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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 Number: 0-19442
OXFORD HEALTH PLANS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1118515
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
800 Connecticut Avenue, Norwalk, Connecticut 06854
(Address of principal executive offices) (Zip Code)
(203) 852-1442
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $.01 Per Share
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 is not contained herein, and will not be contained, to the
best of 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. [ ]
As of March 3, 1997, there were 77,771,954 shares of common stock issued and
outstanding. The aggregate market value of such stock held by nonaffiliates, as
of that date, was $4,205,276,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A (Part III)
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PART I
ITEM 1. BUSINESS
GENERAL
Oxford Health Plans, Inc. ("Oxford" or the "Company"), incorporated under
the laws of the State of Delaware on September 17, 1984, is a health care
company providing health benefit plans in New York, New Jersey, Pennsylvania,
Connecticut and New Hampshire. The Company's product line includes its
point-of-service plans, the Freedom Plan and the Liberty Plan, traditional
health maintenance organizations ("HMOs"), Medicare and Medicaid plans,
third-party administration of employer-funded benefit plans ("self-funded health
plans") and dental plans. The Company's principal executive offices are located
at 800 Connecticut Avenue, Norwalk, Connecticut 06854, and its telephone number
is (203) 852-1442. Unless the context otherwise requires, references to Oxford
or the Company include its subsidiaries.
In July 1995, a wholly-owned subsidiary of the Company merged with OakTree
Health Plan, Inc. ("OakTree"), a Philadelphia-based HMO. The merger was
accounted for as a pooling of interests and, accordingly all data in the
paragraphs that follow have been restated to include the operations and accounts
of OakTree for all periods prior to the merger.
The Company offers its products through its five HMO subsidiaries, Oxford
Health Plans (NY), Inc. ("Oxford NY"), Oxford Health Plans (NJ), Inc. ("Oxford
NJ"), Oxford Health Plans (CT), Inc. ("Oxford CT"), Oxford Health Plans (NH),
Inc. ("Oxford NH"), Oxford Health Plans (PA), Inc. ("Oxford PA") and through
Oxford Health Insurance, Inc. ("OHI"), the Company's health insurance
subsidiary. OHI has been granted a license to operate as an accident and health
insurance company by the Department of Insurance of the State of New York, the
State of New Jersey, the State of Connecticut, the State of New Hampshire, the
State of Florida, and the Commonwealth of Pennsylvania. The Company is not
dependent on any single employer or group of employers, as the largest employer
group contributed approximately 3.0% of total premiums earned during 1996 and
the ten largest employer groups contributed 8.7% of total premiums earned during
1996. The Company's business is managed through regional management structures
in New York, New Jersey, Connecticut and Pennsylvania (including southern New
Jersey counties in the Philadelphia metropolitan area).
PRODUCTS
Freedom Plan
Oxford's Freedom Plan is a point-of-service health care plan that combines
the benefits of Oxford's HMOs with those of conventional indemnity health
insurance. Oxford's Freedom Plan gives members the option at any time of using
Oxford's HMO plan or exercising their freedom to choose physicians not
affiliated with Oxford. The Freedom Plan, first offered in January 1988 in New
York, has grown to approximately 1,015,100 members at December 31, 1996 compared
with 680,400 at the end of 1995. As a percentage of total premiums earned,
Freedom Plan premiums earned were 61.2% in 1996, 64.2% in 1995 and 66.3% in
1994. The flexibility of this program has enabled Oxford to successfully market
health care coverage to employer groups who have not previously offered HMO
products. The largest employer group offering the Freedom Plan accounted for
approximately 3.0% of total premiums earned during 1996 and the ten largest
employer groups offering the Freedom Plan accounted for 8.6% of total premiums
earned in 1996.
Oxford has targeted small to medium-size employers (10 to 1,500 employees)
for this product. New York Freedom Plan enrollment accounts for more than 80% of
all Freedom Plan enrollment. In New York and Pennsylvania, each Freedom Plan
member receives two forms of coverage - HMO coverage through the appropriate
Oxford HMO and conventional insurance through OHI. In New Jersey and
Connecticut, each member receives Freedom Plan coverage through one contract.
For Freedom Plan coverage, employers receive one monthly bill and have both the
in-network and out-of-network coverage centrally administered by Oxford.
Oxford offers the Freedom Plan to employers on either a total replacement or
a dual option basis. The total replacement Freedom Plan involves the complete
conversion of an employer group from the prior base plan to
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the Freedom Plan, with the Freedom Plan being the new base plan for all
employees. Oxford's dual option Freedom Plan gives individual employees the
option of selecting Oxford's Freedom Plan as an alternative to the employer's
base plan. The dual option Freedom Plan maintains all the in-plan benefits of
Oxford's total replacement Freedom Plan, but has significant dollar limits on
the out-of-plan benefits.
The New Jersey Freedom Plan was introduced in New Jersey in January 1991.
During 1992, the Company introduced the Connecticut Freedom Plan which, until
1993, was underwritten by an independent insurer and marketed and administered
by Oxford, with Oxford retaining substantially all of the profits or losses
arising from the product. In 1993, the Company received a license to directly
offer its Freedom Plan and HMO products in Connecticut and now fully markets its
products in such state. The Company commenced offering its Freedom Plan in
Pennsylvania in December 1995.
HMOs
Oxford operates licensed HMOs in each of the states in which it operates.
The largest HMO commercial employer group accounted for less than one percent of
total premiums earned during 1996, while the ten largest HMO groups accounted
for 3.2% of total premiums earned in 1996. Commercial HMO membership
approximated 192,300 members at December 31, 1996 compared with 112,000 members
at the end of 1995. As a percentage of total premiums earned, HMO revenues were
10.7% in 1996, 11.2% in 1995 and 15.2% in 1994.
Liberty Plan
In response to demand for more economical health plans, the Company
introduced the Liberty Plan, a point-of-service plan, in late 1993. This plan
offers savings of up to 12% over the standard Freedom Plan and HMO plans by
allowing member groups to choose from a smaller network of highly qualified
providers. The Liberty Plan provider network, while smaller than the Freedom
Plan network, still ranks among the largest networks of board-certified or
recently board-eligible physicians in the New York metropolitan area. Liberty
Plan premiums earned represented approximately 2% of total premiums earned in
1996.
Other Products
The Company intends to offer other health plan products in certain regions in
the coming year, including preferred provider organization products and similar
products.
Medicare and Medicaid
The Company offers the Oxford Medicare Advantage plan to Medicare eligible
individuals through its New York, New Jersey and Connecticut HMO subsidiaries.
Under risk contracts with the Federal Health Care Financing Administration (the
"HCFA"), Oxford is paid a fixed per member per month capitation amount by the
HCFA based upon a formula of the projected medical expense of each Medicare
member. The Company bears the risk that the actual costs of health care services
may exceed the per member per month capitation amount received by the Company.
Medicare risk contracts provide revenues which are generally higher per
member than those for non-Medicare members, and thus provide an opportunity for
increased profits and cash flow. Such risk contracts, however, also carry
certain risks such as higher comparative medical costs, government regulatory
and reporting requirements, the possibility of reduced or insufficient
government reimbursement in the future, and higher marketing and advertising
costs per member as the result of marketing to individuals rather than to
groups. The Company has developed a network of physicians and other providers to
serve its Medicare enrollees. At December 31, 1996, the Company had
approximately 125,000 members enrolled in its Medicare plans compared with
67,100 members at the end of 1995. Medicare premiums accounted for approximately
19.8% of total premiums earned for the year ended December 31, 1996 compared
with 14.2% in 1995 and 6.8% in 1994.
Oxford also offers a Medicaid Healthy Start plan to individuals eligible for
Medicaid benefits in New York, New Jersey, Metropolitan Philadelphia, and
Connecticut. The Company receives fixed monthly premiums per
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member under a risk contract with the respective state agencies administering
the Medicaid program. The Company bears the risk that the actual costs of health
care exceed the per member per month capitation amounts received by the Company.
Medicaid plans also involve the risk of reduced or insufficient government
reimbursement and higher marketing and advertising costs per member as a result
of marketing to individuals rather than to groups. At December 31, 1996,
approximately 162,000 members were enrolled in the Company's Medicaid plans
compared with 105,600 members at the end of 1995. Medicaid premiums accounted
for approximately 8.3% of total premiums earned for the year ended December 31,
1996 compared with 10.4% in 1995 and 11.8% in 1994.
