The Company's management services revenues result from operations in which the Company's health plans provide administrative and other services to self-insured employers and to employer group beneficiaries that have elected HMO coverage. The Company receives an administrative fee for these services, but does not assume underwriting risk. In addition, the Company offers a PPO product to other third party payors, under which it provides rental of and access to the Company's PPO network, claims repricing and utilization review, and does not assume underwriting risk. A significant portion of the Company's management services revenue in 1999 and 1998 was a result of the acquisition of certain PHC health plans from Principal Life Insurance Company ("Principal Life"). The Company recognized revenue under a Marketing Services Agreement, Management Services Agreement and PPO access agreement with Principal Life. These agreements have either expired or have been terminated as of December 31, 1999.
As a result of the acquisition, Coventry assumed an agreement with Principal Life, whereby Principal Life pays a fee for access to Coventry's PPO network based on a fixed rate per employee entitled to access the PPO network and a percentage of savings realized by Principal Life. Effective June 1, 1999, Coventry sold the Illinois portion of the PPO network back to Principal Life. Under this agreement, Coventry recognized revenue of approximately $8.0 million and $12.0 million for the years ended December 31, 1999 and 1998, respectively.
In connection with the acquisition of certain PHC health plans and the sales of the Florida and Illinois plans, Coventry established reserves of approximately $33.0 million for the estimated transition costs of the PHC health plans. These reserves are primarily comprised of severance costs related to involuntary terminations of former PHC employees, relocation costs of former PHC personnel, lease termination costs and contract termination costs. Through December 31, 1999, Coventry has expended approximately $29.7 million related to these reserves and expects to make payments on the remaining reserves through July 2002.
In August 1997, the Company entered into agreements to sell certain remaining medical offices associated with HealthAmerica in Harrisburg, Pennsylvania. The sales price was $2.4 million, resulting in a pretax loss to the Company of $0.6 million. All gains or losses resulting from medical office sales are reflected in other income, net, in the accompanying Consolidated Statement of Operations for the year ended December 31, 1997.
OTHER LEGAL ACTIONS. In the normal course of business, the Company has been named as a defendant in various legal actions seeking payments for claims denied by the Company, medical malpractice, and other monetary damages. The claims are in various stages of proceedings and some may ultimately be brought to trial. Incidents occurring through December 31, 1999 may result in the assertion of additional claims. With respect to medical malpractice, the Company carries professional malpractice and general liability insurance for each of its operations on a claims-made basis for which the Company maintains reserves. In the opinion of management, the outcome of these actions should not have a material adverse effect on the financial position or results of operations of the Company.
Management services revenue increased $3.3 million in 1999, or 4.3%, from the prior year. The increase in management service revenue is primarily attributable to an increase in self-funded membership of 19,695, or 9.0%, including the conversion of a large group from a commercial risk product to a self-funded product.
(2) St. Louis includes PHC of St. Louis membership in 1998.
managed health care, while others would adversely affect managed care. Although the provisions of any legislation adopted at the state or federal level cannot be accurately predicted at this time, management of the Company believes that the ultimate outcome of currently proposed legislation would not have a material adverse effect on the Company and its results of operations in the short-term.
Increases in our revenues will be generally dependent upon our ability to increase premiums and membership. In addition to the loss of revenues generated from the Principal Life fees, there are several factors that may affect our ability to maintain or increase revenues including:
Effective May 1, 1997, the Company completed its sale of the medical offices associated with GHP, its health plan in St. Louis, Missouri, to a major health care provider organization. The sales price was $26.9 million resulting in a pretax gain of approximately $9.6 million. Coincident with the sale, the Company entered into a long-term global capitation agreement with the purchaser covering approximately 83,000 members, pursuant to which the provider organization receives a fixed percentage of premiums to cover all of the medical treatment the globally capitated members receive.
In August 1997, the Company entered into agreements to sell certain remaining medical offices associated with HealthAmerica in Harrisburg, Pennsylvania. The sales price was $2.4 million and the transaction resulted in a pretax loss of $0.6 million. All gains or losses resulting from medical office sales are reflected in other income, net, in the accompanying Consolidated Statement of Operations for the year ended December 31, 1997.
The expected tax provision based on the statutory rate of 35% differs from the Company's effective tax rate as a result of the following:
The Company's HMO subsidiaries are required by the respective domicile states to maintain minimum statutory capital and surplus in aggregate of approximately $80.7 million at December 31, 1999. Combined statutory capital and surplus of the Company's HMOs was approximately $159.8 million. The states in which the Company's HMOs operate require HMOs to maintain deposits with the Department of Insurance. These deposits totaled $24.8 million at December 31, 1999.
UNITY ARBITRATION. GHP, a health plan subsidiary of the Company, entered into an agreement, effective January 1, 1998, with Unity Health Network, L.L.C. ("Unity") for Unity's provider network to provide health care services to GHP's members in the southern and western areas of St. Louis County, Missouri. The agreement contained risk sharing provisions. Disputes arose under the agreement and the matter was submitted to arbitration before the American Arbitration Association ("AAA"). GHP demanded payment from Unity of $7.6 million and specific performance under the agreement. Unity demanded payment from GHP of $14.5 million, specific performance of certain provisions of the agreement and suspension of its payment obligations. On December 23, 1999, the AAA tribunal of arbitrators awarded GHP the sum of $1.1 million for deficiencies in risk fund pools for 1998, and awarded Unity the sum of $1.8 million as liquidated damages for GHP's failure to meet certain administrative performance standards, and held Unity contractually liable for funding any deficits in the risk fund pools for 1999. The only remaining issue pending is the readjudication of certain disputed claims submitted subsequent to June 30, 1999.