The Company's subsidiary owns two three-story office buildings located at 556 and 560 East Town Street, Columbus, Ohio, which are used as Health Power HMO's principal office facilities. These facilities contain approximately 14,195 square feet of office space.
Health Power HMO and CompManagement share office space which is leased in Cincinnati, Ohio.
During 1996, the Company's operating subsidiaries were Health Power HMO and CompManagement. As further discussed below, CompManagement Health Systems began providing its MCO services to employers in March 1997. See "1996 Developments- CompManagement Health Systems."
Health Power HMO provides comprehensive managed health care services to members of its HMO in four service areas encompassing 19 Ohio counties in and around the cities of Columbus, Dayton, Cincinnati, Cleveland and Youngstown. Health Power HMO has historically focused on serving ADC Medicaid recipients and, to a lesser extent, commercial members enrolled through employer groups.
The Company acquired CompManagement on July 21, 1995. The acquisition was accounted for as a pooling of interests. CompManagement, which began business in September 1984, provides claims management and medical cost containment services to employers with respect to their workers' and unemployment compensation claims. CompManagement provides its services to approximately 10,000 employers located in all 88 Ohio counties.
This discussion should be read in conjunction with the consolidated financial statements, notes, and tables included elsewhere in this report. The Company cautions readers that any forward looking statements contained in this report involve risks and uncertainties and are subject to change based on various factors.
In November 1996, CompManagement Health Systems was certified as a state-wide MCO under Ohio's recently implemented managed care workers' compensation system, and in March 1997, it began providing its MCO services to employers. CompManagement Health Systems provides its MCO services to approximately 17,000 employers located in all 88 Ohio counties. As an MCO, CompManagement Health Systems provides, among other things, claims review and processing for workers' compensation claims, bill review and payment with respect to physician and hospital charges, quality assurance programs, and medical management and cost containment services for employers with respect to their workers' compensation claims. Because all workers' compensation claims are reimbursed by the BWC, CompManagement Health Systems does not assume any risk for the payment of medical or disability benefits to employees with respect to their workers' compensation claims.
In November 1996, Health Power HMO received one-year accreditation from NCQA. This accreditation is granted to HMOs which are found to have comprehensive functioning continual quality improvement programs and which satisfy all NCQA standards for accreditation.
Health Power HMO acquired certain contract rights from ChoiceCare Health Plans, Inc., an Ohio corporation ("ChoiceCare"), which enabled approximately 12,000 Hamilton County ADC Medicaid recipients previously served by ChoiceCare to be automatically enrolled in Health Power HMO as of July 1, 1996. The purchase price for the contract rights was $5.0 million. The Results of Operations set forth below reflect the acquisition of such contract rights and the enrollment of the ADC Medicaid recipients previously served by ChoiceCare.
In July 1996, Health Power HMO and Health Power Management entered into agreements with MedOhio Health, Inc. and MedOhio Health Plan, Inc. (collectively, "MedOhio Health") to offer and manage a private label managed care product known as the "University Healthcare Plan". Health Power HMO began offering the University Healthcare Plan to Franklin County ADC Medicaid recipients during the first quarter of 1997. As part of this transaction, MedOhio Health was granted an option to purchase 25,000 shares of Common Stock of the Company. See
Columbus, Ohio March 5, 1997, except for Note 13 for which the date is March 20, 1997
a. DESCRIPTION OF OPERATIONS: Health Power, Inc. (the Company) is a Delaware holding company that operates Health Power HMO, Inc., a health maintenance organization (HMO) in the Columbus, Cincinnati and Dayton, Ohio, areas for Aid to Families With Dependent Children (ADC) and Healthy Start Medicaid recipients as well as for commercial members. On November 18, 1996 the HMO received a National Committee for Quality Service Assurance (NCQA) certificate which expires February 18, 1998. The Company also provides full-service workers' and unemployment compensation consulting services through its CompManagement, Inc. (CompManagement) subsidiary (see Note 2) to employers in the state of Ohio. Effective March 1, 1997, CompManagement Health Systems, Inc., a subsidiary of CompManagement, will also begin operations as a managed care organization for the Ohio Bureau of Workers' Compensation.
b. BASIS OF PRESENTATION: The accompanying consolidated financial statements are presented in accordance with generally accepted accounting principles (GAAP). The Company's HMO subsidiary is subject to regulation by the Ohio Department of Insurance (the Department) and is required to file separate financial statements with the Department prepared in accordance with statutory accounting practices. Such practices differ in certain respects from GAAP. Significant statutory differences relate to certain assets designated as "nonadmitted" (principally intercompany accounts), which are charged directly to surplus and deferred federal income taxes and are not recognized for statutory reporting purposes.
c. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
d. PER SHARE DATA: Earnings per common share have been computed by dividing net income by the weighted average number of common shares and common stock equivalents outstanding. Common stock equivalents included in the computation represent shares issuable on assumed exercise of stock options and stock warrants having exercise prices less than the average market price of the common stock using the treasury stock method.
e. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: It is the policy of the Company to classify investments with original maturities of three months or less as cash equivalents and original maturities greater than three months but less than one year as short-term investments.
