We operate health plans in six states (Arizona, California, Connecticut, New Jersey, New York and Oregon) and offer our products to commercial, Medicare and Medicaid members. We have sold or otherwise disposed of a number of health plans over the past several years to focus our sales and marketing efforts on these six plans in populous and contiguous markets, most notably Southern California and the New York metropolitan area, which we believe offer sustained growth opportunities.
Over the past several years, our overall operating performance has improved. Our Health Plan Medical Care Ratio (“MCR”) was 82.7% for 2003, an 80 basis point decline from 2002. Our goal is to achieve a modest improvement of approximately 20 to 50 basis points in our MCR each year. We exceeded this range in 2003 as health care costs rose more slowly than expected. Our Government contracts cost ratio, which includes both health care and administrative costs, has remained relatively stable in the past three years and we expect it to continue to remain stable over the next several years. At the end of 2003, our debt-to-capital ratio was 23.5%, well below our stated target of 30%. Our administrative ratio
• Increase in commercial premiums of $517.1 million or 8.6% due to an 11.9% increase in premiums on a PMPM basis, partially offset by a decrease of 2.9% in member months. The premium increases on a PMPM basis occurred in large and small groups across all states, with California and New Jersey having the largest increases ranging from 12% to 15%. The decrease in member months is primarily due to the loss of the CalPERS account in California and the loss of members in Arizona, Connecticut and Pennsylvania,
Health Plan Services premiums increased $6.6 million or 0.1% for the year ended December 31, 2002 as compared to the same period in 2001. Our Health Plan Services premiums, excluding the Florida health plan sold effective August 1, 2001, increased by $346.4 million or 4% for the year ended December 31, 2002 as compared to the same period in 2001, primarily due to the following:
• Increase in Medicaid premiums of $173.0 million or 18% for the year ended December 31, 2002 as compared to the same period in 2001 is due to a 15% increase in member months and a 3% increase in premiums on a PMPM basis. These increases are primarily from membership increases in the Healthy Families program in California.
• Increase of $42.8 million due to administrative and health care change order cost activities, and
• Increase of $7.6 million from the accelerated depreciation of certain capitalized software as a result of our systems consolidation project in 2001.
The divestitures of our employer services group subsidiary, dental plan, vision plan, claims services subsidiaries and Florida health plan and our withdrawal from the Pennsylvania market during 2003, 2002 and 2001 are not expected to have a material impact on our financial condition, results of operations or liquidity. The sales agreements for our employer services group subsidiary and dental and vision subsidiaries included an indemnification obligation for certain pending and threatened litigation as of the closing date and certain litigation arising from disputes prior to the closing date. We have recorded liabilities of $1.2 million related to these obligations as of December 31, 2003.
$26 million in a secured six-year note bearing 8% interest per annum for which we recorded a full reserve. We also sold the corporate facility building used by our Florida health plan to DGE Properties, LLC for $15 million, payable by a secured five-year note bearing 8% interest per annum. We estimated and recorded a $72.4 million pretax loss on the sales of our Florida health plan and the related corporate facility building during the second quarter ended June 30, 2001.
• Net decrease in net income plus amortization, depreciation and other net non-cash charges of $72.1 million,
As of December 31, 2003, we were in compliance with the covenants contained in the credit facilities.
From time to time, we make adjustments to our revenues based on retroactivity. These retroactivity adjustments reflect changes in the number of enrollees subsequent to when the revenue is billed. We estimate the amount of future retroactivity each period and accordingly adjust the billed revenue. The estimated adjustments are based on historical trends, premiums billed, the volume of contract renewal activity during the period and other information. We refine our estimates and methodologies as information on actual retroactivity becomes available.