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:
4. The potential for increased medical expenses due to: - Increased utilization by the Company's membership. - Increased practitioner and pharmaceutical costs. - Federal or state mandates that increase benefits or limit the Company's oversight ability.
5. The possibility that the Company is not able to negotiate new or renewal contracts with appropriate physicians, other health care practitioners, hospitals and facilities.
Due to continued concern about privacy, the accountability of health insurers and HMOs, and the cost and availability of health care coverage, legislation has been considered and is likely to be considered by the United States Congress and the legislatures of the states in which the Company operates or may seek to operate.
The Company's consolidated net income for the year ended December 31, 2000 increased to $39,406,000 from $26,322,000 for the year ended December 31, 1999. Diluted earnings per share increased from $.64 in year ended December 31, 1999 to $1.00 for the year ended December 31, 2000. The increase in earnings is attributable to an increase in premiums per member, a reduction in medical expenses as a percentage of health premium revenue ("medical care ratio"), offset somewhat by an increase in administrative expense. The Company has priced its health products competitively in order to increase its membership base and thereby enhance its strategic position in its market place. 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. 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. Commercial premium rate increases are expected to continue in 2001 in the range of 9.5% to 10.5%. Management believes that these rate increases may have the effect of slowing the Company's future membership growth. In addition, management reevaluated premium reimbursement rates with regard to its Medicare and Medicaid programs. Specifically, effective January 1, 1999, the Company withdrew from participation in the Medicare program. In October, 1999, the Company withdrew from participation in the North Carolina and West Virginia Medicaid programs. Effective May 1, 2000, the Company transferred its membership in the Virginia Medicaid Program to a non-affiliated carrier. Therefore, as of May 1, 2000, the Company ended its participation in any government entitlement health insurance programs.
The Company's home health operations contributed $26.3 million in revenue for the year ended December 31, 2000 as compared with $23.6 million for the year ended December 31, 1999 reflecting an increase in services provided to non-affiliated companies. Life and short-term disability products contributed $8.0 million in revenue for the year ended December 31, 2000 as compared with $8.2 million for the year ended December 31, 1999.
The medical care ratio decreased to 86.5 percent for the year ended December 31, 2000 as compared to 87.9 percent for the year ended December 31, 1999. On a per member per month basis, medical expenses increased 8.8 percent. The decrease in the medical care ratio is due to a combination of factors including continuing efforts by the Company to implement product specific cost containment controls, continued activity in specialized subrogation areas and claims review for dual health coverage, the Company's withdrawal from state Medicaid programs, and also increased premiums per member. The ongoing initiatives should help to control the Company's medical care ratio. The medical expense trend is expected to be between 8.5% and 9.5% for 2001. The statements in this paragraph and the preceding paragraphs regarding future utilization rates, cost containment initiatives, total medical costs and trend and future increases in health premiums per member are forward-looking statements. See "Forward-Looking Information" above for a description of risk factors that may affect medical expenses per member and the medical care ratio.
The medical care ratio decreased to 87.9 percent for the year ended December 31, 1999 as compared to 88.8 percent for the year ended December 31, 1998. On a per member per month basis, medical expenses increased 3.2 percent. The decrease in the medical care ratio is due to a combination of factors including continuing efforts by the Company to implement product specific cost containment controls, expanded activity in specialized subrogation areas and claims review for dual health coverage, the Company's withdrawal from the Medicare program and certain state Medicaid programs, and also increased premiums per member.
The administrative expense ratio increased from 11.4 percent (adjusted to exclude the effect of real estate gains in revenue) for the year ended December 31, 1998 to 11.6 percent for the year ended December 31, 1999. Management believes that the administrative expense ratio will increase modestly in 2000 as additional personnel with specialized medical and other expertise who were only with the Company for part of 1999 are reflected for a full year.
Also reflected in the Company's 1998 results is a $4.8 million write down of certain computer and computer related assets that the Company had identified as being no longer of use and which were discarded or sold.
The Company's cash and investment securities increased from $206.2 million at December 31, 1999 to $275.2 million at December 31, 2000, primarily due to the timing of medical expense payments which traditionally lag behind the receipt of increased premiums per member, the Company's net income and cash received from exercise of stock options offset by the effect of treasury stock purchases. Accounts receivable increased from $83.6 million at December 31, 1999 to $90.0 million at December 31, 2000, principally due to the timing of customer billings and payments offset by payment on receivables due from the FEHBP. Prepaid expenses, advances and other decreased from $27.3 million at December 31, 1999 to $26.4 million at December 31, 2000 due to collection of income tax refunds from prior years offset by an increase in working capital advances paid to Maryland hospitals.
Medical claims payable increased from $154.4 million at December 31, 1999 to $178.7 million at December 31, 2000, primarily due to increased membership and an increase in medical expenses per member.
Additional paid-in capital increased from $152.6 million at December 31, 1999 to $296.3 million at December 31, 2000 due to an additional 2.0 million shares of the Company's stock being placed into the SCT, as well as an increase in the market value of the shares of the Company's stock held in the SCT. This also accounts for the change in the SCT balance.
