As of December 31, 1999, RightCHOICE owned or leased the following facilities which it considers material to its operations:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------------------------------------------------------------------- AND RESULTS OF OPERATIONS -------------------------
The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto and the information set forth under the caption "Risk Factors" of Part I, Item I, General Business, of this Annual Report, and under the caption in Note 13 "Contingencies" of Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report.
* does not include 391,021 and 455,006 additional third-party administrator members as of December 31, 1999, and 1998, respectively, that are part of The EPOCH Group, L.C., a joint venture with Blue Cross and Blue Shield of Kansas City formed in December 1995.
The overall medical loss ratio of RightCHOICE and its subsidiaries decreased to 82.2% in 1999 from 83.5% in 1998. The medical loss ratio experienced in 1999 is lower compared to that in 1998 due in part to RightCHOICE's pricing strategy, which resulted in an overall increase in the premium per member per month of approximately 10.2% in 1999 as compared to 1998. The medical expense on a per member per month basis increased by approximately 8.4% in 1999 as compared to 1998.
General and administrative expenses, excluding depreciation and amortization, increased $5.7 million in 1999 compared to 1998. This increase is directly attributable to HealthLink's geographic and member expansion efforts. RightCHOICE's general and administrative expense ratio, excluding depreciation and amortization, decreased to 17.9% in 1999 compared to 18.3% in 1998.
The operating loss for RightCHOICE's underwritten segment decreased to $4.4 million in 1999 from $23.1 million in 1998. The significant improvement is due to RightCHOICE's aforementioned successful pricing strategies and cost management efforts.
RightCHOICE's net income for 1999 increased to $17.2 million, or $0.92 per share, as compared to net income of $5.7 million, or $0.30 per share for 1998, as a result of the factors noted above.
HMO premium revenue increased $22.8 million, or 12.4% -- $16.7 million increase due to an 8.0% increase in net premium rates and a $6.1 million increase resulting from a 4.1% increase in member months. Net premium rates increased in part due to overall premium renewal rate increases of 7% to 19% during 1998 enrollment periods. Net rate increases are lower than the overall premium increase range because of:
. changes in the geographic mix of the HMO business, . product mix shifts, and . status of one large group, the Missouri Consolidated Health Care Plan, comprised of 33,200 members as of December 31, 1998, with which BlueCHOICE has historically had limited ability to increase premium rates.
Managed indemnity premium revenue decreased by $4.9 million because of a 44.3% decline in member months. Member month declines are consistent with RightCHOICE's strategy to move toward more highly managed care products.
The overall medical loss ratio decreased to 83.5% in 1998 from 84.8% in 1997. The medical loss ratio experienced in 1998 is lower compared to that in 1997 due in part to RightCHOICE's pricing strategy, which resulted in an overall increase in premium per member per month of approximately 9.5% in 1998 as compared to 1997. The medical loss ratio in 1998 is slightly higher than RightCHOICE previously anticipated in the beginning of the year as a result of continued escalation of the medical cost trend,
Depreciation and amortization expenses decreased to $19.3 million in 1998 from $23.1 million in 1997. This reduction of depreciation and amortization expenses primarily related to intangible assets that became fully amortized during 1997. In 1997, Healthy Alliance Life Insurance Company recorded $4.3 million of expense to complete the amortization of a prepaid reinsurance asset associated with RightCHOICE's reinsurance agreements with Blue Cross and Blue Shield of Kansas City. Amortization expenses for completed components of RightCHOICE's information and operations strategy project increased by $2.4 million in 1998 compared to 1997.
A non-recurring charge of $0.9 million was recognized in the fourth quarter of 1998 related to a planned reduction of RightCHOICE's work force and changes in its employee health care benefits. In 1997, RightCHOICE expensed $3.3 million related to costs associated with the relocation of RightCHOICE's St. Louis-based claims, customer service, billing, and provider services functions to its Springfield, Missouri facility and a new facility in Cape Girardeau, Missouri.
The operating loss for RightCHOICE's underwritten segment was $23.1 million in 1998 compared to an operating loss of $69.4 million in 1997. The decrease in losses in 1998 is partially attributable to the aforementioned $29.5 million contract loss reserve as well as an increase in RightCHOICE's overall premium rates.
RightCHOICE's self-funded segment experienced operating income of $18.8 million in 1998 as compared to operating income of $8.4 million for 1997. The improvement in 1998 operating income is partially the result of the continued positive performance of HealthLink, which added an additional $7.9 million to this segment's operating income in 1998 as compared to 1997. HealthLink's operating income is inclusive of $2.8 million and $3.1 million in 1998 and 1997, respectively, for amortization expenses related to goodwill and other intangible assets that were acquired through RightCHOICE's HealthLink acquisition.
