UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter period ended March 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-27654
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LONG ISLAND PHYSICIAN HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
New York 11-3232989
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
One Huntington Quadrangle Suite 4C-01
Melville, New York 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 454-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.001
Class B Common Stock, par value $.001
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 past 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [_] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined under Rule 12b-2 of the Act). Yes [_] No [X]
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date: As of March 31, 2004 there were
1,506 shares of Class A common stock and 4,333 shares of Class B common stock
outstanding.
TABLE OF CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations and Accumulated Deficit 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
CERTIFICATIONS
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Long Island Physician Holdings Corporation
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
(unaudited)
March 31, December 31,
2004 2003
----------- -----------
Assets
Cash and cash equivalents $ 4,089,528 $ 1,575,080
Premium receivables (net of allowances of
approximately $1,320,000 in 2004 and
$959,000 in 2003) 11,242,289 12,544,775
Reinsurance recoverables 320,155 450,549
Payments in excess of capitation 2,074,163 2,074,163
Prepaid expenses and other current assets 3,469,574 3,142,168
Due from Catholic Health Services of Long Island -- 2,382,027
----------- -----------
Total current assets 21,195,709 22,168,762
Property plant and equipment, net 279,813 272,134
Restricted cash and cash investments 5,736,095 5,600,790
Payments in excess of capitation, net of
current portion 17,723,357 17,953,057
----------- -----------
Total assets $44,934,974 $45,994,743
----------- -----------
Liabilities and Stockholders' Equity:
Medical claims payable $24,287,059 $27,542,261
Public goods payable 7,970,086 6,779,734
Unearned premium revenue 2,168,972 1,862,367
Accounts payable and accrued expenses 3,051,545 2,933,560
Current portion of capital lease obligations -- 1,479
----------- -----------
Total current liabilities 37,477,662 39,119,401
Note payable and accrued interest 3,369,993 3,346,059
Total liabilities 40,847,655 42,465,460
Minority interest in MDNY Healthcare, Inc. 1,850,942 1,682,934
Stockholders' equity
Class A common stock, $.001 par value;
10,000 shares authorized, 1,506 issued
and outstanding 2 2
Class B common stock, $.001 par value;
25,000 shares authorized, 4,333 issued
and outstanding 4 4
Additional paid-in capital 11,478,536 11,478,536
Accumulated deficit (9,242,165) (9,632,193)
----------- -----------
Total stockholders' equity 2,236,377 1,846,349
----------- -----------
Total liabilities and stockholders' equity $44,934,974 $45,994,743
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
Long Island Physician Holdings Corporation
Consolidated Statements of Operations and Accumulated Deficit
Three Months Ended March 31, 2004 and 2003
(unaudited)
Three months ended
March 31,
----------------------------
2004 2003
------------ ------------
Revenue
Premiums earned $ 35,078,863 $ 40,287,643
------------ ------------
Total revenue 35,078,863 40,287,643
------------ ------------
Expenses:
Medical services expense 29,767,156 34,404,249
Commissions expense 1,393,306 1,729,819
General and administrative expenses 3,471,699 3,809,350
Depreciation 25,304 46,429
------------ ------------
Total expenses 34,657,465 39,989,847
------------ ------------
Operating income 421,398 297,796
Investment and other income 169,269 49,427
Income before income taxes
and minority interest 590,667 347,223
Provision for income taxes (32,631) (33,500)
Minority interest in income
of subsidiary (168,008) (103,528)
Net income 390,028 210,195
Accumulated deficit
Accumulated deficit, beginning of period (9,632,193) (10,642,205)
------------ ------------
Accumulated deficit, end of period $ (9,242,165) $(10,432,010)
============ ============
Basic and diluted income per share $ 67.00 $ 36.00
Basic and diluted weighted average shares 58.39 5,839
The accompanying notes are an integral part of these consolidated financial
statements.
