As of June 30, 1995, the Company leased approximately 1.2 million aggregate square feet of space primarily for administrative offices, data processing facilities and claims processing in the states in which it is doing business. These leases expire at various dates through July 2002. The Company owns approximately 486,000 aggregate square feet of space for health care centers in California and Arizona and approximately 248,760 square feet of space for the two hospitals in Southern California. The Company also leases approximately 245,000 aggregate square feet of space for health care centers in Arizona, California and Florida, which leases expire at various dates through April 2003.
The Company's financial position and results of operations changed significantly during fiscal year 1995 as a result of the following mergers and acquisitions which enhanced the Company's geographic and product diversity:
The financial information, enrollment data and related comparisons presented in this discussion have been restated to include the results of CareFlorida, TDMC and its majority interest in Intergroup for all periods presented. The acquisitions accounted for under the purchase method of accounting have been included in the Company's consolidated financial statements from their respective dates of acquisition. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Investment and other income, included as a component of the Company's revenues, increased each year due primarily to the investment of excess surplus and reserves generated by operations, a significant part of which was generated by CalComp, acquired in August 1993, whose investments are primarily held in tax-exempt securities. Investment income also increased due to the general rise in interest rates during fiscal years 1993, 1994 and 1995.
The Company's selling, general and administrative ("SG&A") expenses in fiscal year 1995 increased due primarily to the implementation costs of the Washington/Oregon and Region 6 Contracts and start-up of the New Jersey Medicaid administrative services only contract. The increase in SG&A expenses in fiscal year 1994 over 1993 was due primarily to expenses related to the establishment and operation of government claims processing as an internal function and the inclusion of SG&A expenses related to Gem Insurance Company ("Gem"), the Utah insurance subsidiary which was acquired by Intergroup effective January 1, 1994.
Amortization and depreciation expense increased each year primarily due to increased depreciation as a result of the Company's ownership and construction of health care centers and increased amortization of goodwill incurred in connection with the purchase of the Intergroup minority interest and other business acquisitions during fiscal years 1993, 1994 and 1995.
The acquisition and restructuring charge represents the costs of acquiring and consolidating the companies' management information systems and administrative functions and positioning the Company to take advantage of best practices in healthcare delivery systems and managed care techniques after the mergers.
These costs satisfy the definition of "exit costs" as set forth in Emerging Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
As of June 30, 1995, $62.8 million (primarily professional fees, transition and related severance payments and write-off of impaired assets) in merger, integration and restructuring costs have been paid or otherwise charged against the $124.8 million accrual. The remaining restructuring obligations are expected to be substantially paid as due through the fourth quarter of fiscal year 1996 utilizing existing cash resources of the Company. The amounts set forth above represent management's best estimate of the restructuring costs to be incurred and the timing of the restructuring and integration plan (the "Plan"). The progress of the Plan and the actual amounts incurred could vary from these estimates if future developments differ from the underlying assumptions used by management in developing the recorded accrual. The Company expects that this restructuring will result in operating cost savings in excess of the amount of the charge.
Minority interest represents the allocation of Intergroup's net income to the holders of the 39.5% shares of Intergroup common stock not held by TDMC (the "Intergroup Minority Interest"), for the periods prior to the Company's acquisition of the Intergroup Minority Interest.
The Company's ability to expand its business is dependent, in part, on competitive premium pricing and its ability to secure cost-effective contracts with providers. Achieving these objectives is becoming increasingly difficult due to the competitive environment. In addition, the Company's profitability is dependent, in part, on its ability to maintain effective control over health care costs while providing members with quality care. Factors such as health care reform, integration of acquired companies, regulatory changes, utilization, new technologies, hospital costs, major epidemics
Commercial operations includes the Company's HMOs and life and health insurance subsidiaries. This line of business is characterized by operations in which the Company assumes underwriting risk in return for premium revenue. Government contracts consists of contractual services to state and federal government programs such as CHAMPUS and administrative-only Medicaid contracts in which the Company receives revenues for administrative and management services and, under the CHAMPUS contracts, also accepts financial responsibility for health care costs. Specialty services includes operations in which the Company assumes underwriting risk in return for premium revenue, including managed care workers' compensation insurance and behavioral health, dental and vision HMO products, and operations in which the Company provides administrative services only, including certain of the behavioral health and pharmacy benefits management programs, workers' compensation third party administration and bill review services and administrative-only products and services.
Revenues generated by the Company's commercial operations increased in fiscal year 1995 over fiscal year 1994 due in part to inclusion of revenues from the January 1994 purchase of Gem and the November 1994 purchases of the Colorado HMO and the Florida Medicaid HMO as well as increased enrollment in existing lines of business. Revenues in fiscal year 1994 increased over fiscal year 1993, reflecting increased enrollment growth and as well as the inclusion of revenue from Gem for the last six months of fiscal year 1994. The Company anticipates revenues to increase during fiscal year 1996 primarily as a result of enrollment growth; however, the rate of increase is not expected to be at the same level as in prior years since, to some extent, prior year increases have resulted from businesses acquired and the Company anticipates continued pressure on its ability to increase premium rates.
