(a) Amounts represent cash and investments available for general corporate use without regulatory approval.
The following table sets forth revenue (in thousands) by product group for the years ended December 31, 1999, 1998, and 1997:
Premium revenue increased $37.7 million to $732.2 million in 1999 from $694.5 million in 1998. As described below, components of premium revenue were affected by shifts in product mix, rate increases
and other factors; and as a result, such increase in premium revenue may not be indicative of future periods. RightCHOICE and its subsidiaries 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 or other factors, RightCHOICE cannot provide any assurances that it will be able to price the products of its subsidiaries consistent with health care cost trends.
Recently, competitors of RightCHOICE have announced their intention to exit the Missouri market, which is RightCHOICE's primary sales area. A reduction in the number of competitors for the Missouri market share may have a positive impact on RightCHOICE's ability to attract and maintain membership; however, RightCHOICE cannot provide any assurances that it will attract or retain membership as a result of the changing competitive landscape.
PPO premium revenue increased $34.0 million in 1999 -- $40.5 million increase due to an 11.5% increase in net premium rates, partially offset by a $6.5 million decrease resulting from a slight decrease in member months. The term member months refers to the cumulative number of members added together over a specific time period. Thus, for a year, member months are determined by adding together the membership counts for all twelve months. Net premium rates increased due in part to overall premium renewal rate increases ranging from 7% to 19% during 1999 enrollment periods. Net premium rate increases are at the lower end of the overall premium increase range due in part to changes in deductibles, the timing of group renewals throughout the year and product mix changes. Alliance PPO membership increased by 8,544 members from December 31, 1998, to December 31, 1999, and AllianceCHOICE POS membership increased by 2,285 over the same time period. RightCHOICE began offering PPO products in Illinois at the end of first quarter 1997. Included in the Alliance PPO member count are 14,248 PPO Illinois members as of December 31, 1999, an increase of 7,212 from December 31, 1998.
HMO premium revenue increased $5.6 million in 1999, or 2.7% -- $22.4 million due to a 10.0% increase in net premium rates, partially offset by a $16.8 million decrease resulting from a 6.6% decrease in member months. Net premium rates increased in part due to overall premium renewal rate increases of 7% to 19% during 1999 enrollment periods. Net premium rate increases are lower than the overall premium increase range because of:
. HMO competition in BlueCHOICE's HMO service areas, . shifts in chosen benefit levels, . changes in the geographic mix of the HMO business, . product mix shifts, and . the status of a large group, the Missouri Consolidated Health Care Plan, comprised of approximately 39,500 members as of December 31, 1999, with which BlueCHOICE has historically had a limited ability to increase premium rates.
Membership in the Missouri Consolidated Health Care Plan increased by 6,277 members from December 31, 1998 to December 31, 1999. Effective January 1, 2000, the Missouri Consolidated Health Care Plan pricing increased by approximately 21% pursuant to a contract amendment. See "Liquidity and Capital Resources" below. Excluding the Missouri Consolidated Health Care Plan, membership in RightCHOICE's HMO products decreased over the same time period by 7,997 members, primarily due to RightCHOICE's pricing strategy.
Managed indemnity premium revenue decreased by $4.0 million primarily as a result of a 58.5% decline in member months. Member month declines are consistent with RightCHOICE's strategy to move toward more highly managed care products. With the exception of a short-term medical product, RightCHOICE no longer sells managed indemnity products, but continues to renew coverage for those members who wish to remain in these managed indemnity programs.
Revenue from other specialty services, which includes certain of RightCHOICE's drug and dental health care benefit plans, increased $4.7 million -- $7.3 million increase as a result of a 17.6% increase in net premium rates partially offset by a $2.6 million decrease resulting from a 5.7% decrease in member months. Specialty product membership related to RightCHOICE's drug products increased slightly in 1999 as a result of growth in RightCHOICE's Alliance group membership, growth in the RightCHOICE Insurance Company group membership, and an increase in the AllianceCHOICE group membership. The increase in membership for drug products was offset by larger decreases in RightCHOICE's dental product member months, which decreased by 22.4% due to competition from dental products that are priced below RightCHOICE's dental product. RightCHOICE intends to design a more competitive dental product in 2000. The large net premium rate increases primarily relate to RightCHOICE's drug products and correspond to the high levels of prescription utilization and trends that RightCHOICE, as well as the industry as a whole, have experienced in recent years.
