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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED] For fiscal year ended DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] For the transition period from to
Commission file number 1-13340
Mid Atlantic Medical Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1481661
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 Taft Court, Rockville, Maryland 20850
(Address of principal executive offices) (Zip Code)
(301) 294-5140
(Registrant's telephone number, including area code) Securities registered
pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- ---------------------
Common Stock, $0.01 par value The New York Stock
per share. Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[ ]
Aggregate market value of voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity February 27,
1998: Approximately $531 million.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
54,677,862 shares of common stock as of February 27, 1998
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DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's annual meeting of shareholders to be
held on April 27, 1998 is incorporated by reference into Part III of this Form
10-K.
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FORM 10-K
INDEX
ITEM NO. DISCLOSURE REQUIRED PAGE
PART I
Item 1 Business .............................................. 4
Item 2 Properties ............................................ 17
Item 3 Legal Proceedings ..................................... 17
Item 4 Submission of Matters to a Vote of Security Holders ... 17
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 18
Item 6 Selected Financial Data .............................. 19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation ................. 20
Item 7a Quantitative and Qualitative Disclosures About
Market Risk ........................................ 26
Item 8 Financial Statements and Supplementary Data .......... 27
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 48
PART III
Item 10 Directors and Executive Officers of the Registrant ... 49
Item 11 Executive Compensation ............................... 49
Item 12 Security Ownership of Certain Beneficial Owners
and Management ..................................... 49
Item 13 Certain Relationships and Related Transactions ....... 49
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............................ 50
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PART I
ITEM 1. BUSINESS
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company for
subsidiaries active in managed health care and other life and health insurance
related activities. MAMSI and its subsidiaries (the "Company") have developed a
broad range of managed health care and related ancillary products and deliver
these services through health maintenance organizations ("HMOs"), preferred
provider organizations ("PPOs"), a life and health insurance company, a home
health care company, a pharmaceutical services company and a hospice company.
The Company also has a partnership interest in an outpatient surgery center.
GENERAL DEVELOPMENT OF BUSINESS
MAMSI was incorporated in Delaware in 1986 to serve as a holding company for MD
- - Individual Practice Association, Inc. ("M.D. IPA") and Physicians Health Plan
of Maryland, Inc. ("PHP- MD"). MAMSI made an exchange offer for all of the
issued and outstanding shares of common stock of M.D. IPA and PHP-MD in 1987.
M.D. IPA, a Federally qualified HMO, was organized as a nonstock corporation in
1979. M.D. IPA operated as a non-profit organization until 1985 when it amended
its articles of incorporation and was reorganized into a stock corporation.
PHP-MD, an individual practice association ("IPA"), was organized as a nonstock
corporation in 1979 to provide physician and other medical services to M.D. IPA
enrollees. PHP-MD operated as a non-stock organization until it amended its
articles of incorporation and was reorganized into a stock corporation in 1984.
MANAGED HEALTH ORGANIZATIONS
MAMSI's primary business is providing access to and managing health care through
its HMOs and its life and health insurance company. MAMSI currently offers HMO
coverage through four licensed HMO subsidiaries - M.D. IPA, Optimum Choice, Inc.
("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc.
of Pennsylvania ("OCIPA") and offers life and health insurance through MAMSI
Life and Health Insurance Company ("MAMSI Life").
M.D. IPA became a licensed HMO in Maryland in 1981 and in Virginia in 1985. M.D.
IPA's present service area (which includes all geographic areas where the HMO
has received regulatory approval to provide health care services) includes the
entire state of Maryland, the District of Columbia and most counties and cities
in Virginia including the Northern Virginia, Richmond/Tidewater and Roanoke
areas ("HMO Service Area"). In addition to serving governmental entities such as
the Office of Personnel Management of the United States Government under the
Federal Employees Health Benefit Plan, M.D. IPA generally provides coverage to
the larger commercial group market.
OCI, a non-Federally qualified HMO, became a licensed HMO in Maryland in 1988,
in Virginia in 1990, in Delaware in 1993 and in West Virginia in 1994. OCI
generally operates within the small business market segment, which is comprised
of both small and large group employers and also covers Medicaid and Medicare
recipients. OCI's present commercial service area includes the entire states of
Maryland and Delaware, the District of Columbia, most counties and cities in
Virginia, and certain areas of West Virginia. For the Medicare Program, OCI is
licensed in Northern Virginia, Maryland, Delaware and the District of Columbia.
OCCI, a non-Federally qualified HMO, became a licensed HMO in North Carolina in
1995 and South Carolina in 1996. OCCI operates in both the small and large group
commercial market. OCCI's present service area includes certain areas of North
Carolina and South Carolina.
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OCIPA, a non-Federally qualified HMO, became a licensed HMO in Pennsylvania in
1996. OCIPA operates in both the small and large group commercial market.
OCIPA's present service area includes five counties in south-central
Pennsylvania.
MAMSI Life, a life and health insurance company, is licensed in over 30 states
and actively markets in the states in which MAMSI has licensed HMO's. MAMSI Life
sells group health insurance as well as a preferred point of service product to
large and small employers and individuals. MAMSI Life also sells group term life
insurance as well as short-term disability insurance.
GENERAL
HMOs typically provide or arrange for the provision of comprehensive medical
care (including physician and hospital care) to enrollees for a fixed, prepaid
premium regardless of the amount of care provided. Enrollees generally receive
care from participating primary care physicians ("PCPs") who, as required, refer
enrollees to participating specialists and hospitals. HMOs require patients to
utilize participating physicians and other participating health care providers.
This allows HMOs to negotiate favorable rates and control utilization to a
greater extent than traditional health insurers, while monitoring and enhancing
the quality of care provided to enrollees.
The goal of an HMO is to combine quality health care with management controls
designed to encourage efficient and economical use of health care services. Such
controls include monitoring physician services, hospital admissions and lengths
of stay and maximizing the use of non-hospital based medical services. Because
an HMO generally receives fixed monthly premiums from its enrollees regardless
of the health care services provided, an HMO has an incentive to maintain the
health of its enrollees, while carefully monitoring expenses through the
implementation of various cost control strategies and effective management.
MAMSI's HMO provider network is organized as an Individual Practice Association
("IPA"). Under the IPA model, the HMO contracts with a broadly dispersed group
of physicians to provide medical services to enrollees in the physicians' own
offices and in hospitals; the physicians are generally paid on a capitated or a
negotiated fee maximum basis. Physicians may contract directly with the HMO or
through a designated organization that, in turn, contracts with the HMO.
MAMSI'S HMO PRODUCTS
MAMSI's HMOs offer a range of benefit plans for providing health care to
enrollees. Generally, enrollees arrange for coverage through their employer.
However, group enrollees can convert their coverage to an individual contract
upon separation from their employer. There is no assurance that HMO agreements
with employers will be renewed annually or that, within each employer group, the
HMO will not experience disenrollment by individual enrollees. MAMSI's HMOs also
offer individual coverage to the commercial, Medicaid and Medicare markets.
Under traditional HMO coverage, the enrollee selects a PCP from the HMO's
provider network. All medical care provided to the enrollee must be authorized
and coordinated by the PCP. Generally, the enrollee pays a copayment for all PCP
and specialist office visits and may also be required to pay a copayment for
hospital admissions and emergency room services. Except in emergencies,
enrollees are generally required to utilize only those participating
professional and institutional health care providers that have contracted with
the IPA (see further discussion under "HMO Arrangements with Physician and
Institutional Providers").
MAMSI's HMOs, in cooperation with MAMSI Life, a wholly owned subsidiary of
MAMSI, also offer point-of-service coverage (the "preferred plan"), which is
marketed to appeal to the following customers:
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1. Individuals who will not consider a closed delivery system. These
individuals prefer the flexibility of the traditional indemnity plan but are
also seeking a lower-cost alternative such as an HMO.
2. Small to mid-sized employers who are looking to limit the number of health
care plan options. In this case, the HMO would seek to be offered as an
exclusive health care provider.
In the preferred plan, enrollees have the choice of seeking care from the PCP or
from any physician of their choice (point-of-service option). Whenever care is
provided under the point-of-service option and the enrollee visits a provider
outside of the HMO network, MAMSI Life, which underwrites this indemnity
benefit, generally covers the lesser of 80% of the bill or 100% of the
established fee maximum for the service provided. The enrollee is responsible
for the remainder of the charge.
Additionally, MAMSI, through its subsidiaries, offers hybrid products to large
employer groups. These products offer the ability to tailor employee health care
offerings by varying benefit designs, funding methods and insurance risk. Hybrid
products generally compete in the so-called self-funded employer plan
marketplace. A typical MAMSI hybrid product combines the use of capitated PCPs
to serve as gatekeepers, employer funding of specialist and institutional claims
on an "as paid" basis and MAMSI's underwriting of risk of loss on a specific
and/or aggregate stop loss basis.
OCI offers HMO coverage to recipients of Title XIX Medical Assistance
("Medicaid") in certain states. The Medicaid plan operates in a manner similar
to the traditional HMO plan. The participating states pay a monthly premium
based upon the age, sex and geographic location of the recipients for which OCI
provides comprehensive medical coverage. At December 31, 1997, MAMSI's Medicaid
service area includes certain areas of Virginia, nine counties in West Virginia
and Mecklenburg and Gaston Counties in North Carolina.
Effective January 1, 1997, because of insufficient reimbursement rates, OCI
withdrew from the mandated Medicaid Program in the Tidewater area of Virginia
which reduced the Company's membership by approximately 26,000 members. In July,
1997, OCI declined to participate in the State of Maryland mandated Medicaid
program, again due to insufficient rates, which resulted in OCI's Maryland
Medicaid membership of approximately 38,000 being reassigned to other managed
care organizations. Effective January 1, 1998, OCI withdrew from the Northern
Virginia area due to insufficient reimbursement rates. It is anticipated that
this will reduce OCI's Virginia Medicaid membership by approximately 6,000
members.
Under all coverage options, enrollees receive the following basic benefits:
primary and specialist physician services; hospital services such as diagnostic
tests, x-rays, drugs, medication, nursing and maternity services; outpatient
diagnostic tests such as laboratory tests, x-rays, and allergy testing and
injections.
OCI also offers health coverage to Title XVIII Medicare recipients. Under a
contractual arrangement with the United States Health Care Financing
Administration ("HCFA"), OCI receives a monthly premium based upon age, sex,
county of residence and enrollment status for which OCI provides comprehensive
medical coverage to those individuals. Currently, approximately only 11% of the
Medicare recipients in MAMSI's Medicare service area (which includes Delaware,
the District of Columbia, several counties in Northern Virginia, and most of the
State of Maryland) are covered through MAMSI or other HMOs. Effective January 1,
1997, OCI reduced the size of its Medicare service area. This reduction in
service area reduced the Company's Medicare membership by approximately 5,000
members. Effective January 1, 1998, the Company again reduced the size of its
service area and changed the benefit structure. It is anticipated that these
changes will further reduce MAMSI's Medicare membership.
7
The Company's total health plan (managed care full risk and hybrid, ASO and
indemnity health insurance) membership in the HMOs and MAMSI Life decreased to
approximately 691,000 at December 31, 1997 from 745,000 at December 31, 1996, a
decrease of 7 percent.
The following table sets forth information relevant to MAMSI's HMO and indemnity
health plans as of December 31, 1997:
Employer Groups Served 30,500
Population of Aggregate HMO
Service Area 33,500,000
Service Area Penetration 2.1%
Primary Care Physicians 5,200
Specialist Physicians 14,200
Other Affiliated Health
Care Providers 7,500
Hospitals and Outpatient
Facilities 1,500
Pharmacies 8,800
A significant portion of the Company's premium revenue is derived from Federal,
state and local government agencies including governmental employees and
Medicaid and Medicare recipients. For the years ended December 31, 1997, 1996
and 1995, approximately 11%, 11% and 7%, respectively, of premium revenue was
derived from Federal government agencies, and approximately 25%, 26% and 21%,
respectively, was derived from state and local government agencies located in
the Company's service area.
HMO ARRANGEMENTS WITH PHYSICIAN AND INSTITUTIONAL PROVIDERS
M.D. IPA and OCI contract with PHP-MD to provide physician services to their
enrollees while OCCI (North Carolina and South Carolina) and OCIPA
(Pennsylvania) generally contract directly with providers. The HMOs are
ultimately responsible for ensuring that an adequate number of physicians and
other health care providers are maintained in order to service enrollees.
The Company contracts with many different kinds of health care providers,
including primary care and specialist physicians, dentists, social workers,
psychologists, physical therapists and podiatrists. PCPs are paid a monthly
capitation payment for each enrollee who has chosen that PCP. This capitation
payment varies according to the age and sex of the enrollee and according to the
primary care designation of the provider chosen by the enrollee. The primary
care designations on which premiums are based fall into one of two types: (1)
family and general practice, pediatrics and internal medicine, and (2)
obstetrics and gynecology.
PCPs may receive, in addition to capitation payments, fees for specified
procedures and an annual payment that is based on a Quality Review
Reconciliation. This payment generally does not exceed 3 percent of their annual
capitation payments. The reconciliation evaluates the physician's practice
performance as well as quality issues such as grievance rates from members,
sanctions by a MAMSI HMO, and member transfer rate. As part of the Quality
Review Reconciliation, the Company provides a quarterly report to each PCP that
compares the physician's practice performance based on outpatient and inpatient
expenses to those of his/her peers and allows the PCP not only to monitor the
number of referrals consistent with quality medical standards, but also to
evaluate the most cost-effective consultants and facilities within each
specialty area.
Prior to July, 1, 1995, specialist providers and participating non-physician
providers were compensated on a discounted fee maximum basis. This compensation
was limited to an established maximum rate that reflected the amount that
similar providers of a similar service would typically charge. Effective July 1,
1995, the Company modified the method used to compensate providers and adopted
the Medicare Resource Based Relative Value Scale
8
methodology of provider reimbursement. This methodology, which applies generally
to specialist health claims, has resulted in the lowering of some reimbursement
levels, mainly those having to do with office and hospital-based procedures,
while increasing payments for many evaluation and management tasks. Management
believes that this change has allowed the Company to continue to be competitive
within its marketplace.
