changes, discontinued withholding from payments in substantially all areas of operations.
For the years ended December 31, 1996, 1995 and 1994, certain members of the Boards of Directors of MAMSI and subsidiary corporations who are also participating physicians provided medical services to enrollees totaling $8,406,000, $9,699,000 and $6,450,000, respectively, which represents approximately 2% in all years of payments to all physicians. Board members are remunerated at the same contractual level as all other participating physicians and are selected by enrollees to render medical services under the same guidelines as all other participating physicians.
1994, the Company's contribution to the 401(k) plan aggregated $540,000, $433,000 and $231,000, respectively.
Effective December 31, 1994, the Company discontinued its non- contributory defined benefit pension plan (the "Plan"). Benefits earned under the Plan, which covered substantially all employees, were fully vested at that date. The obligation to provide these benefits was satisfied as of December 31, 1995 through a combination of purchases of annuity contracts, transfers of vested funds into the 401(k) plan and cash withdrawals. The Company recognized a gain on the curtailment of the defined benefit pension plan of approximately $345,000.
The net pension cost for the Plan was approximately $1,095,000 in 1994.
In accordance with a personal service contract negotiated by the Company, its Chairman is entitled to supplemental pension benefits based upon years of service and attained salary levels. Expense recognized related to this plan was $818,000, $1,682,000 and $844,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"). Statement 123 prescribes accounting and reporting standards for all stock based compensation plans. Statement 123 requires that the company either adopt the fair value method of accounting for its stock option plans or continue to apply the existing accounting rules but provide supplemental pro forma disclosures as if the new rules had been adopted. The Company has elected to follow the existing rules and make the required pro forma disclosures in its 1996 consolidated financial statements. Although Statement 123 first became effective in 1996, it requires that the pro forma disclosures include the effects of all awards granted in fiscal years beginning after December 15, 1994, the majority of which were issued under the Company's 1995 and 1996 stock option plans.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information follows (in thousands except share amounts): 1996 1995 Pro forma net income (loss) $ (8,409) $58,670 Pro forma earnings (loss) per share ( .18) 1.23
The effects of applying Statement 123 as computed above are not likely to be representative of the pro forma effects on reported net income in future years as the above only considers options granted in 1995 and 1996.
In each year 1990 through 1996, 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. Shares authorized under the plans total 15,500,000. 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
1. Certain quarterly revenue and expense amounts are different from the amounts originally reported due to reclassifications necessary to conform to the current presentation.
2. Earnings (loss) per common share are computed after giving effect to dilutive stock options. All per share amounts and weighted average common and common equivalent shares have been adjusted to reflect all stock dividends on a retroactive basis. See Note 12 to the consolidated financial statements.