As of December 31, 2000, we owned or leased the following facilities in the state of Missouri, which we consider material to our operating segments:
The following table sets forth our selected consolidated financial information for the years indicated and should be read in conjunction with our consolidated financial statements and the notes to our consolidated financial statements and the "Management's discussion and analysis of financial condition and results of operation" section of this Annual Report.
(a) The financial data for all periods presented reflect the reorganization of our company as more fully described in Note 1, "Organization" of the Notes to Consolidated Financial Statements of Part II, Item 8, which is incorporated herein by reference. Prior to our reorganization, Blue Cross and Blue Shield of Missouri owned 14,962,500 shares, or approximately 80%, of Old RightCHOICE's 18.7 million shares of common stock outstanding, and the public minority stockholders owned the remainder. As of December 31, 2000, The Missouri Foundation For Health owned approximately 80% of our outstanding common stock. In conjunction with the reorganization, the public minority stockholders exchanged their 3.7 million shares of Old RightCHOICE common stock for an equal number of shares of our common stock. As a result of the reorganization, the results of operations up to and including November 30, 2000 reflect a charge against earnings for the public minority stockholders' interest in Old RightCHOICE. For the purpose of computing basic earnings per share prior to the reorganization, the public minority stockholders' 3.7 million shares of Old RightCHOICE common stock reduced the weighted average common shares. After the reorganization, the weighted average share calculations include the 3.7 million shares of our common stock issued to Old RightCHOICE's public minority stockholders.
(d) The adjusted general and administrative expense ratio is calculated as general and administrative expense excluding depreciation and amortization as a percentage of total revenue.
(e) Amounts represent cash and investments available for general corporate uses without regulatory approval.
We offer our managed health care products and services through a variety of provider networks, utilizing a range of benefit designs and funding options. We design our products and services to meet the needs of individuals and a wide range and size of employers and other groups. We offer our managed health care products and services in two funding types: (1) underwritten products, for which we receive premium revenue in exchange for the assumption of medical, selling and administrative risks, and (2) self-funded products, for which we generally assume no risk, or reinsure the risk, for medical costs and receive compensation for providing the requested services. Products in our underwritten segment include preferred provider organizations (PPO), point of service (POS), health maintenance organizations (HMO), Medicare supplement, specialty managed care, short-term medical and managed indemnity benefit plans. Products in our self-funded segment include third-party administrator services, administrative services only (ASO) for self-insured organizations, network rental services for self-insured organizations, insurance companies and other organizations, including network rental for workers' compensation, and life insurance agency services. Our other segment includes our commercial real estate business.
Our combination of underwritten and self-funded products and services provides us with a diversified and complementary source of revenue and earnings. For the year ended December 31, 2000, our underwritten products accounted for approximately 89% of revenue and 20% of operating profits compared to 11% and 75%, respectively, for our self-funded products. As of December 31, 2000, we had 554,252 members in our underwritten products and 2,187,000 members in our self-funded products. For the year ended December 31, 2000 compared to the prior year, revenue for our underwritten products increased 15% and revenue for our self-funded products increased by 15%. Operating results for our underwritten segment increased from a loss of $4.9 million to a gain of $10.6 million while operating profit for our self-funded segment increased from $30.2 million to $40.3 million in 2000 as compared to 1999. We believe that the profitability and growth dynamics of our underwritten and self-funded businesses are complementary. We believe that our diversification offers an attractive combination of earnings growth potential from our underwritten business and earnings stability from our self-funded business.
For Health, which was created as part of the reorganization, now owns approximately 80% of our outstanding common stock and the remainder is owned by public stockholders.
(2) Does not include 425,053 and 391,021 additional third-party administrator members as of December 31, 2000, and 1999, respectively, that are part of The EPOCH Group, L.C., a joint venture with Blue Cross and Blue Shield of Kansas City formed in December 1995. Our share of the earnings of EPOCH are included in our income statement under the caption "Other, net."