The HMOs have contractual arrangements with a combined total of 1,500
facilities, consisting of 300 hospitals and 1,200 non-hospital facilities, as of
December 31, 1997. These facilities are located in the Company's HMO Service
Area. Contracts with facilities are renewable annually.
HMO ARRANGEMENTS FOR OTHER SERVICES
The HMOs have contracted with a number of entities to arrange for the provision
of other services:
EMERGENCY CARE - Enrollees may receive urgent care services as an alternative to
hospital emergency room treatment. Enrollees can use local urgent care centers
and any hospital emergency room in emergency situations.
HOME HEALTH CARE - A number of medical care providers are engaged to provide
health care services (such as nursing, pediatric, neonatal, orthopedic,
psychiatric, geriatric, dialysis treatments, physical therapy, speech therapy
and respiratory therapy) at the home of the enrollee. MAMSI's home health care
subsidiary, HomeCall, Inc. ("HomeCall"), provides these services throughout much
of the Company's service area.
PHARMACEUTICAL ASSISTANCE - The Company has arrangements with participating
pharmacies so that an enrollee is only responsible for the deductibles and/or
copayments that are indicated on his or her enrollment card. The Company's
pharmaceutical company, HomeCall Pharmaceutical Services, Inc. provides home
infusion, delivery of drugs to physician offices and mail order prescription
services to its members and other payors.
LABORATORY TESTING - The Company has an arrangement with a laboratory that
conducts much of the laboratory work required by HMO providers. Enrollees in
MAMSI's PPO are similarly referred to this laboratory for testing.
DENTAL - The Company has several dental products available including a dental
indemnity product available from MAMSI Life, subcontracted capitated
arrangements with a dental HMO, and a discount dental services network through a
dental PPO.
QUALITY ASSESSMENT/IMPROVEMENT AND COST CONTAINMENT
MAMSI conducts a multidisciplinary approach to its Quality Assessment/Quality
Improvement ("QA/QI") Program, utilizing the resources of all of its
subsidiaries to ensure the provision of quality health care and services to its
HMO enrollees in an appropriate and cost-efficient manner.
MAMSI recognizes the importance of a Continuous Quality Improvement Program to
determine and allocate appropriate resources that will have the greatest impact
for the members. The QA/QI Program is designed to meet and serve the needs of
employers, members and providers as well as to monitor the timeliness,
appropriateness and effectiveness of services via ongoing and systematic reviews
of key indicators and aspects of care. The QA/QI Program conducts member
satisfaction surveys, identifies opportunities for improvements in providing
care, adopts strategies to improve outcomes and monitors the improvement to
report progress.
9
MAMSI's QA/QI Committee, which operates under the direction and oversight of
MAMSI's Board of Directors, includes administrative, clinical and provider
representation. The Committee evaluates numerous quality related issues and
outcomes measuring overall services provided to enrollees.
In addition, MAMSI utilizes several cost control and quality review mechanisms.
Provider applications are reviewed by a Credentials Committee in order to
determine whether the applicant meets MAMSI's criteria, including Board
Certification or eligibility.
MAMSI maintains a physician review process to determine whether the needed
levels of medical service are being provided in a timely and efficient manner.
The Company conducts medical reviews to monitor the quality of care provided.
The Company also monitors the hospital and out-of-plan referrals issued by
primary care providers.
In most situations, prior authorization must be obtained for non-emergency
hospital admissions. Failure to secure prior authorization for non-emergency
hospital admissions of enrollees may cause claims to be denied, and in some
situations, providers may be sanctioned. Prior to admission for non-emergency
hospital services, MAMSI applies certain medical criteria to authorize the
admission.
After admission of an HMO enrollee, MAMSI monitors the course of hospital
treatment and coordinates discharge planning in the hope of preventing unneeded
use of medical resources. Although the Utilization Management staff is not
permitted to interfere with a physician's medical judgment regarding the course
of treatment, if the physician decides to extend an enrollee's stay beyond that
authorized, the physician must provide medical justification for the necessity
of such proposed action and obtain specific approval.
The HMOs have established a grievance procedure to respond to enrollee and
provider complaints. Enrollees are encouraged to use this procedure before
proceeding further with a complaint. Once this procedure is exhausted, any
unresolved complaint or grievance may be settled by binding arbitration rather
than through the courts. There is a similar grievance procedure for physician
complaints.
In 1993, MAMSI invited the National Committee for Quality Assurance ("NCQA"), a
private, non-profit organization, to evaluate the Company's methodologies in an
effort to receive NCQA accreditation. NCQA accreditation is a voluntary process.
In the 1993 review, the Company did not meet certain of NCQA's criteria and,
therefore, did not receive NCQA accreditation. In response, MAMSI adopted
methodologies and programs designed to respond to concerns and questions raised
in NCQA's assessment. The Company requested the NCQA to perform another
accreditation review which took place in December of 1996. In May, 1997, NCQA
informed the Company that its flagship HMOs received one year accreditation. The
Company has implemented the Health Plan and Employer Data and Information Set
("HEDIS") 3.0 which represents a core set of performance measures developed by
NCQA to serve the employer as a purchaser. In addition, in October, 1997 the
Maryland Health Care Access and Cost Commission released the results of
Maryland's first ever statewide HMO report card. MAMSI's Maryland HMOs exceeded
the state wide average in overall satisfaction, accessibility and quality. In
another survey of member satisfaction taken by the U.S. Office of Personnel
Management, federal employees expressed satisfaction with the Company's
federally qualified HMO.
The Company's home health care and home infusion subsidiaries underwent
voluntary accreditation review by the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO") during 1995. Full accreditation status was
awarded as a result of this process.
COMPETITION AND MARKETING STRATEGY
The health care industry is characterized by intense competition. MAMSI
recognizes the possibility that other entities with greater resources may enter
into competition with MAMSI
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in the future by either entering its HMO Service Area or by designing
alternative health care delivery systems. HMOs compete not only with other HMOs
and managed care organizations such as provider sponsored organizations, but
also with insurance companies that offer indemnity insurance products.
MAMSI's HMOs compete with approximately 21 HMOs or other prepaid alternative
health care delivery systems that have a presence in at least one of the cities
or counties in MAMSI's non expansion service areas. The following table sets
forth MAMSI's best estimate of 1997 enrollment of HMOs operating in its non
expansion HMO Service Areas. Certain of the HMOs are part of a larger entity and
the enrollees estimated herein include only those in MAMSI's HMO Service Area.
Approximate
Number
HMO Plan Type of Enrollees
- ------------- --------- ------------
Mid Atlantic Medical Services, Inc.* .......... IPA 547,000
Kaiser Permanente Health Care Program ......... Group 518,000
NYLCARE of the Mid Atlantic.................... IPA 439,000
FreeState Health Plan** ....................... IPA 270,000
Trigon ........................................ IPA 261,000
Prudential Healthcare.......................... IPA 176,000
Optima/Sentara Health Plans.................... IPA/Staff 176,000
AETNA/U.S. Healthcare.......................... IPA 166,000
United Healthcare ............................. IPA 91,000
George Washington University Health Plan ...... Group 60,000
Southern Health Services (Coventry Corp.) ..... IPA 53,000
Capital Care***................................ IPA 72,000
CIGNA Health Plans ............................ IPA 70,000
Qualchoice .................................... IPA 54,000
Other HMOs .................................... Various 259,000
* - Includes individuals covered by the Company's HMOs only.
** - This company is owned by Blue Cross/Blue Shield of Maryland.
*** - This company is owned by Blue Cross/Blue Shield of the National Capital
Area.
MAMSI's HMOs compete with other HMOs and insurance companies on the basis of
price, network and range of services offered to enrollees. PHP-MD competes with
the same entities and with other IPAs for physician services. PHP-MD believes
that its capitation payments to PCPs and the fee for service payments to
specialists are competitive with other HMOs. MAMSI believes that the freedom
IPA-model HMOs offer their enrollees in choosing from a greater number of
physicians constitutes a competitive advantage over group or staff model HMOs.
The ability to retain and attract enrollees will depend, in part, on how present
enrollees assess their benefit packages, quality of service, provider network,
rates and the HMOs' responsiveness to enrollee needs.
MAMSI subsidiaries employed approximately 455 full-time individuals who provide
marketing services for the Company's products as of December 31, 1997. MAMSI's
marketing strategy includes identifying and contacting employers in its HMO
Service Area. In addition, the Company employs prospecting, telemarketing,
employer group consultation, referrals by consultants, and the use of a minimum
number of selected brokers to acquire new accounts. Since 1994, the Company's
strategy has included reducing the use of brokers for new business while
increasing its internal sales force. New members acquired by the Company's
dedicated sales force accounted for 48 percent of total large group new members
and 97 percent of total small group new members in 1997.
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RISK MANAGEMENT
With the exception of certain small group markets, OCI uses underwriting
criteria as a part of its risk management efforts. Underwriting is the process
of analyzing the risk of enrolling employer groups in order to establish an
appropriate premium rate. Utilizing underwriting criteria, OCI seeks to avoid
contracting with employers that are likely to experience an actuarially higher
than expected need for medical care. OCI's use of underwriting techniques is
restricted in certain situations by state small group reform legislation (see
further discussion under "Government Regulation").
The Company maintains professional, directors and officers, errors and
omissions, general liability and property insurance coverage in amounts believed
to be adequate. The Company requires participating hospitals to maintain
professional liability coverage and physicians to have malpractice insurance. A
professional liability insurance policy provides coverage in the event that
legal action is taken against any entity as a result of medical malpractice
committed by a physician.
In addition, MAMSI's HMOs reduce the financial impact of catastrophic losses by
maintaining reinsurance coverage for hospital costs. The reinsurer indemnifies
80% of the eligible in and out of service area medical expenses in excess of
$200,000 per enrollee per year up to a lifetime maximum of $2,000,000 in
eligible medical costs.
Through June 30, 1996, PHP-MD generally placed 5% to 15% of the payments due to
participating physicians in a Claims Reserve Risk Pool. The Claims Reserve Risk
Pool constitutes a financial risk-sharing arrangement among the participating
physicians and PHP-MD. Amounts held in the Claims Reserve Risk Pool were
distributed from time to time by PHP-MD to participating physicians if, in the
judgment of PHP-MD's Board of Directors, PHP-MD's financial condition permits
such distribution. Effective July 1, 1996, Maryland regulations eliminated the
use of such risk pools by HMOs, therefore, commencing on that date the majority
of PHP-MD payments to physicians are not reduced. Amounts placed in such risk
pools, in jurisdictions where it is still permitted, are minor. The following
table sets forth information regarding the portion of the amount in the Claims
Reserve Risk Pool that was distributed to participating physicians in each
calendar year.
Percentage
Distributed
Year to Providers
- ---- ------------
1990 16
1991 5
1992 4
1993 59
1994 58
1995 4
1996 0
1997 0
GOVERNMENT REGULATION
MAMSI's HMOs are subject to state and, in some instances, Federal regulation.
Among the areas regulated are: (i) premium rate setting; (ii) benefits provided;
(iii) marketing; (iv) provider contracts; (v) quality assurance and utilization
review programs; (vi) adherence to confidentiality and medical records
requirements; (vii) enrollment requirements; and (viii) financial reserves and
other fiscal solvency requirements.
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Under applicable law, HMOs must generally provide services to enrollees
substantially on a fixed, prepaid basis without regard to the actual degree of
utilization of services. The Company generally fixes the premiums charged to
employers for a 12 month period and revises the premium with each renewal. In
setting premiums, the Company forecasts health care utilization rates based on
the relevant demographics and also considers competitive conditions and the
average number of enrollees in the employer group. In addition to these
premiums, enrollees also make copayments to providers as required.
Although premiums established may vary from account to account through composite
rate factors and special treatment of certain broad classes of enrollees,
Federal regulations generally prohibit Federally qualified HMOs from traditional
experience rating of accounts on a retrospective basis. Consistent with the
practices of other Federally qualified HMOs, M.D. IPA, in some situations, bases
the premiums it charges employers in part on the age, sex and geographic
location of the enrolled employees. M.D. IPA believes that its premiums are
competitive with other HMOs and health insurers and its health coverage is a
better value for members because of the range of physician and hospital
selection and other benefits provided.
M.D. IPA contracts with the Office of Personnel Management ("OPM") to provide or
arrange health services under the Federal Employees Health Benefit Program
("FEHBP"). The contract with OPM and applicable government regulations establish
premium rating requirements for the FEHBP. The premiums established under the
OPM contract are subject to periodic review and audit to determine if they were
established in compliance with the community rating and other requirements under
the program.
MAMSI's HMOs must file periodic reports with, and are subject to periodic review
by, state regulatory authorities. Although MAMSI's HMOs are not regulated
specifically as insurance companies, they must comply with certain provisions of
state insurance laws as well as other laws specifically enacted to regulate
HMOs.
MAMSI Life, the Company's insurance subsidiary, is domiciled in Maryland and is
licensed in over 30 states. MAMSI Life is subject to regulation by the
department of insurance in each state in which it is licensed. These regulations
subject MAMSI Life to extensive review of the terms, administration and
marketing of insurance products offered and minimum net worth and deposit
requirements. In addition, MAMSI Life is required to file periodic reports and
is subject to periodic audits and continuing oversight. The offering of certain
new insurance products may require the approval of regulatory agencies.
The Company's home health care operations are regulated principally in four
areas: home health care licensing; certification for participation in private
insurance and government reimbursement programs; employee licensure and training
requirements; and Federal occupational safety guidelines. The Company believes
that it is in compliance with all applicable regulations, which include
possessing the required Certificates of Need in all locations in which such
certificates are required. Additionally, the Company's infusion and mail order
prescription businesses have obtained the necessary licenses and permits to
operate as a full service retail pharmacy.
MAMSI's customers include employee health benefit plans subject to the Employee
Retirement Income Security Act of 1974 ("ERISA"). To the extent that the Company
has discretionary authority in the operation of these plans, the Company could
be considered a plan fiduciary under ERISA. Plan fiduciaries are barred from
engaging in various prohibited transactions, including self-dealing. They are
also required to conduct the operations of employee benefit plans in accordance
with each plan's terms.
Due to the continued increase in health care costs and the inability of many
individuals to obtain health care insurance, numerous proposals relating to
health care reform have been made, and additional proposals may be introduced,
in the United States Congress and the legislatures of the states in which the
Company operates or may seek to operate.
