The adverse development recorded in 1999 for the prior accident years is primarily attributable to increased California claim severity. Higher claim severity has had a negative impact on the entire California workers' compensation industry. The historical claim frequency development patterns have not significantly changed
General, Administrative and Marketing Expenses. General, administrative and marketing ("G&A") cost increased $27.1 million, or 24.5%, compared to 1998. As a percentage of revenues, G&A costs for 1999 was 10.7% which is consistent with 1998. Of the $27.1 million increase in G&A, $14.3 million was due to additional G&A related to the acquired HMO business in the Dallas/Ft. Worth area, net of premium deficiency utilization of $20.9 million. The remaining increase of $12.8 million included a $6.9 million increase in compensation expense, resulting primarily from additional employees supporting expanded services. Broker and premium tax expense increased approximately $2.2 million due to increased membership. In addition, depreciation expense increased $2.4 million.
The accompanying Consolidated Financial Statements have been audited by independent certified public accountants, whose audits thereof were made in accordance with generally accepted auditing standards and included a review of internal accounting controls to the extent necessary to design audit procedures aimed at gathering sufficient evidence to provide a reasonable basis for their opinion on the fairness of presentation of the Consolidated Financial Statements taken as a whole.
Medical Premiums. Non-Medicare member enrollment is represented principally by employer groups. Medical premiums are billed to each employer group in accordance with negotiated contracts, and such premium revenue is recognized when earned. Unearned premium revenue includes payments under prepaid Medicare contracts with the Health Care Financing Administration ("HCFA") and prepaid HPN and TXHC commercial and SHL indemnity premiums. HPN and TXHC offer a prepaid health care program to Medicare recipients. Revenues associated with Medicare recipients were approximately $301,141,000, $238,913,000 and $186,105,000 in 1999, 1998 and 1997, respectively.
Medical Expenses. The Company contracts with hospitals, physicians and other providers of health care under capitated or discounted fee-for-service arrangements including hospital per diems to provide medical care services to enrollees. Capitated providers are at risk for the cost of medical care services provided to the Company's enrollees in the relevant geographic areas; however, the Company is ultimately responsible for the provision of services to its enrollees should the capitated provider be unable to provide the contracted services. Health care costs are recorded in the period when services are provided to enrolled members, including estimates for provider costs which have been incurred as of the balance sheet date but not reported to the Company.
Income Taxes. The Company accounts for income taxes using the liability method. Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and the reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. The Company's temporary differences arise principally from certain net operating losses, accrued expenses, reserves and depreciation.
that begins on June 30, 2001 and ends September 30, 2003 if the principal balance exceeds certain thresholds. The terms of the credit facility contain certain covenants including a minimum fixed charge coverage ratio and a maximum leverage ratio. For the quarter ended September 30, 1999, the Company exceeded the limits of certain covenants. The Company was able to obtain a waiver and re-negotiate the covenant limits. These negotiations resulted in a borrowing rate of LIBOR plus 2.375% through September 30, 2000. The Company believes it is in compliance with debt covenants as of December 31, 1999.
The Company's Board of Directors has authorized a line of credit from the Company to the Chief Executive Officer (the "CEO"). The CEO borrowed amounts under this line of credit during 1998 which resulted in aggregate borrowings of $2,650,000. The CEO repaid approximately $360,000 of the indebtedness during the first quarter of 1999. The borrowed amounts bear interest at a rate equal to the rate at which the Company could have borrowed funds under the credit facility at the time of the borrowing plus 10 basis points. Indebtedness under the line of credit is secured by certain of the CEO's rights to compensation from the Company. At December 31, 1999, the aggregate outstanding principal of and accrued interest on this indebtedness was $2,635,000.
The Company evaluates each segment's performance based on segment operating profit. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.