PPO premium revenue, including our Illinois PPO products and Federal Employee Program, increased $68.7 million, or 23.3%, to $363.2 million in 2000 from $294.5 million in 1999 -- $27.1 million of the increase was due to an 8.4% increase in net premium rates and $41.6 million of the increase resulted from a 13.8% increase in member months. The term member months refers to the cumulative number of members added together over a specific time period. Thus, for a year, member months are determined by adding together the membership counts for all twelve months. Net premium rates increased due in part to our premium renewal rate increases, which are affected by medical cost inflation, changes in deductibles, the timing of group renewals throughout the year and product mix changes. Member months increases reflect our PPO products that we began offering in Illinois under the RightCHOICE of Illinois brand at the end of the first quarter of 1997. Included in the number of our underwritten PPO members are 29,536 PPO Illinois members as of December 31, 2000, an increase of 15,288 members from December 31, 1999. PPO premium revenue for the Federal Employee Program increased $11.5 million, or 14.0%, to $93.6 million in 2000 from $82.2 million in 1999. Included in the $82.2 million in PPO premium revenue for 1999 is $2.3 million in administrative cost reimbursement related to administrative costs incurred in 1994 through 1998 we received as a result of a focused effort to recover administrative costs from prior years which the Federal Employee Program had not reimbursed. Federal Employee Program revenue typically fluctuates based on actual administrative costs incurred and claims submitted. The increase in revenue is due to an increase in claims costs of approximately $13.4 million. The increase in both revenue and claims is partially due to a 4.6% increase in member months in 2000 as compared to 1999.
HMO (including other POS) premium revenue increased $8.7 million, or 4.1%, to $220.6 million in 2000 from $211.9 million in 1999 -- $19.6 million of the increase due to a 7.2% increase in net premium rates (inclusive of the 12% rate increase for the Missouri Consolidated Health Care Plan described below), partially offset by a $10.9 million decrease resulting from a 2.9% decrease in member months. Membership declines were partially due to increases in premium rates and partially due to a general migration by employers from HMO products to other managed care products such as PPO products.
Other specialty services premium revenue, which is derived from our PPO and POS group pharmacy plans as well as all of our group dental benefit plans, increased $18.0 million, or 38.1%, to $65.4 million in 2000 from $47.4 million in 1999 -- $9.4 million of the increase as a result of a 21.2% increase in net premium rates and $8.6 million resulting from a 14.0% increase in member months. Specialty product membership related to our pharmacy products increased in 2000 as a result of growth in our related underwritten membership. The increase in membership for pharmacy products was offset slightly by decreases in our dental product member months, which decreased by 7.0% due to competition from dental products that have lower premiums than our dental product. We continue to work towards revising our dental product to be more competitive in the market. We do not separately report membership related to other specialty services in our total underwritten membership because these members are already counted as members of our other underwritten products. The 21.2% increase in net premium rates primarily related to our pharmacy products and corresponded to the high levels of prescription utilization and trends that our company, as well as the industry as a whole, have experienced in recent years.
Our medical cost ratio decreased to 81.8% in 2000 from 82.5% in 1999. The medical cost ratio represents health care services expense divided by premium revenue. The medical cost ratio in 2000 is lower compared to that in 1999 due in part to our pricing strategy, which resulted in an overall increase in the premium per member per month of approximately 8.9% in 2000 as compared to 1999. The medical expense on a per member per month basis increased by approximately 7.9% in 2000 as compared to 1999. Inclusive in the medical expense on a per member per month basis in 2000 is a pharmacy cost trend increase of approximately 21%, which was driven by a combination of factors, including introduction of new drug therapies, physicians' use of newer, more expensive drugs, and greater utilization of drugs driven in part by direct-to-consumer advertising. We are managing our medical costs through a variety of medical management programs. See Part I, Item 1 "Business--Medical Management" of this Annual Report.
Commission expense increased by $4.0 million, or 12.4%, to $36.5 million in 2000 from $32.5 million in 1999. Our commission expense ratio decreased to 3.4% for 2000 compared to 3.5% in 1999. This ratio represents commission expense divided by total revenues. The increase in commission expense in 2000 is primarily due to an increase in overall premium and membership.
Depreciation and amortization expenses increased $0.6 million, or 2.6%, to $20.6 million in 2000 from $20.0 million in 1999. Amortization expenses for completed components of our information and operations strategy project increased by $0.4 million in 2000 compared to 1999. The increase in amortization for the information and operations strategy project is due to additional completed modules of the project that we are amortizing over an estimated seven-year useful life. In addition, during 2000, we amortized $0.1 million of the goodwill and intangible assets resulting from our reorganization on November 30, 2000.
