To accommodate the Company's rapid growth, the Company has purchased seven office buildings since 1988. 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.
In addition, the Company leases approximately 163,000 square feet of office space and approximately 5,200 square feet of warehouse space in various locations within its service areas to support sales and administrative operations.
During 1997, the Company purchased an office building in Frederick, Maryland in order to consolidate existing office space needs and plan for future growth. As a result, the Company intends to sell and is actively marketing two office buildings it currently owns.
1. Earnings (loss) per common share have been adjusted to reflect stock dividends on a retroactive basis and to reflect adoption of Financial Accounting Standards No. 128. All previously reported earnings per share amounts have been restated to reflect the adoption of this statement. See Note 1 to the Consolidated Financial Statements.
During the three year period ended December 31, 1997, the Company experienced rapid expansion through 1996, followed by a year of relative stability. While membership in certain products continues to grow, others have shown substantial decreases when compared with 1996. The Company has achieved its overall size by continually expanding its product lines which include point-of-service, small group, indemnity health, hybrid products, Medicaid and Medicare, 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 market place. During 1997, the Company's consolidated operating margin showed a profit after being slightly negative in 1996. The Company achieved 1997's results, in part, by implementing product price increases and reducing 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 1998. This is a forward-looking statement. See "Forward-Looking Information" above for a description of those risk factors.
The effect of Kennedy-Kassebaum differs from state to state. In the group market, state laws remain in effect unless they prevent the application of the new federal requirements, and in the individual market, state laws govern if the Health and Human Services Secretary determines that it provides an "acceptable alternative mechanism" to the federal requirement. This means that in those states like Maryland, where state reforms have already been enacted, the legislation has little, if any, effect in the small group market, but may have some effect on the individual market. In other states, the legislation has greater effect.
Most of the provisions of Kennedy-Kassebaum took effect on July 1, 1997, but some, like the provisions pertaining to Medical Savings Accounts, took effect earlier and some, like administrative simplification, take effect later.
The District of Columbia, which has not previously regulated HMOs, enacted legislation effective July 1, 1997 providing for regulatory oversight similar to that currently provided by other states. The Company does not anticipate any significant negative impact on its operations because of the new regulatory oversight in the District of Columbia.
Consolidated net income (loss) of the Company was $14,489,000 and $(2,768,000) in 1997 and 1996, respectively. Net earnings (loss) per share was $.31 in 1997 as compared to $(.06) in 1996. The increase in earnings is primarily attributable to a decrease in the medical loss ratio for commercial products which was slightly offset by an increase in the administrative expense ratio. The medical loss ratio decreased principally due to increased efforts by the Company to control medical costs through utilization review, enhanced claim adjudication, and increased claims audit and claims reversal activity. The Company has priced its products competitively in order to increase its membership base and thereby enhance its strategic position in its market place. The Company currently has one of the largest HMO and managed care enrollments and also the largest network of contract providers of medical care in its service area (which includes the entire states of Maryland and Delaware, the District of Columbia, most counties and cities in Virginia and certain areas of West Virginia, North Carolina and Pennsylvania).
Revenue for the year ended December 31, 1997 decreased approximately $22.1 million or 2.0 percent over the year ended December 31, 1996. A 4.4 percent decrease in net average HMO and indemnity enrollment resulted in a decrease of approximately $47.5 million in health premium revenue while a 2.0 percent increase in the average monthly premium per enrollee, combined for all products, resulted in a $20.2 million increase in health premium revenue. The net decrease in revenue is mainly related to the Company's withdrawal from the Maryland Medicaid program and from certain areas of the Virginia Medicaid program due to inadequate premiums paid by the states. Management believes that commercial health premiums should increase over the next twelve months as the Company increases 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. Effective January 1, 1998, the Company has modified its Medicare product offering. This modification has the potential to significantly reduce the Company's Medicare membership and related premium revenue. This is a forward-looking statement. See "Forward Looking Information" above for a description of the risk factors that may effect health premiums per member.
