The Company has implemented the corrective action plan developed for OmniCare Health Plan ("OmniCare-MI"), a plan operated by the Company in Michigan. The corrective action plan included the reduction of medical costs through renegotiation of hospital and provider contracts, a reduction in the management fee percentage paid to the Company from 17% to 14% effective June 1, 1998 and a commitment to ensure OmniCare-MI meets its minimum statutory requirements for net worth and working capital. In June 1998, the Company funded a $4.6 million unsecured loan to OmniCare-MI, evidenced by a surplus note, to enable OmniCare-MI to meet its minimum requirements for net worth and working capital. Pursuant to the surplus note, interest and principal repayments are subject to approval by the Michigan Insurance Bureau and are payable only out of the statutory surplus earnings of OmniCare-MI. The interest is payable annually, at prime, and if not paid is forfeited. Interest of $0.4 million was forfeited for fiscal 1999. The principal has no stated maturity or repayment date. In addition, in fiscal 1999 the Company provided additional funding by forgiving $1.3 million in management fees owed by OmniCare-MI, to enable OmniCare-MI to meet its statutory requirements for net worth and working capital.
In January 1999, the Company announced that OmniCare-MI had joined with Blue Cross Blue Shield of Michigan (the "CasinoCare Venture") in proposals to provide health care, dental and prescription drug benefits to employees of the three planned casinos that are to bring casino gaming to Detroit. Two of the casinos have selected the CasinoCare Venture to provide health care coverage to their employees. Both casinos are building temporary facilities, currently expected to open within the next five months. The Company estimates that over the next several months approximately 3,000 employees (amounting to more than 7,000 members) will require health coverage and could generate medical premiums of up to $0.9 million monthly ($11.2 million annually). The casinos' temporary facilities are expected to be replaced by permanent riverfront facilities in Detroit by 2002; and based upon the casinos' estimates, up to 8,000 employees (amounting to more than 18,000 members) will require health coverage and could generate medical premiums of up to $2.3 million monthly ($28.0 million annually). The Company would receive a management fee based on the medical premiums generated from those members who select the Company's products.
Earnings from continuing operations before income taxes for the year ended June 30, 1999 were $1.1 million compared to losses of $27.4 million for fiscal 1998. The $28.5 million change from fiscal 1998 is due primarily to corporate expense reductions of $12.5 million, increased earnings before income taxes from the Company's Tennessee operations of $3.7 million and the end of losses related to the Company's Florida operations of $11.7 million.
The Company's cash position was significantly improved with receipts during the year ended June 30, 1999, of a federal income tax refund of approximately $5.5 million, $4.0 million related to adverse selection settlements (as explained below) and the net recovery of $0.5 million in refundable advances made to a third party administrator.
The State of Tennessee's TennCare Bureau provides settlement payments to managed care organizations for high cost chronic conditions of their members ("adverse selection") and new medical technologies. OmniCare-TN received $5.9 million in adverse selection payments in the year ended June 30, 1999, of which $1.8 million, $3.1 million and $1.0 million represented the service periods for July 1998 to March 1999, July 1997 to June 1998 and June 1997 and prior, respectively. Additionally, in fiscal 1999 OmniCare-TN recognized a one-time adverse settlement adjustment of $1.2 million. For the year ended June 30, 1999, OmniCare-TN medical premiums related to excess adverse selection payments, which had been based on the State of Tennessee's estimate, increased by $4.0 million (364%), from $1.1 million for fiscal 1998 to $5.1 million for fiscal 1999. The OmniCare-TN per member per month ("PMPM") premium rate -- based on an average membership of 45,000 for the year ended June 30, 1999 compared to 44,000 for the year ended June 30, 1998 -- was $122 for the year ended June 30, 1999, compared to $119 for the year ended June 30, 1998 (excluding excess adverse selection payments), an increase of 2% or $3.4 million. The 4% increase in member months accounted for $1.8 million of the OmniCare-TN increase.