See "Cautionary Statement Regarding Forward Looking Statements."
Self-Funded Health Plans
Oxford's self-funded health plans have the same flexible plan designs as the
Company's fully-insured programs, yet retain the cash flow advantage of
self-funding for the employer. The employer self-insures health care expenses
and pays for health claims only as they are incurred. In exchange for
administration fees, Oxford provides claims processing and health care cost
containment services through its provider network and utilization management
programs. Unlike most third-party administrators, the Company's self-funded
health plans enable employers to access Oxford's provider network and to realize
savings through certain of Oxford's discounted fee arrangements and medical cost
containment capabilities, while allowing employers to design custom health
benefit plans in accordance with their own requirements and objectives.
Dental Plans
Oxford maintains a contractual network of over 1,800 private dentists in its
service areas through which it offers two dental benefit plans in conjunction
with its health benefit plans.
Specialty Care Management
During 1996, the Company formed Oxford Specialty Holdings, Inc. (taken
together with its subsidiaries, "Specialty Holdings") which was established to
manage specialty medical costs in distinct specialties, such as cardiology,
oncology or orthopedics. Specialty Holdings will provide the Company and other
payors with advisory services from panels of expert specialists, case rate
reimbursement contracts for diseases and cases in up to 13 medical specialties,
and administrative products and services related to the management of
individual diseases and conditions. Expert panels will provide advice as to
appropriate diagnoses and treatment at the disease or specialty level and will
also provide case management services. With the assistance of each expert
panel, Specialty Holdings will develop case rate contracts with physicians and
other providers, which will cover the full spectrum of treatment for a specific
case or disease for a fixed "case rate." It is anticipated that the Company and
other payors will contract with Specialty Holdings for advisory services and
procure care for their members at case rates from Specialty Holdings in an
effort to reduce the medical costs associated with each specialty.
Other Investments
During the third quarter of 1993, the Company agreed to invest up to
$10,000,000 of a total of $50,000,000 committed for investment in Health
Partners, Inc. ("Health Partners"), an independent company established to
provide management and administrative services to physicians, medical groups and
other providers of health care. On May 18, 1994, the Company entered into a
securities purchase agreement, among the Company, a corporate investor, Health
Partners and certain management investors named therein. Pursuant to such
securities purchase agreement, the Company increased its commitment to invest in
Health Partners from $10,000,000 to $25,000,000, with an ownership interest not
to exceed 49%, in exchange for preferred stock which is convertible into 47% of
Health Partners' common stock, and the corporate investor agreed to invest
$25,000,000 in exchange for preferred stock which is convertible into 33% of
Health Partners' common stock. In accordance with the securities purchase
agreement, the Company had invested $24,947,000 in Health Partners as of
December 31, 1996. The Company's net investment, after recognizing its share of
Health Partners losses, was $14,414,000 as of December 31, 1996. The Company
contracts with provider groups managed by Health Partners in several of the
Company's service areas.
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On November 7, 1995, Oxford completed the acquisition of a 19% interest in
St. Augustine Health Care, Inc. ("St. Augustine"), a health maintenance
organization offering health benefit plans to Medicaid beneficiaries in eleven
counties in the State of Florida. During 1996, St. Augustine received approval
of its application to offer commercial programs and expects to begin offering
such programs in 1997. Under the terms of the transaction, Oxford has provided
$8 million in financing to St. Augustine and has the right to make future equity
investments in St. Augustine.
MARKETING AND SALES
Oxford distributes its products through its direct sales force and its
telemarketing representatives and through its network of independent insurance
brokers and agents.
Direct Sales Force; Telemarketing
The Company maintains a direct sales staff of account executives and group
service representatives. Account executives sell traditional HMO programs, the
Company's Freedom and Liberty Plans, and self-funded medical plans. The direct
sales force is organized into units in each of the Company's regions. Separate
regional sales executives are responsible for each direct sales unit. The
Company's marketing department develops television advertising, as well as
direct mail advertising, targeted print advertisements and internally generated
marketing publications for use by the direct sales force and by independent
brokers and agents.
Group service representatives are also organized on a regional basis and are
responsible for servicing accounts. Group service representatives become the
principal administrative contact for employers and their benefit managers by
conducting on-site employee meetings and by providing reporting and
troubleshooting services.
The Company also employs a staff of telemarketing representatives who
generate leads for the direct sales force and who sell directly to small group,
individual and government program customers.
Independent Insurance Agents and Brokers
The primary distribution system for the group health insurance industry in
the Company's service areas has been independent insurance agents and brokers.
Oxford markets its commercial products through approximately 4,500 independent
insurance agents and brokers (compared with 3,300 at the end of 1995) who are
paid a commission on sales. Independent insurance agents and brokers have been
responsible for a significant portion of Oxford's Freedom Plan enrollment growth
over the past four years, and the Company expects to continue using independent
insurance agents and brokers in its marketing system over the next several
years. The Company believes that the New York metropolitan market, in
particular, is influenced significantly by independent agents and brokers, and
that utilization of this distribution system is an integral part of a successful
marketing strategy in the region.
National Accounts
Oxford has entered into affiliations with HMOs and other provider networks
outside the Company's service area which enable Oxford to market its Freedom
Plan, Liberty Plan and HMO products to employers seeking coverage for employees
in other geographic regions.
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PHYSICIAN NETWORK
The Company's health care programs are designed around "primary care"
physicians, who assume overall responsibility for the care of members, and
determine or recommend the nature and extent of services provided to any given
member. Primary care physicians provide preventive and routine medical care and
are also responsible for making referrals to contracted specialist physicians,
hospitals and other providers. Medical care provided directly by primary care
physicians includes the treatment of illnesses not requiring referrals, as well
as periodic physical examinations, routine immunizations, maternity and well
child care and other preventive health services.
Oxford maintains a network of approximately 37,700 individual physicians,
with approximately 17,400 in New York, 8,200 in New Jersey, 6,500 in
Pennsylvania, 4,800 in Connecticut, and 800 in New Hampshire. The majority of
Oxford's physicians have contracted individually and directly with Oxford,
although Oxford also has contracts with management service organizations,
individual practice associations and physician groups.
Private Practice Partnerships
The Company continues to develop and implement its Private Practice
Partnership program ("the Partnerships"), first introduced in 1993 to organize
physicians into groups which promote efficient, quality care. The Partnerships
initiative organizes private practice physicians within a community into small
medical groups, enabling them to achieve the efficiencies and quality control of
much larger medical groups, while remaining in their own private offices. These
smaller groups also allow the Company to introduce new forms of payment to
physicians that encourage more efficient patient care. These forms of payment
vary among the Partnerships and include risk sharing and incentive payments
which reward the provision of high quality, cost effective care. Each
Partnership is responsible for establishing a management committee to oversee
the operation of the group. The Company performs the administrative, claims
processing, marketing, enrollment, health promotion, quality assurance and
utilization review functions for each of the Partnerships. The Company believes
that a sustainable competitive advantage in health care is built on structural
innovations such as the Partnerships and the Company's specialty management
initiatives, as opposed to incremental cost control efforts. The Company's goal
in developing the Partnerships is to enable physicians to achieve optimal cost
and quality performance, while giving them greater authority and responsibility
for a patient's full range of health care needs. By the end of 1996, a total of
151 Partnerships with 3,500 primary care physicians had been established.
Physician Compensation
Exclusive of the Partnerships and case rate reimbursement for specialty
care, Oxford currently compensates its participating physicians based upon a
fixed, discounted fee schedule, under which physicians receive payment for
specific procedures and services. The Company's discounted, fee-for-service
reimbursement program for participating physicians was designed to achieve
delivery of cost-effective, high-quality health care by its physician network.
Prior to March 1, 1996, the Company generally withheld 20% of agreed
compensation to primary care physicians, and 15% of agreed compensation to
specialist physicians. The Company returned to the physicians a portion of such
withhold, at its discretion, based upon system-wide and individual physician
medical costs compared to actuarially budgeted expenditures. In March 1996,
Oxford shifted to a modified fee schedule under which withholds were eliminated
for most participating physicians.
