The Company's results of operations are dependent, in part, on its ability to predict and maintain effective control over health care costs (through, among other things, appropriate benefit design, utilization review and case management programs and its case rate and risk-sharing agreements with providers) while providing members with quality health care. Factors such as utilization, new technologies and health care practices, hospital costs, major epidemics, inability to establish acceptable compensation agreements with providers and numerous other factors may affect Oxford's ability to control such costs. The Company attempts to use its medical cost containment capabilities, such as claim auditing systems, physician tracking systems and utilization review protocols, and improved channeling to cost-effective providers with a view to reducing the rate of growth in health care services expense. There can be no assurance that Oxford will be successful in mitigating the effect of any or all of the above-listed or other factors. In addition, the Company's relationships with many of its contracted providers were adversely affected by the Company's computer systems and related claims payment problems which could impede the Company's efforts to obtain favorable arrangements with some of these providers going forward. Accordingly, past financial performance is not necessarily a reliable indicator of future performance, and investors should not use historical performance to anticipate results or future period trends. The Company continues to reconcile delayed claims and claims previously paid or denied in error and pay down backlogged claims. Information gained as the process continues may result in future changes to the Company's estimates of its medical costs and expected cost trends.
The Company's equity in the net loss of Health Partners, for 1996 was $4.6 million compared with a loss of $3.9 million in 1995. The increased losses for Health Partners related primarily to lower per member per month premium revenue in Health Partners' Medicaid programs.
As a result of the previously discussed delays in claims payments, the Company experienced a significant increase in medical claims payable during the fourth quarter of 1996 and the first quarter of 1997, but the increase in medical costs payable was mitigated by progress in paying backlogged claims and by making advance payments to providers during the first quarter of 1997 and thereafter. Outstanding advances aggregated approximately $203 million at December 31, 1997 and have been netted against medical costs payable in the Company's consolidated balance sheet. The Company has established a valuation reserve of $10 million against the advances. The Company believes that it will be able to recover outstanding advances payments, either through repayment by the provider or application against future claims, but any failure to recover funds advanced in excess of the reserve would adversely affect the results of the Company's operations.
During the fourth quarter of 1997, the Company made cash contributions to the capital of its HMO subsidiaries aggregating $65.7 million and contributed the outstanding capital stock of OHI to Oxford NY to increase Oxford NY's surplus. Since December 31, 1997, the Company has funded additional contributions of cash and marketable securities (valued at market on the date of contribution) totaling $160.4 million. The capital contributions were made to ensure that each subsidiary had sufficient surplus as of December 31, 1997 under applicable regulations after giving effect to operating losses and reductions to surplus resulting from the nonadmissibility of certain assets. The contributions in 1998 were made with the proceeds of the issuance of $200 million of senior secured notes ("Bridge Notes") under the Bridge Securities Purchase Agreement, dated as of February 6, 1998, between the Company and an affiliate of Donaldson Lufkin & Jenrette Securities Corporation ("DLJ"), as amended on March 30, 1998 (the "Bridge Agreement"). The Bridge Notes mature on February 6, 1999 and bear interest at prime plus 2.5% per annum during the first three months, and thereafter the spread over prime will increase by 0.5% every three months; provided, however, that the per annum interest rate will not be less than 10.5%, nor more than 17%. In connection with the issuance of the Bridge Notes, the Company has paid and will pay commitment and other fees to DLJ and has granted a security interest in the stock of certain subsidiaries and certain other assets of the Company. The Bridge Agreement contains various covenants, financial maintenance requirements and other restrictions, including, among others, a covenant prohibiting the payment of dividends on the Company's common stock and a
The Company believes that the proceeds of the Proposed Financing will be sufficient to finance the capital needs referred to above and to provide additional capital for losses or contingencies in excess of the Company's current expectations. Although the Company currently expects to complete the Proposed Financing, there can be no assurance that all relevant conditions will be satisfied. If the Proposed Financing cannot be completed, the Company believes that other sources of equity and/or debt financing could be arranged to finance the Company's immediate capital needs, based on discussions with its financial advisors and expressions of interest received from qualified investors in the course of the Company's efforts to negotiate the Investment Agreement and related agreements. The Company currently believes that, in the event such a financing could not be completed on a timely basis, it has the ability and intent to reduce certain costs, including those specified in the Turnaround Plan and others, and otherwise to generate funds to enable it to support its operations through 1998. The Company's ability to obtain other financing, and the timing, form and terms thereof, would depend on a number of factors beyond the Company's control, including, among others, general economic and market conditions and the possible need for regulatory approvals.