Net cash provided by operations totaled $28.7 million for the year ended December 31, 1999 as compared to $11.0 million for the year ended December 31, 1998. RightCHOICE's net income was $17.2 million, which included (on a before-tax basis) $0.5 million of net realized losses from the sale of investments, $17.2 million of depreciation and amortization expenses, and $9.1 million related to the reduction in the Missouri Consolidated Health Care Plan contract loss reserve. In addition, receivables from members, accounts payable and accrued expenses, medical claims payable, and net intercompany payables were affected by the timing of operating cash payments and receipts, intercompany tax settlements, as well as
changes in membership and utilization and claims payment trends. Receivables from members increased by $10.9 million in part due to an increase of $9.1 million related to HealthLink receivables, rate increases related to RightCHOICE's underwritten products, and other timing factors. Accounts payable and accrued expenses decreased by $5.2 million due in part to a $6.0 million settlement payment relating to a contingency that was previously reserved. Medical claims payable increased by $14.4 million, approximately 13%, due to the increase in the cost of health care services, the timing of claim payments, and an increase in RightCHOICE's claims inventory. RightCHOICE's efforts to reduce claims inventory during 2000 could reduce the level of operating cash flows in future quarters of 2000. Net intercompany payables decreased by $9.7 million due to the timing of operating cash receipts and payments and intercompany tax settlements, among other things.
In the first quarter of 1999, RightCHOICE received regulatory approval of a reinsurance arrangement between its subsidiaries, Healthy Alliance Life Insurance Company and BlueCHOICE. Under this arrangement, Healthy Alliance Life Insurance Company will reinsure the Missouri Consolidated Health Care Plan losses that exceed certain thresholds over the remaining term of the current Missouri Consolidated Health Care Plan contract. RightCHOICE anticipates that this arrangement will assist in mitigating the risk that additional surplus notes or other funding will need to be provided to BlueCHOICE.
RightCHOICE primarily invests positive cash flow in fixed income securities. RightCHOICE's investment policies are designed to preserve principal, maximize yield and provide liquidity to meet anticipated obligations. RightCHOICE's available-for-sale securities primarily include fixed-rate government securities and corporate bonds as well as mortgage-backed securities and other asset-backed securities. RightCHOICE also has approximately $10.9 million as of December 31, 1999, invested in a large capitalization equity index fund.
. several financial covenant calculations were favorably modified and the financial covenant requirements were favorably adjusted,
. an additional $7 million of surplus notes will be permitted to be incurred between RightCHOICE and its subsidiaries to provide for capital planning flexibility.
Other than continued investment in information technology and debt repayment, RightCHOICE currently has no definitive material commitments for future use of its current or expected levels of available cash resources. RightCHOICE anticipates that in 2000 it will repay $8.0 million of its long-term debt pursuant to the credit agreement's requirements, as described above. In addition, in 2000, RightCHOICE anticipates that it will expend approximately $8.6 million, of which $6.5 million will be capitalized, related to RightCHOICE's information and operations strategy project. Management continually evaluates opportunities to expand RightCHOICE's operations. RightCHOICE's expansion options may include additional acquisitions and internal development of new products and programs. RightCHOICE's available cash resources will remain in interest-bearing investments until they are utilized for such purposes.
RightCHOICE executed a program to evaluate its major systems, processes and equipment to minimize the possibility of a material disruption to its business due to Year 2000 problems (e.g., the difficulties of certain computers, computer programs and other equipment to distinguish between the year 1900 and the year 2000).
As of February 1, 2000, RightCHOICE had not experienced any significant problems relating to the Year 2000 transition. While there are some applications that have not had their first production use in 2000,
management does not anticipate that any such problems would have a material adverse effect on RightCHOICE. RightCHOICE will continue to monitor these and other systems for continued processing. As of February 1, 2000, RightCHOICE was not aware of significant Year 2000 problems encountered by its critical vendors, suppliers and providers or in RightCHOICE's use of their services.
The total cost associated with modifications required to become Year 2000 ready was approximately $12.9 million with $5.4 million expensed in 1999. RightCHOICE expensed all costs associated with these changes as they were incurred. These costs were funded internally through operating cash flows or investment sales and represented less than 10% of RightCHOICE's information technology budget over the life of the Year 2000 program.
The United States Department of Health and Human Services has issued proposed rules, as contemplated by the Health Insurance Portability and Accountability Act of 1996, which would, if the rules are adopted, among other things, impose security and confidentiality requirements with respect to a member's transactions with health care providers and payors, as well as requirements for the standardization of certain electronic transaction code sets and provider identifiers. RightCHOICE has not fully assessed the financial impact related to full compliance with the Health Insurance Portability and Accountability Act of 1996 and its regulations; however, RightCHOICE believes such financial impact could be material.
The United States House of Representatives has passed the "Bipartisan Consensus Managed Care Improvement Act," also known as the Norwood-Dingell bill, which would, if it became law, among other things, impose limits on the methods of operation for group health plans and health insurance issuers, limit the ability of group health plans and health insurance issuers to define medical necessity for purposes of coverage, and permit group health plans and health insurance issuers to be sued in state courts for coverage determinations. This law and other proposals, including those referred to generally as the "Patients Bill of Rights," could impose additional restrictions or obligations on the operations of RightCHOICE.