Certain of Oxford's Partnerships are compensated based on global budgeting
and risk sharing for serving enrollees in Oxford's commercial, Medicare and
Medicaid plans receiving care through Partnerships. For Partnerships that meet
the Company's requirements for risk sharing, these agreements allocate
Partnerships a fixed, periodic sum on a per member per month basis, adjusted for
certain demographics, without regard to the amount or scope of the services
rendered. Such agreements shift a portion of the Company's health cost risks to
these Partnerships, recognizing the providers' role and capabilities in the area
of cost containment. These arrangements are subject to compliance with new risk
sharing regulations adopted by the HCFA, which require disclosure and
reinsurance for specified levels of risk sharing, and proposed state regulation
which could affect physician risk sharing. The Company has also developed an
incentive program for non-risk sharing Partnerships based on quality and
efficiency measures and a large number of Partnerships will be subject to this
program in 1997. The Company continues to evaluate and
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develop funding models that provide appropriate incentives and fair compensation
to physicians of the Partnerships and comply with applicable government
regulations.
The Company, through Specialty Holdings, is also working with specialists
that will offer comprehensive treatment for specific diseases or cases at a
predetermined case rate. These providers will be responsible for care from the
initial diagnosis through post-treatment procedures and will establish contracts
with hospitals, specialists, and ancillary providers involved in each case.
CONTROL OF HEALTH CARE COSTS
Oxford's medical review program controls out-patient services, elective
surgeries and hospitalizations provided to Oxford members. Under the medical
review program, for most of Oxford's plans, physicians and members are obligated
to contact Oxford prior to providing or receiving specified treatments.
Utilizing standardized protocols on a procedure-specific basis, Oxford's staff
of registered nurses and physicians reviews the proposed treatment for
consistency with established norms and standards. The Company's utilization rate
for hospitalizations in 1996 exclusive of Medicare and Medicaid was
approximately 62 admissions per 1,000 members per year, which the Company
believes compares favorably with average industry admissions for all health care
plans.
Oxford's out-patient cost control program is based on the primary care
system of health care coordination, which promotes consistency and continuity in
the delivery of health care. For most plans sold, each person who enrolls in an
Oxford plan must select a participating primary care physician who serves as the
manager of the member's total health care needs. Members see their primary care
physician for all routine and preventive medical services. The primary care
physician either provides necessary services directly or authorizes referrals
for specialist physicians, diagnostic tests and hospitalizations. Except in
life-threatening situations, all elective hospitalizations and surgical
procedures must be authorized in advance by a member's primary care physician
and, in order to receive the highest level of benefits, must be delivered by
providers who have contracted with Oxford.
In connection with its review of claims, the Company compares the services
rendered by its participating physicians to an independently developed pattern
of treatment standards. This pattern of treatment analysis allows the Company to
identify procedures which were not consistent with a patient's diagnoses, as
well as billing abuses. Separate claims auditing systems are utilized for
hospital diagnosis related group payments and all other surgical payments.
Oxford utilizes a hospital bill audit program which has yielded significant
savings with respect to hospital claims, through pricing reviews, medical chart
audits and on-site hospital reviews. Oxford's claim auditing program includes a
sophisticated computer program that also identifies abuses in physician billing
practices, and helps isolate specific physicians who are not practicing and
billing in a manner consistent with Oxford's health care philosophy. In
addition, the Company maintains management information systems which help
identify aberrant medical care costs.
QUALITY MANAGEMENT
Oxford requires that each of its physicians in its commercial and Medicare
rosters be board certified in his or her specialty (by passing certifying
examinations in his or her specialty as recognized by the American Board of
Specialties) or become board certified within five years of becoming eligible.
Board certification is one of the few objective measures of a physician's
expertise. Additionally, Oxford has a rigorous credentialing procedure that
consists of: primary verification of all credentials; query of the National
Practitioner Data Bank, state medical boards and admitting hospitals for
malpractice history, disciplinary actions and/or restrictions of hospital
privileges; and, on-site office evaluation to determine compliance with Oxford
standards. Oxford also biennially recredentials all providers. The
recredentialing review consists of repeating the initial credentialing process
as well as a review of the provider's practice history with Oxford. This process
also includes evaluating the results of quality assurance reviews, complaints
from members concerning the provider, utilization patterns and the provider's
compliance with Oxford's administrative protocols.
The Company's physician contracts require adherence to Oxford's Quality
Assurance and Medical Review Programs. Oxford's Quality Management Committees,
which are composed of distinguished physicians from within Oxford's network of
providers, advise the Company's Vice President of Medical Affairs concerning the
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development of credentialing and other medical criteria. The committees also
provide oversight of Oxford's Quality Management and Utilization Management
Programs through peer review and ongoing review of performance indicators.
As part of its quality management efforts, the Company uses physician
profiling analyses to assess physician behavior with respect to both the direct
and indirect components of care, adjusting for differences in case mix, severity
and comorbidity. These analyses recognize that primary care physicians have
responsibility and accountability for not just the care they provide directly,
but also for care provided by specialists to whom they refer cases and for
facilities and other related providers. The analyses generate clinical
complexity indices to help determine "expected" costs and utilization, and to
assess a provider's variance from his/her peers. The Company further evaluates
the quality and appropriateness of medical services provided to its members by
performing member and physician satisfaction studies. The Company conducts
on-site review of medical records at physician offices facilitating accurate
retrieval of statistical information which allows for prompt problem resolution
in the event of member or physician complaints and for retrieval of data when
conducting focused studies.
RISK MANAGEMENT
The Company limits in part the risk of catastrophic losses by maintaining
reinsurance coverage. Current reinsurance arrangements cover 50% to 90% of
annual medical expenses beyond an annual deductible of $150,000 for each member,
up to a lifetime maximum of $2,000,000 per member.
The Company also maintains general liability, property, employee fidelity,
directors and officers, and professional liability insurance coverage in amounts
the Company deems prudent. The Company requires contracting physicians,
physician groups and hospitals to maintain professional liability and
malpractice insurance in an amount at least equal to industry standards.
GOVERNMENT REGULATION
The Company's HMO subsidiaries in New York, New Jersey, Pennsylvania,
Connecticut and New Hampshire are each subject to substantial federal and state
government regulation. The Company's New York domiciled insurance subsidiary,
OHI, is subject to regulation by the New York State Department of Insurance
("NYSDI"). In addition, OHI is subject to regulation as a foreign insurer by New
Jersey, Pennsylvania, Connecticut, Florida and New Hampshire.
Federal Regulation
One of the most significant applicable federal laws is the Health
Maintenance Organization Act of 1973, as amended (the "HMO Act"), and the rules
and regulations promulgated thereunder. The HMO Act governs federally qualified
HMOs and competitive medical plans ("CMPs"), and prescribes the manner in which
such HMOs and CMPs must be organized and operated in order to maintain federal
qualification and/or to be eligible to enter into Medicare contracts with the
federal government. Oxford NY, Oxford NJ and Oxford CT are qualified CMPs under
the HMO Act. In order to maintain this status, Oxford NY, Oxford NJ and Oxford
CT must remain in compliance with certain financial, reporting and
organizational requirements under applicable federal statutes and regulations in
addition to meeting the requirements established pursuant to applicable state
law.
The Company's health plans which have Medicare risk contracts, Oxford NY,
Oxford NJ and Oxford CT, are subject to regulation by the HCFA, a branch of the
United States Department of Health and Human Services. Enrollment under the
Medicare risk program and other federal programs cannot exceed 50% of a health
plan's total enrollees. The HCFA has the right to audit health plans operating
under Medicare risk contracts to determine each health plan's compliance with
the HCFA's contracts and regulations and the quality of care being rendered to
the health plan's Medicare members. Health plans which offer a Medicare risk
product must also comply with requirements established by peer review
organizations ("PROs"), which are organizations under contract with the HCFA to
monitor the quality of health care received by Medicare members. PRO
requirements relate to quality assurance and utilization review procedures.
Recent regulations of the HCFA impose requirements relating to physician
incentive plans which place physicians participating in Medicaid and
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Medicare HMO plans at substantial financial risk. Requirements include mandatory
reinsurance, member disclosure and member satisfaction surveys.
The Company's health plans which have Medicaid contracts, Oxford NY, Oxford
NJ, Oxford PA and Oxford CT, are subject to both federal and state regulation
regarding services to be provided to Medicaid enrollees, payment for those
services and other aspects of the Medicaid program. Medicaid regulations require
that enrollment of Medicaid and other federal government program beneficiaries
cannot exceed 25% of a health plan's total enrollment. Oxford PA is currently
operating under a HCFA waiver of this requirement.
