Employers, insurers, and government payor programs are continuing to attempt to contain health care costs by limiting the price or reimbursement levels of medical products and services or establishing managed care programs to increase efficiency in medical care procurement and utilization. The Company believes it should benefit from the increasing use of managed care programs since it offers pharmacy benefits management services which are easily adaptable into a variety of managed care programs and provide efficiencies and cost savings in comparison to traditional indemnity health insurance programs where insureds obtain prescriptions from local pharmacies at retail prices. However, the announcement and progress of proposals to restructure the health care system by the Federal government, industry consolidation and restructurings resulting from actual and anticipated changes in the U.S. health care delivery system, and the investment community's reaction thereto, create an environment which could produce significant volatility in the trading and market price of the Company's Common Stock.
The pharmacy benefits management revenue, which represents 98 percent of consolidated net operating revenues, increased 7 percent over the prior year. This increase was primarily generated from a rise in mail service pharmacy revenues of 7 percent due to an increase in prescriptions dispensed of 8 percent offset by a slight decline in the average revenue per prescription processed. This higher volume of prescriptions was the result of the addition of new Clients at the beginning of the year combined with increased utilization of mail service pharmacy benefits from existing accounts. The nominal decline in the average revenue per prescription was attributable to the impact of competitive pricing pressure and changes in product mix. Claims processing revenues for 1995 exceeded the prior year by 6 percent as a result of a 28 percent increase in the volume of claims offset by a reduction in the average revenue per transaction processed. This change in revenues occurred primarily as a result of a large portion of our customer base converting the majority of its eligible members to lower-cost electronic claims processing products versus traditional paper claims processing utilized in the past. Additionally, several accounts were repriced downward during the year.
Other operating revenues reflect the sales from the Company's pharmaceutical distribution subsidiary, Newport Pharmaceuticals de Costa Rica. The Company believes its pharmacy benefits management segment offers greater revenue growth potential and anticipates disposing of this subsidiary in the near future.
Cost of sales as a percentage of consolidated net operating revenues for 1995 increased slightly in relation to the prior year. The current year's modest rise in the cost of sales percentage resulted mainly from one-time start up costs associated with implementation of the new proprietary prescription processing system and new automated dispensing technology at the Iowa mail service pharmacy in the fourth quarter. Additionally, administrative costs associated with the implementation of the therapeutic alternatives programs, an increase in branded drug costs and continued pricing pressure also contributed to the reduction in gross profit margin. The Company believes that its operations are performing at levels which are competitive with industry norms. The Company has met with moderate success in controlling its cost of sales through aggressive drug procurement strategies, which include higher purchase and market performance discounts, integration of operating activities, on-going process improvements at both the mail service pharmacy and claims processing operations and the Company's quality management program started earlier this year. Nevertheless, management anticipates that the pharmacy benefits management industry will continue to experience competitive pricing pressure consistent with what has been experienced over the last year, which could lead to an erosion of the gross profit margin in the future. Therefore, the Company intends to continue its on-going process improvement and quality management activities, pursue additional strategies for the reduction of drug costs, leverage its new automated dispensing technology and further invest in higher margin clinical and knowledge-based products, in order to offset the impact of competition on pricing for traditional product offerings.
Selling, marketing and customer service expenses for the current year increased 32 percent over 1994. In the prior year, the Company benefited from lower costs attained by the restructuring of its selling, marketing and customer service activities in the first
Interest income increased $239,000 over the prior year due to the Company's higher level of invested cash. Interest expense and other non-operating expenses remained constant with the prior year amounts.
The 1995 provision for income taxes is comprised of amounts for state, federal and foreign taxes. The Company has significant net operating loss carryforwards available to offset future income tax liabilities. For the foreseeable future, the Company anticipates that the effective tax rates will be comprised primarily of state tax provisions.
In March 1995, the Company reached an agreement to sell NSL to the principal management of NSL for a nominal value. Additionally, the agreement requires NSL to repay its outstanding intercompany obligations of $2,710,000, which were converted to a promissory note payable in equal annual installments over 15 years with an additional balloon payment of $240,000 due in the fifth year if certain profit thresholds are achieved (See Note 10 of Notes to Consolidated Financial Statements).
The pharmacy benefits management segment revenues, which comprised 98 percent of consolidated operating revenues, increased 6.2 percent over the prior year. The Company's 1994 mail service pharmacy revenues increased 6.8 percent from 1993 revenues due to the increased number of prescriptions dispensed (7 percent), which were partially offset by a nominal decline in the average revenue per prescription processed. The increase in the volume of prescriptions dispensed resulted from the addition of new customers and increased utilization by existing clients, while the small decline in average revenue per prescription was due to changes in the sales mix and competitive pricing pressure. Systemed Pharmacy's 1994 claims processing revenues were consistent with the prior year despite a transaction volume increase of 18 percent over the 1993 volume. This comparable revenue performance resulted as higher volume levels of transactions processed were offset by the impact of the repricing of a major account during the second quarter of 1993 and, to a lesser degree, a change in the mix of claims processed during the year.
General and administrative expenses for 1994 increased $4.0 million over 1993 as a result of monies spent for the enhancement of information systems, investments made in additional staffing to handle the anticipated growth in future revenues, increased legal costs for fulfilling regulatory compliance requirements, a higher allowance for potentially uncollectible accounts and non-recurring investment advisory fees incurred for implementation of the stockholder rights plan and other corporate governance matters.
During 1995, the Company spent $5.5 million in capital expenditures, a 133 percent increase over the prior year, primarily to further automate and increase the capacity of the Company's mail service pharmacy in Iowa. In addition, other capital spending included advanced data processing equipment, and office furniture and equipment for core activities. Management believes that its facilities maintain sufficient capacity to accommodate significant growth. It is anticipated that capital expenditures in 1996 will return to levels consistent with prior years. As of December 31, 1995, the Company had no material commitments for capital expenditures.