13
Recently, the "Health Insurance Portability and Accountability Act of 1996,
Public Law 104- 191", commonly called the Kennedy-Kassebaum Bill for its primary
sponsors, was enacted. This bill establishes certain Federal requirements for
large group, small group, and individual health benefit plans, and applies not
only to insurers and HMOs but also to ERISA plans.
Kennedy-Kassebaum is intended to make coverage more portable and available by
limiting pre-existing condition requirements; providing special enrollment
periods for employees who lose other coverage or whose family status changes;
prohibiting group plans from denying an individual coverage or charging a higher
premium based on the individual's health status or history; and by guaranteeing
coverage availability and renewability in certain circumstances in the small
group and individual markets. Kennedy-Kassebaum also allows for the
establishment of Medical Savings Accounts; increases the penalties for health
care fraud and abuse; and calls for standardized health care information in
order to reduce administrative costs.
The effect of Kennedy-Kassebaum differs from state to state. In the group
market, state laws remain in effect unless they prevent the application of the
new federal requirements, and in the individual market, state laws govern if the
Health and Human Services Secretary determines that they provide an "acceptable
alternative mechanism" to the federal requirement. This means that in those
states, like Maryland, where state reforms have already been enacted, the
legislation has little, if any, effect in the small group market, but may have
some effect in the individual market. In other states, the legislation has a
greater effect.
Most of the provisions of Kennedy-Kassebaum took effect on July 1, 1997, but
some, like the provisions pertaining to Medical Savings Accounts, took effect
earlier and others, like administrative simplification, took effect later.
In recent years, state legislatures in the Company's service area have been
active in health care reform legislation targeted at the small group market,
i.e., usually for groups of 2 to 50 employees. This small group reform is now in
place in Maryland, Virginia, Delaware and North Carolina, but not in
Pennsylvania, Washington, D.C. or West Virginia. Although different in many of
the details, this type of legislation generally requires all HMOs and insurers
that offer small group coverage to accept all small employers who apply for
coverage and to guarantee coverage to their employees seeking coverage
regardless of their health status. The legislation also requires renewal of
these small group employer plans, limits rate renewal increases, mandates
adjusted community rating and eliminates pre-existing condition limitations
either entirely or within a short period of time, usually six months. In
addition, many states have begun to legislate certain mandated benefits like
minimum hospital length of stays and required coverages.
The Company believes that the current political environment in which it operates
will result in continued legislative scrutiny of health care reform and may lead
to additional legislative initiatives. The Company is unable to predict the
ultimate impact on the Company of any Federal or state restructuring of the
health care delivery or health care financing systems, but such changes could
have a material adverse impact on the operations and financial condition of the
Company.
The District of Columbia, which has not previously regulated HMOs, enacted
legislation effective July 1, 1997, providing for regulatory oversight similar
to that currently provided by other states. The Company does not anticipate any
significant negative impact on its operations because of the new regulatory
oversight in the District of Columbia.
PREFERRED PROVIDER ORGANIZATIONS
MAMSI offers PPO coverage through two subsidiaries: Alliance PPO, Inc.
("Alliance") and Mid Atlantic Psychiatric Services, Inc. ("MAPSI").
14
PPOs allow enrollees to receive care from participating physicians at
contractually negotiated rates. A PPO is different from an HMO in that a PPO
does not assume any financial risk from medical utilization nor does it
typically process claims payments to providers. All medical charges are paid
directly by the payor, which can be a self-funded employer, a health benefits
trust fund or another health insurance company. In return for access to the
PPO's network, the PPO charges the payor either a per employee rate or a
percentage of the savings of actual claims processed for the services accessed.
MAMSI's PPOs provide access to substantially the same provider network as
MAMSI's HMOs.
A PPO operates by being incorporated into an employer's current benefit program,
and offers some or all of the following: access to physician, hospital and
facility services; utilization management and quality assurance; and claims
screening and repricing. The employer determines the level of the benefits and
any applicable copayments.
Alliance is marketed primarily to and through insurance companies, insurance
brokers, consultants, third party administrators ("TPAs"), self-insured
employers and union trusts. The advantages of a TPA marketing approach are
minimized marketing costs and maximized market coverage through established
TPA-employer relationships. Alliance also works directly with employers and
unions that are self-insured and uses direct marketing efforts. The major
competition comes from other PPOs and individual insurance carriers. At December
31, 1997, Alliance had contracts with approximately 20,900 employer groups that
had access to the entire IPA provider network.
The MAPSI PPO is comprised of providers specializing in mental health and
substance abuse care. MAPSI's products are marketed directly to TPAs,
self-insured groups, brokers, indemnity plans, union funds and consultants. In
addition, MAPSI contracts with indemnity insurers that want to offer groups a
managed care mental health product. MAPSI believes it has a competitive
advantage with its unique mental health screening process that offers the
employer the benefit of enhanced coordinated treatment for employees as well as
increased cost savings. MAPSI's major competitors include Merit Behavioral
Health, Inc., Green Spring Mental Health and MCC Inc. At December 31, 1997,
MAPSI had a provider network of approximately 4,000 psychiatrists,
psychologists, social workers, and other affiliated licensed mental health
providers.
Alliance and MAPSI are most often marketed jointly and the prospective purchaser
usually also purchases the MAPSI PPO if the Alliance PPO is purchased. The total
number of lives covered under one or both of these PPO products as of December
31, 1997 was approximately 1,006,000.
PPOs are not subject to HMO regulations by virtue of their business. However,
PPOs are subject to certain state regulations governing the provision of PPO
services such as mandatory state registration. It is possible that PPOs may be
subject to increased regulatory oversight in the future.
OTHER PRODUCTS
MAMSI Life currently underwrites the indemnity coverage of the HMO's preferred
plans in addition to offering stand-alone indemnity health and dental insurance,
aggregate and specific stop loss insurance for self-insured groups, and group
life, accidental death and short-term disability policies. In addition, in 1995
MAMSI Life began providing an administrative services only ("ASO") product to
the State of Maryland. ASO business consists of allowing access to MAMSI's
provider network, without gatekeeper PCPs, and the payment of claims. MAMSI has
no insurance risk on this product. MAMSI Life holds insurance licenses in over
30 jurisdictions including Maryland, Virginia, the District of Columbia, West
Virginia, Delaware and North Carolina. MAMSI Life also became licensed in
Pennsylvania in 1995.
15
In October, 1994, MAMSI acquired all of the outstanding stock of HomeCall and
its wholly owned subsidiary, FirstCall, Inc. ("FirstCall"), for approximately
$10 million, including direct expenses. HomeCall is a state licensed, Medicare
certified home health agency. The combined operations of HomeCall and FirstCall
include 17 branch locations that serve virtually all of Maryland, the District
of Columbia, Northern Virginia and the Panhandle area of West Virginia. HomeCall
achieved full accreditation from the Joint Commission of Accreditation of
Healthcare Organizations ("JCAHO"), following its survey of all services in
November, 1995.
Also during 1994, the Company formed a home infusion services company, HomeCall
Pharmaceutical Services, Inc. ("HCPS"), which received its pharmacy license in
1994 and its Federal license from the Drug Enforcement Agency in 1995.
HomeCall, FirstCall and HCPS provide services that are generally lower cost
alternatives to institutional treatment and care. The Company believes that it
will provide better care to its members and reduce its medical costs by
substituting, where medically appropriate, in- home medical treatment for
treatment in an institutional setting.
Medical services provided by HomeCall, FirstCall and HCPS include skilled
nursing, advanced nursing in support of infusion therapy, maternal/infant
nursing, physical, speech and occupational therapy, medical social work,
nutrition consultation and home health care aides. Services provided by HCPS
include a comprehensive range of in home drug infusion therapies, the delivery
of infusion ready drugs for physician office based infusion therapy, mail order
pharmacy (as described below) and some hospice (as described below).
In April, 1996, HCPS started a mail-order pharmacy, HomeCall Mail Rx, which
received its pharmacy license and its Federal license in 1996. HomeCall Mail Rx
fills and delivers prescription oral medications via common carrier to patients
in their homes. Approximately 12,000 prescriptions are filled each month.
In November, 1996, the Company started HomeCall Hospice Services, Inc.
("Hospice"), which received its Maryland state license to operate a general
hospice care program on December 3, 1996. Based in Columbia, Maryland, Hospice
was organized to address the needs of terminally ill patients and their
families. This hospice program will provide services to individuals in the
comfort of their homes.
Hospice currently serves the Baltimore and Washington, D.C. metropolitan areas.
It is the goal of Hospice to extend its service delivery area to all
geographical areas served by MAMSI. The addition of hospice services complements
MAMSI's other home care products by having a full range of services available to
its members.
In addition to providing in-home medical care to the Company's members,
HomeCall, FirstCall, Hospice and HCPS will continue to provide services to other
payors, including insurance companies, other HMOs and individuals.
The Company also has an equity interest in an ambulatory surgery center located
in Rockville, Maryland. The surgery center conducts outpatient surgery and
services to HMO enrollees and other patients.
16
A summary of MAMSI's membership enrollment in all product lines is as follows:
MEMBERSHIP DATA AT DECEMBER 31
---------------------------------
PRODUCT LINE 1995 1996 1997
- ------------ ---------------------------------
(in thousands)
Commercial HMO (1) 430.1 430.8 398.1
Hybrid HMO (2) 94.5 106.7 103.5
Medicaid 91.0 82.5 34.0
Medicare 6.0 14.4 11.2
Indemnity 23.6 99.2 132.7
ASO (3) 13.2 11.0 11.0
------- ------- -------
658.4 744.6 690.5
PPO (4) 825.0 935.0 1,006.0
------- ------- -------
Total Membership 1,483.4 1,679.6 1,696.5
======= ======= ========
(1) Commercial HMO includes traditional HMO and point-of-service members.
(2) Hybrid HMO includes any business that uses MAMSI's network and gatekeeper
PCPs, utilization management services, claims adjudication and payment services
and that has a self-funded component. Generally, these products include specific
and/or aggregate stop loss provisions.
(3) ASO includes administrative services only business without gatekeeper PCPs
and no assumption of insurance risk by any MAMSI affiliate.
(4) PPO includes all business whereby access is granted to MAMSI's provider
network. MAMSI assumes no risk and does not provide claims payment services on
this business.
INVESTMENTS
The majority of the Company's investments are held by its state regulated
subsidiaries to provide capital for those subsidiaries' operations and to
satisfy capital, surplus and deposit requirements of the HMO and insurance laws
of the various states in which the Company is licensed. HMO and insurance laws
generally protect consumers of insurance products with one of the principal
focuses being on financial solvency of the companies that underwrite insurance
risk. These laws and regulations limit the types of investments that can be made
by the regulated entities with appropriate investments being deemed "admitted
assets." Admitted assets are those assets that can be used to fulfill capital
and surplus requirements. The Company's current investment policy generally
prohibits investments that would be "non-admitted" for statutory reporting
purposes. The Company has no investments in derivative financial instruments and
has no current intention of owning such investments.
EMPLOYEES
As of December 31, 1997, the Company had a total of 2,639 employees, including
2,041 full-time and 598 part-time employees. MAMSI's home health care
subsidiaries employed 733 of these employees (284 on a full-time basis and 449
on a part-time basis). None of the Company's employees are covered by a
collective bargaining agreement and the Company has not experienced any work
stoppage since its inception. The Company believes that it has a good
relationship with its employees.
17
ITEM 2. PROPERTIES
To accommodate the Company's rapid growth, the Company has purchased seven
office buildings since 1988. These buildings are located in Rockville and
Frederick, Maryland and total approximately 453,000 square feet of office and
warehouse space. The Company's headquarters is located at 4 Taft Court,
Rockville, Maryland 20850.
In addition, the Company leases approximately 163,000 square feet of office
space and approximately 5,200 square feet of warehouse space in various
locations within its service areas to support sales and administrative
operations.
During 1997, the Company purchased an office building in Frederick, Maryland in
order to consolidate existing office space needs and plan for future growth. As
a result, the Company intends to sell and is actively marketing two office
buildings it currently owns.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as the defendant in a suit filed by certain medical
providers on March 26, 1997 in the Circuit Court for Anne Arundel County,
Maryland, which alleges that the Company improperly reduced payments to
participating providers in the form of "withhold". It is the plaintiffs'
allegation that certain payments should not have been reduced in this manner and
seek unspecified damages. This matter has been filed as a class action against
the Company. On August 18, 1997, the court stayed further proceedings in the
litigation pending plaintiff's pursuit of arbitration as provided for under the
contract.
The Company is involved in other various legal actions arising in the normal
course of business, some of which seek substantial monetary damages. After
review, including consultation with legal counsel, management believes that any
ultimate liability that could arise from these other actions will not materially
affect the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for shareholder vote in the fourth quarter of
1997.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently listed on The New York Stock Exchange,
Inc. ("NYSE") under the trading symbol MME. The following table sets forth for
the indicated periods the high and low reported sale prices of the common stock
as furnished by the NYSE.
1997 1996
----------------- -----------------
HIGH LOW HIGH LOW
----------------- -----------------
First Quarter $15.25 $10.75 $24.38 $20.38
Second Quarter 15.56 10.25 24.00 14.25
Third Quarter 17.00 13.88 14.75 11.75
Fourth Quarter 16.75 10.81 13.38 10.13
The Company has never paid any cash dividends on its common stock and presently
anticipates that no cash dividends will be declared in the foreseeable future.
Any dividends will depend on future earnings, the financial condition of the
Company and regulatory requirements. See Note 13 to the Consolidated Financial
Statements.
As of February 27, 1998, there were approximately 765 stockholders of record of
the Company's common stock.