State Regulation
Oxford's HMO subsidiaries are licensed to operate as HMOs by the insurance
departments, and, in some cases, health departments, in the states in which they
operate. Applicable state statutes and regulations require Oxford's HMO
subsidiaries to file periodic reports with the relevant state agencies and
contain requirements relating to the operation of their HMOs, the rates and
benefits applicable to their products and their financial condition and
practices. In addition, state regulations require the subsidiaries to maintain
restricted cash or available cash reserves and restrict their abilities to make
dividend payments, loans or other transfers of cash to the Company. State
regulatory authorities exercise oversight regarding the Company's HMOs' provider
networks, medical care delivery and quality assurance programs, form contracts
and financial condition. The Company's HMOs are also subject to periodic
examination by the relevant state regulatory authorities.
OHI is an accident and health insurance company licensed by the NYSDI and
licensed as a foreign insurer by the insurance departments of New Jersey,
Pennsylvania, Connecticut, Florida, and New Hampshire. Applicable state laws and
regulations contain requirements relating to OHI's financial condition, reserve
requirements, premium rates and form contracts, and require OHI to file periodic
reports with the various insurance departments. OHI's affairs and operations are
also subject to periodic examination by these agencies.
State regulations generally require that HMOs utilize standard "community
rates" in determining HMO premiums. Such community rates are generally revised
annually by the HMO, and, in most cases, must be approved in advance by the
applicable state insurance department. The methodology employed in determining
premiums for the Company's Freedom Plan products utilizing an HMO must also be
approved in advance by the applicable state insurance department and must
combine the relevant community rate with traditional indemnity insurance rating
criteria.
Applicable federal and state regulations also contain licensing and other
requirements relating to the offering of the Company's products in new markets
and offerings by the Company of new products, which may restrict the Company's
ability to expand its business. The failure of the Company's subsidiaries to
comply with 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.
Applicable New York statutes and regulations require the prior approval of
the New York Commissioner of Health and the New York Superintendent of Insurance
for any change of control of Oxford NY or the Company and the prior approval of
the New York Superintendent of Insurance for any change of control of OHI or the
Company. Similar laws in New Jersey, Pennsylvania, Connecticut, Florida and New
Hampshire require insurance department approval of any change in control of the
Company or the relevant subsidiary. For purposes of these statutes and
regulations, "control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of an
entity. Control is presumed to exist when a person, group of persons or entity
acquires the power to vote 10% or more of the voting securities of another
entity. Therefore, prior approval would be required for any person to acquire
the power to vote 10% or more of the common stock of the Company.
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Recent Regulatory Developments
State and federal government authorities are continually considering changes
to laws and regulations applicable to Oxford's HMO subsidiaries and OHI. The
recently enacted Federal Health Insurance Portability and Accountability Act of
1996, (i) insures portability of health insurance to individuals changing jobs
or moving to individual coverage by limiting application of preexisting
condition exclusions, (ii) guarantees availability of health insurance to
employees in the small group market and (iii) prevents exclusion of individuals
from coverage under group plans based on health status. The act also permits
offering Medical Savings Account plans on a pilot basis and includes programs
targeting fraud and abuse. The provisions are effective beginning July 1, 1997.
The Company is currently subject to similar state law provisions in New York
limiting preexisting condition exclusions for new group and individual enrollees
who had continuous prior coverage and requiring issuance of group coverage to
small group employers. Recently enacted federal legislation mandates coverage
for minimum hospital stays after childbirth (consistent with many new state law
requirements) and parity in applying lifetime limits to mental health benefits.
In addition, the HCFA adopted rules in 1996 imposing reinsurance, disclosure and
other requirements relating to physician incentive plans which place physicians
participating in Medicare and Medicaid HMO plans at substantial financial risk.
New York recently enacted the Health Care Reform Act of 1996 (the "Act").
Effective January 1, 1997, the Act allows all private health care payors to
negotiate payment rates for inpatient hospital services. Previously, only HMOs
could negotiate rates for these services. While non-HMO payors who compete with
the Company may pay negotiated hospital rates beginning January 1, 1997, the
Company expects that it will continue to have competitive arrangements with
hospitals in its network in view of its position as one of the largest payors in
the market. Also, effective January 1, 1997, the Company is required to make
payments to state funding pools to finance hospital bad debt and charity care,
graduate medical education, and other state programs under the Act. Previously,
hospital bad debt and charity care and graduate medical education were financed
by surcharges on payments to hospitals for inpatient services. As contemplated
by the Act, the Company has substantially completed the negotiation of
adjustments to rates paid to network hospitals in New York to reflect
elimination of these surcharges. These adjustments are generally effective as of
January 1, 1997, but they are not expected to result in savings equal to the
cost of the surcharges. Accordingly, the Company has filed increases in certain
of its commercial premium rates in New York of between 2% and 3.2% in addition
to normal trend increases in view of the increases in costs attributable to the
Act.
The New York legislature also recently passed legislation related to
operation of managed care plans, which contains provisions relating to, among
other things, utilization review, consumer disclosure and right of hearing on
termination of physicians from health plan networks.
Many states in which Oxford operates are currently considering regulations
relating to mandatory benefits, provider compensation arrangements, health
plan liability to members who fail to receive appropriate care, disclosure
and composition of physician networks, and Congress is considering significant
changes to both the Medicare and Medicaid programs, including changes which
would significantly reduce reimbursement to HMOs. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations". Over the past
year, bills have been introduced in the legislature in New York, New Jersey,
Connecticut and Pennsylvania including some form of the so-called "Any Willing
Provider" initiative which would require HMOs such as the Company's HMO
subsidiaries to allow any physician meeting their credentialing criteria to join
the Oxford network regardless of geographic need, hospital admitting privileges
and other important factors. Certain of these bills have also included
provisions relating to mandatory disclosure of medical management policies and
physician reimbursement methodologies.
Recently enacted legislation and the proposed regulatory changes described
above, if enacted, could increase health care costs and administrative expenses,
and reductions could be made in Medicare and Medicaid reimbursement rates. In
addition, proposed Medicare reform bills contain provisions relating to
Medicare which would facilitate entry of competing HMOs into the Company's
service areas by repealing the rule requiring Medicare risk contractors to have
one commercial enrollee for each Medicare or other government program enrollee
and creating permissive licensure for HMOs sponsored by provider networks. See
"Cautionary Statement Regarding Forward Looking Statements--Government
Regulation; Reimbursement."
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COMPETITION
HMOs and health insurance companies operate in a highly competitive
environment. The Company has numerous competitors, including for-profit and
not-for-profit HMOs, preferred provider organizations ("PPOs"), and indemnity
insurance carriers, some of which have substantially larger enrollments and
greater financial resources than the Company. The Company competes with
independent HMOs, such as Health Insurance Plan of New York and United Health
Care, each of which has significant enrollment in the New York metropolitan area
and, in the case of the latter, greater financial resources than the Company.
The Company also competes with HMOs and managed care plans sponsored by large
health insurance companies, such as The Prudential Insurance Company, The New
York Life Insurance Company, Aetna U.S. Healthcare Inc. and Blue Cross/Blue
Shield. Additional competitors may enter the Company's markets in the future.
The Company believes the quality of its service and physicians, as well as its
reputation, are important competitive factors. However, the cost of providing
benefits is in many instances the controlling factor in obtaining and retaining
employer groups and certain of Oxford's competitors have set premium rates at
levels below Oxford's rates for comparable products. Oxford anticipates that
premium pricing will continue to be highly competitive.
To address rising health care costs, some large employer groups have
consolidated their health benefits programs and have considered a variety of
health care options to encourage employees to use the most cost-effective form
of health care services. These options, which include traditional indemnity
insurance plans, HMOs, point-of-service plans, and PPO plans, may be provided
either by third parties or may be self-funded by the employer. Point-of-service
plans have gained favor with some employer groups because they allow for the
consolidation of health benefit programs. The Company believes that employers
will seek to offer health plans, similar to the Company's Freedom and Liberty
Plans, that provide for "in plan" and "out-of-plan" options while encouraging
members to use the most cost-effective form of health care services through
increased copayments, deductibles and coinsurance. Although the Company's
point-of-service products, the Freedom Plan and Liberty Plan, offer this
alternative to employers, there is no assurance that the Company will be able to
continue to compete effectively for the business of employer groups. The Company
also competes with other health plans to contract with physicians and other
providers.
