Our government services segment leases and occupies 64,693 square feet in three locations in California, and approximately 32,000 square feet in three locations in Virginia and West Virginia. In addition, this segment leases and occupies a total of seven other locations, all of which are under 5,000 square feet. These facilities are located in Minnesota, New York, Wisconsin, Illinois, and Michigan.
During 1999 and 2000, we experienced large operating losses. These losses were due primarily to our Medicare+Choice line of business and self-funded business. Additionally, United Wisconsin Services, Inc. ("UWS") reported losses in 2001 arising from its federal employee contracts and a conversion of certain of its provider arrangements from capitation to a fee-for-service model. During this period we also experienced difficulties in implementing new information systems, which impaired our ability to identify trends indicating increasing medical costs, leading to writing unprofitable contracts. These factors led to increased medical loss ratios and resulting losses. In addition, the resulting adverse effect on our capital position led to discussions with the OCI and the BlueCross BlueShield Association (the "Association") regarding our plans for capital improvement.
The insured medical products loss ratio in 2002 was 86.4% compared with 90.6% in 2001. The continued improvement in the insured medical products loss ratio is primarily due to the exiting of unprofitable business in the Milwaukee market and improved underwriting discipline.
Government services revenue in 2001 increased 66.7% to $117.2 million from $70.3 million in 2000. The increase from 2000 to 2001 is attributable to significant growth in the volume of Medicare claims processed, due to being awarded additional government contracts. Effective December 1, 2000, United Government Services, LLC, ("UGS") became the Medicare Part A Intermediary for certain additional states and U.S. territories. In addition, also effective December 1, 2000, UGS became the Regional Home Health Intermediary for certain additional states and U.S. territories.
Medical and other benefits paid can also be significantly impacted by the outcomes from court decisions, interpretations by regulatory authorities, and legislative changes involving healthcare matters. As a result, amounts ultimately paid may differ from initial estimates that did not consider such outcomes.
The Association's capital requirements are generally more stringent than those imposed under Wisconsin law and are currently based on the Health Organization Risk-Based Capital calculations prescribed by the NAIC.
o no person may own 20% or more of all of our outstanding equity securities (regardless of voting power).
We conduct business primarily within the State of Wisconsin. Therefore, our business may be more sensitive to local or state conditions, such as pricing dynamics, health care developments, or general economic conditions, than organizations servicing larger, more diverse markets. For example, national competitors could subsidize losses in the Wisconsin market with profits from other markets in which they operate. We may be competitively disadvantaged, or otherwise harmed, by our Wisconsin focus, although we are not dependent on a small number of major contracts.
o legislation that holds insurance companies, HMOs, or managed care companies liable for adverse consequences of medical decisions;
WE WILL NOT BE ABLE TO SELL OR MERGE WITHOUT THE APPROVAL OF THE FOUNDATION AS LONG AS THE FOUNDATION BENEFICIALLY OWNS 50% OR MORE OF THE OUTSTANDING SHARES OF OUR COMMON STOCK.
The Company offers full coverage, co-payment, preferred provider organization ("PPO"), and health maintenance organization ("HMO") products to groups, and offers Medicare supplement, indemnity, and HMO coverage options to individuals. The Company is also a leading provider of managed health care services and employee benefit products, HMO products, dental, life, disability and workers' compensation products, managed care consulting, electronic claim submission services, and receivables management services. UGS is a government contractor and processes Medicare claims for providers in all 50 states and is currently the largest Part A Medicare processor in the nation. TS provides integrity, consulting, and safeguard services in connection with publicly funded health programs.
The Company participates in securities lending programs whereby blocks of securities, which are returnable to the Company on short-term notice and are included in investments, are loaned to third parties, primarily major brokerage firms. The Company requires a minimum of 102% of the fair value of the loaned securities to be separately maintained as collateral for the loans. Securities with a cost or amortized cost of $80,987,000 and $11,269,000 and estimated fair value of $84,509,000 and $11,409,000 were on loan under the programs at December 31, 2002 and 2001, respectively.
During 2002, the Company sold a total of 4,927,448 shares of AMSG (including 1,400,000 shares repurchased by AMSG), reducing its ownership to 1,382,077 shares, or 10.7%, at December 31, 2002, with a fair market value of $19,321,000 ($13.98 per share). The unrealized investment gain on these shares of $989,000 is included, net of tax, in accumulated other comprehensive income in shareholders' equity. On January 3, 2003, the Company sold its remaining investment in AMSG.
The Company employs quota share and excess of loss reinsurance with third-party reinsurers as follows:
As a result of the Combination, this intra-company note and related accrued interest is eliminated in the accompanying consolidated balance sheets as of December 31, 2001. Interest income received totaled $5,494,000 in 2000. Interest income of $1,339,000 received prior to Combination in 2001 is included in the accompanying consolidated statement of operations. Interest income subsequent to March 31, 2001 has been eliminated in the accompanying consolidated statement of operations.
On October 1, 1998, the Company entered into an agreement with a vendor to obtain certain electronic data processing services for the Company. The agreement had an initial term of five years, with options for two additional one-year renewal periods, which have been exercised. Expenses related to this arrangement were $10,421,000, $13,405,000, and $14,986,000 in 2002, 2001, and 2000, respectively.
December 31, 2002 2001 ---------------------- Pension: Discount rate 6.50 % 7.00% Rate of compensation increase 4.75 4.75 Expected rate of return on Plan assets 8.75 9.25
The Company has four reportable business segments: insured medical products, specialty managed care products and services (previously reported as two separate segments, specialty risk and specialty service), government services, and self-funded products. Insured medical products include full coverage, copayment, PPO, Medicare supplement, interim coverage, HMO, and point-of-service ("POS") products sold primarily in Wisconsin. The specialty managed care products and services segment includes dental, life, disability, and workers' compensation products, along with managed care consulting, electronic claim submission services, subrogation and hospital bill audit services, and receivables management services. The specialty managed care products and services are sold throughout the United States. The self-funded products consist of administrative services and access to Cobalt's extensive provider networks for uninsured contracts and the BlueCard Program. Government services include processing services for Medicare providers throughout the United States and for Medicaid in the states of Wisconsin, Hawaii, and Michigan, as well as providing integrity, consulting, and safeguard services in connection with publicly funded health programs.