Fees and other income from administrative services only, network services and life insurance commission revenues increased in 1999 by $11.7 million. These increases are primarily due to increased 1999 revenues of $14.2 million from HealthLink, RightCHOICE's network rental and managed care service subsidiary. HealthLink's revenues increased as a result of an 11.5% increase in membership during 1999 which was partially due to expansion into new territories. Additionally, HealthLink's membership increases during this period included a transfer of approximately 10,000 members to HealthLink from RightCHOICE's other self-funded plans.
. introduction of new drug therapies, . physicians' use of newer, more expensive drugs, and . physicians' decreased use of generic drugs in favor of specific drugs promoted by pharmaceutical companies.
RightCHOICE is continuing its strategy for managing drug costs by utilizing a three-tier drug benefit design that allows members to make choices among generic, preferred drugs (drugs which are part of RightCHOICE's preferred drug list), or other brand name drugs, albeit at different copayment levels.
Commission expense increased by $1.1 million, or 3.4%, in 1999. The commission expense ratio of 4.0% for 1999 compares to 4.1% in 1998.
RightCHOICE's results from operations improved from an operating loss of $4.2 million in 1998 to an operating income of $19.7 million in 1999. Pricing strategies, medical cost management, and controlled general administrative expense contributed to the increase in operating income in 1999.
The operating income for RightCHOICE's self-funded segment increased to $24.1 million in 1999 from $18.8 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 RightCHOICE's HealthLink acquisition.
Net investment income includes investment income in the form of interest and dividend income and net realized gains or losses from the sale of portfolio securities. Net investment income of $12.9 million represents a $5.8 million decrease from 1998 primarily as a result of a $4.4 million decrease in net realized gains.
RightCHOICE's effective income tax provision rate was 39.4% and 40.4% for 1999 and 1998, respectively. RightCHOICE's effective tax provision rates for 1999 and 1998 were affected by non-deductible goodwill amortization, among other things. Due to a change in the filing status for the State of Missouri during 1998, RightCHOICE's 1999 and 1998 state income tax provisions were favorably impacted. 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. As of December 31, 1998, RightCHOICE maintained a valuation allowance of $0.1 million relating to items in which uncertainty existed with respect to the future realization of the undistributed losses of minority-owned subsidiary companies. During 1999, RightCHOICE determined that this uncertainty no longer existed. Based upon all the available evidence, management believes it is more likely than not that RightCHOICE will realize its deferred tax assets as of December 31, 1999, and, accordingly, no valuation allowance has been provided against such assets as of December 31, 1999.
Premium revenue increased $40.2 million to $694.5 million in 1998 from $654.3 million in 1997. As described below, components of premium revenue were affected by shifts in product mix, rate increases and other factors; and as a result, such increase in premium revenue may not be indicative of future periods.
PPO premium revenue increased $20.7 million in 1998 -- $36.3 million increase due to an 11.0% increase in net premium rates, partially offset by a $15.6 million decrease resulting from a 4.1% decrease in member months. Net rates increased due in part to overall premium renewal rate increases averaging 7% to 19% during 1998 enrollment periods. Net premium rate increases are at the lower end of the overall premium increase range due in part to changes in deductibles, the timing of group renewals throughout the year and product mix changes. Alliance PPO membership decreased by 8,114 members from December 31, 1997, to December 31, 1998, and AllianceCHOICE POS membership decreased by 4,017 over the same time period. Net membership decreases are due primarily to RightCHOICE's aforementioned pricing strategy during 1998. Included in the Alliance PPO member count are 7,000 PPO Illinois members as of December 31, 1998, an increase of 4,800 from December 31, 1997.
