Summarized in the table below are the Company’s major lease commitments for currently occupied office space, excluding formerly occupied office space in various cities which have been either subleased to new tenants or charged to the Company’s restructuring reserve.
The Company believes that the remaining restructuring reserves as of December 31, 2001 are adequate and that no revisions of estimates are necessary at this time.
Premiums earned from the Company’s Medicare programs decreased 2.7% to $659.3 million in 2001 compared with $677.5 million in 2000. The overall decrease was attributable to a 7.6% decrease in member months of Medicare programs, due to the withdrawal from certain New Jersey counties in January 2001. The member month decline was partially offset by a 5.3% increase in premium yields as a result of annual rates of
Marketing, general and administrative expenses increased $12.7 million, or 2.7%, to $489.1 million for 2001 compared with $476.4 million for 2000. Marketing, general and administrative expenses as a percent of operating revenue improved to 11.3% in 2001 compared with 11.8% in 2000. The increase in dollars spent in 2001 when compared with the prior year is primarily due to increased information technology spending and broker commissions. Partially offsetting these increases were lower payroll, benefits and occupancy costs, the result of reduced staffing levels, and lower depreciation charges. During 2001, the Company recorded a charge of $10 million for estimated legal expenses related to the securities class action pending against the Company that may not be recoverable from one of the Company’s primary director’s and officer’s insurance carriers due to its insolvency. Included in marketing, general and administrative expenses for 2001 and 2000 are severance charges of approximately $6.4 million and $7.5 million, respectively. Administrative costs in future periods may also be adversely affected by costs associated with responding to regulatory inquiries, investigations and defending pending securities class actions and other litigation, including fees and disbursements of counsel and other experts to the extent such costs are not reimbursed under existing policies of insurance. See “Legal Proceedings”.
replaced with new senior bank facilities totaling $250 million, $175 million of which is a 5 1/2 year term loan (the “New Term Loan”) and $75 million of which is a 5 year revolving credit facility (the “Revolver”, together with the New Term Loan, the “Senior Credit Facilities”). In addition, the Company repaid approximately $21.9 million of its New Term Loan during the year ended December 31, 2001. See “Liquidity and Capital Resources - Financing”. The Company’s average interest rate on bank debt was 9.4% in 2001 compared with 12.1% in 2000. Interest expense on capital leases approximated $0.9 million in 2000. Interest expense on delayed claims totaled $3.4 million in 2001 compared with $4 million in 2000, reflecting more timely payment of claims and lower levels of older claims outstanding.
During the second quarter of 1998, the Company incurred a net loss of $507.6 million. At that time, the Company evaluated the deferred tax assets arising from the net loss and established a valuation allowance pending the results of its restructuring. Based on management’s analysis during 1998, management concluded that it was not more likely than not that all of its deferred tax assets would be fully realized. In that regard, the Company established a valuation allowance of $282.6 million as of December 31, 1998.
Total commercial premiums earned for the year ended December 31, 2000 were basically unchanged at $3.3 billion compared with the prior year. A 9.8% decrease in member months in the Company’s commercial health care programs, primarily due to a 10.3% member month decrease in the Freedom Plan, was offset by average premium yield increases in commercial programs of 10.7% when compared with 1999. The Company experienced attrition of commercial members in its core commercial markets beginning in 1999 through the third quarter of 2000, adversely affecting revenue. The majority of the attrition in commercial members was concentrated in the small group market, where the Company’s switch to 4-tier pricing contributed to the decline in membership. Although commercial membership declined 7.5% year over year, overall commercial membership increased from the third to fourth quarter of 2000.
Premiums earned from the Company’s Medicare programs decreased 8.2% to $677.5 million in 2000 compared with $737.8 million in 1999. The overall decrease was attributable to a 16.9% decrease in member months of Medicare programs, due to the withdrawal from Suffolk County, New York in January 2000, partially offset by an 8.7% increase in premium yields.