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, increased competition in the Company's service area and changes in state mandated enrollment in Medicaid HMO programs in which the Company participates. Enrollment may also decrease if the Company determines that premium reimbursement rates related to certain state Medicaid programs are inadequate, which would cause the Company to voluntarily withdraw from participation. As previously described, this determination was made in connection with the Maryland Medicaid program and part of the Virginia Medicaid program.
In 1993, MAMSI invited the National Committee for Quality Assurance ("NCQA"), a private, non-profit organization, to evaluate the Company's methodologies in an effort to receive NCQA accreditation. NCQA accreditation is a voluntary process. In the 1993 review, the Company did not meet certain of NCQA's criteria and, therefore, did not receive NCQA accreditation. In response, MAMSI adopted methodologies and programs designed to respond to concerns and questions raised in NCQA's assessment. The Company requested the NCQA to perform another accreditation review which took place in December of 1996. In May, 1997, NCQA informed the Company that its flagship HMOs received one year accreditation. The Company has implemented the Health Plan and Employer Data and Information Set ("HEDIS") 3.0 which represents a core set of performance measures developed by NCQA to serve the employer as a purchaser. In addition, in October, 1997 the Maryland Health Care Access and Cost Commission released the results of Maryland's first ever statewide HMO report card. MAMSI's Maryland HMOs exceeded the state wide average in overall satisfaction, accessibility and quality. In another survey of member satisfaction taken by the U.S. Office of Personnel Management, federal employees expressed satisfaction with the Company's federally qualified HMO.
The administrative expense ratio for 1997 increased to 11.7 percent as compared to 10.7 percent for 1996. This increase is due primarily to increased salaries and expenses in certain administrative areas of the Company, including utilization management, claims audit, and customer service departments, as well as reduced revenue. Management believes that the administrative expense ratio will remain near the current level over the next year. Management's expectations concerning the administrative expense ratio are forward-looking statements. The administrative expense ratio is affected by changes in health premiums per member, development of the Company's expansion areas and increased administrative activity related to business volume.
Revenue for the year ended December 31, 1996 increased approximately $178.8 million or 18.7 percent over the year ended December 31, 1995. A 19 percent increase in net average HMO and indemnity enrollment resulted in an increase of approximately $171.5 million in health premium revenue while the average monthly premium per enrollee, combined for all products, remained approximately the same.
Service revenue from non-MAMSI affiliated entities earned by the Company's home health care subsidiaries contributed $20.5 million in revenue in 1996 as compared to $18.9 million for 1995. This increase is the result of increasing business volume for these subsidiaries, particularly in the home infusion area, which is largely offset by an increasing relative percentage of business conducted for MAMSI HMO and indemnity members which is eliminated in consolidation. Revenue from life and short-term disability products contributed $3.2 million in 1996 as compared to $1.0 million in 1995.
Medical expenses as a percentage of health premium revenue ("medical loss ratio") increased to 92.4 percent in 1996 as compared to 81.9 percent for 1995 and, on a per member per month basis, medical expenses increased 12.8 percent. This significant increase is due to a combination of factors including lower commercial premiums charged due to competitive forces, higher than expected utilization by commercial members, cost increases due to legislatively mandated benefits and extremely high medical expenses related to the Company's Medicare enrollment.
The administrative expense ratio for 1996 increased to 10.7 percent from 10.5 percent in 1995. This increase is due primarily to increased salaries and expenses in certain administrative areas of the Company, including utilization management and customer service departments, as well as additional sales expenses in new expansion areas in 1996.
Accounts receivable increased from $77.0 million at December 31, 1996 to $84.7 million at December 31, 1997. This $7.7 million increase is primarily due to amounts due from the Federal government related to the Company's Federal Employees Health Benefit Program participation.
