The Company owns eight office buildings, one of which is sublet. These buildings are located in Rockville and Frederick, Maryland and total approximately 453,000 square feet of office and warehouse space. The Company's headquarters is located at 4 Taft Court, Rockville, Maryland 20850.
2. Days are presented exclusive of skilled nursing, neonatal intensive care and psychiatric inpatient care.
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, all with inherent risks and uncertainties, affecting MAMSI's business. MAMSI's actual results may differ materially if these assumptions prove invalid. Significant risk factors, while not all-inclusive, are:
2. The effect on the Company due to a weaker economy.
6. The inability to predict and control 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. - Existing disputes under risk-sharing arrangements, the Company's ability to maintain and renew these arrangements, and any future disputes under such arrangements.
The list of significant risk factors is not intended to be exhaustive. There may be other risk factors that would preclude the Company from realizing the predictions made in the forward-looking statements. While the Company may periodically update this discussion of risk factors, the Company does not undertake to update any forward-looking statement that may be made by or on behalf of the Company prior to its next required filing with the Securities and Exchange Commission.
While MAMSI's business is somewhat complex from an insurance regulatory standpoint, its consolidated balance sheet and income statement are straightforward and the accounting policies and procedures that we use to produce them are reasonable and appropriate. MAMSI does not own any special purpose entities, does not have any complex or extraordinarily risky investments nor does it have any off balance sheet financing arrangements. In fact, MAMSI has almost no debt outstanding. The buildings that the Company owns and uses in its operations do not even have mortgages; they are owned free and clear. The Company's funds are held in cash or invested in money market accounts, tax exempt securities and other debt securities. All of the bonds we own have investment ratings of "A" or better.
We think that the single most important accounting issue we have is the recording, at the end of each reporting period, of an adequate liability and corresponding expense for medical services that have been provided to our members but for which we have not yet received a bill. This lag between date of service and date of billing is normal in the insurance business and the liability for these claims is called "liability for incurred, but not reported claims" ("IBNR"). The IBNR liability is included with medical claims payable in our balance sheet.
The determination of the Company's IBNR is a fairly complex process. The Company employs its own actuary to aid in its determination. The primary method we use to estimate IBNR is consistent from period to period and uses historical claims data to develop the historical relationship of how many claims dollars have been reported in any given month to what was received in total, once all claims were received. This relationship gives us an indication of how much medical expense has been incurred in months for which we have not yet received all claims. While we use a consistent method in developing our IBNR estimate, considerable judgment is required. To the extent that we over or under estimate our IBNR at the end of any reporting period, the adjustment is included in the next period's results.
customers pay in a timely fashion but some do not. After some communication, we generally receive payment but we do not always collect what we are due. This can happen for a variety of reasons such as customers having financial difficulties, disputes regarding the amount of the bill or a customer failing to notify us that they have obtained other health insurance. To properly value the accounts receivable at its net realizable value we must determine an allowance for doubtful accounts.
The allowance for doubtful accounts reduces the gross amount of accounts receivable that are recorded, based on the bills sent, to the net amount that we actually think we will receive. The allowance also reduces premium revenue by the same amount. To determine how much to record as a reduction of the gross accounts receivable, we prepare an accounts receivable aging. This aging segments the total accounts receivable balance by category as to when it was due to the Company. This allows us to evaluate how old our accounts receivable are. We then prepare an evaluation based on historical collection percentages applied to various categories of accounts. We also identify individual accounts that are unlikely to pay due to financial or other problems and analyze them individually. The aforementioned analyses are then summarized and an allowance is developed and recorded. The Company applies this methodology on a consistent basis from period to period.
During the three year period ended December 31, 2001, the Company experienced growth in membership. While membership in certain products continues to grow, other products have decreased when compared to 2000. The Company has achieved its overall size by continually expanding its product lines which include point-of-service, small group, indemnity health, hybrid products and group term-life and through expansion into new geographic markets. Premium rates during this time have increased, yet remain at competitive levels for the Company's marketplace. During 2001, the Company's consolidated operating margin showed improvement over 2000. The Company achieved 2001's results, in part, by implementing product price increases and reducing or eliminating membership in products or effectively terminating groups that had the potential for continued unprofitability. The Company anticipates that it will continue to increase premium rates during 2002. This is a forward-looking statement. See "Forward-Looking Information" above for a description of those risk factors.
The Company generally receives a fixed premium amount per member per month while the majority of medical expenses are variable and significantly affected by spontaneous member utilization. Even with managed care controls, unusual medical conditions can occur, such as an outbreak of influenza or a higher than normal incidence of high cost cases (such as premature births, complex surgeries, or rare diseases). As a result, the Company's quarterly results can be materially affected and irregular. However, over the longer business cycle, the Company believes that its managed care control systems, underwriting procedures (when allowed) and network of physicians and health care practitioners should result in continued profitability.
