Oxford occupies as its principal executive offices approximately 185,000 square feet of office space at 800 Connecticut Avenue, Norwalk, Connecticut under four leases expiring February 28, 1999 through February 28, 2001. Additionally, the Company has leases to occupy a) approximately 114,000 square feet of sales and administrative office space at 1133 Avenue of the Americas in New York City expiring December 1, 1999; b) approximately 34,000 square feet of sales office space in Melville, NY expiring June 30, 2002; c) approximately 133,000 square feet of sales office space in Edison, New Jersey expiring December 1, 1999 through April 30, 2002; d) approximately 180,000 square feet of administrative office space in Nashua, NH expiring May 31, 1999 through June 30, 2000; e) approximately 58,000 square feet of sales and administrative office space in Philadelphia, Pennsylvania expiring April 30, 2005; f) approximately 282,000 square feet of sales and administrative office space in White Plains, New York expiring November 30, 2000; g) approximately 352,000 square feet of administrative office space in Trumbull, CT expiring October 31, 1998 through April 30, 1999; h) approximately 121,000 square feet of administrative office space in Hooksett, New Hampshire expiring November 30, 2002; and i) approximately 61,000 square feet of administrative office space in Milford, Connecticut expiring December 31, 2001.
The statement of earnings data and balance sheet data set forth below for each year in the five-year period ended December 31, 1996 have been derived from the audited consolidated financial statements of the Company. The information below has been restated to reflect the merger in July 1995 with OakTree Health Plan, Inc. in a pooling of interests transaction (see note 8 to consolidated financial statements) and is qualified by reference to and should be read in conjunction with the consolidated financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
(4) Defined as health care services expense as a percentage of premiums earned.
The Company's revenues consist primarily of commercial premiums derived from its Freedom Plan and Liberty Plan, health maintenance organization ("HMO") and dental plan products, reimbursements under government contracts relating to its Medicare and Medicaid programs, third-party administration fee revenue for its self-funded plan services (which is stated net of direct expenses such as third-party reinsurance premiums) and investment income.
Health care services expense primarily comprises payments to physicians, hospitals and other health care providers under fully insured health care business and includes an estimated amount for incurred but not reported claims ("IBNR"). The Company estimates IBNR expense based on a number of factors, including prior claims experience. The actual expense for claims attributable to any period may be more or less than the amount of IBNR reported. See "Liquidity and Capital Resources."
Premium revenues of government programs increased $423.5 million to $850.7 million in 1996 from $427.3 million in 1995. Membership growth accounted for most of the change in Medicare as member months increased 123.7% when compared with the prior year. The increase in Medicaid revenues was attributable to a 61.6% increase in member months compared with 1995, offset in part by a 13.8% decrease in average premium rates during 1996. Premium rates of Medicare programs in 1996 were 8.5% higher than in 1995.
The Company expects that premium rates for commercial business in 1997 will be slightly higher than in 1996. The Company's commercial rates are often higher than those charged by competitors and its ability to increase rates will be affected by competitive factors and the ability of employer groups to demand concessions from competing health plan providers. The Company believes that commercial premium pricing will continue to be highly competitive. The Company expects that premium rates for Medicare will be approximately 1.6% higher on average in 1997, based on the weighted-average premium rate approved by the Health Care Financing Administration ("HCFA") for the Company's Medicare risk contracts for the year 1997. HCFA has proposed legislation which would result in the Company receiving no increases in Medicare premiums in 1998 and 1999, a slight decrease in premiums in 2000 and slight increases in 2001 and 2002 in the counties where most of the Company's Medicare members reside. Passage of this legislation could cause the Company to reduce benefits or charge a premium under its Medicare plans or require renegotiation of provider arrangements. There is significant opposition to the proposed legislation, and the Company cannot predict the outcome of the legislative
process or the impact of reform on the Company's results of operations. The Company currently expects a slight decrease in premium yields in its Medicaid business in 1997 as a consequence of lower enrollment of higher yielding disabled beneficiaries in its Pennsylvania Medicaid plan than was originally anticipated. See "Business-Government Regulation."