19
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(in thousands except share amounts, key ratios and operating data)
SELECTED INCOME STATEMENT DATA
Revenue $1,111,653 $1,133,742 $ 954,907 $ 749,898 $ 648,225
Expense 1,090,213 1,138,677 858,567 663,343 605,779
Income (loss) before income taxes and
cumulative effect of accounting change 21,440 (4,935) 96,340 86,555 42,446
Income (loss) before cumulative effect
of accounting change 14,489 (2,768) 61,124 54,530 25,496
Net income (loss) 14,489 (2,768) 61,124 54,530 24,833
Earnings (loss) per common share (1):
Basic
Income (loss) before cumulative effect
of accounting change $0.31 ($0.06) $1.33 $1.21 $0.58
Net income (loss) $0.31 ($0.06) $1.33 $1.21 $0.57
Diluted
Income (loss) before cumulative effect
of accounting change $0.31 ($0.06) $1.28 $1.15 $0.57
Net income (loss) $0.31 ($0.06) $1.28 $1.15 $0.55
Weighted Average Shares
Basic 46,273,484 45,978,864 46,127,112 45,030,113 43,607,402
Diluted 46,885,666 45,978,864 47,908,379 47,370,211 45,109,230
Dividends --- --- --- --- ---
SELECTED BALANCE SHEET DATA (AT DECEMBER 31)
Working capital 128,065 118,870 153,668 91,983 39,758
Total assets 342,823 334,719 354,182 268,522 189,561
Long-term debt 74 134 194 5,331 5,763
Stockholders' equity 208,307 184,400 217,216 141,326 71,963
Cash dividends per common share (2) --- --- --- --- ---
KEY RATIOS
Medical loss ratio 89.4% 92.4% 81.9% 80.8% 86.3%
Administrative expense ratio 11.7% 10.7% 10.5% 9.4% 8.3%
Net income margin 1.3% (.2%) 6.4% 7.3% 3.9%
OPERATING DATA
Annualized hospital days per
1,000 enrollees:
All products and health services 297 331 313 312 321
HMO only (3) 192 203 222 238 251
Medicare 2,566 2,698 2,531 --- ---
Medicaid 552 454 405 466 ---
Annualized hospital admissions per
1,000 enrollees 78 77 80 76 69
HMO, hybrid, ASO and indemnity
health enrollees at year end 691,000 745,000 658,000 508,000 440,000
PPO enrollees at year end 1,006,000 935,000 825,000 698,000 510,000
Participating providers at year end 28,400 24,300 21,077 16,950 15,500
Notes
1. Earnings (loss) per common share have been adjusted to reflect stock
dividends on a retroactive basis and to reflect adoption of Financial Accounting
Standards No. 128. All previously reported earnings per share amounts have been
restated to reflect the adoption of this statement. See Note 1 to the
Consolidated Financial Statements.
2. MAMSI has not declared or paid cash dividends on its common stock.
3. Days are presented exclusive of skilled nursing, neonatal intensive care and
psychiatric inpatient care.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
All forward-looking information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations is based on
management's current knowledge of factors affecting MAMSI's business. MAMSI's
actual results may differ materially if these assumptions prove invalid.
Significant risk factors, while not all-inclusive, are:
1. The possibility of increasing price competition in the Company's market
place.
2. The possibility of state or Federal budget related mandates that reduce
premiums for Medicaid or Medicare recipients.
3. The potential for increased medical expenses due to: - Increased utilization
by the Company's membership. - Inflation in provider and pharmaceutical
costs.
- Federal or state mandates that increase benefits or limit the Company's
oversight ability.
4. The possibility that the Company is not able to expand its service territory
as planned due to regulatory delays and/or inability to contract with
appropriate providers.
5. The possibility that the Company is not able to increase its market share at
the anticipated premium rates.
GENERAL
During the three year period ended December 31, 1997, the Company experienced
rapid expansion through 1996, followed by a year of relative stability. While
membership in certain products continues to grow, others have shown substantial
decreases when compared with 1996. The Company has achieved its overall size by
continually expanding its product lines which include point-of-service, small
group, indemnity health, hybrid products, Medicaid and Medicare, group term-life
and through expansion into new geographic markets. Premium rates during this
time have remained at or near competitive levels for the Company's market place.
During 1997, the Company's consolidated operating margin showed a profit after
being slightly negative in 1996. The Company achieved 1997's results, in part,
by implementing product price increases and reducing membership in products or
effectively terminating groups that had the potential for continued
unprofitability. The Company anticipates that it will continue to increase
premium rates during 1998. This is a forward-looking statement. See
"Forward-Looking Information" above for a description of those risk factors.
The Company generally receives a fixed premium amount per member per month while
the majority of medical expenses are variable and significantly affected by
spontaneous member utilization. Even with managed care controls, unusual medical
conditions can occur, such as an outbreak of influenza or a higher than normal
incidence of high cost cases (such as premature births, complex surgeries, or
rare diseases). As a result, the Company's quarterly results can be materially
effected and irregular. However, over the longer business cycle, the Company
believes that its managed care control systems, underwriting procedures (when
allowed) and network of providers will result in continued profitability.
Due to the continued escalation of health care costs and the inability of many
individuals to obtain health care insurance, numerous proposals relating to
health care reform have been made, and additional proposals may be introduced,
in the United States Congress and the legislatures of the states in which the
Company operates or may seek to operate.
21
Recently, the "Health Insurance Portability and Accountability Act of 1996,
Public Law 104- 191", commonly called the Kennedy-Kassebaum Bill for its primary
sponsors, was enacted. This bill establishes certain Federal requirements for
large group, small group, and individual health benefit plans, and applies not
only to insurers and HMOs but also to ERISA plans.
Kennedy-Kassebaum is intended to make coverage more portable and available by
limiting pre-existing condition requirements; providing special enrollment
periods for employees who lose other coverage or whose family status changes;
prohibiting group plans from denying an individual coverage or charging a higher
premium based on the individual's health status or history; and by guaranteeing
coverage availability and renewability in certain circumstances in the small
group and individual markets. Kennedy-Kassebaum also allows for the
establishment of Medical Savings Accounts, increases the penalties for health
care fraud and abuse, and calls for standardized health care information in
order to reduce administrative costs.
The effect of Kennedy-Kassebaum differs from state to state. In the group
market, state laws remain in effect unless they prevent the application of the
new federal requirements, and in the individual market, state laws govern if the
Health and Human Services Secretary determines that it provides an "acceptable
alternative mechanism" to the federal requirement. This means that in those
states like Maryland, where state reforms have already been enacted, the
legislation has little, if any, effect in the small group market, but may have
some effect on the individual market. In other states, the legislation has
greater effect.
Most of the provisions of Kennedy-Kassebaum took effect on July 1, 1997, but
some, like the provisions pertaining to Medical Savings Accounts, took effect
earlier and some, like administrative simplification, take effect later.
In recent years, state legislatures in the Company's service area have been
active in health care reform legislation targeted at the small group market,
i.e., usually for groups of 2 to 50 employees. This small group reform is now in
place in Maryland, Virginia, Delaware and North Carolina, but not in
Pennsylvania, Washington, D.C. or West Virginia. Although different in many of
the details, this type of legislation generally requires all HMOs and insurers
that offer small group coverage to accept all small employers who apply for
coverage and to guarantee coverage to their employees seeking coverage
regardless of their health status. The legislation also requires renewal of
these small group employer plans, limits rate renewal increases, mandates
adjusted community rating and eliminates pre-existing condition limitations
either entirely or within a short period of time, usually six months. In
addition, many states have begun to legislate certain mandated benefits like
minimum hospital length of stays and required coverages.
The Company believes that the current political environment in which it operates
will result in continued legislative scrutiny of health care reform and may lead
to additional legislative initiatives. The Company is unable to predict the
ultimate impact upon the Company of any Federal or state restructuring of the
health care delivery or health care financing systems, but such changes could
have a material adverse impact on the operations and financial condition of the
Company.
The District of Columbia, which has not previously regulated HMOs, enacted
legislation effective July 1, 1997 providing for regulatory oversight similar to
that currently provided by other states. The Company does not anticipate any
significant negative impact on its operations because of the new regulatory
oversight in the District of Columbia.
- -----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------
22
RESULTS OF OPERATIONS
Consolidated net income (loss) of the Company was $14,489,000 and $(2,768,000)
in 1997 and 1996, respectively. Net earnings (loss) per share was $.31 in 1997
as compared to $(.06) in 1996. The increase in earnings is primarily
attributable to a decrease in the medical loss ratio for commercial products
which was slightly offset by an increase in the administrative expense ratio.
The medical loss ratio decreased principally due to increased efforts by the
Company to control medical costs through utilization review, enhanced claim
adjudication, and increased claims audit and claims reversal activity. The
Company has priced its products competitively in order to increase its
membership base and thereby enhance its strategic position in its market place.
The Company currently has one of the largest HMO and managed care enrollments
and also the largest network of contract providers of medical care in its
service area (which includes the entire states of Maryland and Delaware, the
District of Columbia, most counties and cities in Virginia and certain areas of
West Virginia, North Carolina and Pennsylvania).
Revenue for the year ended December 31, 1997 decreased approximately $22.1
million or 2.0 percent over the year ended December 31, 1996. A 4.4 percent
decrease in net average HMO and indemnity enrollment resulted in a decrease of
approximately $47.5 million in health premium revenue while a 2.0 percent
increase in the average monthly premium per enrollee, combined for all products,
resulted in a $20.2 million increase in health premium revenue. The net decrease
in revenue is mainly related to the Company's withdrawal from the Maryland
Medicaid program and from certain areas of the Virginia Medicaid program due to
inadequate premiums paid by the states. Management believes that commercial
health premiums should increase over the next twelve months as the Company
increases its commercial membership and as new and renewing groups are charged
higher premium rates due to legislatively mandated benefit enhancements and
general price increases initiated by the Company. Effective January 1, 1998, the
Company has modified its Medicare product offering. This modification has the
potential to significantly reduce the Company's Medicare membership and related
premium revenue. This is a forward-looking statement. See "Forward Looking
Information" above for a description of the risk factors that may effect health
premiums per member.
The Company has implemented increased premium rates across essentially all of
its commercial products which began to take effect in July, 1996. As the
Company's contracts are generally for a one year period, increased pricing
cannot be initiated until a contract reaches its renewal date. Therefore, price
increases cannot be made across the Company's membership at the same time.
Additionally, the Company received an approximate 5 percent premium rate
increase in its Virginia Medicaid program effective July 1, 1997, an approximate
8 percent premium rate decrease in its North Carolina Medicaid program effective
August 1, 1997, and an approximate 2 percent premium rate increase in its
Medicare program, effective January 1, 1998. Management believes that the
commercial premium rate increases may have the effect of slowing the Company's
future membership growth as compared to membership growth in 1994 through 1996.
In addition, management reevaluated premium reimbursement rates with regard to
its Medicare and Medicaid participation and reduced or eliminated certain
service areas. Specifically, effective January 1, 1997, 59 counties and cities
were eliminated from the Company's Medicare service area. Effective January 1,
1998, the Company again reduced its Medicare service area, modified certain
benefits and began charging an additional premium in certain areas. Also
effective January 1, 1997, the Company discontinued participation in the
mandated portion of the Virginia Medicaid program which serves Medicaid
eligibles in the Tidewater area of Virginia. In addition, the Company has
withdrawn from the Maryland Medicaid program due to changes to premium and
benefit levels and other requirements made by the State of Maryland after it
obtained an 1115 waiver and became a mandated state. As the Company was the
largest provider of managed care Medicaid in Maryland, the Company continued to
provide services in 1997 until an orderly transition was accomplished. The
Company was compensated during the transition period at a rate higher than the
mandated program allows but lower than historical reimbursement. In 1996, the
Company became licensed to serve portions of the Medicaid populations in West
Virginia and North Carolina. The Company's
23
future membership growth depends on several factors such as relative premium
prices and product availability, future increases or decreases in the Company's
service area, increased competition in the Company's service area and changes in
state mandated enrollment in Medicaid HMO programs in which the Company
participates. Enrollment may also decrease if the Company determines that
premium reimbursement rates related to certain state Medicaid programs are
inadequate, which would cause the Company to voluntarily withdraw from
participation. As previously described, this determination was made in
connection with the Maryland Medicaid program and part of the Virginia Medicaid
program.
Service revenue from non-MAMSI affiliated entities earned by the Company's home
health care subsidiaries contributed $21.0 million in revenue in 1997 as
compared to $20.5 million in 1996. This increase is the result of increasing
business volume for these subsidiaries, particularly in the home infusion area,
which is largely offset by an increasing relative percentage of business
conducted for MAMSI HMO and indemnity members which is eliminated in
consolidation. Revenue from life and short-term disability products contributed
$5.3 million in 1997 as compared to $3.2 million in 1996.
In 1993, MAMSI invited the National Committee for Quality Assurance ("NCQA"), a
private, non-profit organization, to evaluate the Company's methodologies in an
effort to receive NCQA accreditation. NCQA accreditation is a voluntary process.
In the 1993 review, the Company did not meet certain of NCQA's criteria and,
therefore, did not receive NCQA accreditation. In response, MAMSI adopted
methodologies and programs designed to respond to concerns and questions raised
in NCQA's assessment. The Company requested the NCQA to perform another
accreditation review which took place in December of 1996. In May, 1997, NCQA
informed the Company that its flagship HMOs received one year accreditation. The
Company has implemented the Health Plan and Employer Data and Information Set
("HEDIS") 3.0 which represents a core set of performance measures developed by
NCQA to serve the employer as a purchaser. In addition, in October, 1997 the
Maryland Health Care Access and Cost Commission released the results of
Maryland's first ever statewide HMO report card. MAMSI's Maryland HMOs exceeded
the state wide average in overall satisfaction, accessibility and quality. In
another survey of member satisfaction taken by the U.S. Office of Personnel
Management, federal employees expressed satisfaction with the Company's
federally qualified HMO.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") decreased to 89.4 percent for 1997 as compared to 92.4 percent for 1996
and, on a per member per month basis, medical expenses decreased 1.4 percent.
This decrease is due to a combination of factors including continuing efforts by
the Company to implement product specific cost containment controls, expanded
activity in specialized subrogation areas and claims review for dual health
coverage, the adoption of regionalized and product specific fee maximums for
health services, and the identification and possible termination of certain
providers and specialists from the delivery network following a continuing
intensified peer review analysis. In addition, during 1997, the Company
identified certain claims which had been overpaid and recorded as a reduction of
medical expenses approximately $12 million relating to claims incurred and paid
in 1996. The Company believes that it has taken the appropriate action and
implemented appropriate controls to ensure that future claims are paid at the
appropriate amounts although the complexity of paying claims and the increasing
sophistication of providers requires constant evaluation of historical payment
patterns which might indicate improper payments. Additionally, the Company has
greatly expanded its initial health assessments of new Medicare members after
they have enrolled and has also increased its case management personnel. These
initiatives should help to control the Company's medical loss ratio. The
statements in the preceding paragraphs regarding future utilization rates, cost
containment initiatives, total medical costs and future increases in health
premiums per member are forward-looking statements. See "Forward-Looking
Information" above for a description of risk factors that may affect medical
expenses per member and the medical loss ratio.