Premium revenues from the County Care program which began in April 1999 totaled $2.3 million in fiscal 1999.
UltraMedix Healthcare Systems, Inc. ("UltraMedix"), a Florida HMO 51%-owned by the Company, which ceased operations and was placed in liquidation in March 1998, did not contribute any medical premium revenues in the year ended June 30, 1999. Medical premium revenues from UltraMedix were $15.1 million in the year ended June 30, 1998.
Medical service expenses were $59.9 million in the year ended June 30, 1999, a decrease of $10.4 million (15%) from medical service expenses of $70.3 million in the year ended June 30, 1998. Medical service expenses for OmniCare-TN increased $4.8 million (9%), from $53.0 million in the year ended June 30, 1998 to $57.8 million in the year ended June 30, 1999. The percentage of medical service expenses to medical premium revenues -- the medical loss ratio ("MLR") -- was 82% for the year ended June 30, 1999 and 83% for the year ended June 30, 1998 for OmniCare-TN. The fiscal 1999 OmniCare-TN MLR includes an approximate 3% reduction due to offsets to medical service expenses related to the net recovery of $0.5 million in refundable advances made to a third party dental administrator and an excess adverse selection payment of $1.0 million for the period June 1997 and prior.
Medical service expenses for County Care in fiscal 1999 were $2.1 million from inception of the contract in April 1999. The MLR for County Care is estimated at 92%, a rate management believes is adequate to establish reserves sufficient to cover anticipated program medical expenses.
Marketing, general and administrative expenses (MG&A) decreased $17.0 million (38%), from $44.3 million in the year ended June 30, 1998 to $27.3 million in the year ended June 30, 1999, due to the following corporate and Tennessee activities: (i) employee downsizing in fiscal 1998 and early fiscal 1999 which significantly contributed to the decrease in salary expense of $5.1 million; (ii) expensing of $1.0 million of deferred HMO licensure-related costs in Louisiana and Pennsylvania in fiscal 1998; (iii) a decrease in professional service fees of $2.0 million related primarily to the fiscal
1998 financial restructuring program; (iv) a decrease in promotion and advertising expense of $2.6 million; and (v) a decrease of approximately $6.0 million related to UltraMedix and United American of Florida, Inc., the Company's 80%-owned subsidiary, which ceased operations and were placed in liquidation in March 1998.
Depreciation and amortization decreased $6.3 million (65%), from $9.7 million for the year ended June 30, 1998 to $3.4 million for fiscal 1999. Of the decrease, $4.1 million is attributable to the write-off in fiscal 1998 of the remaining intangibles related to the Company's purchase of UltraMedix due to the liquidation of the Florida operation, $0.8 million related to the write-off or revaluation of obsolete and other property and equipment in fiscal 1998 and $1.4 million is attributable to fully depreciated assets.
The discontinued operation contributed no earnings or loss for the year ended June 30, 1999, compared to a net loss of $2.6 million for the year ended June 30, 1998.
Total revenues from continuing operations decreased $6.9 million (6%), from $112.5 million in fiscal 1997 to $105.6 million in fiscal 1998.
Medical premium revenues were $78.6 million in fiscal 1998, an increase of $8.2 million (12%) over medical premium revenues of $70.4 million in fiscal 1997. Medical premiums for OmniCare-TN increased $7.0 million (12%), from $56.5 million in fiscal 1997 to $63.5 million in fiscal 1998. Of the increase, $1.1 million relates to the TennCare Bureau's 1998 annual settlement to managed care organizations for high cost chronic conditions of their members ("adverse selection") and new medical technologies. The remaining OmniCare-TN increase of $5.9 million is due to rate and enrollment increases. The OmniCare-TN per member per month ("PMPM") premium rate -- based on an average membership of 44,000 for the year ended June 30, 1998 compared to 43,000 for the prior fiscal year -- was $119 in fiscal 1998, compared to $110 in fiscal 1997 (excluding excess adverse selection payments), an increase of 8% or $4.7 million. The rate increase included changes in the enrollment mix. A 2% increase in enrollment accounted for the remaining $1.2 million increase.