Net investment income for the year ended December 31, 1996 increased to $42.4 million from $19.4 million in 1995. This was principally due to the increase in invested cash resulting from increased cash flow from operations during 1996 and approximately $220 million of net proceeds from the Company's public offering in April 1996.
Marketing, general and administrative expenses increased 46.6% to $477.4 million in 1996 from $325.6 million in 1995 which, as a percentage of operating revenues, was 15.7% in 1996 compared with 18.7% in 1995. The increase in marketing, general and administrative expenses was attributable to the Company's rapid membership growth and the costs associated with continuing development and expansion into new markets and the expansion of the Medicaid Healthy Start and Oxford Medicare Advantage programs. The other areas of increased expense were payroll and benefits expense, broker commissions, marketing expenses and depreciation. Payroll and benefits expense increased $74.4 million in 1996 primarily due to an increase in the size of the Company's work force to over 5,000 employees at the end of 1996 from approximately 4,000 employees at the end of 1995. The additional employees were hired primarily in the areas of marketing, management information systems, health services and member services. Broker commissions increased by $23.8 million in 1996 due to the increase in premiums earned. Marketing expenses other than payroll and benefits increased by $5.4 million in 1996, reflecting the Company's continuing commitment to
aggressively market its products in a highly competitive environment. Depreciation expense was $18.5 million higher than in 1995 as a result of $48.3 million of capital expenditures during 1996.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
The medical-loss ratio was 77.5% for the year ended December 31, 1995 compared with 74.1% for the year ended December 31, 1994. The increase in the medical-loss ratio was attributable to the fact that the Company's premium rates have increased at a lower rate than the rate of increase of health care services expenses, and to the higher medical-loss ratio associated with the significantly expanded Medicare program. Overall per member per month revenue increased 2.7% to $185.69 in 1995 from $180.87 in 1994 while overall per member per month health care services expenses increased 7.4% to $143.99 in 1995 from $134.06 in 1994.
Marketing, general and administrative expenses increased 105.5% to $325.6 million in 1995 from $158.4 million in 1994 which, as a percentage of operating revenues, was 18.7% in 1995 compared with 21.0% in 1994. The increase in marketing, general and administrative expenses was attributable to the Company's rapid membership growth and the costs associated with continuing development and expansion into new markets and the expansion of the Medicaid Healthy Start and Oxford Medicare Advantage programs. Marketing and administrative expenses related to the Medicare and Medicaid programs increased $22.5 million in 1995 to $37.2 million compared with $14.7 million in 1994. The other areas of increased expense were payroll and benefits expense, broker commissions, marketing expenses and depreciation. Payroll and benefits expense increased $68.7 million primarily due to an increase in the size of the Company's work force to almost 4,000 employees at the end of 1995 from approximately 1,950 employees at the end of 1994. The additional employees were hired primarily in the areas of sales, marketing, management information systems, health services and member services. Broker commissions increased by $21.0 million due to the increase in premium revenues. Marketing expenses other than payroll and benefits increased by $16.1 million. Depreciation expense was $14.6 million higher than in 1994 as a result of $83.9 million of capital expenditures during 1995. Marketing, general and administrative expenses also increased due to costs incurred in connection with the advance hiring of customer service and medical management staff to serve the Company's rapidly growing membership.
Cash used for capital expenditures was $48.3 million during 1996. This amount was used primarily for computer equipment and software, reflecting the Company's ongoing commitment to upgrade and maintain its information systems to support its rapid growth. In addition, significant expenditures were incurred for leasehold improvements related to the Company's headquarters in Norwalk, Connecticut, and existing regional offices, and to expansion of regional offices in Trumbull, Connecticut; Milford, Connecticut; and White Plains, New York. The Company anticipates capital expenditures of approximately $64 million during 1997, a significant portion of which will be devoted to management information systems and leasehold improvements.