2. The possibility that the Company is not able to increase its market share at the anticipated premium rates.
4. The potential for increased medical expenses due to: - Increased utilization by the Company's membership. - Inflation in 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 and health care practitioners.
During the three year period ended December 31, 1999, the Company experienced modest membership expansion. While membership in certain products continues to grow, others have shown decreases when compared to 1998. 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 remained at or near competitive levels for the Company's marketplace. During 1999, the Company's consolidated operating margin showed improvement over 1998 after consideration of non-recurring items in 1998. The Company achieved 1999'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 2000. This is a forward-looking statement. See "Forward- Looking Information" above for a description of those risk factors.
State legislatures and the U.S. Congress continue to debate and consider legislation to amend civil tort law so as to expand "enterprise liability" to insurers, HMOs and ERISA plans as well as other health care reform initiatives. Neither Congress nor any state legislature in the Company's service area has enacted laws that would expand an insurer's or HMO's liability in tort action.
State legislatures are looking at a variety of proposals to increase access to health care coverage. This includes expanding the eligibility rules for the Medicaid Program.
The Company believes that the current political environment will result in continued legislative scrutiny of health insurers and HMOs and may lead to additional legislative initiatives. The Company is unable to predict the ultimate impact of any federal or state restructuring of the health care delivery or financing systems, but such changes could have a material adverse impact on the operations and financial condition of the Company.
The Company's consolidated net income for the year ended December 31, 1999 increased to $26,322,000 from $9,045,000 for the year ended December 31, 1998. Earnings per share increased from $.20 in year ended December 31, 1998 to $.64 for the year ended December 31, 1999. 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. In addition, the 1998 results include a non-recurring item related to the results of an audit conducted in connection with the Company's participation in the FEHBP as well as the effect of certain real estate sales and retirements of equipment.
The Company's future membership growth depends on several factors such as relative premium prices and product availability, future increases or decreases in the Company's service area and increased competition in the Company's service area.
The Company's home health operations contributed $23.6 million for the year ended December 31, 1999 as compared with $20.0 million for the year ended December 31, 1998 reflecting an increase in services provided to companies other than MAMSI.
Included in the Company's year-to-date 1998 results is a $16,500,000 charge related to an audit conducted by the Office of Inspector General concerning the Company's participation in the FEHBP for the years 1992 - 1997. The report's findings indicated that in the years 1992 - 1994 the FEHBP was charged rates that exceeded the then market price. The report had no findings for the years 1995 - 1997. In early 2000, the report was finalized without material modification.
The net margin rate increased from .8 percent for the year ended December 31, 1998 to 2.0 percent for the year ended December 31, 1999. This increase is consistent with the factors described above.
Fee and other income increased from $18.4 million in 1997 to $20.5 million in 1998, principally due to increased membership in the Company's PPO product.
The medical care ratio decreased to 88.8 percent for 1998 compared to 89.4 percent for 1997. On a per member, per month basis, medical expenses increased 4.0 percent. Included in the year ended December 31, 1997 are the results of the Company's identification of certain claims which were overpaid. These overpayments were caused, in large part, by a combination of factors including the ever increasing complexity of the claims paying process as well as physicians and health care practitioners enhancing their ability to maximize charges. In connection with these overpayments, during 1997 the Company recorded, as a reduction of medical expenses, approximately $12 million relating to claims paid in 1996.
The administrative expense ratio decreased to 11.3 percent for 1998 as compared to 11.7 in 1997. Adjusted to exclude the effect of the $5.7 million gain on sale of real estate, the administrative expense ratio was 11.4 percent for 1998.
Investment income decreased $4.4 million due to a decrease in realized gains on sales of marketable equity securities of $5.3 million offset by an increase in interest income due to higher investable balances.
Additional paid-in capital increased from $138.2 million at December 31, 1998 to $152.6 million at December 31, 1999 due principally to an additional 3.0 million shares of the Company's stock being placed into the SCT. This also accounts for the change in the SCT balance.
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, 1999, approximately $3.6 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 $150,000 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.
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............................... 30
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, a pharmacy, and part ownership in an outpatient surgery center.
Physicians Health Plan of Maryland, Inc. ("PHP-MD") is an individual practice association ("IPA") that provides physician services to certain of the Company's HMOs.
Alliance PPO, LLC ("Alliance") provides a delivery network of physicians (called a preferred provider organization) to employers and insurance companies in association with various health plans.
A significant portion of the Company's premium revenue is derived from federal, state and local government agencies, including governmental employees and Medicaid and Medicare recipients. For the years ended December 31, 1999, 1998 and 1997, approximately 8%, 11% and 11%, respectively, of premium revenue was derived from federal government agencies which is included in the Medicare and Risk segments, and approximately 21%, 18% and 25%, respectively, was derived from Maryland and Virginia state and local government agencies which is included in the Risk segment.