Operating expenses for our underwritten segment include health care service costs, commissions, and general and administrative expenses, as well as any non-recurring charges attributable to that segment's operations. Operating expenses for our self-funded segment include commissions, general and administrative expenses, and non-recurring charges attributable to that segment's operations. Operating expenses for our other segment include general and administrative expenses and non-recurring charges related to the company's real estate activities. Operating expenses for our underwritten segment increased $106.6 million, or 13.0%, to $929.5 million in 2000 from $822.9 million in 1999 primarily due to an increase in health care service costs of $93.9 million in 2000 as compared to 1999. Health care service costs increased due to an increase in our underwritten membership as well as an increase in per member claims costs, as previously described. General and administrative expenses and commission expenses also increased by $8.5 million and $4.2 million, respectively, in 2000 to $125.0 million and $36.1 million as compared to 1999. These increases were also partially attributable to an increase in our underwritten membership of 7.3% during 2000. Operating expenses for our self-funded segment increased $5.6 million, or 7.8%, to $77.6 million in 2000 from $72.0 million in 1999. This increase was primarily due to the increase in HealthLink's general and administrative expenses, as
Operating income for our other segment remained unchanged at $2.8 million in 2000 and 1999.
Net investment income increased $2.7 million, or 18.3%, to $17.4 million in 2000 from $14.7 million in 1999, as a result of comparatively higher cash and investment levels in 2000 as well as an increase of $0.8 million in net realized gains. Net investment income includes investment income in the form of interest and dividend income and net realized gains or losses from the sale of portfolio securities.
Other, net expenses decreased $2.2 million, or 54.5%, to $1.9 million in 2000 from $4.1 million in 1999. Other, net includes interest expense, realized gains and losses from the sale of property and equipment, equity in unconsolidated affiliates, and other items. We realized a $0.7 million gain on the sale of our Southwest Missouri regional office building in May 2000. We relocated the employees and our operations to a larger leased facility within the same region. In addition, our share of the earnings of an unconsolidated affiliate, The EPOCH Group, L.C., increased $0.5 million, or 73.1%, to $1.2 million in 2000 from $0.7 million in 1999. Our interest expense decreased by $0.5 million to $3.8 million in 2000 from $4.3 million in 1999, primarily due to a reduction in the total amount of debt outstanding under our credit facility.
The charge for minority interest increased $3.0 million, or 89.6%, to $6.4 million in 2000 from $3.4 million in 1999, due to the increase in Old RightCHOICE's earnings in 2000 through the November 30, 2000 reorganization date as compared to Old RightCHOICE's earnings for the full year 1999. The charge for the minority interest relates to the public minority stockholders' interest in Old RightCHOICE's results of operations up to and including November 30, 2000, the date of our reorganization as further described in Note 1, "Organization" of the Notes to Consolidated Financial Statements. The public minority stockholders consisted of the holders of the 3.7 million class A common shares of Old RightCHOICE, which represented approximately 20% of the total outstanding shares of Old RightCHOICE.
Net income increased $16.7 million, or 88.8%, to $35.5 million in 2000 from $18.8 million in 1999, as a result of the factors noted above. Basic and diluted earnings per share for 2000 were $2.33 and $2.27, respectively, compared to basic and diluted earnings per share for 1999 of $1.26 and $1.25, respectively. Basic and diluted earnings per share for the year ended December 31, 2000 are based upon weighted average shares outstanding of 15.3 million and 15.6 million, respectively. Basic and diluted earnings per share for the year ended December 31, 1999 are based upon weighted average shares outstanding of 15.0 million. The increase in weighted average shares outstanding in 2000 primarily relates to the effect of the reorganization on November 30, 2000 which resulted in the issuance of 3.7 million shares as further described in Note 1, "Organization" of the Notes to Consolidated Financial Statements. In addition, in 2000 the increase in weighted average shares outstanding assuming full dilution was primarily due to the aforementioned reorganization as well as the impact of the increase in our stock price during the year.