Net investment and other income for the year ended December 31, 2000 decreased 11.6% to $73 million from $82.6 million in the prior year. Net investment income increased $15.3 million or 24.7% to $77.4 million in 2000 compared with $62.1 million in 1999. The improvement is due primarily to an increase in interest income due to higher investment yields and invested balances and a $5 million increase in capital gains realized during the year. Included in other income for the year ended December 31, 2000 are losses on the sale of fixed assets of approximately $5.4 million, investment valuation losses of approximately $1.5 million and gains on asset disposals of $1.6 million. In 1999, other income includes a $13.5 million gain on the sale of the Company’s New York Medicaid business and a $7 million gain on the sale of the business and certain assets of the Company’s wholly-owned mail order pharmacy subsidiary, Direct Script, Inc. See “Liquidity and Capital Resources”.
Marketing, general and administrative expenses decreased $122.7 million or 20.5% to $476.4 million for 2000 compared with $599.2 million for 1999. Marketing, general and administrative expenses as a percent of operating revenue were 11.8% in 2000 compared with 14.6% in 1999. Significant expense reductions in 2000 compared to 1999 include $44.9 million in payroll and employee related expenses, $20.3 million in occupancy and depreciation costs, $15.1 million in operating costs (primarily equipment rental and maintenance, telephone, postage expense and other services), $8.7 million in marketing and outside services and $24 million in other general and administrative costs, representing a charge in 1999 for the purchase of insurance policies for litigation matters. Included in marketing, general and administrative expenses for 2000 are severance charges of approximately $7.5 million.
Although the rate of inflation has remained relatively stable in recent years, health care costs have generally been rising at a significantly higher rate than the consumer price index. The Company employs various means to reduce the negative effects of inflation. The Company has increased overall commercial premium rates when practicable in order to attempt to maintain margins. The Company’s cost-control measures and risk-sharing and cost-containment arrangements with various health care providers may mitigate the effects of inflation on its operations. There is no assurance that the Company’s efforts to reduce the impact of inflation will be successful or that the Company will be able to increase premiums to offset cost increases associated with providing health care.
As of December 31, 2001, the Company had approximately $1.3 billion in current cash and marketable securities, including approximately $180 million at the parent company. In addition, in January 2002, the parent company received a dividend from its New York HMO of $80 million. Parent company cash is used for, among other things, capital expenditures, acquisitions, debt repayment, stock repurchases, costs of litigation and other general corporate purposes. A significant portion of parent company cash is directly dependent upon operating profits generated by the Company’s regulated operating subsidiaries and the ability to receive dividends from those subsidiaries beyond amounts that would be payable without prior regulatory approval. There is no assurance that the Company will receive regulatory approval for these future dividend payments. Cash provided by operations was $613.8 million in 2001 compared with $404.7 million in 2000. The improvement is primarily attributable to increased net earnings, a new pharmacy benefit management agreement, improved working capital management and the benefit of one extra collection day in December 2001.
During 2001, the Company received distributions from the 1997 and 1998 New York Stabilization Pools of approximately $25.1 million and collected receivables of approximately $22 million from a health care risk contract for fiscal 1999 and 2000. These assets were classified as other receivables in the Company’s December 31, 2000 consolidated balance sheet. In September 2001, the Company entered into a five-year agreement with Merck-Medco, effective beginning January 1, 2002, pursuant to which Merck-Medco and certain of its subsidiaries will provide pharmacy benefit management services, including retail and mail-order pharmacy services, to the Company’s members. This agreement provided for a payment of $4.5 million to Oxford to offset systems and other costs associated with implementation of designated services. In addition to the pharmacy services agreement, the Company also entered into an alliance agreement with Merck-Medco under which the Company will develop, de-identify and provide certain historic and current information and furnish strategic consultative and other services to Merck-Medco over a five-year period in return for a total payment of approximately $82.9 million. The Company received these amounts, which are included in unearned revenue at December 31, 2001, during the third and fourth quarters of 2001. Substantially all of these amounts will be amortized to income on a straight line basis beginning January 1, 2002. The Company anticipates that operating cash flow in 2002 will be lower than that in 2001 as a result of the non-recurring receipts described above and higher income tax payments.