24
The administrative expense ratio for 1997 increased to 11.7 percent as compared
to 10.7 percent for 1996. This increase is due primarily to increased salaries
and expenses in certain administrative areas of the Company, including
utilization management, claims audit, and customer service departments, as well
as reduced revenue. Management believes that the administrative expense ratio
will remain near the current level over the next year. Management's expectations
concerning the administrative expense ratio are forward-looking statements. The
administrative expense ratio is affected by changes in health premiums per
member, development of the Company's expansion areas and increased
administrative activity related to business volume.
The net margin rate increased from (.2) percent in 1996 to 1.3 percent in 1997.
This increase is primarily due to the decrease in the medical loss ratio.
- -----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated net income (loss) of the Company was $(2,768,000) and $61,124,000
in 1996 and 1995, respectively. Diluted net earnings (loss) per share was $(.06)
in 1996 as compared to $1.28 in 1995. The reduction in earnings is primarily
attributable to a significant increase in the medical loss ratio for commercial
products, continuing losses in the Company's Medicare product and lower earnings
from the Company's Medicaid products. The medical loss ratio increased
principally due to increased member utilization.
Revenue for the year ended December 31, 1996 increased approximately $178.8
million or 18.7 percent over the year ended December 31, 1995. A 19 percent
increase in net average HMO and indemnity enrollment resulted in an increase of
approximately $171.5 million in health premium revenue while the average monthly
premium per enrollee, combined for all products, remained approximately the
same.
Service revenue from non-MAMSI affiliated entities earned by the Company's home
health care subsidiaries contributed $20.5 million in revenue in 1996 as
compared to $18.9 million for 1995. This increase is the result of increasing
business volume for these subsidiaries, particularly in the home infusion area,
which is largely offset by an increasing relative percentage of business
conducted for MAMSI HMO and indemnity members which is eliminated in
consolidation. Revenue from life and short-term disability products contributed
$3.2 million in 1996 as compared to $1.0 million in 1995.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") increased to 92.4 percent in 1996 as compared to 81.9 percent for 1995
and, on a per member per month basis, medical expenses increased 12.8 percent.
This significant increase is due to a combination of factors including lower
commercial premiums charged due to competitive forces, higher than expected
utilization by commercial members, cost increases due to legislatively mandated
benefits and extremely high medical expenses related to the Company's Medicare
enrollment.
The administrative expense ratio for 1996 increased to 10.7 percent from 10.5
percent in 1995. This increase is due primarily to increased salaries and
expenses in certain administrative areas of the Company, including utilization
management and customer service departments, as well as additional sales
expenses in new expansion areas in 1996.
Investment income increased $2.4 million or 20 percent primarily due to an
increase of $1.5 million in realized gains on sales of marketable equity
securities.
25
The net margin rate decreased from 6.4 percent in 1995 to (.2) percent in 1996.
This decrease is primarily due to the increase in the medical loss ratio.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is not capital intensive and the majority of the
Company's expenses are payments to health care providers, which generally vary
in direct proportion to the health premium revenues received by the Company.
Although medical utilization rates vary by season, the payments for such
expenses lag behind cash inflow from premiums because of the lag in provider
billing procedures. In the past, the Company's cash requirements have been met
principally from operating cash flow and it is anticipated that this source,
coupled with the Company's operating line of credit, will be sufficient in the
future.
Accounts receivable increased from $77.0 million at December 31, 1996 to $84.7
million at December 31, 1997. This $7.7 million increase is primarily due to
amounts due from the Federal government related to the Company's Federal
Employees Health Benefit Program participation.
Prepaid expenses, advances and other current assets decreased from $32.3 million
at December 31, 1996 to $19.3 million at December 31, 1997, principally due to
the receipt of 1996 tax refunds for net operating loss carrybacks. Statutory
deposits increased from $9.1 million at December 31, 1996 to $14.9 million at
December 31, 1997 due to the increase in state regulatory deposits related to
certain of the Company's regulated subsidiaries.
Property and equipment increased from $45.2 million at December 31, 1996 to
$57.0 million at December 31, 1997 due to the purchase of a new office building
for existing and future office space needs as well as the replacement and
upgrade of certain of the Company's computer equipment.
Short-term investments are marked to market at the end of every quarter and the
resulting unrealized gain or loss is reflected in the ending stockholders'
equity balance. Accordingly, stockholders' equity at December 31, 1997 reflects
an unrealized gain of $.9 million, net of tax, on the Company's short-term
investments.
Medical claims payable decreased from $118.7 million at December 31, 1996 to
$98.3 million at December 31, 1997 primarily due to decreased membership,
decreased member utilization and related claims accruals and reversals of claims
previously paid.
Additional paid-in capital decreased from $173.3 million at December 31, 1996 to
$162.9 million at December 31, 1997, principally due to activity in the
Company's stock compensation trust. This trust is used to provide shares of the
Company's stock to meet its stock option plan obligations.
Deferred tax assets are recognized for deductible temporary differences that, in
management's opinion, are more likely than not to be realized in the current or
future periods. The Company's history of operating revenue and income growth,
and expectation of future operating income, provides strong positive evidence
that these deferred tax assets will be realized. A valuation allowance has been
recorded for net operating loss carryforwards generated by certain subsidiaries
that are not deductible on a consolidated tax return. Management intends to
continue to monitor the realizability of deferred tax assets in light of future
circumstances and assess the reasonableness of the valuation allowance.
The Company currently has access to total revolving credit facilities of $24.0
million, which is used to provide short-term capital resources for routine cash
flow fluctuations. At December 31, 1997, approximately $2.5 million was drawn
against these facilities.
26
Following is a schedule of the short-term capital resources available to the
Company:
December 31
(in thousands) 1997 1996
--------------------
Cash and cash equivalents $ 3,570 $ 4,065
Short-term investments 152,080 151,359
Working capital advances to Maryland
hospitals 9,186 6,432
-------- --------
Total available liquid assets 164,836 161,856
Credit line availability 21,526 21,802
-------- --------
Total short-term capital resources $186,362 $183,658
======== ========
Certain MAMSI subsidiaries that are subject to regulation by state insurance
departments must notify state regulators before the payment of any dividends to
MAMSI and, in certain circumstances, must receive positive affirmation prior to
such payment. The Company does not perceive these requirements to be a
significant restriction on the subsidiaries' ability to pay appropriate future
dividends to the parent company.
The Company does not anticipate any adverse impact on future liquidity due to
medical malpractice issues because the Company carries substantial professional
liability insurance.
The Company believes that cash generated from operations along with its current
liquidity and borrowing capabilities are adequate for both current and planned
expanded operations. Certain capital expenditures will be made over the next
year to enhance the Company's computer systems, and to make necessary
improvements to new and existing administrative offices.
In 1997, the Company began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue. This issue affects computer systems that have time-sensitive programs
that may not properly recognize the year 2000. This could result in major system
failures or miscalculations. The Company is currently addressing its internal
year 2000 issue with modifications to existing programs. The Company is also
communicating with vendors, financial institutions, software vendors and others
with which it conducts business to help them identify and resolve the year 2000
issue. While the Company has determined that certain of its software programs
require modification, it does not anticipate any future material impact on its
financial statements. The total cost associated with the required modifications
and conversions is not known at this time, however, it is not expected to be
material to the Company's results of operations or financial position. The
statements in the preceding paragraph regarding future effects of the year 2000
issue is a forward looking statement. See "Forward-Looking Information" for a
description of risk factors.
At its February 1998 meeting, the Board of Directors authorized a $20 million
stock repurchase program. The Company may purchase its stock on the open market,
through block trades, or in private transactions over the next 12 months. The
program may be discontinued at any time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Consolidated Balance Sheets as of December 31, 1997 and 1996..... 28
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995............................... 29
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995........... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................... 31
Notes to Consolidated Financial Statements....................... 32
Report of Ernst & Young LLP Independent Auditors................. 47
Selected Quarterly Financial Data for Fiscal Years 1997 and
1996 (Unaudited)............................................... 48
28
Mid Atlantic Medical Services, Inc.
Consolidated Balance Sheets
December 31,
(in thousands except share amounts) 1997 1996
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 3,570 $ 4,065
Short-term investments (Note 2) 152,080 151,359
Accounts receivable, net (Note 3) 84,719 77,042
Prepaid expenses, advances and other 19,294 32,323
Deferred income taxes (Note 7) 303 4,033
-------- --------
Total current assets 259,966 268,822
Property and equipment, net (Note 4) 56,964 45,210
Statutory deposits (Note 2) 14,854 9,125
Other assets 10,427 10,261
Deferred income taxes (Note 7) 612 1,301
-------- --------
Total assets $342,823 $334,719
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable (Note 5) $ 60 $ 60
Short-term borrowings (Note 5) 2,249 1,973
Accounts payable 16,878 18,755
Medical claims payable, net 98,328 118,649
Deferred premium revenue 12,586 10,479
Deferred income taxes (Note 7) 1,800 36
-------- --------
Total current liabilities 131,901 149,952
Notes payable (Note 5) 74 134
Deferred income taxes (Note 7) 2,541 233
-------- --------
Total liabilities 134,516 150,319
Stockholders' equity (Notes 10, 11 and 13) Common stock, $0.01 par, 100,000,000
shares authorized,
56,772,502 issued and 54,677,862 outstanding at
December 31, 1997 and December 31, 1996 567 567
Additional paid-in capital 162,892 173,325
Stock compensation trust (common stock held in trust) (101,482) (120,652)
Treasury stock, 2,094,640 shares at December 31, 1997 and 1996 (41,211) (41,211)
Unrealized gains and losses on investments, net of tax
of $618 and $174 at December 31, 1997 and December 31, 1996 946 265
Retained earnings 186,595 172,106
-------- --------
Total stockholders' equity 208,307 184,400
-------- --------
Total liabilities and stockholders' equity $342,823 $334,719
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
29
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Operations
Year Ended December 31,
(in thousands except share amounts) 1997 1996 1995
---------- ---------- ---------
Revenue
Health premium $1,051,923 $1,079,223 $907,694
Fee and other 18,351 16,376 15,334
Life and short-term disability premium 5,313 3,240 961
Home health services 21,025 20,519 18,910
Investment 15,041 14,384 12,008
---------- ---------- --------
Total revenue 1,111,653 1,133,742 954,907
---------- ---------- --------
Expense
Medical expense
Referral and ancillary care (Notes 8 and 9) 406,840 432,487 320,412
Hospitalization, net of coordination of benefits 323,435 349,445 247,870
Primary care (Notes 8 and 9) 83,183 100,692 93,320
Prescription drugs 127,187 115,544 80,438
Reinsurance premiums, net (Note 6) (49) (600) 1,587
---------- ---------- ---------
940,596 997,568 743,627
---------- ---------- ---------
Life and short-term disability claims 2,811 2,314 934
---------- ---------- ---------
Home health patient services 16,808 17,141 13,684
---------- ---------- ---------
Administrative expense
Salaries and benefits 80,700 76,627 62,706
Promotion and advertising 3,543 4,182 3,246
Professional services 6,499 5,837 3,717
Facilities, maintenance and supplies 26,609 23,398 19,134
Other (including interest expense of $540, $691 and $1,010) 12,647 11,610 11,519
---------- ---------- ---------
129,998 121,654 100,322
---------- ---------- ---------
Total expense 1,090,213 1,138,677 858,567
---------- ---------- ---------
Income (loss) before income taxes 21,440 (4,935) 96,340
Income tax benefit (expense) (Note 7) (6,951) 2,167 (35,216)
---------- ---------- ---------
Net income (loss) $ 14,489 $ (2,768) $ 61,124
========== ========== =========
Basic earnings (loss) per common share (Note 11) $ .31 $ (.06) $ 1.33
=========== =========== ===========
Diluted earnings (loss) per common share (Note 11) $ .31 $ (.06) $ 1.28
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
30
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Additional Stock Unrealized
Common Paid-In Compensation Treasury Gains and Retained
(in thousands except share amounts) Stock Capital Trust Stock (Losses) Earnings Total
------ ---------- ------------ -------- ---------- -------- --------
Balance, December 31, 1994 $ 456 $ 29,431 $ (33) (2,278) $113,750 $141,326
Exercise of stock options for
967,800 shares of MAMSI
common stock 10 4,533 4,543
Stock option tax benefit 6,410 6,410
Change in unrealized gains
and (losses), net of tax of $2,494 3,813 3,813
Net Income 61,124 61,124
------ -------- --------- ------- -------- -------- --------
Balance, December 31, 1995 466 40,374 (33) 1,535 174,874 217,216
Exercise of stock options for
1,011,175 shares of MAMSI
common stock 10 5,682 5,692
Stock option tax benefit 6,162 6,162
Establishment of Stock
Compensation Trust for
9,130,000 shares of MAMSI
common stock 91 130,011 $(130,102)
Exercise of stock options
for 109,300 shares released from
the Stock Compensation Trust (1,011) 1,557 546
Adjustment to market value
for shares held in Stock
Compensation Trust (7,893) 7,893
Repurchase of 2,048,700 shares of
MAMSI common stock (41,178) (41,178)
Change in unrealized gains
and (losses), net of tax
of $830 (1,270) (1,270)
Net loss (2,768) (2,768)
------ -------- --------- -------- -------- -------- --------
Balance, December 31, 1996 $ 567 $173,325 $(120,652) $(41,211) $ 265 $172,106 $184,400
Exercise of stock options for
1,061,325 shares released from the
Stock Compensation Trust (10,265) 15,124 4,859
Stock option tax benefit 3,878 3,878
Adjustment to market value for shares
held in Stock Compensation Trust (4,046) 4,046
Change in unrealized gains and (losses),
net of tax of $444 681 681
Net income 14,489 14,489
------ -------- --------- -------- -------- -------- --------
Balance, December 31, 1997 $ 567 $162,892 $(101,482) $(41,211) $ 946 $186,595 $208,307
====== ======== ========= ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
31
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
(in thousands) 1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 14,489 $ (2,768) $ 61,124
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 10,179 7,874 6,026
Provision for bad debts (187) 1,728 47
Provision for deferred income taxes 7,260 2,261 4,971
Loss on sale and disposal of assets 13 78
Increase in accounts receivable (7,490) (17,507) (24,279)
Decrease (increase) in prepaid expenses, advances and other 13,029 (23,349) (3,231)
Increase (decrease) in accounts payable (1,877) 3,680 (2,490)
Decrease in income taxes payable (2,589)
Increase (decrease) in medical claims payable, net (20,321) 10,159 23,476
Increase (decrease) in deferred premium revenue 2,107 354 (3,219)
-------- -------- --------
Total adjustments 2,700 (14,787) (1,210)
-------- -------- --------
Net cash provided by (used in) operating activities 17,189 (17,555) 59,914
-------- -------- --------
Cash flows (used in) provided by investing activities:
Purchases of short-term investments (100,647) (338,943) (426,601)
Sales of short-term investments 104,052 392,219 365,076
Purchases of property and equipment (21,016) (13,469) (10,027)
Purchases of statutory deposits (8,761) (2,407) (1,405)
Maturities of statutory deposits 10 1,824 739
Purchases of other assets (406) (247) (725)
Proceeds from sale of assets 131 435 946
-------- -------- --------
Net cash (used in) provided by investing activities (26,637) 39,412 (71,997)
-------- -------- --------
Cash flows provided by (used in) financing activities:
Proceeds from notes payable 300
Principal payments on notes payable (60) (210) (5,953)
Increase in short-term borrowings 276 322 603
Exercise of stock options 4,859 6,238 4,543
Stock option tax benefit 3,878 6,162 6,410
Purchase of treasury stock (41,178)
-------- -------- --------
Net cash provided by (used in) financing activities 8,953 (28,666) 5,903
-------- -------- --------
Net decrease in cash and cash equivalents (495) (6,809) (6,180)
Cash and cash equivalents at beginning of year 4,065 10,874 17,054
-------- -------- --------
Cash and cash equivalents at end of year $ 3,570 $ 4,065 $ 10,874
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
32
Mid Atlantic Medical Services, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company whose
subsidiaries are active in managed health care and other life and health
insurance related activities. MAMSI's principal markets currently include
Maryland, Virginia, the District of Columbia, Delaware, West Virginia, North
Carolina and Pennsylvania. MAMSI and its subsidiaries (collectively referred to
as the "Company") have developed a broad range of managed health care and
related ancillary products and deliver these services through health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), a life and
health insurance company, home health care and home infusion services companies,
a hospice company, a mail-order pharmacy, and part ownership in an outpatient
surgery center.