Premium revenue increased $42.3 million, or 5.5%, to $817.5 million in 1999 from $775.2 million in 1998. As described below, components of premium revenue were affected by shifts in product mix, rate increases and other factors. As a result, such increase in premium revenue may not be indicative of future periods.
PPO premium revenue, including the Federal Employee Program, increased $22.5 million, or 8.2%, to $294.5 million in 1999 from $272.0 million in 1998 -- $30.3 million of this increase due to a 10.7% increase in net premium rates, partially offset by a $7.8 million decrease resulting from a 2.2% decrease in member months. Net premium rates increased due in part to our premium renewal rate increases,
which are affected by changes in deductibles, the timing of group renewals throughout the year and product mix changes. We began offering PPO products in Illinois at the end of first quarter 1997. Included in the number of our underwritten PPO members are 14,248 PPO Illinois members as of December 31, 1999, an increase of 7,212 members from December 31, 1998. PPO premium revenue for the Federal Employee Program increased $5.0 million, or 6.4%, to $82.2 million in 1999 from $77.2 million in 1998. Federal Employee Program revenue typically fluctuates based on actual administrative costs incurred and claims submitted. A portion of the increase resulted from an increase in claims costs of $3.0 million. Additionally, as a result of a focused effort to recover administrative costs from prior years, which had not been reimbursed by the Federal Employee Program, we received $2.3 million in administrative cost reimbursement in 1999 related to administrative costs incurred in 1994 through 1998. We also received payments of $0.3 million in 1999 related to the achievement of superior service levels for the Federal Employee Program.
POS premium revenue, which includes our AllianceChoice group and individual products, increased $16.4 million, or 10.8%, to $167.4 million in 1999 from $151.0 million in 1998 -- $21.8 million of this increase due to a 14.6% increase in net premium rates, partially offset by a $5.4 million decrease resulting from a 3.3% decrease in member months. Net premium rates increased due in part to our premium renewal rate increases which are affected by changes in deductibles, the time of group renewals throughout the year and product mix changes.
HMO (including other POS) premium revenue increased $5.6 million, or 2.7%, to $211.9 million in 1999 from $206.3 million in 1998 -- $22.4 million of this increase due to a 10.0% increase in net premium rates, partially offset by a $16.8 million decrease resulting from a 6.6% decrease in member months. The Missouri Consolidated Health Care Plan comprised approximately 39,500 of our underwritten HMO members as of December 31, 1999. We have historically had a limited ability to increase premium rates for this large group. Membership in the Missouri Consolidated Health Care Plan increased by 6,277 members from December 31, 1998 to December 31, 1999. Excluding the Missouri Consolidated Health Care Plan, membership in our HMO products decreased over the same time period by 7,997 members, partially due to our pricing strategy.
Medicare supplement premium revenue decreased by $2.7 million, or 2.8%, to $92.3 million in 1999 from $95.0 million in 1998 -- $7.3 million of this decrease resulting from a 7.4% decrease in member months, partially offset by a $4.6 million increase due to a 5.0% increase in net premium rates. Membership in our Medicare supplement products decreased in part due to subscribers opting for competitors' Medicare-risk programs in which medical benefits are at least as comprehensive as Medicare benefits for persons eligible to receive benefits under a Medicare supplement program. These Medicare-risk programs have historically been offered at no additional cost to the member.
Managed indemnity premium revenue decreased by $4.0 million, or 49.9%, to $4.1 million in 1999 from $8.1 million in 1998, primarily as a result of a 55.4% decline in member months. Member month declines are consistent with our strategy to move toward more focused managed care products.
Other specialty services premium revenue, which is derived from our PPO and POS group pharmacy plans as well as our dental benefit plans, increased $4.7 million, or 10.9%, to $47.4 million in 1999 from $42.7 million in 1998 -- $7.3 million of this increase as a result of a 17.6% increase in net premium rates partially offset by a $2.6 million decrease resulting from a 5.7% decrease in member months. We do not include membership related to other specialty services in our total underwritten membership because these members are already counted as members of other underwritten medical products. Specialty product membership related to our pharmacy products increased slightly in 1999 as a result of growth in our related underwritten membership. The increase in membership for pharmacy products was offset by larger decreases in our dental product member months, which decreased by 22.4% due to competition
Our medical cost ratio decreased to 82.5% in 1999 from 84.0% in 1998. The medical cost ratio in 1999 was lower compared to that in 1998 due in part to our pricing strategy, which resulted in an overall increase in the premium per member per month of approximately 10.7% in 1999 as compared to 1998. The medical expense on a per member per month basis increased by approximately 8.8% in 1999 as compared to 1998.