Cash equivalents at December 31, 1996 include $12,809,000 deposited in an overnight sweep account and $1,472,844 invested in commercial paper and a money market fund.
g. REVENUES: Commercial and Medicaid revenues consist primarily of amounts earned under contracts with commercial groups and the Ohio Department of Human Services (ODHS) for Medicaid recipients. Such amounts are recognized when earned. Amounts received prior to the month of service are recorded as deferred revenues. For the year ended December 31, 1996, commercial group premiums from the State of Ohio approximated 59% of the Company's commercial revenues. Effective February 24, 1997, the Company gave notice to cancel its contract to provide services for a commercial group in the Dayton area; therefore, health care coverage for that group will cease on March 1, 1997. This group accounted for approximately 15% of the HMO's commercial revenue during 1996. Other commercial group coverage will continue as normal in the Dayton area.
Contract revenues are derived from claims management, administrative and consulting services, which are recorded as earned based on the requirements and duration of the related contract. Revenue on certain contracts has been deferred and is recognized into income on a pro rata basis over the related contract periods, which typically range between 3 and 12 months. Commission expense associated with these contracts is also deferred and recognized into expense on a pro rata basis over the related contract periods. For services related to group rating contracts, fees are paid to the group's sponsor and netted against contract revenues. For the year ended December 31, 1996, contract revenue from a major client approximated 32% of the Company's contract revenue.
h. HEALTH CARE COSTS: Health care costs include primary care and physician-related costs and hospital costs. Primary care and physician-related costs represent expenses incurred under contracts and arrangements with health care providers in rendering services to enrollees. Such costs include fee-for-service amounts and capitation (a monthly fixed fee per enrollee) recognized in providing medical, vision, pharmacy and other health care services.
Hospital costs are recognized when hospital services are provided to enrollees and include stop-loss insurance coverage premiums, net of recoveries (see Note 6).
Primary care and physician-related costs and hospital costs include management's estimate of services provided but not reported at year-end and expected future losses on contracts in effect at year-end. The Company recognizes expected future contract losses when it is probable that expected future health care costs and maintenance costs under a group of existing contracts will exceed anticipated future premiums and stop-loss insurance recoveries on those contracts. The reserve for expected future contract losses is approximately $266,175 and $398,000 as of December 31, 1996 and 1995, respectively, and is included with health care costs payable on the accompanying consolidated balance sheets. The methods of making such estimates and for establishing the resulting liabilities are continually reviewed and updated based on current circumstances, and any adjustments resulting therefrom are currently reflected in operations. It is reasonably possible that these circumstances may change in the near term.
Stop-loss reinsurance premiums are reported as health care costs and recoveries are reported as a reduction of health care costs.
j. ACQUISITION COSTS: The cost of acquiring new HMO members, consisting principally of commissions and underwriting costs, is expensed as incurred. Effective June 30, 1996, the HMO acquired by assignment from ChoiceCare Health Plans, Inc., an Ohio corporation (ChoiceCare), certain contract rights with respect to ChoiceCare's provider agreement with the ODHS. Under that provider agreement, ChoiceCare previously provided health care services to ADC and Healthy Start Medicaid recipients residing in Hamilton County, Ohio. Through its acquisition of such contract rights, approximately 12,000 ADC and Health Start Medicaid recipients previously served by ChoiceCare were enrolled in the Company's HMO effective July 1, 1996. The purchase price for the contract rights assigned to the Company's HMO was $5 million and was charged to operations in 1996.
l. USE OF ESTIMATES: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
m. RECLASSIFICATION: Certain 1995 and 1994 amounts have been reclassified to conform with the 1996 presentation.
On July 21, 1995, CompManagement was merged with and into the Company, and 634,878 shares of the Company's common stock were issued in exchange for all the outstanding common stock of CompManagement. The merger has been accounted for as a pooling of interests, and the financial statements have been restated to include CompManagement.
The Company's HMO provides incentives to capitated primary care providers to promote appropriate utilization and control of hospital and ancillary medical costs. Risk-sharing funds are established using budgeted amounts and shared with providers based on actual utilization and health care cost experience.