4
Long Island Physician Holdings Corporation
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003
(unaudited)
Three months ended
March 31,
2004 2003
---------- ----------
Cash flows from operating activities:
Net income $ 390,028 $ 210,195
Adjustment to reconcile net income to net cash
provided by operating activities
Depreciation 25,304 46,429
Minority interest in gain of subsidiary 168,007 103,528
Payments in excess of capitation 229,700 518,860
Reinsurance recoverable 130,394 88,640
Premium receivables 1,302,486 (2,309,727)
Prepaid expenses and other current assets (327,406) 96,688
Medical claims payable (3,255,202) (322,242)
Public goods payable 1,190,352 847,209
Unearned premium revenue 306,605 755,681
Accounts payable and accrued interest 141,919 424,957
---------- ----------
Net cash (used in) provided by operating activities (2,684,215) 460,218
---------- ----------
Cash flows from investing activities:
Increase in restricted cash and investments (135,305) (17,321)
Purchase of Property and Equipment (32,983)
---------- ----------
Net cash (used in) provided by investing activities (168,288) (17,321)
---------- ----------
Cash flows from financing activities:
Payments on capital lease obligations (1,479) (4,009)
---------- ----------
Net cash used in financing activities (1,479) (4,009)
---------- ----------
Net change in cash and cash equivalents 2,514,448 438,888
---------- ----------
Cash and cash equivalents, beginning of period 1,575,080 694,449
---------- ----------
Cash and cash equivalents, end of period $4,089,528 $1,133,337
---------- ----------
The accompanying notes are a integral part of these consolidated financial
statements
5
Long Island Physician Holdings Corporation
Notes to the Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
Background
Long Island Physician Holdings Corporation (the "Company" or "LIPH") was
formed in December 1994 in the State of New York as a holding company for
purposes aimed at advancing the delivery of healthcare on Long Island, New York
(Nassau and Suffolk counties). The Company is owned by individual physicians
residing in New York State. The accompanying consolidated financial statements
include the activity of the Company and its majority owned subsidiary, MDNY
Healthcare, Inc. ("MDNY"), a health maintenance organization. The Company owns
67% of stock of MDNY. The Company is exclusively a holding company whose
principal assets is its investment in MDNY and conducts no operating activities
of its own. The Company's legal and other professional costs are funded by MDNY.
Total costs for the first quarter 2004 were $106,978.
Basis of Presentation
The interim consolidated financial statements reflect all adjustments,
which, in the opinion of management, are necessary for a fair statement of
financial condition and results of operations for the periods presented. Except
as otherwise disclosed, all such adjustments are of a normal recurring nature.
The interim consolidated financial statements have been compiled without audit.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the full year. These interim consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company's 2003 Annual Report on Form 10-K.
Certain amounts reported in the Company's consolidated statements of operations
for the three months ended March 31, 2004 have been reclassified to conform to
the 2003 presentation.
Earnings Per Share
Basic and diluted income per share is based on the number of shares of
Class A common stock and Class B common stock outstanding during the period. At
March 31, 2004 and 2003, the Company had outstanding stock options to purchase
1,041 shares of Class B common stock that were not included in the computation
of diluted earnings per share because the exercise price was greater than the
average market price of common share.
New Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt"
("SFAS 4"), SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers"
("SFAS 44") and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements" ("SFAS 64") and amends SFAS No. 13, "Accounting for
Leases" ("SFAS 13"). This statement updates, clarifies and simplifies existing
accounting pronouncements. As a result of rescinding SFAS 4 and SFAS 64, the
criteria in APB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions", is used to classify gains
and losses from extinguishment of debt. SFAS 44 was no longer necessary because
the transitions under the Motor Carrier Act of 1980 were completed. SFAS 13 was
amended to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions and makes technical corrections to existing pronouncements. The
provisions of SFAS 145 are effective for fiscal years beginning after May 15,
2002. The Company's adoption of SFAS 145 effective January 1, 2003, did not have
a material impact on the Company's results of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses the
recognition, measurement, and reporting of costs associated with exit or
disposal activities, and supercedes Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
("EITF 94-3"). The principal difference between SFAS 146 and EITF 94-3 relates
to the requirements for recognition of a liability for a
6
Long Island Physician Holdings Corporation
Notes to the Financial Statements
(unaudited)
cost associated with an exit or disposal activity. SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity, including
those related to employee termination benefits and obligations under operating
leases and other contracts, be recognized when the liability is incurred, and
not necessarily the date of an entity's commitment to an exit plan, as under
EITF 94-3. SFAS 146 also establishes that the initial measurement of a liability
recognized under SFAS 146 be based on fair value. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company adopted SFAS 146 effective January 1, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair value of
obligations it has undertaken in issuing the guarantee and also include more
detailed disclosures with respect to guarantees. FIN 45 is effective on a
prospective basis for guarantees issued or modified starting January 1, 2003 and
requires the additional disclosures in interim and annual financial statements
effective for the period ended December 31, 2002. The Company's adoption of the
initial recognition and measurement provisions of FIN 45 effective January 1,
2003, did not have a material impact on the Company's results of operations or
financial position.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", as revised in December 2003. ("FIN 46"). FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. Historically, entities generally were not consolidated unless
the entity was controlled through voting interests. FIN 46 also requires
disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. The adoption of
FIN 46 did not have an impact on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS 133. SFAS 149 is effective for contracts entered
into or modified after September 30, 2003, and for hedging relationships
designated after September 30, 2003. The adoption of SFAS 149, effective July 1,
2003, did not have a material impact on the Company's results of operations or
financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"),
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after September 15, 2003. The Company's adoption of the initial
recognition and initial measurement provisions of SFAS 150, effective September
1, 2003, did not have a material impact on the Company's results of operations
or financial position.
