Commercial premiums increased $355 million or 23 percent to $1.9 billion for the fiscal year ended September 30, 1996 from $1.5 billion in 1995. Commercial HMO membership increased by 218,000 to 1,434,000 due to continued growth in all markets except Florida. Commercial HMO membership growth provided $281 million of the increase, more than offsetting average premium rate decreases of 1.2 percent, primarily in California. The effects of acquisitions described above and the commercial specialty managed care products and services provided the remainder of the increase in commercial premiums.
Net interest income increased by approximately $10.0 million compared to the prior fiscal year primarily due to increased cash available for investment purposes at higher interest rates than fiscal year 1995 and lower interest expense associated with decreased debt service.
OTHER. Results may differ materially from those projected, forecast, estimated and budgeted by the Company due to adverse results in ongoing audits or in other reviews conducted by federal or state agencies or health care purchasing cooperatives; adverse results in significant litigation matters; and changes in interest rates causing an increase in interest expense.
a) ORGANIZATION AND OPERATIONS. PacifiCare Health Systems, Inc. (the "Company") owns and operates federally qualified health maintenance organizations ("HMOs"), which arrange health care services principally for a predetermined, prepaid periodic fee to enrolled subscriber groups through independent health care organizations under contract. The Company also offers certain specialty products and services to group purchasers and to other managed care organizations and their beneficiaries, including pharmacy benefit management, life and health insurance, behavioral health services, dental and vision services and Medicare risk management services. UniHealth, a California non-profit public benefit corporation ("UniHealth"), owned approximately 48 percent and 2 percent of the Company's outstanding shares of Class A Common Stock, par value $0.01 per share (the "Class A Common Stock") and Class B Common Stock, par value $0.01 per share (the "Class B Common Stock"), respectively, at September 30, 1996.
k) UTILIZATION REVIEW AND CASE MANAGEMENT SERVICES. The Company's HMOs conduct utilization review and case management programs to ensure that their providers deliver a consistent quality of care to members. The utilization review program essentially provides patients with second opinions, while the case management program assigns nurses to complicated, high-risk or chronic cases to evaluate and recommend treatment options to the patient and provider. Exclusive of costs related to the Company's behavioral health product, the HMOs' costs associated with providing these medical services are recorded in marketing, general and administrative expenses and totaled $11.5 million, $10.4 million and $7.4 million for the fiscal years ended September 30, 1996, 1995 and 1994, respectively.
a) Impairment of Goodwill Charge. In the fourth quarter the Company recognized a charge for the impairment of goodwill associated with its Florida operations. PacifiCare of Florida ("PCFL") was established in 1994 through the acquisition of two health plans which resulted in more than $62.1 million of goodwill recognized in purchase accounting. As of September 30, 1996, PCFL had approximately 41,000 members in small group, individual and Medicaid health plans. The business strategy for PCFL profitability was based on the launching of the Company's Secure Horizons program in Florida. In response to the FHP Transaction (See "Proposed FHP Merger") and the considerable amount of resources which will be needed to integrate FHP's operations with those of the Company, assuming the FHP Transaction is consummated , the Company decided to explore options with respect to PCFL's operations, including a possible sale. Accordingly, the Company withdrew its HCFA application in September 1996. Consequently, the Company recognized a $58.7 million ($34.1 million or $1.08 per share, net of tax) impairment of PCFL goodwill and other intangible assets. The Company expects to continue operations in Florida until a sale is consummated or the Company makes alternative arrangements. A comprehensive plan to dispose of PCFL's business may involve a restructuring charge in future periods.
We have audited the accompanying consolidated balance sheets of PacifiCare Health Systems, Inc. as of September 30, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.