Depreciation and amortization expenses decreased $2.1 million, or 9.5%, to $20.0 million in 1999 from $22.1 million in 1998. Amortization expenses for completed components of our information and operations strategy project decreased by $1.3 million in 1999 compared to 1998. The decrease in amortization for the information and operations strategy project is due in part to our change in the estimated useful life of the capitalized software from five to seven years.
Operating income increased $29.8 million to $28.1 million in 1999 from a loss of $1.7 million in 1998. Pricing strategies, medical cost management, and controlled general and administrative expenses contributed to the increase in operating income in 1999.
Operating income for our other segment increased $0.9 million, or 50.3%, to $2.8 million in 1999 from $1.9 million in 1998, due to the increased rent charged to our company by our real estate subsidiaries.
Net investment income decreased $1.2 million, or 7.5%, to $14.7 million for 1999 from $15.9 million in 1998, primarily as a result of a $1.1 million decrease in net realized gains.
In the first quarter of 1999, we adopted the Accounting Standards Executive Committee Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." As previously described, our adoption of this SOP resulted in a $1.3 million expense write-off ($1.1 million, net of tax) in 1999 relating to costs incurred in 1998 for legal, consulting, accounting and other fees related to the reorganization of the company. We have reported the cumulative effect of this accounting change in our 1999 statement of income.
due to the timing of various operating cash payments and accruals. Medical claims payable increased by $4.9 million, or approximately 3.5%, due to the increase in the cost of health care services and an increase in underwritten membership, partially offset by our efforts to reduce our claims inventory.
We primarily invest our cash balances in fixed income securities. Our investment policies are designed to preserve principal, maximize yield and provide liquidity to meet anticipated obligations. Our available-for-sale securities primarily include fixed-rate government securities and corporate bonds as well as mortgage-backed and other asset-backed securities. We also have invested approximately $16.0 million in various equity index funds, the value of which was approximately $14.5 million, which represents 5.5% of the total value of our investments available for sale, as of December 31, 2000.
Our credit agreement requires that in 2001 we repay $6.0 million of the amount borrowed. To secure our obligations under the credit agreement, we have pledged to the lender the stock of our direct subsidiaries. In addition, the credit facility is currently scheduled to terminate on January 2, 2002 as described in Note 10, "Long-term debt and commitments" of the Notes to Consolidated Financial Statements of Part II, Item 8 of this Annual Report. On March 28, 2001, we filed a registration statement with the Securities and Exchange Commission to offer for sale to the public shares of our common stock. If our offering is completed, we are required to use the net proceeds to reduce our borrowings under our credit agreement. Once repaid, there will be no further borrowings available under the credit agreement.
In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, "Accounting for Computer Software Developed For or Obtained For Internal Use," which is effective for fiscal years beginning after December 15, 1998. SOP 98-1 requires preliminary stage project costs to be expensed as incurred. Once a project is in the application development stage, SOP 98-1 requires all external direct costs for materials and services and payroll and related fringe benefit costs to be capitalized and subsequently amortized over the estimated useful life of the project. The adoption of SOP 98-1 did not have a material impact on our financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," which is effective for fiscal years beginning after December 15, 1998. SOP 98-5 requires that certain costs of start-up activities, including organization costs, should be expensed as incurred. We adopted SOP 98-5 in the first quarter of 1999 and this adoption resulted in a $1.3 million expense write-off ($1.1 million, net of tax) in 1999 relating to costs incurred in 1998 for legal, consulting, accounting and other fees related to the reorganization. We have reported the cumulative effect of this accounting change in our 1999 statement of income. In total, we expensed $2.0 million and $5.1 million (including the $1.3 million noted above) of costs in 2000 and 1999, respectively, related to the reorganization.
See description under the same caption in Note 13 of the Notes to Consolidated Financial Statements of Part II, Item 8, which is incorporated herein by reference.