2. REGULATORY DEVELOPMENTS
As a condition of continued licensure by the New York State Insurance
Department ("NYSID"), MDNY must maintain certain reserve requirements to protect
its subscribers in the event MDNY is unable to meet its obligations, NYSID
directed MDNY to take appropriate action to achieve net worth of at least $7
million (MDNY's escrow deposit requirement) by July 10, 2003. MDNY failed to
meet the $7 million statutory net worth requirement by July 10, 2003, and, as of
March 31, 2004, MDNY failed to satisfy its NYSID statutory net worth requirement
of $7.7 million by approximately $810,000. NYSID has directed MDNY to provide
monthly financial statements and NYSID continues to monitor MDNY's financial
performance.
7
Long island Physician Holdings Corporation
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Company Overview
Long Island Physician Holdings Corporation (the "Company" or "LIPH") is a
New York corporation formed in December 1994 and owned by physicians residing
and practicing in New York State. The Company conducts no operating activities
of its own. The Company's principal asset is 67% of the stock in MDNY
Healthcare, Inc. ("MDNY"), an independent practice association-model health
maintenance organization ("HMO"), that currently operates in Nassau and Suffolk
counties, New York. The financial statements of MDNY are consolidated into the
audited financial statements of the Company. Catholic Healthcare Network of Long
Island, Inc. ("CHNLI") owns the remaining 33% of the stock in MDNY. MDNY
commenced operations in 1996. At March 31, 2004, MDNY had approximately 43,000
members ("Members"), comprised of individuals and families, enrolled in its
health maintenance plans and point-of-service plans. As of December 31, 2003
membership was approximately 47,000.
The Company is affiliated with LIPH, LLC (the "LLC"), a New York limited
liability company formed in December 1996. Upon the formation of the LLC, the
shareholders of the Company owned all of the membership interests in the LLC.
The assets of the LLC consist of the stock in three independent practice
associations, Island Practice Association, I P.A., Inc. ("Island IPA"), Island
Behavioral Health Association IPA, Inc. (currently inactive) and Island Dental
Professional Association IPA, Inc. (the "IPAs"). MDNY has entered into various
contractual arrangements (the "Professional Services Agreements") with the IPAs
to arrange for the provision of applicable health care and administrative
services to the Members of MDNY.
MDNY's principal source of revenue is premiums earned. Premiums earned
represented 99.5% and 99.8% of MDNY's total revenue for the quarters ended March
31, 2004 and 2003, respectively.
MDNY's ability to achieve profitability depends principally on reducing
its medical expenses as a percentage of its premium revenue (the "medical loss
ratio" or "MLR") and sufficiently reducing its administrative costs. During
2003, MDNY continued to implement programs to reduce administrative costs.
Although MDNY was able to reduce its administrative costs by $2 million from
2002, these costs, stated on a per member per month ("pmpm") basis, increased
from $21 pmpm at December 31, 2003, respectively, to $26 pmpm at March 31, 2004.
This was primarily due to MDNY's continued decline in enrollment. Results for
2003 were positively affected by NYSID's approval of a 10% sole proprietor
differential in premium yields in June 2003, together with a loss of members
subscribing for POS Products, which historically had negative operating results.
Premium yields were sufficient to offset the increase in HCRA surcharges (31% on
a pmpm basis) and fee for service medical expenses (8.5% on a pmpm basis) in
2003 from 2002 and achieve a profit of $1.3 million for 2003.
As of March 31, 2004, the reported profit of approximately $390,000 is the
result of the overall increase in premium yields that became effective in 2004.
The Company believes limiting the marketing of the POS plan in 2004 because of
historic losses helped achieve profitability as of March 31, 2004.
MDNY seeks to control medical expenses through arrangements with its
affiliated IPAs and with non-IPA primary care physicians, with certain specialty
providers, and through its quality improvement programs, utilization management
and review of hospital inpatient and outpatient services, and educational
programs on effective managed care for its providers. MDNY's medical loss ratio
was 84.5% and 85.3%, respectively, for the three months ended March 31, 2004 and
2003. As of March 31, 2004 and 2003 enrollment was 43,019 and 57,206
respectively.