Cash and investments aggregating $58.8 million at December 31, 2001 have been segregated as restricted investments to comply with state regulatory requirements. With respect to the Company’s HMO and insurance subsidiaries, the minimum amount of surplus required is based on formulas established by the state insurance departments. At December 31, 2001, the Company’s regulated subsidiaries had statutory net worth of approximately $448.3 million, or approximately $257.2 million in excess of current regulatory requirements. The Company primarily manages its subsidiary capital against 125% of Risk Based Capital (“RBC”) rules, although RBC standards are not yet applicable to all of the Company’s operating subsidiaries. Under Company Action Level (“CAL”) RBC, the Company had approximately $206.3 million of excess capital. The Company’s subsidiaries are subject to certain restrictions on their ability to make dividend payments, loans or other transfers of cash to the parent company. These restrictions limit the ability of the Company to use cash generated by subsidiary operations to pay the obligations of the parent, including debt service and other financing costs. The Company intends to continue to seek dividends for capital in excess of 125% of CAL RBC standards from most of its subsidiaries. The Company currently estimates amounts requested for dividends to be approximately $146 million, $80 million of which was received in January 2002. There is no assurance that the Company will receive regulatory approval for these future dividends. During 2001 and 2000, the Company’s HMO subsidiaries paid dividends to the parent company of approximately $328.4 million and $317.6 million, respectively, and the Company made cash contributions to its HMO and insurance subsidiaries of approximately $6 million and $4.5 million during 2000 and 1999, respectively. The capital contributions were made to ensure that each subsidiary had sufficient surplus under applicable regulations after giving effect to operating results and reductions to surplus resulting from the non-admissibility of certain assets. The Company may be required to contribute additional amounts to MedSpan in 2002 in order to maintain capital at 125% of CAL RBC. In addition, a dividend of approximately $80.1 million was approved and paid in January 2002 from the Company’s indemnity insurance company to its parent company, Oxford’s New York HMO. New York State regulatory authorities authorized the repayment in 2000 of a $38 million surplus note plus $6 million in accrued interest by Oxford NY to
The New Jersey State legislature has passed legislation that includes a $50 million assessment on HMOs in the state proportionate to market share to be collected over a three-year period. The Company paid $1.8 million in 2001 related to this assessment and may be required to pay a similar amount in 2002.
The Company’s medical costs payable was $595.1 million (approximately 83% of which was IBNR) as of December 31, 2001 compared with $612.9 million (approximately 85% of which was IBNR) as of December 31, 2000. The Company estimates the amount of its IBNR reserves and other medical costs payable using standard actuarial methodologies based upon historical data, including the average intervals between the date services are rendered and the date claims are received and paid, denied claims activity, expected medical cost inflation, seasonality patterns and changes in membership. During the past three years, there has been no significant adverse development of actual claims history when compared with recorded reserves. Due to the nature of health care services, claims submission methods and processing, and payment practices utilized by the Company, there is a relatively short time lag between service provided and claim payment. During the past two years, approximately 95% of claims have been paid within six months of incurral. The Company revises its estimates for IBNR in future periods based upon continued actuarial analysis of claims payments, receipts and other items subsequent to the incurral period. Revisions to estimates, where material, have been disclosed and are recorded in the period they arise. The liability is also affected by shared risk arrangements, including arrangements relating to the Company’s Medicare business in certain counties. In determining the liability for medical costs payable, the Company accounts for the financial impact of the transfer of risk for certain Medicare members and the experience of risk-sharing providers (who may be entitled to credits from Oxford for favorable experience or subject to deductions for accrued deficits) as well as the impact of cost-containment arrangements and reserves for estimated settlements. In the case of the prior North Shore Medicare risk arrangement discussed below, the Company maintains a reserve for a portion of the potential claims liability though the payment obligation has been transferred to North Shore for claims incurred prior to January 1, 2002. The Company believes that its reserves for medical costs payable are adequate to satisfy its ultimate claim liabilities.
The Company currently has risk-sharing agreements with two hospitals and a provider organization covering approximately 21,000 Medicare members. Premium revenues for the Medicare members covered under risk-share agreements in place at December 31, 2001 totaled approximately $251 million and $240 million in 2001 and 2000, respectively. Prior to January 1, 2002, the Company had transferred the medical cost risk for its Medicare members in certain New York counties to North Shore. However, as of January 1, 2002, the Company exited the Medicare line of business in Long Island. Although North Shore is obligated under the contract to pay all claims for dates of service through December 31, 2001, the Company is ultimately responsible for any claims not paid by North Shore. The Company is continuing to explore other risk-sharing or risk-transfer opportunities relating to its remaining Medicare members with providers and other organizations.