The four key areas of Administration Simplification are: 1) Transactions and Code Sets, 2) Unique Identifiers, 3) Security, and 4) Privacy. HHS has published
MLH, MAMSI's HMOs and HomeCall are in the process of assessing current procedures and developing plans to comply with the Administration Simplification provisions of HIPAA. The Company believes it has sufficient internal resources to address those issues related to HIPAA compliance. If internal resources prove to be insufficient, the Company will engage outside resources. The statements in this paragraph regarding the future effects of HIPAA are forward-looking statements. See "Forward-Looking Information" for a description of risk factors. MAMSI has two (2) years plus two (2) months from the effective date of the final regulations to comply.
States in the Company's service area have enacted laws regarding the internal and external review of adverse utilization review decisions. Under these laws, persons covered by insurers or HMOs (subject to state regulation) are given a right to seek a fast and fair review of these decisions, first internally by a medical director and then externally by an independent review organization and/or a state regulator. Maryland, the District of Columbia, Virginia, North Carolina, West Virginia and Pennsylvania have enacted such laws.
Revenue for the year ended December 31, 2001 increased approximately $323.3 million or 21.8 percent over the year ended December 31, 2000. A 10.0 percent increase in net average HMO and indemnity enrollment resulted in an increase of approximately $142.0 million in health premium revenue while an 11.8 percent increase in average monthly premium per enrollee, combined for all products, resulted in a $184.0 million increase in health premium revenue. Management believes that commercial health premiums should continue to increase over the next twelve months as the Company continues to increase its commercial membership and as new and renewing groups are charged higher premium rates due to legislatively mandated benefit enhancements and general price increases initiated by the Company. This is a forward-looking statement. See "Forward-Looking Information" for a description of the risk factors that may affect health premiums per member.
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 generally cannot be initiated until a contract reaches its renewal date. Therefore, price increases are not implemented across the Company's membership at the same time. Overall, commercial premium rate increases are expected to continue in 2002 in the range of 11.5% to 12.0%. 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 Medicaid program. 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 program.
The medical care ratio decreased to 85.4 percent for the year ended December 31, 2001 as compared to 86.5 percent for the year ended December 31, 2000. On a per
member per month basis, medical expenses increased 10.5 percent. The decrease in the medical care ratio is due to increased premiums per member combined with 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 ongoing initiatives should help to control the Company's medical care ratio. The medical expense trend is expected to be between 10.7% and 11.5% for 2002. 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 net margin rate increased from 2.7 percent for the year ended December 31, 2000 to 3.2 percent for the year ended December 31, 2001. This increase is consistent with the factors described above.
Revenue for the year ended December 31, 2000 increased approximately $167.2 million or 12.7 percent over the year ended December 31, 1999. A 2.2 percent increase in net average HMO and indemnity enrollment resulted in an increase of approximately $27.1 million in health premium revenue while a 10.5 percent increase in average monthly premium per enrollee, combined for all products, resulted in a $134.7 million increase in health premium revenue.
The administrative expense ratio increased from 11.6 percent for the year ended December 31, 1999 to 12.1 percent for the year ended December 31, 2000. The administrative expense ratio is affected by changes in health premiums and other revenues, development of the Company's expansion areas and increased administrative activity related to business volume.
The effective tax rate decreased from 33.9 percent for the year ended December 31, 1999 to 30.6 percent for the year ended December 31, 2000 primarily due to the increase in tax exempt income, the restructuring of certain operations to increase tax efficiency and the benefit from certain one-time tax credits.
The net margin rate increased from 2.0 percent for the year ended December 31, 1999 to 2.7 percent for the year ended December 31, 2000. This increase is consistent with the factors described above.
The Company's business is not capital intensive and the majority of the Company's expenses are payments to physicians and health care practitioners, which generally vary in direct proportion to the health premium revenues received by the Company. Although medical utilization rates vary by season, the payments for such expenses lag behind cash inflow from premiums because of the lag in provider billing procedures. In the past, the Company's cash requirements have been met principally from operating cash flow and it is anticipated that this source, coupled with the Company's operating line-of-credit, will continue to be sufficient to meet the Company's cash requirements in the future.
Net property and equipment increased from $47.2 million at December 31, 2000 to $57.3 million at December 31, 2001 primarily due to build-out and renovation costs associated with the purchase of facilities, for use in the Company's operations, in late October 2001.
The value of the SCT increased from $198.5 million at December 31, 2000 to $204.7 million at December 31, 2001 due to the increase in the market value of the shares of the Company's stock held in the SCT, and the purchase of an additional 2.0 million shares of the Company's stock being placed into the SCT offset by the exercise of employee stock options. For financial reporting purposes, the SCT is consolidated with MAMSI. The fair market value of the shares held by the SCT is shown as a reduction to stockholders' equity in the Company's consolidated balance sheets. All transactions between the SCT and MAMSI are eliminated. The difference between the cost and fair value of common stock held in the SCT is included in the consolidated financial statements as additional paid-in capital.