Information System Conversion
In September 1996, the Company converted a significant part of its business
operations to a new computer operating system developed at Oxford over the last
four years. During the conversion, unanticipated software and hardware issues
created a slow-down in the Company's claims payment, billing functions and
telephone service. As a result, the Company's accounts receivable and liability
for medical costs payable at December 31, 1996 increased significantly from the
third quarter. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations". The Company believes it has addressed the problems
principally responsible for the delays in claims payments and billing and
continues to aggressively pursue solutions to remaining system and data issues
and resolution of billing and claims payment issues raised by customers and
providers.
EMPLOYEES
At December 31, 1996, the Company had approximately 5,000 employees, none of
whom is represented by a labor union. The Company has experienced no work
stoppages and believes that its employee relations are good.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" including statements concerning
future premium rates for commercial, Medicare and Medicaid business, future
medical-loss ratio levels and the Company's ability to control health care
costs, certain statements contained in "Business" including statements
concerning proposed efforts to control health care and administrative costs,
government regulation and the future of the health care industry, and other
statements contained herein regarding matters that are not historical facts are
forward-looking statements (as such term is defined in the Securities Exchange
Act of 1934, as amended). Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
hereinafter.
Control Over and Predictability of Health Care Costs
Oxford's future profitability is dependent, in part, on its ability to
predict and maintain effective control over health care costs (through, among
other things, appropriate benefit design, utilization review and case management
programs and its case rate and risk-sharing arrangements with providers) while
providing members with quality health care. Factors such as utilization, new
technologies and health care practices, hospital costs, major epidemics,
inability to establish acceptable compensation arrangements with providers and
numerous other
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factors may affect Oxford's ability to control such costs. There can be no
assurance that Oxford will be successful in mitigating the effect of any or all
of the above-listed or other factors.
Medical costs payable in Oxford's financial statements include reserves for
incurred but not reported claims ("IBNR") which are estimated by Oxford. Oxford
estimates the amount of such reserves using standard actuarial methodologies
based upon historical data including the average interval between the date
services are rendered and the date claims are paid, expected medical cost
inflation, seasonality patterns and increases in membership. Oxford believes
that its reserves for IBNR are adequate in order to satisfy its ultimate claim
liability. However, Oxford's rapid growth affects its ability to rely on
historical information in making IBNR reserve estimates. There can be no
assurances as to the ultimate accuracy or completeness of such estimates or that
adjustments to reserves will not cause volatility in Oxford's results of
operations.
Government Regulation; Reimbursement
The health care industry in general, and HMOs and health insurance companies
in particular, are subject to substantial federal and state government
regulation, including, but not limited to, regulation relating to cash
reserves, minimum net worth, licensing requirements, approval of policy
language and benefits, mandatory products and benefits, provider compensation
arrangements, member disclosure, premium rates and periodic examinations by
state and federal agencies. Oxford's ability to declare and pay dividends is
limited by state regulations (although Oxford has not paid cash dividends in
the past and does not anticipate paying cash dividends in the foreseeable
future). In 1996, significant federal and state legislation affecting the
Company's business was enacted. See "Business-Recent Regulatory Developments."
Moreover, state and federal government authorities are continually considering
changes to laws and regulations applicable to Oxford and are currently
considering regulation relating to mandatory benefits, provider compensation,
health plan liability to members who fail to receive appropriate care,
disclosure and composition of physician networks which would apply to the
Company. In addition, Congress is considering significant changes to Medicare
and Medicaid legislation and has in the past considered, and may in the future
consider, proposals relating to health care reform. Changes in federal and
state laws or regulations, if enacted, could increase health care costs and
administrative expenses and reductions could be made in Medicare and Medicaid
reimbursement rates. Oxford is unable to predict the ultimate impact on the
Company of recently enacted and future legislation and regulations but such
legislation and regulations, particularly in New York, could have a material
adverse impact on the Company's operations, financial condition and prospects.
See "Business-Government Regulation."
Premiums for Oxford's Medicare and Medicaid programs are determined through
formulas established by the HCFA for Oxford's Medicare contracts and by state
government agencies in the case of Medicaid. Medicaid premiums in New York were
significantly reduced in 1996, and HCFA has proposed legislation which would
reduce future reimbursement under the Company's Medicare risk contracts. Premium
reductions or premium rate increases in a particular region which are lower than
the rate of increase in health care service expenses for Oxford's Medicare or
Medicaid members in such region could adversely affect Oxford's results of
operations. Oxford's Medicare programs are subject to certain risks relative to
commercial programs, such as higher comparative medical costs and higher levels
of utilization. Oxford's Medicare and Medicaid programs are subject to higher
marketing and advertising costs associated with selling to individuals rather
than to groups.
Competition
HMOs and health insurance companies operate in a highly competitive
environment. Oxford has numerous competitors, including for-profit and
not-for-profit HMOs, PPOs and indemnity insurance carriers, some of which have
substantially larger enrollments and greater financial resources than Oxford.
Oxford also competes with HMOs and managed care plans sponsored by large health
insurance companies. Many of these competitors offer flexible plans that permit
employers to self-fund the medical risk of their plans. Additional competitors
may enter Oxford's markets in the future. The cost of providing benefits is in
many instances the controlling factor in obtaining and retaining employer groups
and certain of Oxford's competitors have set premium rates at levels below
Oxford's rates for comparable products. Oxford anticipates that premium pricing
will continue to be highly competitive. See "Business-Competition."
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Management of Growth
Over the past five years the Company has experienced rapid growth in its
business and in its staff and the Company will be affected by its ability to
manage growth effectively, including its ability to continue to develop
processes and systems to support its growing operations. See "Business-
Information System Conversion." There can be no assurance that the Company will
be able to maintain its historical growth rate.
ITEM 2. PROPERTIES
Oxford occupies as its principal executive offices approximately 185,000
square feet of office space at 800 Connecticut Avenue, Norwalk, Connecticut
under four leases expiring February 28, 1999 through February 28, 2001.
Additionally, the Company has leases to occupy a) approximately 114,000 square
feet of sales and administrative office space at 1133 Avenue of the Americas in
New York City expiring December 1, 1999; b) approximately 34,000 square feet of
sales office space in Melville, NY expiring June 30, 2002; c) approximately
133,000 square feet of sales office space in Edison, New Jersey expiring
December 1, 1999 through April 30, 2002; d) approximately 180,000 square feet of
administrative office space in Nashua, NH expiring May 31, 1999 through June 30,
2000; e) approximately 58,000 square feet of sales and administrative office
space in Philadelphia, Pennsylvania expiring April 30, 2005; f) approximately
282,000 square feet of sales and administrative office space in White Plains,
New York expiring November 30, 2000; g) approximately 352,000 square feet of
administrative office space in Trumbull, CT expiring October 31, 1998 through
April 30, 1999; h) approximately 121,000 square feet of administrative office
space in Hooksett, New Hampshire expiring November 30, 2002; and i)
approximately 61,000 square feet of administrative office space in Milford,
Connecticut expiring December 31, 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings. In the
ordinary course of its business, the Company is subject to claims and legal
actions by members in connection with benefit coverage determinations and
alleged acts by network providers and by health care providers and others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded in the over-the-counter market on the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
National Market System under the symbol "OXHP." The following table sets forth
the range of high and low sale prices for the common stock for the periods
indicated as reported on the NASDAQ National Market System. Prices have been
adjusted to reflect the two-for-one stock splits in 1995 and 1996 effectuated by
the distribution of dividends of one share of common stock for each share of
common stock outstanding. See Item 8. "Financial Statements and Supplementary
Data" - note 5 of notes to consolidated financial statements.
1996 1995
--------------------- -----------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $ 44.88 31.13 29.75 19.25
Second Quarter $ 55.25 37.38 29.75 19.25
Third Quarter $ 50.38 27.69 36.75 23.00
Fourth Quarter $ 62.25 41.00 41.88 29.88
As of March 3, 1997, there were 571 shareholders of record of the Company's
common stock.
The Company has not paid any dividends on its common stock since its
formation. The Company does not intend to pay any cash dividends in the
foreseeable future; rather the Company intends to retain earnings to provide for
the operation and expansion of its business. Additionally, the Company's ability
to declare and pay dividends to its shareholders may be dependent on its ability
to obtain cash distributions from its operating subsidiaries. The ability to pay
dividends is also restricted by insurance and health regulations applicable to
its subsidiaries. See Item 1. "Business-Government Regulation."
