The Company's revenues consist primarily of insurance premiums related to the Health Plan Unit, management service fees for health plan management in the 4YourCare Business Unit, QualityFIRST revenues for software licenses and subscription fees in the QualityFIRST Business Unit, and investment income.
The Company's operating expenses are comprised of medical costs related to the Health Plan operations (consisting of the costs of medical services incurred by the Health Plan members net of medical costs ceded to the reinsurer), cost of services (consisting of salaries, wages and benefits, telephone expenses, depreciation and amortization, rent, computer operations, customer service, and the development of new services), and selling, marketing and administration expenses, (consisting of salaries, wages and benefits of sales staff and sales account management personnel, bad debts, professional services, insurance, litigation costs and depreciation). The net medical costs, net cost of services and net selling, marketing and administration expenses reflect the impact of the reinsurance agreements discussed above.
been replaced by a management team experienced in restructuring health care companies. To date, payroll and other operating expense reductions which are expect to yield approximately $10.1 million on an annualized basis have been identified and implemented.
The Company's Health Plan is required to submit statutory financial statements with the Pennsylvania Department of Insurance and to maintain a statutory surplus level sufficient to meet or exceed risk-based capital calculations. The Health Plan filed its 2000 Annual Statement with the Department of Insurance, indicating the net worth was below a threshold control level as of December 31, 2000. As a result, the Department of Insurance required a Risk-Based Capital (RBC) Plan be submitted to the Department of Insurance within 90 days. On April 19, 2001, that plan was submitted. On April 30, 2001, the Health Plan received notice that the Department required a re-submission of the RBC Plan by May 7, 2001. The Health Plan has prepared and submitted the revised RBC Plan to address the Department's issues; however, there can be no assurance that the Health Plan will be successful in obtaining approval of the revised RBC Plan. Failure to achieve approval may jeopardize the contract for covered members with the Pennsylvania Department of Public Welfare.
The Health Plan has a receivable of $6,910,000 from a reinsurance policy for aggregate coverage of excessive medical costs that is currently in the course of collection. The Health Plan fully expects to collect the receivable during 2001 once issues related to reinsurance claim are fully resolved. To the extent that the reinsurer does not meet its obligations assumed under the reinsurance contract, the Health Plan remains primarily liable.
Premiums - gross are from insurance premiums related to the HMO operations of the Health Plan business unit. The Company did not have this business in the first three quarters of fiscal 1998. The premiums-gross increased 20% or $30.7 million, for the year ended December 31, 2000 compared to the same period in 1999 (increasing from $156.1 million to $186.9 million). This increase was the result of approximately $28 million from the acquisition of HealthMate February 1, 2000 and approximately $15 million from rate increases under terms of its agreement with the Department of Public Welfare of the Commonwealth of Pennsylvania (DPW) offset by approximately $7 million of lower premiums due to the decrease in Oaktree membership and $3 million for the discontinuation of a commercial product in 2000. Premium-gross increased 427% or $117.2 million, from fiscal 1998 to fiscal 1999 (increasing from $27.5 million to $144.6 million). The increase was the result of there being only two and one-half months of premium in fiscal 1998 compared to twelve months of premiums in fiscal 1999 along with membership category changes and rate adjustments effective January 1999.
In order to manage its insurance risk and generate statutory surplus , the HMO entered into quota share reinsurance agreements to cede off 33% of the Health Plan premiums, medical costs, costs of services and selling, marketing and administration expenses in the last six months of 2000 and 50% in 1999. Under terms of the quota share agreements, the Health Plan received an advance ceding allowance of $4,000,000 under the 33% agreement and $5,000,000 under the 50% agreement. The ceding allowance is realized in relation to profits ceded to the reinsurer. The ceding allowance earned under terms of the reinsurance agreements decreased from $3.1 million in 1999 to $.8 million in 2000 due to the quota share reinsurance agreement changing from a 50% quota share policy for the full year of 1999 to a 33% quota share policy covering only the last six months of 2000.
The 4YourCare revenues decreased 20% or $9.4 million, for the year ended December 31, 2000 compared to the same period in 1999 (decreasing from $47.0 million to $37.6 million) which was the result of the loss of several significant self-insured clients who were acquired, who downsized operations or went bankrupt. The unit also lost approximately $7 million of care management revenues from an insurance company client who moved the service in-house. Revenues decreased 23% or $14.7 million, from fiscal 1998 to fiscal 1999 (decreasing from $63.4 million to $48.7 million) mainly the result of the decrease in the number of covered participants enrolled in the Company's management services related to an HMO that terminated services on September 30, 1998 and other clients who terminated services. The Company has been able to stabilize its 4YourCare revenues with the addition of a significant number of covered lives through its contract with HCA, a client of many years, in January 2001. HCA represented 18% and 15% of 4YourCare revenues in the years ended December 31, 2000 and 1999, respectively.
Revenues from QualityFIRST(R) increased 9% or $.4 million for the year ended December 31, 2000 compared to the same period in 1999 (increasing from $4.0 million to $4.5 million), increased 11% or $.4 million, from fiscal 1998 to fiscal 1999 (increasing from $3.6 million to $4.1 million). The increases were the result of an increased number of new clients, expansion of systems with existing clients utilizing the guidelines and the expansion of the number of products available for sale.