The Company and certain of its former and present Directors and Officers are currently defendants in certain securities class actions. In the fourth quarter of 1999, the Company purchased new insurance policies providing additional coverage of, among other things, certain judgments and settlements, if any, incurred by the Company and individual defendants in certain pending lawsuits and investigations, including among others, the securities class action pending against the Company and certain of its directors and officers and the pending stockholder derivative actions. Subject to the terms of the policies, the insurers have agreed to pay 90% of the amount, if any, by which covered costs exceed a retention of between $155 million and $165 million (the “Retention”), provided that the aggregate amount of insurance under these new policies is limited to $200
During 2000, the Company recorded an extraordinary charge of $20.3 million, net of income tax benefits of $13.9 million, in connection with the prepayment of the Term Loan and the repurchase or tender of its $200 million Senior Notes. The extraordinary charges include premiums paid, transaction costs and the write-off of unamortized original issuance debt costs.
Simultaneously with the consummation of the Recapitalization and the tender offer for the Senior Notes, the Company entered into the Senior Credit Facilities, comprised of the $175 million Term Loan and the $75 million Revolver. The proceeds of the New Term Loan were used, along with available Company cash, to fund the Recapitalization. The Company has not drawn on the Revolver.
The agreement governing the Senior Credit Facilities (the “Credit Agreement”), provides for scheduled quarterly repayments of principal of the New Term Loan with a final maturity of June 2006. The Credit Agreement provides for voluntary prepayments of principal and voluntary reductions in commitments under the Revolver without penalty of a minimum amount of $5 million and mandatory prepayments of principal from proceeds upon the occurrence of certain events. Mandatory prepayments of principal and/or reductions in the Revolver are required from (1) the net proceeds from the sale of assets, subject to certain exceptions; (2) 50% of the net proceeds from certain equity issuances; and (3) the net proceeds from the issuance of debt securities. The Credit Agreement also provides for mandatory prepayment of the entire amount outstanding under the Senior Credit Facilities at a 1% premium upon the occurrence of a change in control (as defined). In July 2001, the Company and its Lenders amended the Credit Agreement (the “Amendment”) to, among other things, (i) eliminate the mandatory prepayment provisions as they related to excess cash flows, (ii) allow the Company to use unrestricted Parent Company cash to repurchase common stock and make other payments as defined in the Credit Agreement, subject to a minimum of $150 million of liquidity and (iii) allow the Company, subject to certain restrictions, to borrow an additional $300 million. As a result of the Amendment, the Company adjusted the amounts included in current and long-term liabilities to reflect the scheduled repayments of principal according to the New Term Loan. At December 31, 2000, prior to the Amendment and based on financial projections at that time for 2001 and 2002, the Company expected to repay the New Term Loan in full by June 30, 2002. Accordingly, a portion of the debt had been classified as current at December 31, 2000 based on these estimates.
The commitment under the Revolver shall be reduced to $50 million plus the then outstanding amount upon the settlement of certain securities litigation, and $50 million on January 1, 2005, with the expiration of all commitments under the Revolver on December 31, 2005.
Borrowings under the Senior Credit Facilities bear interest, subject to periodic resets, at either a base rate (“Base Rate Borrowings”) or LIBOR plus an applicable margin based on the Company’s credit ratings. Interest on Base Rate Borrowings is calculated as the higher of (a) the prime rate or (b) the federal funds effective rate plus 0.5% and is payable quarterly. Currently, interest is being calculated based on a $76 million tranche at a rate of approximately 5.50% through August 13, 2002, a $6.6 million tranche at a rate of approximately 5.34% through March 13, 2002, and a $70.6 million tranche at a rate of 5.92% through April 16, 2002. Commitment fees of 0.5% per annum are payable on the unused portion of the Revolver.
The Senior Credit Facilities grant a first priority lien to the Lenders on all property of the Company and material non-regulated subsidiaries and all capital stock of its material subsidiaries, and require the Company to maintain certain financial ratios and prohibit certain restricted payments, as defined.
Operating lease terms generally range from one to five years with certain early termination or renewal provisions at the Company’s option.
The Company is subject to various contracts with certain health care providers, facilities and the federal government for the provision of health care services to its members. Such contracts involve payments to or from the Company, generally on a monthly basis, in the ordinary course of business and are not included in the above table.