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The statement of earnings data and balance sheet data set forth below for each
year in the five-year period ended December 31, 1996 have been derived from the
audited consolidated financial statements of the Company. The information below
has been restated to reflect the merger in July 1995 with OakTree Health Plan,
Inc. in a pooling of interests transaction (see note 8 to consolidated financial
statements) and is qualified by reference to and should be read in conjunction
with the consolidated financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein.
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
REVENUES AND EARNINGS: (In thousands, except per share amounts and operating statistics)
Operating revenues .............................. $3,032,569 1,745,975 752,832 307,622 151,301
Investment income, net .......................... 42,439 19,392 7,438 6,103 4,395
Earnings before change in accounting principle .. 99,623 52,398 28,231 12,347 7,193
Change in accounting principle (1) .............. -- -- -- -- 3,300
---------- ---------- ---------- ---------- ----------
Net earnings .................................... $ 99,623 52,398 28,231 12,347 10,493
========== ========== ========== ========== ==========
FINANCIAL POSITION:
Working capital ................................. $ 451,957 103,448 71,731 63,192 51,857
Total assets .................................... 1,346,739 608,776 330,160 170,130 107,496
Long-term liabilities ........................... -- -- -- -- 270
Common shareholders' equity (2) ................. $ 598,170 220,033 132,394 94,655 67,427
PER COMMON AND COMMON EQUIVALENT SHARE (3):
Primary:
Earnings before change in accounting principle $ 1.24 .71 .40 .18 .11
Change in accounting principle (1) ........... -- -- -- -- .06
---------- ---------- ---------- ---------- ----------
Net earnings ................................. $ 1.24 .71 .40 .18 .17
========== ========== ========== ========== ==========
Weighted average number of
common shares outstanding ................ 80,019 73,454 70,682 67,942 63,406
Fully diluted:
Earnings before change in accounting principle $ 1.24 .71 .40 .18 .11
Change in accounting principle (1) ........... -- -- -- -- .05
---------- ---------- ---------- ---------- ----------
Net earnings ................................. $ 1.24 .71 .40 .18 .16
========== ========== ========== ========== ==========
Weighted average number of
common shares outstanding ................ 80,643 74,154 71,110 68,742 64,718
OPERATING STATISTICS:
Enrollment ...................................... 1,535,500 1,007,700 513,000 221,330 117,250
Fully insured member months ..................... 15,604,400 9,338,610 4,101,863 1,715,761 913,146
Self-funded member months ....................... 474,200 514,200 524,000 401,000 238,800
Number of contracted physicians ................. 37,700 29,900 21,000 11,500 5,700
Medical-loss ratio (4) .......................... 80.1% 77.5% 74.1% 73.2% 74.9%
(1) Change in accounting principle is a credit relating to the implementation of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
(2) The Company completed registered public offerings in April 1992 and April
1996. In 1992, the Company issued 553,273 shares of common stock from which
the Company realized net proceeds of approximately $9.6 million. In 1996,
the Company issued 5,227,272 shares of common stock from which the Company
realized net proceeds of approximately $220.5 million.
(3) Per share amounts and weighted average number of common share amounts have
been restated to reflect the two-for-one stock splits in 1993, 1995 and
1996. See note 5 to consolidated financial statements.
(4) Defined as health care services expense as a percentage of premiums earned.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues consist primarily of commercial premiums derived from
its Freedom Plan and Liberty Plan, health maintenance organization ("HMO") and
dental plan products, reimbursements under government contracts relating to its
Medicare and Medicaid programs, third-party administration fee revenue for its
self-funded plan services (which is stated net of direct expenses such as
third-party reinsurance premiums) and investment income.
Health care services expense primarily comprises payments to physicians,
hospitals and other health care providers under fully insured health care
business and includes an estimated amount for incurred but not reported claims
("IBNR"). The Company estimates IBNR expense based on a number of factors,
including prior claims experience. The actual expense for claims attributable to
any period may be more or less than the amount of IBNR reported. See "Liquidity
and Capital Resources."
The Company has experienced substantial growth in membership and revenues
since it began operations in 1986. The membership and revenue growth has been
accompanied by increases in the cost of providing health care in New York, New
Jersey, Pennsylvania, Connecticut and New Hampshire. Since the Company provides
services on a prepaid basis, with premium levels fixed for one-year periods,
unexpected cost increases during the annual contract period cannot be passed on
to employer groups or members.
In July 1995, the Company merged with OakTree Health Plan, Inc. ("OakTree"),
a Philadelphia-based HMO servicing primarily Medicaid beneficiaries. The merger
was accounted for as a pooling of interests and, accordingly, all data in the
paragraphs that follow have been restated to include the operations and accounts
of OakTree for all periods prior to the merger.
The following table provides certain statement of operations data expressed
as a percentage of total revenues and the medical-loss ratio for the years
indicated:
YEARS ENDED DECEMBER 31
-----------------------
REVENUES: 1996 1995 1994
------ ------ ------
Premiums earned ..................... 98.3% 98.2% 97.6%
Third-party administration, net ..... .3 .7 1.4
Investment income, net .............. 1.4 1.1 1.0
------ ------ ------
Total revenues ...................... 100.0 100.0 100.0
------ ------ ------
EXPENSES:
Health care services ................ 78.7 76.2 72.3
Marketing, general and
administrative...................... 15.5 18.4 20.8
------ ------ ------
Total expenses ...................... 94.2 94.6 93.1
------ ------ ------
Operating earnings .................. 5.8 5.4 6.9
Other income (expense), net ......... (.1) (.2) (.3)
------ ------ ------
Earnings before income taxes ........ 5.7 5.2 6.6
Provision for income taxes .......... 2.4 2.2 2.9
------ ------ ------
Net earnings ........................ 3.3% 3.0% 3.7%
====== ====== ======
MEDICAL-LOSS RATIO ...................... 80.1% 77.5% 74.1%
====== ====== ======
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RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Total premiums earned for the year ended December 31, 1996 increased 74.3%
to $3.02 billion from $1.73 billion in 1995. This overall increase was primarily
attributable to a 67.1% increase in member months for commercial and government
programs. The substantial growth in membership reflected continued consumer
acceptance of health care plans in the Company's markets in general, and the
popularity of the products offered by the Company in particular.
Commercial premium revenues increased $864.6 million to $2.17 billion in
1996 from $1.31 billion in 1995. Membership growth accounted for substantially
all of the change as member months of the Freedom Plan increased 63.5% when
compared with 1995, and member months of Oxford's traditional HMOs increased
65.9% over the prior year. Premium rates of commercial programs were slightly
higher in 1996 than in 1995.
Premium revenues of government programs increased $423.5 million to $850.7
million in 1996 from $427.3 million in 1995. Membership growth accounted for
most of the change in Medicare as member months increased 123.7% when compared
with the prior year. The increase in Medicaid revenues was attributable to a
61.6% increase in member months compared with 1995, offset in part by a 13.8%
decrease in average premium rates during 1996. Premium rates of Medicare
programs in 1996 were 8.5% higher than in 1995.
The following tables show plan revenues earned and membership by product:
YEARS ENDED
DECEMBER 31
---------------------------- PERCENT
1996 1995 INCREASE
---------- ----------- ----------
PLAN REVENUES: (In thousands)
Freedom Plan .................. $1,849,167 1,113,432 66.1%
HMOs .......................... 322,288 193,404 66.6
Medicare ...................... 599,824 247,090 142.8
Medicaid ...................... 250,889 180,172 39.2
---------- ----------
Total premium revenues ....... 3,022,168 1,734,098 74.3
Third-party administration,
net.......................... 10,401 11,877 (12.4)
---------- ----------
Total plan revenues .......... $3,032,569 1,745,975 73.7%
========== ========== =========
AS OF
DECEMBER 31
-------------------------
MEMBERSHIP: 1996 1995
--------- ---------
Freedom Plan .......... 1,015,100 680,400 49.2%
HMOs .................. 192,300 112,000 71.7
Medicare .............. 125,000 67,100 86.3
Medicaid .............. 162,000 105,600 53.4
--------- ---------
Total fully insured... 1,494,400 965,100 54.8
Self-funded ........... 41,100 42,600 (3.5)
--------- ---------
Total membership ..... 1,535,500 1,007,700 52.4%
========= ========= ========
The Company expects that premium rates for commercial business in 1997 will
be slightly higher than in 1996. The Company's commercial rates are often higher
than those charged by competitors and its ability to increase rates will be
affected by competitive factors and the ability of employer groups to demand
concessions from competing health plan providers. The Company believes that
commercial premium pricing will continue to be highly competitive. The Company
expects that premium rates for Medicare will be approximately 1.6% higher on
average in 1997, based on the weighted-average premium rate approved by the
Health Care Financing Administration ("HCFA") for the Company's Medicare risk
contracts for the year 1997. HCFA has proposed legislation which would result in
the Company receiving no increases in Medicare premiums in 1998 and 1999, a
slight decrease in premiums in 2000 and slight increases in 2001 and 2002 in
the counties where most of the Company's Medicare members reside. Passage of
this legislation could cause the Company to reduce benefits or charge a premium
under its Medicare plans or require renegotiation of provider arrangements.