MAMSI delivers managed health care services principally through HMOs. The HMOs,
MD- Individual Practice Association, Inc. ("M.D. IPA"), Optimum Choice, Inc.
("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc.
of Pennsylvania ("OCIPA") arrange for health care services to be provided to an
enrolled population for a predetermined, prepaid fee, regardless of the extent
or nature of services provided to the enrollees. The HMOs offer a full
complement of health benefits, including physician, hospital and prescription
drug services.
The following are other significant wholly owned subsidiaries of MAMSI:
Physicians Health Plan of Maryland, Inc. ("PHP-MD") is an individual practice
association ("IPA") that provides physician services to certain of the Company's
HMOs.
Alliance PPO, Inc. ("Alliance") provides a delivery network of physicians
(called a preferred provider organization) to employers and insurance companies
in association with various health plans.
Mid Atlantic Psychiatric Services, Inc. ("MAPSI") provides psychiatric services
to third party payors or self-insured employer groups.
MAMSI Life and Health Insurance Company ("MAMSI Life") develops and markets
indemnity health products and group life, accidental death and short-term
disability insurance.
HomeCall, Inc., FirstCall, Inc. and HomeCall Pharmaceutical Services, Inc.
("HCPS") provide in-home medical care including skilled nursing, infusion and
therapy to MAMSI's HMO members and other payors. In addition, HCPS provides
mail-order pharmacy services to MAMSI's HMO members and other payors.
HomeCall Hospice Services, Inc. ("HCHS") began operations in December, 1996 and
provides services to terminally ill patients and their families.
The significant accounting policies followed by MAMSI and its subsidiaries are
described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MAMSI and its
subsidiaries. All significant intercompany balances have been eliminated in
consolidation.
33
MAJOR CUSTOMERS
The Company's operations are conducted within one business segment. A
significant portion of the Company's premium revenue is derived from federal,
state and local government agencies, including governmental employees and
Medicaid and Medicare recipients. For the years ended December 31, 1997, 1996
and 1995, approximately 11%, 11% and 7%, respectively, of premium revenue was
derived from federal government agencies, and approximately 25%, 26% and 21%,
respectively, was derived from state and local government agencies.
CASH EQUIVALENTS
Floating rate municipal putable bonds, which possess an insignificant risk of
loss from changes in interest rates, that have been held less than three months,
are classified as cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments, consisting principally of marketable equity securities,
municipal bonds and tax-free bond funds, are classified as available-for-sale.
These securities are carried at fair market value plus accrued interest and any
unrealized gains and losses are reported as a separate component of
stockholders' equity, net of the related tax effect. Gains and losses are
reported in earnings when realized. Gains and losses on sales of securities are
computed using the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the property and equipment. Leasehold improvements are amortized on a
straight-line basis over the lesser of the life of the improvement or the term
of the related lease.
STATUTORY DEPOSITS
Statutory deposits, consisting principally of municipal bonds and treasury notes
held in custodial accounts by state regulatory agencies, are classified as
held-to-maturity. These securities are stated at amortized cost.
GOODWILL
The excess of cost over the fair value of net assets of the acquired company in
the 1994 purchase transaction is recorded as goodwill and is classified in the
consolidated balance sheets as an other asset. Goodwill is amortized on a
straight-line basis over 15 years.
HEALTH PREMIUM
Amounts charged for health care services are recognized as premium revenue in
the month for which enrollees are entitled to receive care. Included in premium
revenue are amounts due from customers that utilize the Company's capitated
primary care physician network, its medical utilization management services and
other services related to health management and who self-fund, generally up to
specified limits, certain elements of medical costs, such as hospitalization and
specialist physicians. Premium revenue received in advance is recorded as
deferred premium revenue.
34
FEE AND OTHER
Amounts charged to third party payors solely for use of the Company's provider
network and its discounted fee-for-service rate structure are recognized as fee
revenue. Amounts charged for administrative services only arrangements entailing
only claims payment services and utilization of the provider network without
utilization of the Company's primary care physician network and utilization
management services and under which the Company bears no insurance risk, are
recognized as fee revenue.
HOME HEALTH SERVICES
Amounts charged to patients, third party payors and others for home health
services are recorded at net realizable amounts, including retroactive
adjustments under cost reimbursement agreements with third party payors.
MEDICAL EXPENSE
Medical expense consists principally of medical claims and capitation costs.
Medical claims include payments to be made on claims reported as of the balance
sheet date and estimates of health care services incurred but not reported
("IBNR") to the Company as of the balance sheet date. The IBNR is estimated
using an expense forecasting model that is based on historical claims incurrence
patterns modified to consider current trends in enrollment, member utilization
patterns, timeliness of claims submissions and other factors. This estimate
includes medical costs to be incurred beyond the premium paying date that are
contractually required.
Capitation costs represent monthly fixed fees to participating physicians and
other medical providers as retainers for providing continuing medical care.
Medical claims reversals result from the determination that the Company has paid
claims in excess of contractually obligated amounts. Amounts recognized (through
specific identification or estimation) are recorded at their net realizable
value as a reduction of medical expense in the consolidated statements of
operations and as a reduction of medical claims payable in the consolidated
balance sheets.
The Company believes that its claims reserves are adequate to satisfy its
ultimate claims liabilities; however, the liability as established may vary
significantly from actual claims amounts, both negatively or positively, and as
such adjustments are deemed necessary, they are included in current operations.
Establishment of claims estimates is an inherently uncertain process and there
can be no certainty that currently established reserves will prove adequate to
cover actual ultimate expenses. Subsequent actual experience could result in
reserves being too high or too low which could positively or negatively impact
the Company's earnings in future periods.
COORDINATION OF BENEFITS
Coordination of benefits ("COB") results from the determination that the Company
has paid for medical claims expenses for which an enrollee has duplicate
coverage and for which another insurer is primarily liable. In the consolidated
statements of operations, such identified amounts are classified as a reduction
of hospitalization expense and, in the consolidated balance sheets, such amounts
are classified as a reduction of medical claims payable.
INCOME TAXES
The income tax provision includes Federal and state income taxes both currently
payable and deferred because of differences between financial reporting and tax
bases of assets and liabilities. Deferred tax assets and liabilities are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
35
EARNINGS (LOSS) PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", resulting in the restatement of earnings per share for all
prior periods. Basic earnings per common share are based upon the weighted
average shares outstanding. Outstanding stock options are treated as common
stock equivalents for purposes of computing diluted earnings per share. Shares
held in the Company's Stock Compensation Trust (see Note 11) are excluded from
the calculation of basic and diluted earnings per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" ("Statement No. 107"), requires disclosure of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. Statement
No. 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:
Cash and cash equivalents - The carrying amount reported in the consolidated
balance sheets approximates fair value.
Short-term investments - Fair values are based on quoted market prices.
Statutory deposits - Fair values are based on quoted market prices.
Short-term borrowings - The carrying amount reported in the consolidated balance
sheets approximates fair value.
ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock option plans. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
value of the underlying stock on the date of grant, no compensation expense is
recognized.
NEW ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board issued Statement No. 130
"Reporting Comprehensive Income" ("Statement 130") and Statement No. 131
"Disclosure About Segments of an Enterprise and Related Information" ("Statement
131"). Statement 130 establishes standards for reporting and display of
comprehensive income in a full set of general purpose financial statements, and
Statement 131 significantly changes the way companies report segment information
in annual financial statements. Because Statement 131 concerns itself only with
how supplemental financial statement information is disclosed in annual and
interim reports, the adoption will not have a material impact on the Company's
consolidated financial
36
statements. The Company is currently evaluating the effect of Statement 130 on
its financial statements. Each of these statements is effective for periods
beginning after December 15, 1997.
NOTE 2 - INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("Statement No. 115"). Under this statement, securities are
classified into categories and are valued based upon this designation.
Securities classified as available-for-sale, which include debt and equity
securities that the Company does not have the positive intent to hold to
maturity, are marked to market with the resulting unrealized gain or loss
reflected in stockholders' equity. Securities classified as held-to-maturity,
which are debt securities that the Company has both the positive intent and
ability to hold to maturity, are carried at amortized cost. The Company
classifies its statutory deposits as held-to-maturity with no effect on the
recorded value. All other investments are classified as available-for-sale.
Management re-evaluates these designations annually. During 1997, statutory
deposit investments with an amortized cost of $3,001,000 were released by state
regulatory agencies and transferred to the Company's short-term investment
portfolio. The unrealized gain at the date of transfer was $94,000.
The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 1997:
-----------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
Obligations of states and political subdivisions $ 85,433 $ 1,615 $ 21 $ 87,027
Municipal bond funds 15,775 15,775
Other debt securities 462 46 508
Accrued interest 1,170 1,170
-------- ------- ------ --------
Debt securities 102,840 1,661 21 104,480
Equity securities 46,220 2,812 2,893 46,139
Mutual funds 1,456 5 1,461
-------- ------- ------ --------
Short-term investments $150,516 $ 4,478 $2,914 $152,080
======== ======= ====== ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 3,943 $ 85 $ 2 $ 4,026
Obligations of states and political subdivisions 10,661 187 10,848
Other investments 250 250
-------- ------- ------ --------
Statutory deposits $ 14,854 $ 272 $ 2 $ 15,124
======== ======= ====== ========
37
The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 1996:
----------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
Obligations of states and political subdivisions $ 98,115 $ 885 $ 107 $ 98,893
Municipal bond funds 8,201 8,201
Other debt securities 1,478 57 1,535
Accrued interest 1,031 1,031
-------- -------- --------- --------
Debt securities 108,825 942 107 109,660
Equity securities 39,184 1,554 1,671 39,067
Mutual funds 2,911 142 421 2,632
-------- -------- --------- --------
Short-term investments $150,920 $ 2,638 $ 2,199 $151,359
======== ======== ======== ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 6,224 $ 100 $ 15 $ 6,309
Obligations of states and political subdivisions 2,003 121 3 2,121
Other investments 898 898
-------- -------- -------- --------
Statutory deposits $ 9,125 $ 221 $ 18 $ 9,328
======== ======== ======== ========
For the years ended December 31, 1997 and 1996, marketable equity
available-for-sale securities with a fair value at the date of sale of
$62,804,000 and $53,037,000, respectively, were sold. The gross realized gains
on such sales totaled $11,027,000 and $8,971,000, and the gross realized losses
totaled $2,935,000 and $3,072,000 for each of the respective periods. Realized
gains and losses are included in investment income. Other sales of short-term
investments consisted principally of redemptions from municipal bond funds.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1997, by contractual maturity, are shown below.
Actual maturities may differ from contractual maturities because the issuers of
the securities may have the right to prepay obligations without prepayment
penalties.
38
-------------------------
Estimated
Fair
(in thousands) Cost Value
-------------------------
AVAILABLE-FOR-SALE
Due in one year or less $ 23,939 $ 23,955
Due after one year through five years 38,157 38,853
Due after five years through ten years 22,449 22,921
Due after ten years 18,295 18,751
-------- --------
Debt securities 102,840 104,480
Equity securities 46,220 46,139
Mutual funds 1,456 1,461
-------- --------
$150,516 $152,080
======== ========
HELD-TO-MATURITY
Due in one year or less $ 250 $ 250
Due after one year through five years 11,987 12,103
Due after five years through ten years 2,012 2,065
Due after ten years 605 706
-------- --------
$ 14,854 $ 15,124
======== ========
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
-------------------------
(in thousands) 1997 1996
-------------------------
Premium and fee accounts $ 65,507 $ 58,756
Home health service accounts 2,735 2,677
Medical recoverables 11,726 11,707
Other 9,931 9,268
Less: allowance for doubtful accounts (5,180) (5,366)
-------- --------
$ 84,719 $ 77,042
======== ========
Medical recoverables consist of refunds identified on paid claims. This amount
has been recorded as a reduction of medical expense in the consolidated
statements of operations. Other receivables consist primarily of amounts due for
reinsurance recoveries and pharmacy rebates.