MDNY's working capital deficit decreased from $16.9 million at December
31, 2003 to $16.3 million at March 31, 2004 primarily due to earnings generated
during the first quarter of 2004.
Recent Developments
Certain Regulatory Matters.
The New York State Department of Health ("NYSDOH") and the New York State
Insurance Department ("NYSID") require MDNY to maintain reserves in the form of
cash and statutory net worth.
8
During the second quarter 2000, the NYSID performed its first financial
audit of MDNY and the IPAs as of June 30, 2000. On May 10, 2001, MDNY received
from NYSID a Draft Report on Examination of MDNY as of June 30, 2000 (the "Draft
Report"). The Draft Report stated, among other things, NYSID's determinations
that, as of June 30, 2000, MDNY was insolvent in the amount of $4,311,487 and
that MDNY's required contingency reserves were impaired in the amount of
$12,231,333. These determinations resulted from NYSID's position that MDNY
should have reported the IPAs' obligations in MDNY's financial statements.
MDNY's position was that the IPAs, not MDNY, are responsible for their own
obligations, and MDNY disputed NYSID's attribution of IPA liabilities to MDNY.
With respect to years prior to 2001, MDNY was contractually obligated to
pay a capitated amount to Island IPA for covered services provided by
participating providers. Through 2001, however, MDNY continued to pay medical
claims to Island IPA relating to claims with dates of service prior to January
1, 2001 in excess of capitated amounts for years prior to 2001. These payments
resulted from medical claim obligations due by Island IPA to providers of
approximately $23.2 million at December 31, 2001, reflected in MDNY's financial
statements as payments in excess of capitation as of December 31, 2001 (the
"Island Debt"). NYSID's position was that the Island Debt should be carried on
the financial statements of MDNY as a liability of MDNY and not of Island IPA,
causing MDNY to be deficient in its reserves.
In order to meet NYSID's concerns, MDNY converted the capitation-based
contract with Island IPA to a fee for service based IPA Participation Agreement
effective January 1, 2001.
In addition, with NYSID's approval, MDNY, Island IPA and the Catholic
Health Services of Long Island, Inc. ("CHSLI"), an affiliate of CHNLI, on behalf
of five catholic hospitals that act as providers to MDNY (the "Hospitals"),
entered into a Recovery and Subordination Agreement (the "Recovery and
Subordination Agreement"), dated July 12, 2001 and effective January 1, 2002.
The Recovery and Subordination Agreement provides, among other things, as
follows: (i) Island IPA is required to pay the Island Debt pursuant to a
Repayment Plan whereby Island IPA is obligated to withhold, and remit to MDNY,
5% of all payments due to Island IPA participating providers (the "IPA
Withhold"), MDNY will make claims payments to Island IPA or its participating
providers on a fee-for-service basis, Island IPA is required to pay MDNY a $1.50
per member per month network access fee, and Island IPA is required to pay to
MDNY the net revenue it receives from sources other than MDNY; (ii) until the
Island Debt is repaid, Island IPA, Island IPA's participating providers and the
Hospitals agreed (a), in the event that MDNY becomes insolvent (pursuant to a
court approved order or admits its inability to pay its debts), to subordinate
their rights to payment by MDNY of outstanding claims (including IBNR) to all
other outstanding claims in an amount equal to the amount of the then
outstanding Island Debt, and (b) that, after payment of third party claims, the
claims of Island IPA and its providers will be subordinated to the claims of the
Hospitals; and (iii) the amount of the Island Debt outstanding from time to time
will be carried on the financial statements of MDNY as an admitted asset. The
aggregate amount owed by MDNY to the subordinating parties in the form of
medical claims payable was approximately $20 million and $25 million as of
December 31, 2003 and 2002, respectively.
In 2003 and 2002 the Island Debt was adjusted for additional claims and
reduced by the IPA Withhold pursuant to the Recovery and Subordination
Agreement. The Island Debt was approximately $20.0 million and $22.2 million at
December 31, 2003 and 2002, respectively. As of March 31, 2004 the Island Debt
was $19.8 million. The $200,000 reduction of the Island Debt since December 31,
2003 is the result of the IPA Withhold paid in the first quarter of 2004.
On July 31, 2002, NYSID issued its Report on Examination of The MDNY
Healthcare, Inc. as of June 30, 2000 dated April 2, 2001 and revised July 31,
2002 (the "Final Report"). The Final Report states, among other things, that,
based on the execution of the Recovery and Subordination Agreement, "the IPA
receivable will be allowed as an admitted asset and the examination insolvency
will be eliminated. [NYSID] will monitor the impact of the [Recovery and
Subordination] Agreement."