There is significant opposition to the proposed legislation, and the Company
cannot predict the outcome of the legislative
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process or the impact of reform on the Company's results of operations. The
Company currently expects a slight decrease in premium yields in its Medicaid
business in 1997 as a consequence of lower enrollment of higher yielding
disabled beneficiaries in its Pennsylvania Medicaid plan than was originally
anticipated. See "Business-Government Regulation."
Third-party administration revenues for the year ended December 31, 1996
declined to $10.4 million from $11.9 million in 1995, attributable to a 5.1%
decrease in per member per month revenue and a 7.8% decrease in member months.
Net investment income for the year ended December 31, 1996 increased to
$42.4 million from $19.4 million in 1995. This was principally due to the
increase in invested cash resulting from increased cash flow from operations
during 1996 and approximately $220 million of net proceeds from the Company's
public offering in April 1996.
Health care services expense stated as a percentage of premiums earned (the
"medical-loss ratio") was 80.1% for the year ended December 31, 1996 compared
with 77.5% for the year ended December 31, 1995. The increase in the
medical-loss ratio was attributable to a higher percent of membership in the
Company's Medicare programs, greater than expected pharmacy costs, and decreased
per member per month premium revenue in the Company's Medicaid programs. Overall
per member per month revenue increased 4.3% to $193.67 in 1996 from $185.69 in
1995 while overall per member per month health care services expenses increased
7.8% to $155.16 in 1996 from $143.99 in 1995. Effective January 1, 1997, the New
York Health Care Reform Act of 1996 (the "Act") requires that the Company make
payments to state funding pools to finance hospital bad debt and charity care,
graduate medical education and other state programs under the Act. Previously,
hospital bad debt and charity care and graduate medical education were financed
by surcharges on payments to hospitals for inpatient services. As contemplated
by the Act, the Company has substantially completed the negotiation of
adjustments to rates paid to network hospitals in New York to reflect
elimination of these surcharges. These adjustments are generally effective as of
January 1, 1997, but they are not expected to result in savings equal to the
cost of the surcharges. Accordingly, the Company has filed for increases of
between 2% and 3.2% in certain of its commercial premium rates in New York in
addition to normal trend increases in view of the increases in costs
attributable to the Act. See "Government Regulation; Reimbursement."
The Company's profitability is dependent, in part, on its ability to predict
and maintain effective control over health care costs (through, among other
things, appropriate benefit design, utilization review and case management
programs and its case rate and risk-sharing agreements with providers) while
providing members with quality health care. Factors such as utilization, new
technologies and health care practices, hospital costs, major epidemics,
inability to establish acceptable compensation agreements with providers and
numerous other factors may affect Oxford's ability to control such costs. The
Company uses its medical cost containment capabilities, such as claim auditing
systems, physician tracking systems and utilization review protocols, and
improved channeling to the most cost-effective providers with a view to reducing
the rate of growth in health care services expense. There can be no assurance
that Oxford will be successful in mitigating the effect of any or all of the
above-listed or other factors. Accordingly, past financial performance is not
necessarily a reliable indicator of future performance, and investors should not
use historical performance to anticipate results or future period trends.
Marketing, general and administrative expenses increased 46.6% to $477.4
million in 1996 from $325.6 million in 1995 which, as a percentage of operating
revenues, was 15.7% in 1996 compared with 18.7% in 1995. The increase in
marketing, general and administrative expenses was attributable to the Company's
rapid membership growth and the costs associated with continuing development and
expansion into new markets and the expansion of the Medicaid Healthy Start and
Oxford Medicare Advantage programs. The other areas of increased expense were
payroll and benefits expense, broker commissions, marketing expenses and
depreciation. Payroll and benefits expense increased $74.4 million in 1996
primarily due to an increase in the size of the Company's work force to over
5,000 employees at the end of 1996 from approximately 4,000 employees at the end
of 1995. The additional employees were hired primarily in the areas of
marketing, management information systems, health services and member services.
Broker commissions increased by $23.8 million in 1996 due to the increase
in premiums earned. Marketing expenses other than payroll and benefits increased
by $5.4 million in 1996, reflecting the Company's continuing commitment to
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aggressively market its products in a highly competitive environment.
Depreciation expense was $18.5 million higher than in 1995 as a result of
$48.3 million of capital expenditures during 1996.
The Company's equity in the net loss of Health Partners, Inc. ("Health
Partners") for 1996 was $4.6 million compared with a loss of $3.9 million in
1995. The increased losses for Health Partners relate primarily to lower per
member per month premium revenue in Health Partners' Medicaid programs. The
Company has a 47% interest in Health Partners, a company established to provide
management and administrative services to physicians, medical groups and other
providers of health care. The Company contracts with provider groups managed by
Health Partners in the Company's service areas.
The provision for income taxes for 1996 was $72.4 million, or 42.1% of the
Company's pretax income in 1996, approximately the same as the 1995 tax rate.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Total premium revenues for the year ended December 31, 1995 increased 133.7%
to $1.73 billion from $741.9 million in 1994. This overall increase was
primarily attributable to a 127.7% increase in member months for commercial and
government programs. The substantial growth in membership reflected increasing
consumer acceptance of health care plans in the Company's markets in general,
and the popularity of the products offered by the Company in particular.
Commercial premium revenues increased $702.6 million to $1.31 billion in
1995 from $604.3 million in 1994. Membership growth accounted for all of the
change as member months of the Freedom Plan increased 133.5% when compared with
1994, and member months of Oxford's traditional HMOs increased 76.1% over the
prior year. Premium rates of commercial programs were slightly lower in 1995
than in 1994.
Premium revenues of government programs increased $289.6 million to $427.3
million in 1995 from $137.7 million in 1994. Membership growth accounted for
substantially all of the change as member months of Medicare programs increased
386.6% when compared with the prior year, while member months of Medicaid
programs increased 108.8% over the 1994 level. Premium rates of both Medicare
and Medicaid programs were substantially unchanged from the prior year.
The following tables show plan revenues earned and membership by product:
YEARS ENDED
DECEMBER 31
--------------------------- PERCENT
1995 1994 INCREASE
---------- ---------- ----------
PLAN REVENUES: (In thousands)
Freedom Plan .................. $1,113,432 491,692 126.4%
HMOs .......................... 193,404 112,560 71.8
Medicare ...................... 247,090 50,314 391.1
Medicaid ...................... 180,172 87,350 106.3
---------- ----------
Total premium revenues ....... 1,734,098 741,916 133.7
Third-party administration,
net.......................... 11,877 10,916 8.8
---------- ----------
Total plan revenues .......... $1,745,975 752,832 131.9%
========== ========== ==========
AS OF
DECEMBER 31
-------------------------
MEMBERSHIP: 1995 1994
--------- ---------
Freedom Plan .......... 680,400 318,500 113.6%
HMOs .................. 112,000 64,200 74.4
Medicare .............. 67,100 20,300 230.5
Medicaid .............. 105,600 63,500 66.3
--------- ---------
Total fully insured... 965,100 466,500 106.9
Self-funded ........... 42,600 46,500 (8.4)
--------- ---------
Total membership ..... 1,007,700 513,000 96.4%
========= ========= =========
19
20
Third-party administration revenues for the year ended December 31, 1995
rose to $11.9 million from $10.9 million in 1994, attributable to a 10.9%
increase in per member per month revenue, partially offset by a 1.9% decrease in
member months.