Medical Costs, Net: Medical costs, net of amounts ceded, for the Health Plan increased 109% or $72.6 million for the year ended December 31, 2000 compared to the same period in 1999 (increasing from $67.8 million to $139.4 million) due to the change in the per cent and period covered by the quota share reinsurance agreements, the acquisition of HealthMATE February 1, 2000, an estimated 12% increase in pharmacy costs and other increases in medical costs. Medical costs, net of amounts ceded, increased 283% or $66.9 million from fiscal 1998 to fiscal 1999 (from $23.6 million to $90.6 million) due to only two and one-half months of medical costs in fiscal 1998 compared to twelve months of medical costs in fiscal 1999. As a percentage of net Health Plan premiums, net medical costs was 89.8% for the year ended December 31, 2000 compared to 83.2% for the same period in 1999 and 86.0% in fiscal 1998 compared to 84.8% in fiscal 1999. The increase experienced in 2000 relate to increased pharmacy costs, approximately $2.0 million related to the increase in the medical services payable for prior years that was included in current operations and a $2.0 million adjustment of the Health Plan reinsurance recoveries recorded in 2000.
Cost of Services, Net: Cost of services, net of amounts ceded, increased 22% or $12.0 million for the year ending December 31, 2000 compared to the same period in 1999 (increasing from $55.0 million to $67.0 million) and increased 1% or $.3 million from fiscal 1998 to fiscal 1999 (from $55.1 million to $55.4 million). The 2000 increase is primarily due to the change in the per cent and period covered by the quota share reinsurance agreements and the $5.8 million of additional amortization expense related to the write-off of the AutoPILOT Care Management software as the result of the implementation of a new Care Management system in March of 2001. As a percentage of net revenues, the cost of service, net of amounts ceded, was 34% and 40% for the years ended December 31, 2000 and 1999.
Selling, Marketing and Administration, Net: Selling, marketing and administration, net of amounts ceded, increased 69% or $8.5 million for the year ended December 31, 2000 compared to the same period in 1999 (increasing from $12.3 million to $20.8 million) and increased 5% or $.7 million, from fiscal 1998 to fiscal 1999 (from $13.4 million to $14.1 million). The 2000 increase is primarily due to the change in the per cent and period covered by the quota share reinsurance agreements, $2.3 million expense for the settlement of a dispute over amounts the Health Plan allegedly owed to a previous provider, $.6 million write-down of fixed assets related to the closure of Nashville claims operation and $.5 million of expense incurred in efforts to raise external financing. This expense as a percentage of net revenues was 10% for the year ended December 31, 2000 and 9% for the same period in 1999.
Gain on Surplus Note: In August 2000, the HMO and the Company reached agreement with Oxford Health Plans, Inc. (OHPI) on all post acquisition accounting transactions. Under terms of the agreement, the Company acquired the existing $2.5 million surplus note owed by the Plan to OHPI for $.9 million in the form of a promissory note . The net settlement gain on the surplus note was $1.6 million.
Interest Expense: Interest expense decreased 19% or $.2 million for the year ended December 31, 2000 compared to the same period in 1999 (decreasing from $1.2 million to $1.0 million) and decreased as a percentage of net revenue from 0.5% to 0.9%. This decrease was the result of the reversal of $.2 million of interest under the acquired Surplus Note described above. Interest expense increased 99% or $.5 million from fiscal 1998 to fiscal 1999 (from $.5 million
Income Taxes: Income tax expense decreased 191% or $.8 million for the year ended December 31, 2000 compared to the same period in 1999 (from an income tax expense of $.4 million to a benefit of $.4 million). Income tax expense decreased in fiscal 1999 from fiscal 1998 by $.6 million, or 68% (from $.9 million to $.3 million) primarily due to fluctuations in levels of income or loss before income taxes. Net income or loss was reported as fully taxed at the federal tax rate of 34% through December 31, 1999. In 2000, the effective tax benefit is less than the statutory rate because the Company was not able to recognize deferred tax assets in excess of deferred tax liabilities in that the utilization of such assets is not reasonably assured. See Note 12 in the Notes to Consolidated Financial Statements.
Cumulative effect of accounting change: See Note 4 in the Notes to Consolidated Financial Statements regarding the accounting change.
The Company's cash flow used in operations was $.6 million for the year ended December 31, 2000 compared to cash flow from operations of $6.9 million and $23.7 million for fiscal 1999 and 1998, respectively. Cash flow from operations has exceeded net income (loss) primarily due to non-cash charges such as depreciation and amortization, deferred income taxes, cumulative effect of the accounting change and changes in operating assets and liabilities and the medical services payable.
Cash of $7.7 million, net of cash acquired, was used in the third quarter of fiscal 1999 to purchase Oxford Health Plans (PA), Inc., now named HRM Health Plans (PA), Inc.
The Company used approximately $4.4 million for the year ended December 31, 2000, and $2.3 million and $2.2 million in fiscal 1999 and fiscal 1998, respectively, to repay principal on notes payable and capital leases. The Company borrowed $1.0 million in the six months ended December 31, 1999 and $6.0 million and $4.8 million in fiscal 1999 and fiscal 1998, respectively. The Company's term loan has a principal balance of $6.4 million as of December 31, 2000. The term loan is secured by liens on the assets of the Company.
The Company has a net operating loss carry forward of approximately $37.0 million for income tax purposes at December 31, 2000, which can be used to reduce taxable income and cash flow necessary to pay taxes. The Company changed its tax accounting treatment to one of capitalizing computer software costs versus expensing them when incurred. This change was made to protect the net operating loss for tax purposes going forward.
The loss for the quarter ended December 31, 2000 resulted in the Company not meeting certain bank covenants under the bank loan agreement. Subsequent to December 31, 2000, the Company and the bank have amended the loan agreement to waive the defaults that existed at December 31, 2000 and to amend the covenants going forward.
As discussed above under the caption BUSINESS - RECENT DEVELOPMENTS, the RBC plan depends upon the Company's obtaining a minimum of $6.1 million in cash. The Company has entered into letters of intent and is presently negotiating the appropriate agreements for the financing. If the financing is not obtained either through the presently contemplated arrangements or otherwise, it is probable that the Pennsylvania Department of Insurance will assume control the health plan.