In January 2003, NYSID notified MDNY that MDNY was impaired by the amount
of $850,332 at September 30, 2002 and required MDNY to submit a restoration plan
to remedy the impairment. (Impairment is the amount by which reported net worth
is less than the amount of required reserves). In February 2003, MDNY submitted
a remedial plan (the "MDNY Remedial Plan") to NYSID whereby: MDNY would continue
negotiations with certain potential acquirors regarding a proposed sale of MDNY;
MDNY would engage an investment banking firm; the Company and CHNLI, as the
stockholders in MDNY, would be offered the alternative of making additional
capital contributions to MDNY or selling all or part of MDNY; and the IPA
providers agreed to reduce the physician fee schedule effective April 1, 2003.
In April 2003, NYSID accepted the MDNY Remedial Plan.
In accordance with the MDNY Remedial Plan, MDNY engaged an outside
financial adviser to pursue the sale of its business and assets. No such sale is
currently anticipated.
On April 10, 2003, with the filing of the December 31, 2002 Annual Report,
NYSID was notified that MDNY was impaired by $3 million. As a result of the
impairment, NYSID directed MDNY to take appropriate action to achieve net
9
worth of at least $7 million (MDNY's escrow deposit requirement) by July 10,
2003. On May 14 2003, NYSID directed MDNY to provide monthly financial
statements.
In June 2003, NYSID revised and finalized its Market Conduct Report on
Examination of MDNY as of September 30, 2002 and made recommendations regarding
certain operational deficiencies found in MDNY's policies and procedures.
As of December 31, 2003 MDNY reported a net operating gain of $1.3 million
and statutory net worth of $6.3 million. The contingent reserve requirement at
December 31, 2003 was $7.7 million. (NYSID reserve requirements are calculated
based upon the greater of the contingent reserve or escrow deposit. The
contingent reserve is calculated by incrementally adding 1% of premiums written
not to exceed 5% (i.e., $7.7 million)). The escrow deposit is calculated as 5%
of the following year's expected medical costs. MDNY's contingent reserve is
currently capped at 5% of current billed premium.
The failure of MDNY to meet reserve requirements, the failure of MDNY or
the IPAs to comply with other existing laws and regulations or a significant
change in such laws or regulations could materially and adversely affect the
operations, financial condition and prospects of the Company and MDNY.
According to the NYSID Final Report, the composition of MDNY's Board of
Directors does not comply with Part 98-1.11(f) of the Administrative Rules and
Regulations of the NYSDOH, which requires that at least 20% of MDNY's directors
must be enrollees of MDNY. The NYSID Final Report recommends that the requisite
number of "enrollee representatives" be elected to MDNY's Board of Directors.
MDNY and its shareholders, LIPH and CHNLI, are in the process of changing the
composition and number of MDNY's Directors so as to include the requisite number
of enrollee representatives and of effecting corresponding amendments to MDNY's
certificate of incorporation and by-laws.
Recent Developments
MDNY is subject to the New York Women's Health and Wellness Act, which, as
of January 1, 2003, obligates MDNY to provide contraceptive drugs and devices to
its members, in conflict with the ethical policies of the Diocese, to which
CHNLI and CHSLI are subject. In light of this conflict, CHNLI has notified the
Company and MDNY of CHNLI's desire to withdraw as an MDNY shareholder by
December 31, 2004, and that the Diocese and CHSLI, on behalf of the Hospitals,
will not renew their respective current subscriber contracts with MDNY upon
expiration thereof effective January 1, 2005 and 2006, respectively. MDNY
provides health care insurance to the employees of the Diocese of Rockville
Center (the "Diocese") and employees of the Hospitals affiliated with CHSLI. At
December 31, 2003, a total of 13,429 Members in MDNY were enrolled from CHSLI
and the Diocese. Premiums from the Diocese and the Hospitals represented
approximately 27% and 30% of total premiums earned by MDNY during both 2003 and
2002. If MDNY's subscriber contracts with the Diocese and CHSLI were to expire,
the loss of business could have a material adverse effect on MDNY's business and
financial condition.
During the first quarter of 2004, the Company and MDNY had preliminary
discussions with CHNLI and CHSLI regarding a potential restructuring whereby
CHNLI would exit as an MDNY shareholder and MDNY would act as a third party
administrator of benefits to employees of the Diocese and the Hospitals, which
would become self-insured upon expiration of their respective subscriber
contracts with MDNY. In such event, MDNY would receive a monthly fee for
providing underwriting, medical management, claims processing and other
administrative services to the Diocese and the Hospitals but would not assume
insurance risk for the cost of providing health care benefits to employees of
the Diocese and the Hospitals. There can be no assurance that the Company and
MDNY will be able to effect such a restructuring of CHNLI's status as a
shareholder in MDNY and of MDNY's provision of health care benefits or
administrative services to employees of the Diocese and the Hospitals on terms
acceptable to the Company and MDNY, if at all.