Treasury stock increased from $104.1 million at December 31, 1999 to $135.6 million at December 31, 2000 due to the purchase of 2,836,900 additional shares by the Company at a total cost of $31,521,000.
The Company currently has access to total revolving credit facilities of $29.0 million, which is used to provide short-term capital resources for routine cash flow fluctuations. At December 31, 2000, approximately $3.0 million was drawn against these facilities. In addition, the Company maintains a $12 million letter of credit for the benefit of the North Carolina Insurance Department in support of the operations of MLH, and a $100,000 letter of credit for the Company's home health subsidiary. While no amounts have been drawn against these letters of credit, they reduce the Company's credit line availability.
At its May 2000 Board meeting, the Board of Directors authorized a $20 million stock repurchase program to begin immediately. The authorized program included any unspent funds carried forward from the October 1999 repurchase program. During the six months ended September 30, 2000, the Company repurchased an additional 1,331,500 shares of its common stock for a total cost of approximately $14.6 million. At its October 2000 Board meeting, the Board of Directors authorized a $20 million stock repurchase program to begin immediately. The authorized program included any unspent funds carried forward from the May 2000 repurchase program. During the three months ended December 31, 2000, the Company repurchased an additional 399,400 shares of its common stock for a total cost of approximately $7.2 million. During January 2001, the Company repurchased an additional 504,900 shares of its common stock for a total cost of approximately $7.2 million. At its February 2001 Board meeting, the Board of Directors authorized a $20 million stock repurchase program to begin immediately. The newly authorized program includes any unspent funds carried forward from the October 2000 repurchase program.
The Company is exposed to market risk through its investment in fixed and variable rate debt securities that are interest rate sensitive. The Company does not use derivative financial instruments. The Company places its investments in instruments that meet high credit quality standards, as specified in the Company's investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer, or type of instrument. A hypothetical ten percent change in market interest rates over the next year would not materially impact the Company's financial position or cash flow. The Company has no significant market risk with regard to liabilities. Debt securities (most of which are exempt from Federal taxes) at December 31, 2000 mature according to their contractual terms as follows (in thousands):
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998............................... 29
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company whose subsidiaries are active in managed health care and other life and health insurance related activities. MAMSI's principal markets currently include Maryland, Virginia, the District of Columbia, Delaware, West Virginia, North Carolina and Pennsylvania. MAMSI and its subsidiaries (collectively referred to as the "Company") have developed a broad range of managed health care and related ancillary products and deliver these services through health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), a life and health insurance company, home health care and home infusion services companies, a hospice company and part ownership in an outpatient surgery center.
Mid Atlantic Psychiatric Services, Inc. ("MAPSI") provides psychiatric services principally to third party payors or self-insured employer groups.
HomeCall Hospice Services, Inc. ("HHSI") began operations in December, 1996 and provides services to terminally ill patients and their families.
Amounts charged to third party payors solely for use of the Company's network of physicians and health care practitioners and its discounted fee-for-service rate structure are recognized as fee revenue. Amounts charged for administrative services only arrangements, entailing only claims payment services and utilization of the provider network without utilization of the Company's primary care physician network and care coordination services, and for which the Company bears no insurance risk, are recognized as fee revenue.
Medical claims reversals result from the determination that the Company has paid claims in excess of contractually obligated amounts. Amounts recognized through specific identification are recorded at their net realizable value as a reduction of medical expense in the consolidated statements of operations and as an increase in accounts receivable in the consolidated balance sheets.
The Company has entered into certain long-term vendor contracts some of which include incentives or cost guarantees designed to provide savings to the Company over several years. The Company typically accounts for the benefit derived from these incentives or guarantees ratably over the contract period as a reduction to medical expense. Because of the complexity of the Company's medical delivery system as well as obligations imposed under the contracts, and the timing of settlement of various contractual periods, disputes may arise as to the degree of satisfaction of the various contractual obligations which could result in material adjustments to the Company's financial statements. The Company believes that it has complied with its contractual obligations and that its financial statements are fairly stated with regard to the aforementioned contracts.
Basic earnings per common share are based upon the weighted average shares outstanding. Outstanding stock options are treated as common stock equivalents for purposes of computing diluted earnings per share. Shares held in the Company's Stock Compensation Trust (see Note 10) are excluded from the calculation of basic and diluted earnings per share.
The following is a summary of available-for-sale and held-to-maturity securities at December 31, 2000 and 1999:
For the years ended December 31, 2000 and 1999, marketable equity available-for-sale securities with a fair value at the date of sale of $317,000 and $2,524,000, respectively, were sold. The gross realized gains on such sales totaled $71,000 and $50,000, and the gross realized losses totaled $-0- and $75,000 for each of the respective periods. Realized gains and losses are included in investment income. Other sales of investment securities consisted principally of redemptions on municipal bond funds.