Floating rate municipal putable bonds, which possess an insignificant risk of loss from changes in interest rates and are held less than three months from the date of purchase, are classified as cash equivalents.
Amounts charged to patients, third party payors and others for home health services are recorded at net realizable amounts, including an estimate of potential retroactive adjustments under cost reimbursement agreements with third party 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 such 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.
The Company follows Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments" ("Statement No. 107"), which requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents - The carrying amount reported in the consolidated balance sheets approximates fair value.
Statutory deposits - Fair values are based on quoted market prices.
For the years ended December 31, 1999 and 1998, marketable equity available-for-sale securities with a fair value at the date of sale of $2,524,000 and $92,570,000, respectively, were sold. The gross realized gains on such sales totaled $50,000 and $5,793,000, and the gross realized losses totaled $75,000 and $3,001,000 for each of the respective periods. Realized gains and losses are included in investment income. Other sales of investment securities consisted principally of redemptions from 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, 1999, approximately $3.56 million was outstanding on one of the lines-of-credit at an interest rate of 6.53% and approximately $12.15 million in letters-of-credit was outstanding.
Interest expense paid in cash during 1999, 1998 and 1997 was approximately $214,000, $188,000 and $538,000, respectively.
Total tax deposits made by the Company in 1999, 1998 and 1997 were approximately $10,027,000, $6,870,000 and $2,461,000, respectively.
For the years ended December 31, 1999, 1998 and 1997, certain members of the Boards of Directors of MAMSI and affiliated corporations who are also participating physicians provided medical services to enrollees totaling $1,790,000, $4,430,000 and $6,103,000, respectively, which represents approximately .3%, 1% and 1% in 1999, 1998 and 1997, 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 has a defined contribution 401(k) savings plan covering all full-time employees. Employees are allowed to contribute up to 23% of their pretax earnings annually up to a maximum contribution of $10,000 and the Company makes a matching contribution of 50% on the first 4% of contributions made by employees. Employees vest immediately in the employee contributions and ratably over five years in the Company contributions. During 1999, 1998 and 1997, the Company's contribution to the 401(k) plan aggregated $1,056,000, $681,000 and $577,000, respectively.
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):
Pro forma net income $19,856 $1,502 $9,007 Pro forma basic earnings per share .48 .03 .19 Pro forma diluted earnings per share .48 .03 .19
The Company has an incentive compensation plan whereby managers receive bonuses based upon the annual operating results of the Company. During 1999, incentive compensation expense was approximately $4,200,000 which was paid to employees in February, 2000. During 1998, $800,000 was earned and recognized as expense and in 1997 no management bonus was earned. In addition, certain individuals receive a cash bonus based upon the achievement of certain measurable criteria other than the annual operating results of the Company. These bonus amounts are not significant.
- ---- ------- 2000 $ 2,720 2001 2,122 2002 1,521 2003 617 2004 178 ------- $ 7,158
During 1998, the Company became involved in a dispute with the Maryland Insurance Administration ("MIA") concerning the construction and application of Section 15-1008 of the Maryland Insurance Article. The law limits the time within which a carrier may retroactively collect money owed by physicians and health care practitioners to the carrier by using the device of offsetting future payments to physicians and health care practitioners with the amount owed by the physicians and health care practitioners to the carrier. The law does not affect the right of carriers to otherwise recover monies owed. The Company construed the law to be applicable to claims paid on or after October 1, 1997. The MIA construed the law to apply to retroactive adjustments made on or after October 1, 1997 and the MIA has ordered the Company to abide by its construction of the law. The Company has not yet decided whether to appeal. The matter remains within the jurisdiction of the MIA. Management believes that the ultimate outcome of this matter will not have a material adverse effect on the Company's financial statements as the MIA's current position affects the method of collection of the claims reversals, rather than the Company's legal right to the refunds.
The Company is involved in other 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 affect the Company's consolidated financial position or results of operations.
M.D. IPA, OCI, OCCI and OCIPA are subject to insurance department regulations in the states in which they are licensed. MLH is subject to insurance department regulations in Maryland, its state of domicile.
Minimum required statutory net worth and actual statutory net worth as of December 31 are as follows:
DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH REPORTABLE SEGMENT DERIVES ITS REVENUES
The Company's reportable segments are business units that offer different products. The reportable segments are each managed separately because of the range of benefit plans offered for providing health care coverage to enrollees.
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, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, 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.
Included in the third quarter of 1998 is a one-time, pre-tax charge of $16.5 million related to the Company's participation in the FEHBP. See Note 11 to the Consolidated Financial Statements.