As a result of incurring deficits of approximately $2.4 million in
hospital risk pools during 1997 and 1998 relating to risk sharing agreements
between MDNY and CHSLI, MDNY and CHSLI entered into agreements dated May 10,
1999 and August 13, 1999 whereby CHSLI agreed to pay MDNY $2.4 million by
December 31, 2003. CHSLI paid such amount to MDNY on March 30, 2004.
Business Strategy
MDNY is focusing on the following six areas in 2004 to achieve
profitability and enrollment growth:
o Achieving administrative efficiencies by, among other things,
increased use of automation and electronic transmission.
10
o Marketing to brokers in Nassau and Suffolk Counties, New York to
increase name recognition and promote enrollment growth.
o Expanding into Queens County, New York, where MDNY has an
established provider network.
o Expanding marketing of MDNY's self-insured products.
o Reduced marketing of MDNY's POS products, which have historically
been unprofitable.
o Applying to NYDOH for an Article 43 (accident and health company)
license to allow MDNY to develop new products and benefit plan
designs and match increased cost sharing provisions that certain of
MDNY's competitors have marketed to their customers. During the
first quarter of 2004, NYDOH indicated its preliminary unwillingness
to grant this license as the Company continues to be impaired.
Effective January 1, 2004, NYSID approved additional 10% and 12% rate
increases for MDNY's HMO and POS sole proprietor products respectively. The
Company anticipates that the increased differential on the sole proprietor POS
Products should help offset historical negative operating results of MDNY's POS
Products.
While the Company believes that implementation of MDNY's plans will
achieve profitability in 2004, there is no assurance that such actions will
achieve positive results from operations or adequate working capital and equity.
11
The following table provides certain statement of operations data
expressed as a percentage of total revenue and other statistical data for the
three-month period ended March 31, 2004 and 2003:
2004 2003
--------- ---------
Revenues:
Premiums earned 99.5% 99.9%
Investment and other income .5 .1
--------- ---------
Total revenue 100.0 100.0
--------- ---------
Medical claims expense 84.5 85.3
Commissions expense 4.0 4.3
General and administrative 9.8 9.4
Expenses .1 0.1
Depreciation --
--------- ---------
Total expenses 98.3 99.1
--------- ---------
Operating income before income taxes 1.7 0.9
Income tax expense (0.1) (0.1)
--------- ---------
Net income before minority interest 1.6 0.8
Minority interest in income of subsidiary (0.5) (0.3)
--------- ---------
Net income 1.1% 0.5%
--------- ---------
Statistical data:
Enrollment (HMO and POS) 43,019 57,206
HMO enrollment 38,979 47,025
POS enrollment 4,040 10,181
ASO enrollment -- 3,723
^Member months 129,668 172,804
*Medical loss ratio 85.3
**Administrative loss ratio 13.9 13.8
* Medical loss ratio-Medical expense and net reinsurance divided by total
premium
** Administrative loss ratio-Commission expense, depreciation, and general
administrative expense divided by total premium
^ does not include ASO member months which is dental only
Comparison of three months ended March 31, 2004 and 2003
Revenues for the three months ended March 31, 2004 were $35,078,863, down
13% from $40,287,643 during the same period in the prior year. Enrollment
totaled 43,019 at March 31, 2003 down 25% from 57,206 at March 31, 2003. Premium
revenues decreased $5,208,780 or 13% as a result of the decline in enrollment
offset by premium rate increases. In addition, although enrollment in the POS
products dropped to 4,040 from 10,181 at March 31, 2003, MDNY was approved for a
10% differential in sole proprietor rates effective June 1, 2003, which helped
offset anticipated declines in premium related to the drop in enrollment.
Premium yields for the first quarter increased 16% to $270 on a pmpm (per member
per month) basis from $233 compared to the first quarter 2003.
12
Total expenses for the quarter ended March 31, 2004 were $34,657,465 down
13% from $39,989,847 for the same period in the prior year. This decrease in
expenses is the result of enrollment declines realized during the first quarter.
Medical claim expense as a percent of premium revenues was 84.5% for the
first quarter 2004 compared to 85.3% for the first quarter 2003. Medical costs
stated on a pmpm basis increased to $229 for the first quarter 2004 from $199
during the same period in the prior year; a 15% increase.