39
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
------------------------
(in thousands) 1997 1996
------------------------
Land, buildings and improvements $31,355 $20,906
Computer equipment and software 38,757 30,151
Office furniture and equipment 17,267 15,566
Leasehold improvements 688 495
------- -------
88,067 67,118
Less: accumulated depreciation and
amortization (31,103) (21,908)
------- -------
$56,964 $45,210
======= =======
NOTE 5 - NOTES PAYABLE
Notes payable consists of the following at December 31:
------------------------
(in thousands) 1997 1996
------------------------
Notes payable $ 134 $ 194
Current portion (60) (60)
------- -------
Noncurrent portion $ 74 $ 134
======= =======
The noncurrent portion of notes at December 31, 1997 mature in future years as
follows (in thousands):
1999 $60
2000 14
The Company has access to total line-of-credit and letter-of-credit facilities
of $24 million, which are subject to annual renewal. Borrowings bear interest at
a rate based on either the bank's prime rate or the Federal Funds rate plus .75%
and are secured by certain cash balances and short-term investments. At December
31, 1997, approximately $2.25 million was outstanding on one of the
lines-of-credit at an interest rate of 7.43% and approximately $225,000 was
outstanding in letters-of-credit.
Interest expense paid in cash during 1997, 1996 and 1995 was approximately
$538,000, $688,000, and $1,541,000, respectively.
NOTE 6 - REINSURANCE
M.D. IPA, OCI, OCCI, OCIPA and MAMSI Life maintain reinsurance coverage to
provide for reimbursement of claims in excess of certain limits. Reinsurance for
health claims generally covers 80% of all hospital costs in excess of a
deductible amount per enrollee per year (subject to a $2,000,000 maximum
lifetime reinsurance limit per person) but excludes coverage of costs in excess
of certain per diem rates. The deductible per enrollee was raised from $100,000
to $200,000 effective October 1, 1994. Reinsurance for life and accidental death
40
claims generally covers all settlements in excess of $50,000 per person subject
to a $1,000,000 maximum recovery per person. Reinsurance recoveries for the
years ended December 31, 1997, 1996 and 1995 were approximately $2,045,000,
$2,288,000 and $128,000, respectively. In the consolidated statements of
operations, reinsurance premiums are shown net of the related recoveries.
NOTE 7 - INCOME TAXES
At December 31, 1997, the Company has net federal operating loss carryforwards
of approximately $1.3 million for income tax purposes that expire in various
years beginning in the year 2002. Approximately $1.2 million of these
carryforwards relate to HomeCall, Inc. operations prior to MAMSI's acquisition.
The Company's ability to utilize these net operating loss carryforwards is
limited.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows as of December
31:
--------------------------
(in thousands) 1997 1996
--------------------------
Deferred tax liabilities:
Accelerated depreciation $ 3,422 $ 3,558
Receivable valuation adjustments 3,314
Unrealized investment gains 618 174
------- -------
Total deferred tax liabilities 7,354 3,732
------- -------
Deferred tax assets:
Accrued medical expenses 3,259 4,510
Premium revenue adjustments 784 725
Allowance recapture 1,753
Accrued pension expenses 915 1,405
Other 32 1,166
------- -------
Total deferred tax assets 4,990 9,559
Valuation allowance for deferred tax assets (1,062) (762)
------- -------
Net deferred tax assets 3,928 8,797
------- -------
$(3,426) $ 5,065
======= =======
Included in the consolidated balance sheets:
Current assets - deferred income taxes $ 303 $ 4,033
Non-current assets - deferred income taxes 612 1,301
Current liabilities - deferred income taxes (1,800) (36)
Non-current liabilities - deferred
income taxes (2,541) (233)
------- -------
Net deferred tax (liability) asset $(3,426) $ 5,065
======= =======
41
Significant components of the provision for income taxes attributable to
continuing operations are as follows for the years ended December 31:
---------------------------------------
(in thousands) 1997 1996 1995
---------------------------------------
Current:
Federal $ (1,363) $ (4,239) $ 32,217
State 1,054 (189) 5,844
--------- --------- ---------
Total current (309) (4,428) 38,061
--------- --------- ---------
Deferred:
Federal 7,279 1,828 (2,207)
State (19) 433 (638)
--------- --------- ---------
Total deferred 7,260 2,261 (2,845)
--------- --------- ---------
$ 6,951 $ (2,167) $ 35,216
========= ========= =========
The Company's tax provision differs from the statutory rate for Federal income
taxes for the years ended December 31 as follows:
-------------------------------------
(in thousands) 1997 1996 1995
-------------------------------------
Statutory rate (35%) $ 7,504 (1,727) $33,719
Tax-exempt interest (1,582) (1,912) (1,872)
State income taxes, net of Federal benefit 461 (254) 3,399
Increase (decrease) in valuation allowance for
deferred tax assets 325 634 (11)
Other non-deductible items 575 785 754
Other, net (332) 307 (773)
------- ------- -------
$ 6,951 $(2,167) $35,216
======= ======= =======
Total tax deposits made by the Company in 1997, 1996 and 1995 were approximately
$2,461,000, $10,320,000 and $27,266,000, respectively.
NOTE 8 - RISK POOL WITHHOLDINGS
Prior to July 1, 1996, contracts with participating physicians allowed for
withholdings generally ranging from 5% to 15% from primary care physicians and
participating specialists on capitation and fee-for-service payments. The
withheld amounts ultimately paid back to providers is generally less than the
total amount withheld. Withheld liabilities and related medical expenses were
reduced by $14,535,000 and $22,802,000 in 1996 and 1995, respectively, to
reflect amounts not returned to providers. Commencing July 1, 1996, the Company,
pursuant to state law changes, discontinued withholding from payments in
substantially all areas of operations. Amounts placed in such risk pools, in
jurisdictions where it is still permitted, were insignificant in 1997.
42
NOTE 9 - RELATED PARTIES
For the years ended December 31, 1997, 1996 and 1995, certain members of the
Boards of Directors of MAMSI and subsidiary corporations who are also
participating physicians provided medical services to enrollees totaling
$6,103,000, $8,406,000 and $9,699,000, respectively, which represents
approximately 1% in 1997 and 2% in all other years of payments to all
physicians. Board members are remunerated at the same contractual level as all
other participating physicians and are selected by enrollees to render medical
services under the same guidelines as all other participating physicians.
NOTE 10 - EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a defined contribution 401(k) savings plan covering all
full-time employees. Employees are allowed to contribute up to 10% of their
pre-tax earnings annually and the Company makes a matching contribution of 50%
on the first 4% of contributions made by employees. Employees vest immediately
in the employee contributions and ratably over six years in the Company
contributions. During 1997, 1996 and 1995, the Company's contribution to the
401(k) plan aggregated $577,000, $540,000 and $433,000, respectively.
Effective December 31, 1994, the Company discontinued its non-contributory
defined benefit pension plan (the "Plan"). Benefits earned under the Plan, which
covered substantially all employees, were fully vested at that date. The
obligation to provide these benefits was satisfied as of December 31, 1995
through a combination of purchases of annuity contracts, transfers of vested
funds into the 401(k) plan and cash withdrawals. The Company recognized a gain
on the curtailment of the defined benefit pension plan of approximately
$345,000.
In accordance with a personal service contract negotiated by the Company, its
Chairman is entitled to supplemental pension benefits based upon years of
service and attained salary levels. Expense recognized related to this plan was
$818,000 and $1,682,000 for the years ended December 31, 1996 and 1995,
respectively. During 1997, the service contract was renegotiated, at which time
the supplemental pension benefits package was amended to include a fixed payment
benefit of $450,000 per year for a fixed term of 15 years. The reduction in
pension expense recognized in 1997 related to this change was approximately $1.1
million.
STOCK OPTION PLANS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). Statement 123 prescribes accounting and
reporting standards for all stock based compensation plans. Statement 123
requires that the company either adopt the fair value method of accounting for
its stock option plans or continue to apply the existing accounting rules but
provide supplemental pro forma disclosures as if the new rules had been adopted.
The Company elected to follow the existing rules and make the required pro forma
disclosures for the first time, in its 1996 consolidated financial statements.
Although Statement 123 first became effective in 1996, it requires that the pro
forma disclosures include the effects of all awards granted in fiscal years
beginning after December 15, 1994, the majority of which were issued under the
Company's 1995 and 1996 stock option plans.
Pro forma information regarding net income and earnings per share are required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
6.4%, 6.3% and 6.7%; volatility factors of the expected market price of the
Company's common stock of .42, .47 and .53 and a weighted average life of the
options of 3 years. The Company anticipates that it will declare no dividends.
43
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially effect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows (in thousands except share amounts):
1997 1996 1995
------ ------- -------
Pro forma net income (loss) $9,007 $(8,409) $58,670
Pro forma basic earnings (loss) per share .19 (.18) 1.28
Pro forma diluted earnings (loss) per share .19 (.18) 1.23
The effects of applying Statement 123 as computed above are not likely to be
representative of the pro forma effects on reported net income in future years
as the above only considers options granted in 1997, 1996 and 1995.
In each year 1990 through 1996, MAMSI implemented a non-qualified stock option
plan whereby options for the purchase of shares of common stock may be granted
to directors, officers and employees of the Company. Shares authorized under the
plans total 15,500,000. Options under the plans generally vest over a three-year
period and are exercisable at 100% of the fair market value per share on the
date the options are granted. The Company accounts for these stock option grants
in accordance with APB 25, and, accordingly, recognizes no compensation expense
for these stock option grants. Transactions relating to the 1990 - 1996 plans
through 1997 are summarized as follows:
44
1997 1996 1995
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
1997 Exercise 1996 Exercise 1995 Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding, January 1 8,864,021 $ 17.02 7,400,405 $ 14.94 6,425,465 $ 12.51
Granted 1,128,500 $ 12.79 3,122,371 $ 17.72 2,270,100 $ 18.22
Exercised (1,061,325) $ 4.58 (1,120,475) $ 5.57 (967,800) $ 4.69
Forfeited (831,965) $ 19.92 (538,280) $ 20.67 (327,360) $ 19.92
--------- --------- ---------
Outstanding, December 31 8,099,231 $ 17.76 8,864,021 $ 17.02 7,400,405 $ 14.94
========= ========= =========
Available for grant, end of year 1,188,744 1,494,829 1,081,670
Exercisable, end of year 4,887,992 4,107,450 3,281,405
Option price range for exercised
shares $3.29-14.75 $2.58-22.38
Option price range at end of year $4.54-28.50 $3.29-28.50
Weighted average fair value of
options granted during year $4.26 $7.32
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- --------------------------------
Outstanding Weighted-Average Exercisable
Range of as of Remaining Weighted-Average as of Weighted-Average
Exercise Prices 12/31/1997 Contractual Life Exercise Price 12/31/1997 Exercise Price
- ------------------- ----------- ---------------- ---------------- ----------- ----------------
$4.54 - $ 5.00 15,000 0.2 $4.80 15,000 $4.80
$5.01 - $10.00 938,975 0.3 $5.86 938,975 $5.86
$10.01 - $15.00 1,466,100 4.0 $12.61 271,700 $12.99
$15.01 - $20.00 3,698,046 2.9 $18.49 1,779,307 $18.29
$20.01 - $25.00 481,350 2.5 $22.45 383,250 $22.46
$25.01 - $28.50 1,499,760 1.3 $27.07 1,499,760 $27.07
--------- ------- ------ --------- ------
8,099,231 2.5 $17.76 4,887,992 $18.59
========= ======= ====== ========= ======
The Company has an incentive compensation plan whereby officers and key
employees receive bonuses based upon the annual operating results of the
Company. No management bonus was earned in 1997, 1996 or 1995. In addition,
certain individuals receive a cash bonus based upon the achievement of certain
measurable criteria other than the annual operating results of the Company.
These bonus amounts are not significant.
45
NOTE 11 - COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per
share:
-----------------------------------------
1997 1996 1995
-----------------------------------------
Numerator:
Net income (loss) $14,489,000 $(2,768,000) $61,124,000
Denominator:
Denominator for basic earnings per share
- weighted average shares 46,273,484 45,978,864 46,127,112
Dilutive securities - employee stock options 612,182 0 1,781,267
Denominator for diluted earnings per share
- adjusted weighted average shares 46,885,666 45,978,864 47,908,379
On April 17, 1995, the stockholders of MAMSI approved an increase in the number
of authorized shares of common stock from 60,000,000 to 100,000,000.
On August 26, 1996, the Company established the MAMSI Stock Compensation Trust
("SCT") to fund its obligations arising from its various stock compensation
plans. MAMSI funded the SCT with 9,130,000 shares of newly issued MAMSI stock.
In exchange, the SCT has delivered a promissory note to MAMSI for approximately
$129.9 million which represents the purchase price of the shares. Amounts owed
by the SCT to MAMSI will be repaid by cash received by the SCT or will be
forgiven by MAMSI, which will result in the SCT releasing shares to satisfy
MAMSI obligations for stock compensation.
For financial reporting purposes, the SCT is consolidated with MAMSI. The fair
market value of the shares held by the SCT is shown as a reduction to
stockholders' equity in the Company's consolidated balance sheet. All
transactions between the SCT and MAMSI are eliminated. The difference between
the cost and fair value of common stock held in the SCT is included in the
consolidated financial statements as additional paid-in capital. At December 31,
1997 and 1996, the SCT held 7,959,375 and 9,020,700 shares of common stock at a
fair market value of approximately $101.5 and $120.7 million, respectively.
Shares held by the SCT are excluded from weighted average shares outstanding
used in the computation of income or loss per common share.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office space under the terms of
noncancellable operating leases that expire at various dates through 2000. Rent
expense relating to these operating leases approximated $3,552,000, $3,316,000
and $2,593,000 in 1997, 1996 and 1995, respectively.