Membership increases were driven primarily by an enrollment increase of 6,000 members in the Missouri Consolidated Health Care Plan products from December 31, 1997, to December 31, 1998. HMO membership in non-Missouri Consolidated Health Care Plan products (and excluding RightCHOICE's Medicaid product) decreased over the same period by 11,600 members or 10.2%, due primarily to RightCHOICE's aforementioned pricing strategy during 1998.
Premium revenue from Medicare supplement decreased by $2.2 million in 1998. Member months decreased by 8.1% partially offset by a 6.4% increase in net premium rates. Membership declines are partially attributable to subscribers opting for Medicare-risk programs, similar to RightCHOICE's Blue Horizons Medicare HMO product, in which medical benefits are at least as comprehensive as Medicare benefits for persons eligible to receive Medicare (parts A and B) at no additional cost to the member.
Revenue from other specialty services, which includes certain of RightCHOICE's drug and dental health care benefit plans, increased $3.9 million -- $6.3 million increase as a result of a 16.2% increase in net premium rates partially offset by a $2.4 million decrease resulting from a 5.4% decrease in member months. The large rate increases relate to RightCHOICE's drug products and correspond to the high levels of prescription utilization and trends that RightCHOICE, as well as the industry as a whole, have experienced in recent years.
Fees and other income from administrative services only, network services and life insurance commission revenues increased in 1998 by $7.9 million. These increases are primarily due to increased 1998 revenues of $14.4 million from HealthLink, RightCHOICE's network rental and managed care service subsidiary. HealthLink's revenues increased due to a 21.1% increase in membership during 1998. Sales during this period included a 30,000-member group that enrolled in HealthLink's self-funded ASO plan, transferring from RightCHOICE's other self-funded business. HealthLink's increases to fees and other income were partially offset by decreases to revenue caused by the loss of approximately 72,000 members in RightCHOICE's other self-funded business due to the nonrenewal of three large groups.
driven by increased cost and utilization of both outpatient services and drug therapies. RightCHOICE's medical expense on a per member per month basis increased by approximately 7.8% in 1998 as compared to 1997.
Commission expense increased by $2.1 million, or 7.1%, in 1998. The commission expense ratio of 4.1% for 1998 remained unchanged from 1997.
In the third quarter of 1997, BlueCHOICE recorded a $29.5 million contract loss reserve for estimated losses relating to its contract with the Missouri Consolidated Health Care Plan. The reserve is based on actuarial estimates, including projected limited rate increases, and projected enrollment and medical cost trends accounted for through the year 2000. RightCHOICE cannot provide any assurances that the amount of this loss reserve will be sufficient to cover all future losses that may be associated with the Missouri Consolidated Health Care Plan contract.
RightCHOICE's operating loss decreased from $61.0 million in 1997 to $4.2 million in 1998. Excluding the non-recurring relocation and restructuring charges and the charge for the Missouri Consolidated Health Care Plan contract loss reserve, the operating loss decreased from $28.2 million in 1997 to $3.3 million in 1998.
Net investment income of $18.7 million in 1998 represents a decrease of $14.5 million from 1997, inclusive of a $13.3 million decrease in net realized gains. Realized gains in 1997 included a $5.7 million gain on the sale of company-owned life insurance policies as well as additional 1997 net realized gains from the liquidation of equity securities due to RightCHOICE's intent to increase its holdings of fixed income securities and decision to repay $15.0 million of its debt in the first quarter of 1997.
RightCHOICE's net income for 1998 was $5.7 million, or $0.30 per share, compared to a net loss of $24.0 million, or $1.29 per share for 1997. Excluding the non-recurring restructuring and relocation charges and the charge for the Missouri Consolidated Health Care Plan loss reserve, RightCHOICE's net income increased to $6.2 million, or $0.33 per share, in 1998, as compared to a net loss of $2.7 million, or $0.14 per share, in 1997, as a result of the factors noted above.
RightCHOICE's working capital as of December 31, 1999 was $73.0 million, an increase of $8.5 million from December 31, 1998. The increase is partially attributable to the net income of $17.2 million in 1999. Depreciation and amortization expenses related to noncurrent assets was $17.2 million. RightCHOICE capitalized $6.6 million of costs for property and equipment purchases, $4.3 million of which relates to capitalized information and operations strategy development costs. RightCHOICE's unrealized net appreciation of investments available for sale decreased by $5.6 million in 1999. In addition, RightCHOICE repaid $9.0 million of the debt from RightCHOICE's reducing revolving credit facility as well as $4.6 million of debt related to capital leases.