Commissions as a percent of premium remained at approximately 4% for the
first quarter 2004 and first quarter 2003. Although enrollment decreased during
the last quarter 2003, the percentage of enrollment generated through
associations remained approximately 48%.
Net income for the first quarter of 2004 totaled $390,028, compared with a
net income of $210,195 for the first quarter 2003. Higher premium yields
realized in 2004 and lower than anticipated medical cost increases contributed
to the overall increase in net earnings reported in the first quarter.
Liquidity and Capital Resources
Cash and cash equivalents for the three months ended March 31, 2004
increased to $4,089,528 from $1,575,080 at December 31, 2003. The increase of
approximately $2.5 million in net cash and cash equivalents is related to the
receipt on March 30, 2004 of $2.4 million from CHSLI.
MDNY had a negative working capital of $16.3 million at March 31, 2004
compared to a negative working capital of $16.9 million at December 31, 2003.
The negative working capital decreased as of March 31, 2004 primarily due to
earnings generated during the first quarter of 2004. The Company anticipates
that 2004 rate increases together with the other operating initiatives described
above under the caption "--Business Strategy" will produce sufficient cash flows
to meet MDNY's obligations. There can be no assurance that MDNY will be able to
achieve sufficient cash flows.
Capital Reserves and Liquidity
Certain matters relating to MDNY's regulatory status, its compliance with
applicable reserve and statutory net worth requirements and liquidity are
discussed above under the captions "--Recent Developments" and "--Business
Strategy."
The continued failure of MDNY to meet reserve requirements, the failure of
MDNY or the IPAs to comply with other existing laws and regulations or a
significant change in such laws or regulations could materially and adversely
affect the operations, financial condition and prospects of the Company, MDNY
and the IPAs.
MDNY obtained a Section 1307 loan from LIPH, LLC for $1 million in 1997
and another from CHNLI for $1.4 million in 1998. Interest on these loans accrues
at the prime rate and are payable quarterly. See Note 7 to the Consolidated
Financial Statements included elsewhere herein. These loans together with the
accrued interest brought MDNY's March 31, 2004 to a statutory net worth of $6.8
million compared to the NYSID required net worth of $7.7 million. (Under Section
1307, the principal and interest are treated as equity capital for regulatory
purposes and are repayable out of free and divisible surplus, subject to the
prior approval of NYSID).
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company to make
estimates and assumptions and select accounting policies that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
While many operational aspects of MDNY's business are subject to complex
federal, state and local regulations, the accounting for the Company's business
is generally straightforward with revenues primarily recognized during the
period in which MDNY is obligated to provide services to subscribers. Premiums
collected in advance are deferred and recorded as unearned premium revenue in
the balance sheet. Due to the nature of MDNY's business, several of the
Company's accounting policies, primarily relating to costs of claims incurred
but not reported and allowance for doubtful accounts associated with premium and
reinsurance receivables, involve significant estimates and judgments. These
accounting policies have been described in our 2002 Annual Report on Form 10-K.
13
Factors affecting future results
Health Insurance Portability and Accountability Act of 1996
The Secretary of the Department of Health and Human Services, or HHS, has
issued final regulations under the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), designed to improve the efficiency and
effectiveness of the health care system by facilitating the electronic exchange
of information in certain financial and administrative transactions while
protecting the privacy and security of the information exchanged. Three
principal regulations have been issued: privacy regulations, security
regulations, and standards for electronic transactions.
MDNY implemented the HIPAA privacy regulations by April 2003, as required,
and is evaluating the costs of upgrading its systems and procedures to fully
comply with the security regulations by the compliance deadline of April 20,
2005.
The HIPAA regulations on electronic transactions, which the Company refers
to as the transaction standards, establish uniform standards for electronic
transactions and code sets, including the electronic transactions and code sets
used for claims, remittance advices, enrollment and eligibility. The transaction
standards became effective in October 2002, although covered entities were
eligible to obtain a one-year extension if approved through an application to
the Secretary of HHS. MDNY received this one-year extension through October 16,
2003 from HHS.
HHS issued Guidance on July 24, 2003 that it will not penalize a covered
entity for post-implementation date transactions that are not fully compliant
with the transactions standards, if the covered entity can demonstrate its good
faith efforts to comply with the standards. HHS' stated purpose for this
flexible enforcement position was to "permit health plans to mitigate unintended
adverse effects on covered entities' cash flow and business operations during
the transition to the standards, as well as on the availability and quality of
patient care."
There is a divergence of interpretation as to how the new transaction
standards are to be implemented and as a result, MDNY could face increased costs
and complexity, and a temporary disruption in MDNY's business processes. MDNY is
continuing to make good faith efforts to comply with the standards. At this
time, the Company cannot estimate the potential impact of implementing (or
failing to implement) the HIPAA transaction standards on cash flows and results
of operations.
Impact of New Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections". In July 2002, the FASB issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities", as revised
in December 2003. In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". In May 2003,
the FASB issued SFAS No. 150, " Accounting for Certain Instruments with
Characteristics of both Liabilities and Equity".
The impact of the above referenced accounting standards is discussed in
Note 1 to the interim consolidated financial statements.
Inflation
Medical costs have been rising at a higher rate than that for consumer
goods as a whole. The Company believes that MDNY's premium increases, provider
reimbursement arrangements and other cost control measures mitigate, but do not
wholly offset, the effects of medical cost inflation on MDNY's operations.
MDNY's inability to increase premiums could negatively effect MDNY's future
earnings.
Certain Factors Affecting Future Operating Results
Certain statements in this Report on Form 10-Q are forward-looking
statements and are not based on historical facts but are management's
projections or best estimates. Such forward-looking statements include but are
not limited to, statements concerning future or prospective: results of
operations or financial position, liquidity, health care and administrative
costs, premium rates and yields for commercial business, growth and retention of
membership and development of new lines of business, health care benefits,
provider networks, provider utilization rates, medical loss ratio
14
levels, claims payment, service performance and other operations matters,
administrative loss ratio levels, proposed efforts to control health care and
administrative costs, impact of agreements with health care providers and
related organizations of providers, reinsurance coverage for risk-transfer
arrangements, enrollment levels, government regulation such as HIPAA, PBOR, the
impact of new laws and regulation, the future of the health care industry, and
the impact on MDNY of regulatory investigations and examinations. Actual results
may differ materially from those expressed or implied by such forward-looking
statements due to risks and uncertainties, including but not limited to the
following: the inability of MDNY to meet applicable reserve and statutory net
worth requirements; that CHNLI has notified the Company and MDNY that CHNLI
desires to withdraw as an MDNY shareholder by December 31, 2004; that the
Diocese of Rockville Center and the Hospitals affiliated with CHSLI may elect
not to renew their respective subscriber contracts with MDNY upon expiration
thereof effective January 1 2005 and 2006, respectively, in light of MDNY's
obligation to comply with the New York Women's Health and Wellness Act, which
obligates MDNY to offer contraceptive drugs and devices to members, in conflict
with the ethical policies of the Diocese of Rockville Center; that increased
regulation or modification of existing regulations will increase health care
expenses or require additional or increased levels of statutory reserve
requirements; that increased competition in MDNY's markets or a change in
product mix will unexpectedly reduce premium revenue; and that MDNY will not be
successful in increasing membership growth; that health care costs in any given
period may be greater than expected due to general unanticipated increases in
health care costs, unexpected incidence of major cases, national emergencies,
natural disasters, epidemics, changes in physician practices, and new
technologies.
See also the discussion under "Risks and Uncertainties" in Note 3 of the
Notes to Condensed Consolidated Financial Statements included in this Report and
matters referred to throughout Item 1 of the Company's Annual Report on Form 10K
for the fiscal year ended December 31, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Part I -- Item 2 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quantitative and Qualitative Disclosure
About Market Risk."
Item 4. Controls and Procedures
Based upon an evaluation by the Company's President and Chairman of the
Board and its Chief Financial Officer as of the end of the period covered by
this report, they have concluded that the Company's disclosure controls and
procedures, as defined in Rule 15d-14(c) under the Securities Exchange Act of
1934, as amended, are effective for gathering, analyzing and disclosing
information contained in the Company's periodic reports provided to the
Securities and Exchange Commission.
Subsequent to the Evaluation Date referred to in paragraph 4 of the
Certifications of the Company's principal executive officer and its principal
financial officer included in this report, the Company has not made any change
to its internal controls referred to in paragraph 5 of the Certifications and
there has been no change in other factors that could significantly affect these
controls.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
1. Composite By-laws of Long Island Physician Holdings Corporation
2. Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification
3 Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification
4. Chief Executive Officer Section 1350 Certification
5. Chief Financial Officer Section 1350 Certification
(1) Filed herewith.
b. Reports on Form 8-K.
None.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LONG ISLAND PHYSICIAN HOLDINGS CORPORATION
By: /s/ PAUL KOLKER, M.D.
--------------------------------------------
Name: Paul Kolker, M.D.
Title: President and Chief Executive Officer
Date May 14, 2004
17