The Company has access to total line-of-credit and letter-of-credit facilities of $29 million, which are subject to annual renewal. Borrowings bear interest at a rate based on the Federal Funds rate plus .75% - 1.65% and are secured by certain cash balances and investment securities. At December 31, 2000, approximately $3.0 million was outstanding on one of the lines-of-credit at an interest rate of 7.06% and approximately $12.10 million in letters-of-credit were outstanding, although no amounts had been drawn.
M.D. IPA, OCI, OCCI, OCIPA and MLH maintain reinsurance coverage to provide for reimbursement of claims in excess of certain limits. The reinsurer for health claims indemnifies either 90% of the approved per diem or fixed charge per procedure, or 80% of the eligible in and out of service area acute care medical expenses in excess of $200,000 per enrollee per year, up to a lifetime maximum of $2,000,000 in eligible medical costs with no more than $1,000,000 in a given year, or $5,000,000 for certain PPO members who have an unlimited lifetime maximum benefit. Reinsurance for life and accidental death claims generally covers all settlements in excess of $50,000 per person subject to a $950,000 maximum recovery per person for life claims and $1,000,000 per person on accidental death claims. Reinsurance recoveries for the years ended December 31, 2000, 1999 and 1998 were approximately $2,044,000, $1,566,000 and $1,597,000, respectively. In the consolidated statements of operations, reinsurance premiums are shown net of the related recoveries.
Significant components of the provision for income taxes attributable to continuing operations are as follows for the years ended December 31:
The Company's tax provision differs from the statutory rate for Federal income taxes for the years ended December 31 as follows:
Total tax deposits made by the Company in 2000, 1999 and 1998 were approximately $19,255,000, $10,027,000 and $6,870,000, respectively.
For the years ended December 31, 2000, 1999 and 1998, certain members of the Boards of Directors of MAMSI and affiliated corporations who are also participating physicians provided medical services to enrollees totaling $4,954,000, $1,790,000 and $4,430,000, respectively, which represents approximately .8%, .3% and .9% in 2000, 1999 and 1998, respectively, 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.
The Company follows APB 25 under which no compensation expense has been recognized in connection with its stock option plans. Pro forma information regarding net income and earnings per share are required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of 6.6%, 5.2%, and 5.6%; volatility factors of the expected market price of the Company's common stock of .65, .59, and .42 and a weighted average life of the options of three years. The Company anticipates that it will declare no dividends.
Pro forma net income $34,020 $19,856 $1,502 Pro forma basic earnings per share .90 .48 .03 Pro forma diluted earnings per share .86 .48 .03
Shares held by the SCT are excluded from weighted average shares outstanding used in the computation of earnings per common share.
The Company leases certain equipment and office space under the terms of non-cancelable operating leases that expire at various dates through 2005. Rent expense relating to these operating leases approximated $3,470,000, $3,429,000 and $3,502,000 in 2000, 1999 and 1998, respectively.
The Company is involved in various legal actions arising in the normal course of business, some of which seek substantial monetary damages. After review, including consultation with legal counsel, management believes any ultimate liability that could arise from these other actions will not materially effect the Company's consolidated financial position or results of operations.
Financial instruments that potentially subject the Company to credit risk consist primarily of investments in marketable securities (including money market funds, floating rate municipal putable bonds, intermediate term municipal bonds, and common stocks) and premiums receivable. The Company receives advice through or assigns direct management of investment in securities to professional investment managers selected for their expertise in various markets, within guidelines established by the Board of Directors. These guidelines include broad diversification of investments. Concentrations of credit risk and business volume with respect to commercial premiums receivable are generally limited due to the large number of employer groups comprising the Company's customer base. As of December 31, 2000, approximately 15% of premium and home health service receivables were due from federal government agencies. The Company performs ongoing credit evaluations of customers and generally does not require collateral.
The Company has three reportable segments: Commercial risk products, Medicare products and Preferred Provider Organizations ("PPO"). Commercial risk products include traditional HMO and point-of-service health care plans as well as hybrid products. Traditional products provide for the provision of comprehensive medical care to enrollees for a fixed, prepaid premium regardless of the amount of care provided. Hybrid products offer the ability to tailor employee health care offerings by varying benefit designs, funding methods and insurance risk. These products combine the use of capitated physicians to serve as care coordinators, employer funding of specialist and institutional claims on an "as paid" basis with MAMSI's underwriting of risk on a specific and/or aggregate stop loss basis. The Medicare product is health coverage offered to Title XVIII Medicare recipients. Under a contractual arrangement with the United States Health Care Financing Administration ("HCFA"), the Company received a monthly premium for which the Company provided comprehensive medical coverage to those individuals. Effective January 1, 1999, the Company no longer participated in the Medicare program. MAMSI offers access to its preferred provider network of physicians to employers and insurance companies in association with various health plans. PPOs allow enrollees to receive care from a network of participating physicians and health care practitioners who agree to provide services at contractually negotiated rates in exchange for increased patient volume. A PPO does not assume insurance risk from medical utilization and it is not the claims payor.
We have audited the accompanying consolidated balance sheets of Mid Atlantic Medical Services, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mid Atlantic Medical Services, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein.