Sales and Exchange of Medicaid Membership; Exit from Northeast Service Area
Health Power HMO's health care costs include reserve estimates of health care costs incurred but not yet reported or paid. Health Power estimates this reserve amount quarterly and makes adjustments based upon a number of factors, including recent claim payment experience. Adjustments, if necessary, are made to health care costs in the period during which the actual claim costs are ultimately determined. Health Power HMO utilizes an actuarial company to review the adequacy of its reserve estimates. As part of the recent quarterly reserve setting process, Health Power HMO increased its reserve estimate for health care costs by $1.5 million for the fourth quarter of 1997, which increase included adjustments for the settlement of claims from prior quarters. This reserve estimate may be subject to further adjustments in subsequent quarters.
As a result of the foregoing, the Company had net income of $3.0 million, or $0.79 per share, diluted, for 1997, as compared to a net loss of $9.5 million, or ($2.49) per share, diluted, for 1996. There were 3,818,465 and 3,810,331 weighted average common diluted shares outstanding at December 31, 1997 and 1996, respectively.
The Company's interest and other income decreased $0.3 million to $0.8 million for 1996, from $1.2 million for 1995. This decrease resulted primarily from a decrease in interest income caused by decreases in the average available investable cash balance combined with reduced interest yields. The decrease in the average available investable cash balance was primarily the result of the payment of the $5.0 million purchase price for the acquisition of the ChoiceCare contract rights at the end of the second quarter of 1996 and the operating losses sustained during the year.
Net cash used in operating activities was $3.7 million for 1997, as compared to net cash used in operating activities of $5.1 million during 1996. In 1997, changes in cash flow from operations were primarily due to changes in net earnings, deferred income taxes, and changes in current assets and current liabilities. Many of these fluctuations are due to timing of cash receipts or payments. Because premium payments received prior to the month of coverage are recorded as deferred revenues, the extent of such receipts can cause fluctuations in the total amount of cash from month-to-month.
Health Power HMO's health care costs include estimates of health care costs incurred but not yet reported ("IBNR"). Health Power HMO estimates its IBNR health care costs based on a number of factors, including hospital admission data and prior claims experience. Adjustments, if necessary, are made to health care costs in the period during which the actual claim costs are ultimately determined. Health Power HMO utilizes an independent actuary to review the adequacy of its IBNR estimates. The Company believes that such IBNR estimates are adequate to satisfy Health Power HMO's ultimate claims liability. However, there can be no assurance as to the adequacy of such IBNR estimates or that adjustments to such IBNR estimates will not have a material adverse affect on the Company's operations.
In July 1997, the Company's HMO discontinued these incentives for the Medicaid business.
b. Commercial Revenue: Certain affiliated providers have contracted with the Company's HMO to provide health care services to their employees and dependents. The Company recognized commercial premiums from these affiliated providers in the amounts of $65,793, $137,223 and $152,774 in 1997, 1996 and 1995, respectively.
a. Stock-Based Compensation Plans: The Company sponsors various stock-based incentive compensation plans (the Plans) for directors and eligible employees. 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 are required by SFAS 123 and are presented below.
Operating (loss) profit is total revenue less operating expenses. In computing operating (loss) profit, the following items are not included: general corporate expenses, interest income and expense and income taxes. Depreciation for the HMO, consulting services, and managed care services segments for the year ended December 31, 1997 were $296,334, $142,145, and $74,176, respectively. Capital expenditures for the three segments were $64,181, $515,288 and $628,558, respectively for the year ended December 31, 1997.