Property and equipment increased from $45.2 million at December 31, 1996 to $57.0 million at December 31, 1997 due to the purchase of a new office building for existing and future office space needs as well as the replacement and upgrade of certain of the Company's computer equipment.
Short-term investments are marked to market at the end of every quarter and the resulting unrealized gain or loss is reflected in the ending stockholders' equity balance. Accordingly, stockholders' equity at December 31, 1997 reflects an unrealized gain of $.9 million, net of tax, on the Company's short-term investments.
Medical claims payable decreased from $118.7 million at December 31, 1996 to $98.3 million at December 31, 1997 primarily due to decreased membership, decreased member utilization and related claims accruals and reversals of claims previously paid.
Additional paid-in capital decreased from $173.3 million at December 31, 1996 to $162.9 million at December 31, 1997, principally due to activity in the Company's stock compensation trust. This trust is used to provide shares of the Company's stock to meet its stock option plan obligations.
The Company currently has access to total revolving credit facilities of $24.0 million, which is used to provide short-term capital resources for routine cash flow fluctuations. At December 31, 1997, approximately $2.5 million was drawn against these facilities.
At its February 1998 meeting, the Board of Directors authorized a $20 million stock repurchase program. The Company may purchase its stock on the open market, through block trades, or in private transactions over the next 12 months. The program may be discontinued at any time.
Consolidated Balance Sheets as of December 31, 1997 and 1996..... 28
Alliance PPO, Inc. ("Alliance") provides a delivery network of physicians (called a preferred provider organization) to employers and insurance companies in association with various health plans.
Short-term investments, consisting principally of marketable equity securities, municipal bonds and tax-free bond funds, are classified as available-for-sale. These securities are carried at fair market value plus accrued interest and any unrealized gains and losses are reported as a separate component of stockholders' equity, net of the related tax effect. Gains and losses are reported in earnings when realized. Gains and losses on sales of securities are computed using the specific identification method.
Amounts charged to third party payors solely for use of the Company's provider network and its discounted fee-for-service rate structure are recognized as fee revenue. Amounts charged for administrative services only arrangements entailing only claims payment services and utilization of the provider network without utilization of the Company's primary care physician network and utilization management services and under which the Company bears no insurance risk, are recognized as fee revenue.
Short-term investments - Fair values are based on quoted market prices.
In June, 1997, the Financial Accounting Standards Board issued Statement No. 130 "Reporting Comprehensive Income" ("Statement 130") and Statement No. 131 "Disclosure About Segments of an Enterprise and Related Information" ("Statement 131"). Statement 130 establishes standards for reporting and display of comprehensive income in a full set of general purpose financial statements, and Statement 131 significantly changes the way companies report segment information in annual financial statements. Because Statement 131 concerns itself only with how supplemental financial statement information is disclosed in annual and interim reports, the adoption will not have a material impact on the Company's consolidated financial
The following is a summary of available-for-sale and held-to-maturity securities at December 31, 1997:
The following is a summary of available-for-sale and held-to-maturity securities at December 31, 1996:
For the years ended December 31, 1997 and 1996, marketable equity available-for-sale securities with a fair value at the date of sale of $62,804,000 and $53,037,000, respectively, were sold. The gross realized gains on such sales totaled $11,027,000 and $8,971,000, and the gross realized losses totaled $2,935,000 and $3,072,000 for each of the respective periods. Realized gains and losses are included in investment income. Other sales of short-term investments consisted principally of redemptions from municipal bond funds.
The noncurrent portion of notes at December 31, 1997 mature in future years as follows (in thousands):
claims generally covers all settlements in excess of $50,000 per person subject to a $1,000,000 maximum recovery per person. Reinsurance recoveries for the years ended December 31, 1997, 1996 and 1995 were approximately $2,045,000, $2,288,000 and $128,000, respectively. In the consolidated statements of operations, reinsurance premiums are shown net of the related recoveries.
Total tax deposits made by the Company in 1997, 1996 and 1995 were approximately $2,461,000, $10,320,000 and $27,266,000, respectively.
Prior to July 1, 1996, contracts with participating physicians allowed for withholdings generally ranging from 5% to 15% from primary care physicians and participating specialists on capitation and fee-for-service payments. The withheld amounts ultimately paid back to providers is generally less than the total amount withheld. Withheld liabilities and related medical expenses were reduced by $14,535,000 and $22,802,000 in 1996 and 1995, respectively, to reflect amounts not returned to providers. Commencing July 1, 1996, the Company, pursuant to state law changes, discontinued withholding from payments in substantially all areas of operations. Amounts placed in such risk pools, in jurisdictions where it is still permitted, were insignificant in 1997.
For the years ended December 31, 1997, 1996 and 1995, certain members of the Boards of Directors of MAMSI and subsidiary corporations who are also participating physicians provided medical services to enrollees totaling $6,103,000, $8,406,000 and $9,699,000, respectively, which represents approximately 1% in 1997 and 2% in all other years 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.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"). Statement 123 prescribes accounting and reporting standards for all stock based compensation plans. Statement 123 requires that the company either adopt the fair value method of accounting for its stock option plans or continue to apply the existing accounting rules but provide supplemental pro forma disclosures as if the new rules had been adopted. The Company elected to follow the existing rules and make the required pro forma disclosures for the first time, in its 1996 consolidated financial statements. Although Statement 123 first became effective in 1996, it requires that the pro forma disclosures include the effects of all awards granted in fiscal years beginning after December 15, 1994, the majority of which were issued under the Company's 1995 and 1996 stock option plans.
Pro forma information regarding net income and earnings per share are required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 6.4%, 6.3% and 6.7%; volatility factors of the expected market price of the Company's common stock of .42, .47 and .53 and a weighted average life of the options of 3 years. The Company anticipates that it will declare no dividends.
In each year 1990 through 1996, 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. Shares authorized under the plans total 15,500,000. 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 1990 - 1996 plans through 1997 are summarized as follows:
The Company has an incentive compensation plan whereby officers and key employees receive bonuses based upon the annual operating results of the Company. No management bonus was earned in 1997, 1996 or 1995. 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.
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 sheet. 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. At December 31, 1997 and 1996, the SCT held 7,959,375 and 9,020,700 shares of common stock at a fair market value of approximately $101.5 and $120.7 million, respectively.
The Company leases certain equipment and office space under the terms of noncancellable operating leases that expire at various dates through 2000. Rent expense relating to these operating leases approximated $3,552,000, $3,316,000 and $2,593,000 in 1997, 1996 and 1995, respectively.
1998 $ 3,428 1999 2,687 2000 1,194 2001 418 2002 297 ------- $ 8,024 =======
M.D. IPA, OCI, OCCI and OCIPA are subject to insurance department regulations in the states in which they are licensed. MAMSI Life is subject to insurance department regulations in Maryland, its state of domicile.
M.D. IPA, OCI, OCCI, OCIPA and MAMSI Life were in compliance with state depository rules at December 31, 1997 and 1996. OCCI failed to meet its net worth requirement of $2.5 million and working capital requirement of $1.6 million at December 31, 1997. In February, 1998, additional capital was provided so that each of these requirements was met. In addition, MAMSI Life was in compliance with the applicable risk-based capital requirements for life and health insurance companies at December 31, 1997 and 1996. These MAMSI subsidiaries must notify state regulators before the payment of any dividends to MAMSI and, in certain circumstances, must receive positive affirmation prior to such payment.
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 short-term investments in marketable 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, 1997, approximately 24% 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.
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1997 AND 1996 (1)
2. During 1997, the Company adopted Financial Accounting Standards No. 128. All previously reported earnings per share amounts have been restated to reflect the adoption of this Statement. See Note 1 to the Consolidated Financial Statements.