Future minimum lease commitments under non-cancelable operating leases are as
follows for the years ended December 31 (in thousands):
1998 $ 3,428
1999 2,687
2000 1,194
2001 418
2002 297
-------
$ 8,024
=======
46
The Company has been named as the defendant in a suit filed by certain medical
providers on March 26, 1997 in the Circuit Court for Anne Arundel County,
Maryland, which alleges that the Company improperly reduced payments to
participating providers in the form of "withhold". It is the plaintiffs'
allegation that certain payments should not have been reduced in this manner and
seek unspecified damages. This matter has been filed as a class action against
the Company. On August 18, 1997, the court stayed further proceedings in the
litigation pending plaintiff's pursuit of arbitration as provided for under the
contract. While the Company believes that no significant liability exists, it is
too early to assess the final outcome.
The Company is involved in other various legal actions arising in the normal
course of business, some of which seek substantial monetary damages. After
review, including consultation with legal counsel, management believes any
ultimate liability that could arise from these other actions will not materially
affect the Company's consolidated financial position or results of operations.
NOTE 13 - STATUTORY REQUIREMENTS
M.D. IPA, OCI, OCCI and OCIPA are subject to insurance department regulations in
the states in which they are licensed. MAMSI Life is subject to insurance
department regulations in Maryland, its state of domicile.
Minimum required statutory net worth and actual statutory net worth are as
follows:
1997 1996
Minimum Actual Minimum Actual
---------- ----------- ---------- -----------
M.D. IPA $3,000,000 $43,300,000 $3,000,000 $27,200,000
OCI 3,000,000 49,800,000 3,000,000 43,100,000
MLH 500,000 28,300,000 500,000 16,400,000
OCCI 2,500,000 1,800,000 2,500,000 2,700,000
OCIPA 1,000,000 2,700,000 1,500,000 2,600,000
M.D. IPA, OCI, OCCI, OCIPA and MAMSI Life were in compliance with state
depository rules at December 31, 1997 and 1996. OCCI failed to meet its net
worth requirement of $2.5 million and working capital requirement of $1.6
million at December 31, 1997. In February, 1998, additional capital was provided
so that each of these requirements was met. In addition, MAMSI Life was in
compliance with the applicable risk-based capital requirements for life and
health insurance companies at December 31, 1997 and 1996. These MAMSI
subsidiaries must notify state regulators before the payment of any dividends to
MAMSI and, in certain circumstances, must receive positive affirmation prior to
such payment.
NOTE 14 - RISK CONCENTRATIONS
Financial instruments that potentially subject the Company to credit risk
consist primarily of investments in marketable securities (including money
market funds, floating rate municipal putable bonds, intermediate term municipal
bonds, and common stocks) and premiums receivable. The Company receives advice
through or assigns direct management of short-term investments in marketable
securities to professional investment managers selected for their expertise in
various markets, within guidelines established by the Board of Directors. These
guidelines include broad diversification of investments. Concentrations of
credit risk and business volume with respect to commercial premiums receivable
are generally limited due to the large number of employer groups comprising the
Company's customer base. As of December 31, 1997, approximately 24% of premium
and home health service receivables were due from federal government agencies.
The Company performs ongoing credit evaluations of customers and generally does
not require collateral.
47
Report of Independent Auditors
Board of Directors and Stockholders
Mid Atlantic Medical Services, Inc.
We have audited the accompanying consolidated balance sheets of Mid Atlantic
Medical Services, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mid
Atlantic Medical Services, Inc. and subsidiaries at December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Washington, D.C.
February 25, 1998
48
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1997 AND 1996 (1)
1997 1997 1997 1997 1996 1996 1996 1996
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(in thousands except share amounts)
(unaudited)
Revenue $283,165 $282,443 $269,875 $276,170 $271,558 $281,455 $287,960 $292,769
Expense 281,856 278,014 262,685 267,658 252,528 292,204 295,170 298,775
Income (loss) before income taxes 1,309 4,429 7,190 8,512 19,030 (10,749) (7,210) (6,006)
Net income (loss) 806 2,788 4,726 6,169 11,869 (6,537) (4,711) (3,389)
Basic earnings (loss) per share .02 .06 .10 .13 .25 (.14) (.10) (.07)
Diluted earnings (loss) per share .02 .06 .10 .13 .25 (.14) (.10) (.07)
Notes
1. Certain 1996 quarterly revenue and expense amounts are different from the
amounts originally reported due to reclassifications necessary to conform to the
current presentation.
2. During 1997, the Company adopted Financial Accounting Standards No. 128. All
previously reported earnings per share amounts have been restated to reflect the
adoption of this Statement. See Note 1 to the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
49
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to "Directors
and Executive Officers" in the Proxy Statement for MAMSI's annual meeting of
shareholders to be held on April 27, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to "Directors
and Executive Officers -- Directors' Compensation" and "Executive Management
Compensation" in the Proxy Statement for MAMSI's annual meeting of shareholders
to be held on April 27, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to "Stock
Owned by Management" and "Principal Stockholders" in the Proxy Statement for
MAMSI's annual meeting of shareholders to be held on April 27, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to "Executive
Management Compensation" in the Proxy Statement for MAMSI's annual meeting of
shareholders to be held on April 27, 1998.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets as of December 31, 1996 and 1995 ... 28
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 ............................. 29
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995 ......... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ............................. 31
Notes to Consolidated Financial Statements ..................... 32
Report of Ernst & Young LLP Independent Auditors ............... 47
(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE
----
II - Valuation and Qualifying Accounts as of December 31,
1997, 1996 and 1995 ..................................... 51
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are omitted because they
are not required under the related instructions or are inapplicable.
51
Mid Atlantic Medical Services, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
Additions
Balance at ------------------------------
Beginning Charged to Charged to Balance
of Costs Other Deductions- at End
Description Period and Expenses Accounts Write-Offs of Period
- ----------- ---------- ------------- ---------- ----------- ---------
DEDUCTED FROM ASSET ACCOUNTS:
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts - accounts receivable
$ 3,591 $ 25 $ 22(1) $ $ 3,638
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 139 $ $ $ (11) $ 128
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts - accounts receivable
$ 3,638 $ $ 1,756(1) $ (28) $ 5,366
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 128 $ $ 634 $ $ 762
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts - accounts receivable
$ 5,366 $ $ (93)(1) $ (93) $ 5,180
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 762 $ $ 325 $ (25) $ 1,062
======== ======== ======== ======== ========
(1) The changes to the allowance were charged to premium revenue.
52
(a)(3)
EXHIBITS
See the Exhibit Index on pages 55-56 of this Form 10-K.
(b)
REPORTS ON FORM 8-K
None.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by undersigned
thereunto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI")
(Registrant)
By: /s/ George T. Jochum 3/28/98
--------------------------------------------------
George T. Jochum Date
Chairman, Chief Executive Officer, President, and Director
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Thomas P. Barbera 3/28/98
--------------------------------------------------
Thomas P. Barbera Date
Vice Chairman, Executive Vice President and
Director
By: /s/ Francis C. Bruno, M.D. 3/28/98
---------------------------------------------------
Francis C. Bruno, M.D. Date
Director
By: /s/ Stanley M. Dahlman, Ph.D. 3/28/98
--------------------------------------------------
Stanley M. Dahlman, Ph.D. Date
Director
By: /s/ Peter L. Flaherty, Jr., M.D. 3/28/98
--------------------------------------------------
Peter L. Flaherty, Jr., M.D. Date
Director
By: /s/ Robert E. Foss 3/28/98
--------------------------------------------------
Robert E. Foss Date
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Walter Girardin 3/28/98
--------------------------------------------------
Walter Girardin Date
Director
By: /s/ Mark D. Groban, M.D. 3/28/98
--------------------------------------------------
Mark D. Groban, M.D. Date
Assistant Medical Director for Mental Health Services
and Director
By: /s/ George T. Jochum 3/28/98
--------------------------------------------------
George T. Jochum Date
Chairman, Chief Executive Officer, President and Director
(Principal Executive Officer)
By: /s/ John P. Mamana, M.D. 3/28/98
--------------------------------------------------
John P. Mamana, M.D. Date
Director
By: /s/ William M. Mayer, M.D. 3/28/98
--------------------------------------------------
William M. Mayer, M.D. Date
Director
54
By: /s/ Gretchen P. Murdza 3/28/98
--------------------------------------------------
Gretchen P. Murdza Date
Chief Executive Officer of Homecare and Pharmacy
Subsidiaries and Director
By: /s/ Creighton R. Schneck 3/28/98
--------------------------------------------------
Creighton R. Schneck Date
Director
By: /s/ Mary E. Shocklee 3/28/98
--------------------------------------------------
Mary E. Shocklee Date
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ Alfred Talamantes 3/28/98
--------------------------------------------------
Alfred Talamantes Date
Executive Vice President,
Chief Operating Officer and Director
By: /s/ James A. Wild 3/28/98
--------------------------------------------------
James A. Wild Date
Director
55
(a)(3), (b) and (c) List of Exhibits.
EXHIBIT INDEX
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
- ------- ----------------------- -------------------
3.1 Copy of Certificate of Incorporation of MAMSI dated
October 7, 1986..........................................................(1)
3.2 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated April 23, 1990.......................................(4)
3.3 Amended and Restated By-laws of MAMSI as of February 25, 1998............
3.4 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated June 2, 1994.........................................(4)
10.5 Copy of Agreement between M.D. IPA and the United States
Secretary of Health and Human Services dated December 20, 1985...........(1)
10.20 Copy of Amendments to Agreement between M.D. IPA and the United
States Secretary of Health and Human Services dated December 24, 1987....(3)
10.26 1990 Non-Qualified Stock Option Plan.....................................(4)
10.27 Copy of 1990 Non-Qualified Stock Option Letter sent to Key Employees.....(4)
10.32 Copy of Contract between George T. Jochum and M.D. IPA for the period
January 1, 1991 through January 1, 1994..................................(4)
10.35 1991 Non-Qualified Stock Option Plan.....................................(4)
10.36 Copy of 1991 Non-Qualified Stock Option Letter sent to Key Employees.....(4)
10.41 Copy of Agreement between M.D. IPA and Surgical Care Affiliates, Inc.,
dated April 22, 1985.....................................................(4)
10.44 1992 Non-Qualified Stock Option Plan.....................................(4)
10.45 Copy of 1992 Non-Qualified Stock Option Letter sent to Key Employees.....(4)
10.48 Equipment Term Loan Agreement with Signet Bank dated March 25, 1991......(4)
10.50 Amendment to Revolving Loan Agreement with Signet Bank dated
June 19, 1991............................................................(4)
10.53 Amendments to the Stock Option Plans effective May 15, 1991..............(4)
10.54 Summary Plan Description of the Employees Cash or Deferred Profit
Sharing (401k) Plan dated October, 1991..................................(4)
10.55 Defined Benefit Plan Agreement with the Principal Financial Group which
was approved September 12, 1991..........................................(4)
10.57 Mortgage and Loan Agreement with Aid Association for Lutherans dated
October 4, 1990..........................................................(4)
10.60 1993 Non-Qualified Stock Option Plan.....................................
10.61 1993 Non-Qualified Stock Option Letter Sent to Key Employees.............
10.62 1992 Amendment to Employment Agreement Between George T. Jochum and
the Company..............................................................
10.65 Agreement to Purchase 2301 Research Boulevard dated September 30, 1993...(2)
10.66 1994 Management Bonus Program............................................(3)
10.67 1994 Non-Qualified Stock Option Plan.....................................(3)
10.68 1994 Non-Qualified Stock Option Letter sent to Key Employees.............(3)
10.69 Revolving Loan Agreement with Signet Bank dated September 30, 1993.......(3)
10.71 Agreement between OCI and the State of Maryland governing the Medical
Assistance Program ("Medicaid") dated August 5, 1993.....................(3)
10.72 List of States in which MAMSI Life is Licensed to Operate................(3)
10.73 1995 Management Bonus Program............................................(4)
10.74 1995 Non-Qualified Stock Option Plan.....................................(4)
10.75 1995 Non-Qualified Stock Option Plan letter sent to Key Employees........(4)
10.76 Agreement between OCI and the Commonwealth of Virginia governing the
Medical Assistance Program ("Medicaid") dated May 27, 1994...............(4)
10.77 1995 Amendment to Employment Agreement between George T. Jochum and
the Company..............................................................(5)
10.78 1996 Management Bonus Program............................................(5)
10.79 1996 Non-Qualified Stock Option Plan.....................................(5)
10.80 Form of Agreement between MAMSI and Employees Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................(5)
10.81 Form of Agreement between MAMSI and George T. Jochum Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................(5)
10.82 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 1996 Non-Qualified Stock Option Plan...................(5)
10 Amended and Restated Compensation Trust Agreement dated
December 20, 1996........................................................(7)
10.1 Amended and Restated Common Stock Purchase Agreement dated
December 20, 1996........................................................(7)
10.2 Replacement Promissory Note dated December 20, 1996......................(7)
10.83 1997 Management Bonus Program............................................(8)
56
10.84 Form of Non-Qualified Stock Option Agreement for Options Granted
under 1991, 1992, 1993, 1994 and 1995 Non-Qualified Stock Option Plan....(9)
10.85 Agreement of Purchase of Real Property by Mid-Atlantic
Medical Services, Inc....................................................(10)
10.86 1997 Amendment to Employment Agreement between George T. Jochum
and the Company..........................................................
10.87 1998 Non-Qualified Stock Option Plan.....................................
10.88 1998 Senior Management Bonus Plan........................................
10.89 1998 Management Bonus Plan...............................................
10.90 Amendment to 1994 Non-Qualified Stock Option Plan........................
10.91 Amendment to 1995 Non-Qualified Stock Option Plan........................
10.92 Amendment to 1996 Non-Qualified Stock Option Plan........................
10.93 1999 Employment Agreement Between George T. Jochum and the Company.......
21 Subsidiaries of the Company..............................................
23 Consent of Independent Auditors..........................................
27 Financial Data Schedule..................................................
(1) Incorporated by reference to exhibits filed with the Company's Registration
Statement filed under the Securities Act of 1933 on Form S-4 (Registration No.
33-9803).
(2) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
Quarterly Period Ended September 30, 1993.
(3) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1993.
(4) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1994.
(5) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1995.
(6) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act on Form 10-Q for the Quarterly
Period Ended March 31, 1996.
(7) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act on Form 10-Q/A for the Quarterly
Period Ended September 31, 1996.
(8) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1996.
(9) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act on Form 10-Q for the Quarterly
Period Ended March 31, 1997.
(10) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act on Form 10-Q for the Quarterly
Period Ended June 30, 1997.