The Company and its subsidiaries also lease an aggregate of approximately 550,000 square feet of office space in Rancho Cordova, California. The Company's aggregate rent obligations under these leases were approximately $9.2 million in 1997. These leases expire at various dates through July 2002.
Revenue of $518.7 million in 1996 increased by $101.6 million or 24.4% as compared to 1995. The increase in revenue was due primarily to an increase in premium revenues.
Realized capital gains of $7.2 million in 1997 were an increase of $6.6 million from 1996. This increase was due to reductions in long term interest rates in the bond market, primarily for tax-exempt bonds, provided an opportunity to sell securities and realize gains in the fourth quarter of 1997.
The Company's HMO and insurance subsidiaries are required to maintain reserves to cover their estimated ultimate liability for expenses with respect to reported and unreported claims incurred. These reserves are estimates of future payments based on various assumptions. Establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience, which in the past has resulted and in the future could result in loss reserves being too high or too low. The accuracy of these estimates may be affected by external forces such as changes in the rate of inflation, the regulatory environment, the judicial administration of claims, medical costs and other factors. Future loss development or governmental regulators could require reserves for prior periods to be increased, which would adversely impact earnings in future periods. In light of present facts and current legal interpretations, management believes that adequate provisions have been made for claims and loss reserves.
Commercial premium revenue includes HMO and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, which premiums are based on a predetermined prepaid fee, Medicaid revenues based on multi-year contracts to provide care to Medicaid recipients, and revenue under Medicare risk contracts to provide care to enrolled Medicare recipients. Revenue is recognized in the month in which the related enrollees are entitled to health care services. Premiums collected in advance are recorded as unearned premiums.
The Company generally contracts in California and Arizona with various medical groups to provide professional care to certain of its members on a capitation or fixed per member per month fee basis. Capitation contracts generally include a provision for stop-loss and non-capitated services for which the Company is liable. Professional capitated contracts also generally contain provisions for shared risk, whereby the Company and the medical groups share in the variance between actual hospital costs and predetermined goals. Additionally, the Company contracts with certain hospitals to provide hospital care to enrolled members on a capitation basis. The HMOs also contract with hospitals, physicians and other providers of health care, pursuant to discounted fee-for-service arrangements and hospital per diems under which providers bill the HMOs for each individual service provided to enrollees.
Proceeds from sales and maturities of investments available for sale during 1997 were $605.3 million, resulting in realized gains and losses of $4.7 million and $75 thousand, respectively.
The Company and certain subsidiaries sponsor defined contribution retirement plans intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). Participation in the plans is available to substantially all employees who meet certain eligibility requirements and elect to participate. Employees may contribute up to the maximum limits allowed by Section 401(k) of the Code, with Company contributions based on matching or other formulas. The Company's expense under the plans totaled $4.2 million, $5.1 million and $4.5 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The regulatory net worth of the Company's health plans exceeded the minimum aggregate requirement by approximately $243 million and $368 million at December 31, 1997 and 1996, respectively. Under certain government contracts. Federal Services is required to maintain a current ratio of 1:1 and certain HMO subsidiaries are required to maintain a current ratio of 1:1 under Medicaid contracts.
Two current directors of the Company and one prior director are partners in law firms which received legal fees totaling $1.1 million, $1.0 million, and $1.9 million in 1997, 1996, and 1995, respectively. An officer of a contracted hospital was also a member of the Company's Board of Directors until April 1, 1997. Medical costs paid to the provider totaled $67.1 million, $58.7 million, and $55.3 million in 1997, 1996, and 1995, respectively. Such contracted hospital is also an employer group of the Company. The Company received annual premium revenues of $1.2 million in 1997, $3.4 million in 1996 and $3.0 million in 1995. Certain stockholders and prior directors of the Company are officers of consulting firms which received approximately $132 thousand in 1997, $1.3 million in 1996 and $140 thousand in 1995, pursuant to consulting agreements to pay for certain consulting services provided to the Company.