Management fees were $25.0 million in fiscal 1998, a decrease of $15.0 million (38%) from fees of $40.0 million in fiscal 1997. The operating revenues of OmniCare-MI decreased in fiscal 1998 due primarily to a net decrease in premium and enrollment rates of approximately 10% and 2%, respectively, which contributed to the decrease in management fees to the Company of approximately $4.2 million. The State Medicaid initiative in Michigan was the primary factor in the reduced premium rates. Additionally, the reduction in the management fee percentage in June 1998 resulted in a decrease of management fees of $0.4 million in fiscal 1998. The Company recognized a decrease in management fee revenues of $10.4 million from fiscal 1997 to fiscal 1998, related to the Personal Physician Care, Inc. ("PPC," an Ohio HMO) management agreement, which was terminated in May 1997.
Medical service expenses were $70.3 million in fiscal 1998, an increase of $12.5 million (22%) over medical service expenses of $57.8 million in fiscal 1997. Medical service expenses for OmniCare-TN increased by $7.6 million (17%), from $45.4 million in fiscal 1997 to $53.0 million in fiscal 1998. Medical service expenses for UltraMedix increased $4.9 million (40%), from $12.4 million in fiscal 1997 to $17.3 million in fiscal 1998. The percentage of medical service expenses to medical premium revenues, or the medical loss ratio ("MLR"), was 83% and 80% for OmniCare-TN in fiscal 1998 and 1997, respectively, and 115% and 88% for UltraMedix in fiscal 1998 and 1997, respectively.
The loss from discontinued operation, net of income taxes, was $2.6 million for fiscal 1998, compared to earnings of $1.9 million for fiscal 1997, a change of $4.5 million. This is due primarily to increased contract servicing costs and the reduction in the net carrying value of net assets to the net realizable value of $2.5 million.
The stock of CHF was sold on September 8, 1998, effective as of August 31, 1998, for $17.75 million, comprised of $2.0 million in cash and the buyer's secured and unsecured notes for $13.25 million and $2.5 million, respectively. The secured note was payable to the Company in four monthly installments of $0.5 million each through December 1998 with the balance due in January 1999, with options to extend the final payment to March 1999, plus interest at the prime rate on short-term unsecured commercial borrowings. The unsecured note was payable to the
Including payments on the secured note, $9.2 million of the sales price, plus $0.8 million of interest, in cash was received through June 30, 1999. The remaining principal balance on the secured and unsecured notes and accrued interest, net of the discount, in the sum of $8.5 million (including $0.1 million of interest earned after June 30, 1999) was paid to the Company on August 16, 1999.
In previous fiscal years, to satisfy applicable statutory requirements, the Company provided $1.0 million in letters of credit on behalf of, and a $1.0 million capital contribution to, OmniCare-LA, and made a $2.1 million capital contribution to PhilCare. The foregoing funds were provided by the Company from its line of credit arrangement. Due to the cessation of its Louisiana operations, the Company withdrew the $1.0 million capital contribution and is in the process of cancelling its letter of credit commitments. The Company's Board of Directors has determined to withdraw from all of its involvement in Pennsylvania and to pursue recouping its investment in PhilCare. Toward that end, however, with the support of all of PhilCare's stockholders, the Company has made a presentation to the Pennsylvania Department of Public Welfare proposing that the Company take over the operation of PhilCare on an interim basis to try to improve PhilCare's financial condition and business prospects; and the Department has not yet responded to the proposal.
Management expects that the OmniCare-MI corrective action plan, which has been implemented, will continue to stabilize that Plan. The Plan has successfully renegotiated certain major hospital provider contracts, including its most significant hospital contract, which was one of the major components of the corrective action plan, the effects of which will reduce medical costs.