Treasury stock increased from $135.6 million at December 31, 2000 to $185.1 million at December 31, 2001 due to the purchase of 2,717,900 additional shares by the Company at a total cost of $49,472,000.
Consolidated Balance Sheets as of December 31, 2001 and 2000..... 28
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999............................... 31
HomeCall, Inc., FirstCall, Inc. and HomeCall Pharmaceutical Services, Inc. ("HCPS") provide in-home medical care including skilled nursing, infusion and therapy to MAMSI's HMO members and other payors.
The Company believes that its claims reserves are adequate to satisfy its ultimate claims liabilities; however, the liability as established may vary significantly from actual claims amounts, either negatively or positively, and as adjustments are deemed necessary, they are included in current operations. Establishment of claims estimates is an inherently uncertain process; there can be no certainty that currently established reserves will prove adequate to cover actual ultimate expenses. Subsequent actual experience could result in reserves being too high or too low which could positively or negatively impact the Company's earnings in future periods.
As permitted by Financial Accounting Standards No. 123, the Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its stock option plans. Under APB 25, because the exercise price of the Company's employee stock options equals the market value of the underlying stock on the date of grant, no compensation expense is recognized.
Certain balances in the 2000 financial statements have been reclassified to conform with the 2001 presentation.
The following is a summary of available-for-sale and held-to-maturity securities at December 31, 2001 and 2000:
Medical recoverables consist of refunds identified on paid claims. This amount has been recorded as a reduction of medical expense in the consolidated statements of operations. Other receivables consist primarily of amounts due for reinsurance recoveries, pharmacy rebates, interest accrued on statutory deposits and amounts related to contractual arrangements with laboratory service providers.
Interest expense paid in cash on borrowings and on claims paid subsequent to state mandated deadlines during 2001, 2000 and 1999 was approximately $1,267,000, $444,000 and $523,000, respectively.
Total tax deposits made by the Company in 2001, 2000 and 1999 were approximately $11,750,000, $19,255,000 and $10,027,000, respectively.
For the years ended December 31, 2001, 2000 and 1999, certain members of the Boards of Directors of MAMSI and affiliated corporations who are also participating physicians provided medical services to enrollees totaling $5,414,000, $4,954,000 and $1,790,000, respectively, which represents approximately .7%, .8% and .3% in 2001, 2000 and 1999, 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.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information follows (in thousands except per share amounts): 2001 2000 1999 ------- ------ ------ Pro forma net income $49,997 $34,020 $19,856 Pro forma basic earnings per share 1.29 .90 .48 Pro forma diluted earnings per share 1.23 .86 .48
In years 1990 through 1996, and years 1998 through 2001, MAMSI implemented a non-qualified stock option plan whereby options for the purchase of shares of common stock may be granted to directors, officers and employees of the Company. Unexpired authorized shares under the plans total 10,000,000. Options under the plans generally vest over a three-year period and are exercisable at 100% of the fair market value per share on the date the options are granted. The Company accounts for these stock option grants in accordance with APB 25, and, accordingly, recognizes no compensation expense for these stock option grants. Transactions relating to the plans are summarized as follows:
On August 26, 1996, the Company established the MAMSI SCT to fund its obligations arising from its various stock compensation plans. MAMSI initially funded the SCT with 9,130,000 shares of newly issued MAMSI stock. In exchange, the SCT delivered a promissory note to MAMSI for approximately $129.9 million which represented the purchase price of the shares. Amounts owed by the SCT to MAMSI are repaid by cash received by the SCT or will be forgiven by MAMSI, which will result in the SCT releasing shares to satisfy MAMSI obligations for stock compensation.
Year Amount - ---- ------- 2002 $ 3,395 2003 2,303 2004 3,168 2005 1,822 2006 1,016 ------- $11,704 =======
On August 30, 2001, the Company filed a Demand for Arbitration with the American Arbitration Association against Merck and related entities seeking an order relating to the parties' Integrated Drug Program Master Agreement (the "Agreement"). The Company asserts that Merck has reneged on its obligations under the Agreement, the aggregate amount of such obligations totaling approximately $49 million for fiscal year ended 2000. On October 8, 2001, Merck and related entities filed an Answer and Counterclaim alleging breach of contract and requesting monetary relief. On October 19, 2001, the Company filed an Answer to the Counterclaim denying all allegations and revising its request for relief to $44.8 million which includes the $41.0 million recorded for
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, 2001, approximately 20% 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 sources of revenue included in the All Others category are composed primarily of Medicaid and miscellaneous. The Company ended its participation in Medicaid in 2000. All revenue is generated within the United States.
We have audited the accompanying consolidated balance sheets of Mid Atlantic Medical Services, Inc. and subsidiaries as of December 31, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, 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.