The Company's HMO withholds 10%-20% of fees due certain commercial primary care providers and 10% of fees due Medicaid primary care providers as a reserve for potential excessive utilization. The balances in these reserve accounts are retained by the Company or remitted to the providers at the end of the year at the discretion of the Company.
During 1996, the Company elected not to remit any capitation costs withheld and risk-sharing funds. In 1995, the Company's HMO remitted capitation costs withheld and risk-sharing funds amounting to $437,303. The Company retained $177,105 and $152,541 of capitation costs withheld from commercial primary care providers in 1996 and 1995, respectively, and retained $825,254 and $413,442 of capitation costs withheld from Medicaid primary care providers in 1996 and 1995, respectively.
A reconciliation of the Company's effective income tax rate, as reflected in the consolidated statement of operations, to the statutory federal tax rate is as follows:
At December 31, 1996, the Company had the following net federal investment credits and tax credit carryforwards available:
The Company has various operating leases for office space and equipment. The leases have initial terms of up to five years, contain certain escalation clauses, and provide for renewal options for up to 10 years.
a. HEALTH CARE PROVIDERS: During 1996, 1995 and 1994, primary care and physician-related costs amounted to $2,854,159, $2,127,691 and $1,885,896, respectively, resulting from transactions between the Company's HMO and affiliated providers. As of December 31, 1996 and 1995, such transactions resulted in the following assets and liabilities:
a. STOCK-BASED COMPENSATION PLANS: The Company sponsors the various stock-based incentive compensation plans (the Plans). The Company applies APB Opinion 25 and related interpretations in accounting for the Plans. In 1995, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 Accounting for Stock-Based Compensation (SFAS 123) which, if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of the Plans. Adoption of the cost recognition provisions of SFAS 123 is optional, and the Company has decided not to elect these provisions of SFAS 123. However, pro forma disclosures as if the Company adopted the cost recognition provisions of SFAS 123 in 1995 are required by SFAS 123 and are presented below.
first four anniversaries of the date of grant. Options granted to various executives vest 100% at the end of six years (subject to acceleration to a two-year period depending on the performance of the Company or at the discretion of the Compensation Committee). In accordance with APB 25, the Company has not recognized any compensation cost for these stock options granted in 1995 and 1996.
c. PROFORMA NET INCOME AND NET INCOME PER COMMON SHARE: Had the compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS 123, the Company's net income and net income per common share for 1995 and 1996 would approximate the pro forma amounts below:
e. STOCK INCENTIVE BONUS: The Company had an agreement with its president to award shares of common stock as part of an incentive stock bonus plan. During 1993, the president was awarded 35,458 shares of common stock. Compensation expense was recognized as earned over a two-year vesting period based on the estimated fair value of the shares awarded.
The Company maintains 401(k) plans for its employees meeting certain age requirements and completing one year of employment. The Company may make discretionary contributions not to exceed 1% and 6% of the participant's compensation for the plan year for Health Power HMO and CompManagement, respectively. The Company's discretionary contributions to the 401(k) plans were approximately $37,829, $40,221 and $32,600 for 1996, 1995 and 1994, respectively.
On March 20, 1997, the Company's HMO was released from the order of supervision by the Department. The release occurred after affiliates of the HMO paid cash and transferred property in payment of, and pledged a certificate of deposit as security for, amounts due to the HMO, which actions satisfied the Department's requirements of supervision.
In March 1994, the Company issued 915,060 shares of common stock in connection with an initial public offering. Net proceeds of the offering of $8,614,974, after deducting $746,090 of costs incurred in connection with the offering, were credited to stockholders' equity in 1994.
The Company operates in two business segments, HMO and workers' and unemployment compensation consulting services. Separate results of the consolidated Company's segments for the period ended December 31, 1996 are as follows:
Operating (loss) profit is total revenue less operating expenses. In computing operating (loss) profit, the following items are not included: general corporate expenses, interest expense and income taxes. Depreciation for the HMO and consulting services segments for the year ended December 31, 1996 was $15,617 and $73,618, respectively. Capital expenditures for the two segments were $24,803 and $49,487, respectively.
Identifiable assets by industry are those assets that are used in the Company's operations in each segment. Corporate assets are principally cash and property, plant and equipment.
The Company decreased its estimate of health care costs payable by approximately $132,291 related to premium deficiencies on contracts in effect at December 31, 1996.
The Company elected to retain certain capitation costs withheld from its providers resulting in an approximate $1 million reduction in costs (see Note 5).
The Company established a 100% valuation allowance on the deferred tax asset of $2,457,049.
Condensed balance sheets of Health Power, Inc. (parent company only) as of December 31, 1996 and 1995 and the condensed statements of operations and cash flows for the years ended December 31, 1996, 1995 and 1994 are as follows: