(1) Change in accounting principle is a credit relating to the implementation of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
(2) The Company completed registered public offerings in April 1992 and April 1996. In 1992, the Company issued 553,273 shares of common stock from which the Company realized net proceeds of approximately $9.6 million. In 1996, the Company issued 5,227,272 shares of common stock from which the Company realized net proceeds of approximately $220.5 million.
(3) Per share amounts and weighted average number of common share amounts have been restated to reflect the two-for-one stock splits in 1993, 1995 and 1996. See note 5 to consolidated financial statements.
In July 1995, the Company merged with OakTree Health Plan, Inc. ("OakTree"), a Philadelphia-based HMO servicing primarily Medicaid beneficiaries. The merger was accounted for as a pooling of interests and, accordingly, all data in the paragraphs that follow have been restated to include the operations and accounts of OakTree for all periods prior to the merger.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Commercial premium revenues increased $864.6 million to $2.17 billion in 1996 from $1.31 billion in 1995. Membership growth accounted for substantially all of the change as member months of the Freedom Plan increased 63.5% when compared with 1995, and member months of Oxford's traditional HMOs increased 65.9% over the prior year. Premium rates of commercial programs were slightly higher in 1996 than in 1995.
Health care services expense stated as a percentage of premiums earned (the "medical-loss ratio") was 80.1% for the year ended December 31, 1996 compared with 77.5% for the year ended December 31, 1995. The increase in the medical-loss ratio was attributable to a higher percent of membership in the Company's Medicare programs, greater than expected pharmacy costs, and decreased per member per month premium revenue in the Company's Medicaid programs. Overall per member per month revenue increased 4.3% to $193.67 in 1996 from $185.69 in 1995 while overall per member per month health care services expenses increased 7.8% to $155.16 in 1996 from $143.99 in 1995. Effective January 1, 1997, the New York Health Care Reform Act of 1996 (the "Act") requires that the Company make payments to state funding pools to finance hospital bad debt and charity care, graduate medical education and other state programs under the Act. Previously, hospital bad debt and charity care and graduate medical education were financed by surcharges on payments to hospitals for inpatient services. As contemplated by the Act, the Company has substantially completed the negotiation of adjustments to rates paid to network hospitals in New York to reflect elimination of these surcharges. These adjustments are generally effective as of January 1, 1997, but they are not expected to result in savings equal to the cost of the surcharges. Accordingly, the Company has filed for increases of between 2% and 3.2% in certain of its commercial premium rates in New York in addition to normal trend increases in view of the increases in costs attributable to the Act. See "Government Regulation; Reimbursement."
The Company's profitability is dependent, in part, on its ability to predict and maintain effective control over health care costs (through, among other things, appropriate benefit design, utilization review and case management programs and its case rate and risk-sharing agreements with providers) while providing members with quality health care. Factors such as utilization, new technologies and health care practices, hospital costs, major epidemics, inability to establish acceptable compensation agreements with providers and numerous other factors may affect Oxford's ability to control such costs. The Company uses its medical cost containment capabilities, such as claim auditing systems, physician tracking systems and utilization review protocols, and improved channeling to the most cost-effective providers with a view to reducing the rate of growth in health care services expense. There can be no assurance that Oxford will be successful in mitigating the effect of any or all of the above-listed or other factors. Accordingly, past financial performance is not necessarily a reliable indicator of future performance, and investors should not use historical performance to anticipate results or future period trends.
The Company's equity in the net loss of Health Partners, Inc. ("Health Partners") for 1996 was $4.6 million compared with a loss of $3.9 million in 1995. The increased losses for Health Partners relate primarily to lower per member per month premium revenue in Health Partners' Medicaid programs. The Company has a 47% interest in Health Partners, a company established to provide management and administrative services to physicians, medical groups and other providers of health care. The Company contracts with provider groups managed by Health Partners in the Company's service areas.
The provision for income taxes for 1996 was $72.4 million, or 42.1% of the Company's pretax income in 1996, approximately the same as the 1995 tax rate.
Total premium revenues for the year ended December 31, 1995 increased 133.7% to $1.73 billion from $741.9 million in 1994. This overall increase was primarily attributable to a 127.7% increase in member months for commercial and government programs. The substantial growth in membership reflected increasing consumer acceptance of health care plans in the Company's markets in general, and the popularity of the products offered by the Company in particular.