On August 29, 1997, RightCHOICE reported the commencement of the litigation with the Missouri Consolidated Health Care Plan and estimated losses (giving effect to all possible renewal terms of the Missouri Consolidated Health Care Plan contract without requested rate increases) in the range of $30 million to $40 million. In the third quarter of 1997, RightCHOICE took a pre-tax charge of $29.5 million, which was based on actuarial estimates, including projected limited rate increases, and projected enrollment and medical cost trends accounted for through the year 2000 in accordance with generally accepted accounting principles. RightCHOICE was advised by the Missouri Department of Insurance in March 1998 that the entire amount of the reserve for the Missouri Consolidated Health Care Plan contract recorded by RightCHOICE for projected losses under the contract through the year 2000 must, for statutory accounting purposes, be recorded by RightCHOICE's subsidiary BlueCHOICE on its statutory filings with the Missouri Department of Insurance. With the prior regulatory approval of the Missouri Department of Insurance, BlueCHOICE issued surplus notes to RightCHOICE in the amount of $29 million to ensure the statutory solvency of BlueCHOICE. On August 6, 1999, the Missouri Consolidated Health Care Plan executed an amendment to the contract providing a rate increase that is anticipated to be approximately 21% for public entities, modified rate factors for state employees, and modification of the pharmacy benefit, effective January 1, 2000, for the 2000 contract year. While management of RightCHOICE believes the current provision for losses is adequate, particularly in light of the rate increases provided on August 6, 1999, if the actual public entity membership in the Missouri Consolidated Health Care Plan grows at a rate in excess of the rate used in the actuarial estimates, or if the projected limited rate increases and medical cost trends should differ materially from those assumed in the actuarial estimates, then the amount of the reserve recorded to date could be insufficient to cover all future losses which may be associated with the Missouri Consolidated Health Care Plan contract, and such losses could have a material adverse effect on RightCHOICE.
During the third quarter of 1999, RightCHOICE completed negotiations to favorably amend the terms of its revolving credit facility, the material terms of which are as follows:
. the borrowings under the credit agreement are to be denominated at reduced interest rates at either 2.5% above the one month floating London Interbank Offered Rate, or at 1.5% above the higher of the latest federal funds rate plus 0.5% or the bank's reference rate, which approximates the prime rate,
. the maximum commitment of the credit agreement of $36 million as of October 1, 1999, will be reduced by $2.0 million quarterly through January 1, 2002, the new termination date, and
In addition, if RightCHOICE meets specified criteria, it may denominate the borrowings at further reduced interest rates at LIBOR plus 2.25%, or as a base rate loan at 1.25% above the higher of the latest federal funds rate plus 0.5% or the bank's reference rate, which approximates the prime rate.
Under applicable state regulations, some of RightCHOICE's subsidiaries are required to retain cash generated from their operations. After giving effect to these restrictions, RightCHOICE had approximately $9.1 million in cash and investments available for general corporate purposes without regulatory approval.
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. In an effort to lessen the impact of health care cost inflation on its premiums, RightCHOICE has implemented programs to strengthen its underwriting standards. These programs include the three-tier copayment levels for drug coverages and various deductible and copayment options for medical coverages, as well as various provider networks and programs such as the Physician Group Partners Program(R). However, RightCHOICE cannot provide any assurances that its efforts to reduce the impact of inflation will be effective or that premium increases will equal or exceed increasing health care costs.
It is uncertain whether RightCHOICE can recoup, through higher premiums or other measures, the increased costs caused by the Bipartisan Consensus Managed Care Improvement Act or any new legislation or regulation, or any court or regulatory decision that expands or reduces the interpretation or application of existing statutes and regulations. While certain of these measures would adversely affect RightCHOICE and its subsidiaries, at this time RightCHOICE cannot predict the extent of this impact or which of (or in what form) the pending laws or rules will be enacted or adopted.