The Company expects continued pressure from employer groups and government agencies to reduce premiums. Effective July 1, 1995, Medicaid HMO rates in Florida were reduced by approximately 18%, which will affect commercial premium revenues. Employer groups continue to demand lower premium increases and in some cases, premium decreases. The Company has managed health care costs and decreased the rate at which its health care costs have grown, by a number of strategies, including greater controls on hospital utilization, the generation of cost savings through national health care purchasing contracts (including mental health, home health and pharmacy) and long-term hospital provider contracts, reduction in specialist reimbursement rates and utilization and development and management of health care centers. The Company is starting to realize the impact of implementing these strategies on its recent acquisitions. The Company's continued medical cost management efforts are reflected in the commercial loss ratio, which improved in fiscal year 1995 from fiscal year 1994. The slight increase in the ratio in fiscal year 1994 over that in fiscal year 1993 was due to the competitive pressures in California offset in part by the greater profitability of the Company's Florida and Arizona HMOs. The Company believes that the pressures on margins will continue, which may adversely affect the commercial loss ratio; however, the Company will seek to mitigate any increase in the loss ratio by the cost management efforts described above. In addition, as the Company's Medicare risk business increases, the loss ratio may increase as historically this product has a higher loss ratio than the Company's other HMO and indemnity insurance business.
Government contracts revenue decreased in each of the last two fiscal years primarily due to the expiration of the CRI Contract in January 1994. The CRI Contract contributed $682.1 million to revenues in fiscal year 1993 and $431.3 million in fiscal year 1994. The Company commenced health care delivery under its managed care contract in Louisiana and Texas in May 1993 and under the Washington/Oregon Contract in March 1995. Government contracts revenue is impacted by semi-annual bid price adjustments, annual price increases or decreases, risk sharing provisions and various other price adjustments attributable to change orders for additional services, inflation and other factors. On August 31, 1995, FHFS was notified of award by the Department of Defense of the multi-year TRICARE managed care contract to provide services to approximately 720,000 CHAMPUS-eligible beneficiaries in California and Hawaii. Health care services are scheduled to commence in April 1996. The contract is valued at approximately $2.5 billion in revenue over the projected five year term.
Specialty services revenues increased from $89.1 million in fiscal year 1993 to $380.7 million in fiscal year 1994 to $509.8 million in fiscal year 1995. A significant part of the increases was due to revenues related to CalComp which was acquired in August 1993 and to the Company's workers' compensation bill review and third party administration subsidiaries which were acquired in July 1994. In addition, during fiscal year 1995, several of the Company's specialty services subsidiaries recorded increased revenues related to start-up Medicaid contracts.
The increase in the specialty services ratio in fiscal year 1994 over that of fiscal year 1993 was primarily a result of the purchase of CalComp, which generally has a higher operating ratio than the other specialty services businesses. The improvement in the ratio in fiscal year 1995 was primarily due to improvement in the workers' compensation operating ratios, discussed below, through the successful implementation of managed care programs, which has lowered workers' compensation medical costs and the addition of the workers' compensation bill review company, which was acquired in July 1994, which has a lower administrative component than most of the other specialty services companies.
Commencing in 1993, several significant reforms to the California workers' compensation laws affected CalComp. The reforms address various aspects of the workers' compensation system, including limitations on certain types of claims, restrictions on vocational rehabilitation benefits, additional penalties for fraud and abuse, and reductions in state-mandated minimum premium rates which culminated in open rating in California effective January 1, 1995. Since the acquisition of CalComp, the Company has taken various actions to mitigate the effects of the reforms and the sharp premium declines as a result of the more competitive pricing environment under open rating. These actions include development and implementation of its managed care approach to workers' compensation, continued use of loss prevention and return to work programs, shifting of the risk profile of CalComp's business, increased use of the Company's PPO and blended case management systems (which have reduced the average severity per claim), and payment of lower average commissions to agents and brokers in California on new and renewal policies written in 1995. The Company believes this strategy should contribute to the continued growth of this part of the specialty services operations and may offset the impact from the changes in the California workers' compensation marketplace.
CalComp was able to maintain a consistent loss and loss adjustment expense ratio in fiscal year 1995 through the successful implementation of managed care programs, as described above, and the increased use of internal staff to support fair hearing representatives in the settlement of claims, despite the 16% decrease in the minimum rates in California effective October 1, 1994, and the abolishment of minimum rates and the commencement of open rating effective January 1, 1995. The
During fiscal year 1996, the Company expects capital expenditures to approximate $67.8 million, primarily consisting of $47.7 million for the purchase of computer hardware and software systems; $15.3 million for the purchase of furniture and equipment primarily for the health care centers and the hospitals; and $4.8 million for other requirements. The Company anticipates the net costs of operating and managing the health care centers for fiscal year 1996 will approximate $20 million, offset in part by health care cost savings anticipated to be realized by the Company's HMOs. Effective September 1, 1995, the Company purchased a medical practice and related facilities in Arizona for approximately $6.2 million, which was paid in cash.
Lenders parties thereto and First Security Bank of Utah, N.A., as Owner Trustee (the "TROL" financing). The Company expects that up to $32 million of the TROL financing will be used during fiscal year 1996 for the construction of health care centers and corporate facilities.
In April 1993, the Company established a stock repurchase program (as amended) to acquire from time to time up to 5.7 million shares of the Company's common stock in the open market at prices deemed appropriate by management and subject to market conditions and other relevant factors. As of June 30, 1995, the Company had repurchased 1,545,500 shares under the program, 100,000 of which were repurchased in fiscal year 1995.