Commercial premium revenues increased $702.6 million to $1.31 billion in 1995 from $604.3 million in 1994. Membership growth accounted for all of the change as member months of the Freedom Plan increased 133.5% when compared with 1994, and member months of Oxford's traditional HMOs increased 76.1% over the prior year. Premium rates of commercial programs were slightly lower in 1995 than in 1994.
Premium revenues of government programs increased $289.6 million to $427.3 million in 1995 from $137.7 million in 1994. Membership growth accounted for substantially all of the change as member months of Medicare programs increased 386.6% when compared with the prior year, while member months of Medicaid programs increased 108.8% over the 1994 level. Premium rates of both Medicare and Medicaid programs were substantially unchanged from the prior year.
Third-party administration revenues for the year ended December 31, 1995 rose to $11.9 million from $10.9 million in 1994, attributable to a 10.9% increase in per member per month revenue, partially offset by a 1.9% decrease in member months.
Net investment income for the year ended December 31, 1995 increased to $19.4 million from $7.4 million in 1994. This was principally due to the increase in invested cash resulting from increased cash flow from operations during 1995.
The Company's equity in the net loss of Health Partners for 1995 was $3.9 million compared with a loss of $2.1 million in 1994. The increased losses for Health Partners relate primarily to increased investment in physician practices and the start-up of additional centers in New York City and Northern Virginia.
The provision for income taxes for 1995 was $39.1 million, or 42.7% of the Company's pretax income in 1995. The decrease in the Company's 1995 income tax rate compared with the prior year's rate of 43.5% was attributable to a reduction in the state rate due to a change in state apportionment factors and the composition of the Company's multi-jurisdictional business.
Cash flow from operations of $287.2 million and the receipt of approximately $220 million in April 1996 from the public offering of shares of the Company's common stock contributed to an increase in cash and cash equivalents and short-term investments to $839.5 million at December 31, 1996 from $368.6 million at December 31, 1995. The Company's cash flow from operations has increased substantially over the last five years primarily as the result of increased earnings from operations and increases in items related to growth in membership and revenues such as receipt of premium revenues before payment of associated health care services expenses.
Cash amounts aggregating $610,000 have been segregated as restricted investments as required by the New York State Department of Insurance, the New Jersey Department of Insurance and the Pennsylvania Department of Insurance. In 1996, the Company made capital contributions of $70 million to its operating subsidiaries in order to increase reserves and meet state statutory requirements. In addition, the Company's subsidiaries are subject to certain restrictions on their abilities to make dividend payments, loans or other transfers of cash to the parent company, which limit the ability of the Company to use cash generated by subsidiary operations to pay the obligations of the parent.
The Company currently has no definitive commitments requiring cash in excess of currently available resources; however, management continually evaluates opportunities to expand the Company's health care services and health plan operations. The Company's expansion options may include acquisitions, investments and internal development of new markets, products and programs.
Premiums receivable at December 31, 1996 increased to $315.1 million from $140.0 million at September 30, 1996 primarily as the result of delays in billings caused by conversion of certain of the Company's operations to a new computer system. The Company's medical costs payable, which includes reserves for IBNR, was $624.4 million (including $551.1 million of IBNR) as of December 31, 1996 and $300.5 million (including $297.0 million of IBNR) as of December 31, 1995. The relative increase in medical costs payable from the prior quarter resulted primarily from delays in claim payments caused by the computer system conversion referred to above. The Company estimates the amount of its IBNR reserves using standard actuarial methodologies based upon historical data, including the average interval between the date services are rendered and the date claims are paid, expected medical cost inflation, seasonality patterns and increases in membership. The liability is also affected by shared risk arrangements under Private Practice Partnerships ("Partnership"). In determining the liability for medical costs payable, the Company accounts for the financial impact of the experience of risk-sharing Partnership providers (who may be entitled to credits from Oxford for favorable experience or subject to deductions for accrued deficits) and, in the case of Partnership providers subject to deficits, has established reserves to account for delays or other impediments to recovery of those deficits. The Company believes that its reserves for IBNR are adequate in order to satisfy its ultimate claim liability. However, the Company's rapid growth affects the Company's ability to rely on historical information in making IBNR reserve estimates.
See Index to Consolidated Financial Statements and Schedules on page 24.