Net investment income for the year ended December 31, 1995 increased to
$19.4 million from $7.4 million in 1994. This was principally due to the
increase in invested cash resulting from increased cash flow from operations
during 1995.
The medical-loss ratio was 77.5% for the year ended December 31, 1995
compared with 74.1% for the year ended December 31, 1994. The increase in the
medical-loss ratio was attributable to the fact that the Company's premium rates
have increased at a lower rate than the rate of increase of health care services
expenses, and to the higher medical-loss ratio associated with the significantly
expanded Medicare program. Overall per member per month revenue increased 2.7%
to $185.69 in 1995 from $180.87 in 1994 while overall per member per month
health care services expenses increased 7.4% to $143.99 in 1995 from $134.06 in
1994.
Marketing, general and administrative expenses increased 105.5% to $325.6
million in 1995 from $158.4 million in 1994 which, as a percentage of operating
revenues, was 18.7% in 1995 compared with 21.0% in 1994. The increase in
marketing, general and administrative expenses was attributable to the Company's
rapid membership growth and the costs associated with continuing development and
expansion into new markets and the expansion of the Medicaid Healthy Start and
Oxford Medicare Advantage programs. Marketing and administrative expenses
related to the Medicare and Medicaid programs increased $22.5 million in 1995 to
$37.2 million compared with $14.7 million in 1994. The other areas of increased
expense were payroll and benefits expense, broker commissions, marketing
expenses and depreciation. Payroll and benefits expense increased $68.7 million
primarily due to an increase in the size of the Company's work force to almost
4,000 employees at the end of 1995 from approximately 1,950 employees at the end
of 1994. The additional employees were hired primarily in the areas of sales,
marketing, management information systems, health services and member services.
Broker commissions increased by $21.0 million due to the increase in premium
revenues. Marketing expenses other than payroll and benefits increased by $16.1
million. Depreciation expense was $14.6 million higher than in 1994 as a result
of $83.9 million of capital expenditures during 1995. Marketing, general and
administrative expenses also increased due to costs incurred in connection with
the advance hiring of customer service and medical management staff to serve the
Company's rapidly growing membership.
The Company's equity in the net loss of Health Partners for 1995 was $3.9
million compared with a loss of $2.1 million in 1994. The increased losses for
Health Partners relate primarily to increased investment in physician practices
and the start-up of additional centers in New York City and Northern Virginia.
The provision for income taxes for 1995 was $39.1 million, or 42.7% of the
Company's pretax income in 1995. The decrease in the Company's 1995 income tax
rate compared with the prior year's rate of 43.5% was attributable to a
reduction in the state rate due to a change in state apportionment factors and
the composition of the Company's multi-jurisdictional business.
INFLATION
Although the rate of inflation has remained relatively stable in recent
years, health care costs have been rising at a higher rate than the consumer
price index. The Company employs various means to reduce the negative effects of
inflation. The Company has in prior years increased overall premium rates in
order to maintain margins; nevertheless, these rate increases have tended to be
below those of traditional indemnity health plans and comparable to competing
health plans, thereby maintaining the Company's competitive position. The
Company's cost control measures and risk-sharing arrangements with various
health care providers also mitigate the effects of inflation on its operations.
There is no assurance that the Company's efforts to reduce the impact of
inflation will be successful or that the Company will be able to increase
premiums to offset cost increases associated with providing health care.
20
21
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations of $287.2 million and the receipt of approximately
$220 million in April 1996 from the public offering of shares of the Company's
common stock contributed to an increase in cash and cash equivalents and
short-term investments to $839.5 million at December 31, 1996 from $368.6
million at December 31, 1995. The Company's cash flow from operations has
increased substantially over the last five years primarily as the result of
increased earnings from operations and increases in items related to growth in
membership and revenues such as receipt of premium revenues before payment of
associated health care services expenses.
Cash amounts aggregating $610,000 have been segregated as restricted
investments as required by the New York State Department of Insurance, the New
Jersey Department of Insurance and the Pennsylvania Department of Insurance. In
1996, the Company made capital contributions of $70 million to its operating
subsidiaries in order to increase reserves and meet state statutory
requirements. In addition, the Company's subsidiaries are subject to certain
restrictions on their abilities to make dividend payments, loans or other
transfers of cash to the parent company, which limit the ability of the Company
to use cash generated by subsidiary operations to pay the obligations of the
parent.
Cash used for capital expenditures was $48.3 million during 1996. This
amount was used primarily for computer equipment and software, reflecting the
Company's ongoing commitment to upgrade and maintain its information systems to
support its rapid growth. In addition, significant expenditures were incurred
for leasehold improvements related to the Company's headquarters in Norwalk,
Connecticut, and existing regional offices, and to expansion of regional offices
in Trumbull, Connecticut; Milford, Connecticut; and White Plains, New York. The
Company anticipates capital expenditures of approximately $64 million during
1997, a significant portion of which will be devoted to management information
systems and leasehold improvements.
The Company currently has no definitive commitments requiring cash in excess
of currently available resources; however, management continually evaluates
opportunities to expand the Company's health care services and health plan
operations. The Company's expansion options may include acquisitions,
investments and internal development of new markets, products and programs.
Premiums receivable at December 31, 1996 increased to $315.1 million from
$140.0 million at September 30, 1996 primarily as the result of delays in
billings caused by conversion of certain of the Company's operations to a new
computer system. The Company's medical costs payable, which includes reserves
for IBNR, was $624.4 million (including $551.1 million of IBNR) as of December
31, 1996 and $300.5 million (including $297.0 million of IBNR) as of December
31, 1995. The relative increase in medical costs payable from the prior quarter
resulted primarily from delays in claim payments caused by the computer system
conversion referred to above. The Company estimates the amount of its IBNR
reserves using standard actuarial methodologies based upon historical data,
including the average interval between the date services are rendered and the
date claims are paid, expected medical cost inflation, seasonality patterns and
increases in membership. The liability is also affected by shared risk
arrangements under Private Practice Partnerships ("Partnership"). In determining
the liability for medical costs payable, the Company accounts for the financial
impact of the experience of risk-sharing Partnership providers (who may be
entitled to credits from Oxford for favorable experience or subject to
deductions for accrued deficits) and, in the case of Partnership providers
subject to deficits, has established reserves to account for delays or other
impediments to recovery of those deficits. The Company believes that its
reserves for IBNR are adequate in order to satisfy its ultimate claim liability.
However, the Company's rapid growth affects the Company's ability to rely on
historical information in making IBNR reserve estimates.
21
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules on page
24.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 10 through 13 is incorporated by reference
to Registrant's definitive proxy statement to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended, within 120 days after
December 31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. All financial statements - see index to financial statements and
schedules on page 24.
2. Financial statement schedules - see index to financial statements
and schedules on page 24.
3. Exhibits - see exhibit index on page 41.
(b) Reports on Form 8-K
In a report on Form 8-K dated November 6, 1996 and filed November 7, 1996, the
Company reported under Item 5 "Other Events," its third quarter 1996 earnings
press release.
22
23
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, on the 13th day of
March 1997.
OXFORD HEALTH PLANS, INC.
By: /s/STEPHEN F. WIGGINS
--------------------------------
STEPHEN F. WIGGINS
Chairman and Chief Executive officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and,
in the capacities indicated on March 13, 1997.
SIGNATURE TITLE
--------- -----
/s/ STEPHEN F. WIGGINS Principal Executive Officer and Director
- ----------------------------------
STEPHEN F. WIGGINS
/s/ ANDREW B. CASSIDY Principal Financial Officer
- ----------------------------------
ANDREW B. CASSIDY
/s/ BRENDAN R. SHANAHAN Principal Accounting Officer
- ----------------------------------
BRENDAN R. SHANAHAN
/s/ JAMES B. ADAMSON Director
- ----------------------------------
JAMES B. ADAMSON
/s/ ROBERT B. MILLIGAN, JR Director
- ----------------------------------
ROBERT B. MILLIGAN, JR.
/s/ FRED F. NAZEM Director
- ----------------------------------
FRED F. NAZEM
/s/ MARCIA J. RADOSEVICH Director
- ----------------------------------
MARCIA J. RADOSEVICH, PH.D.
/s/ BENJAMIN H. SAFIRSTEIN, M.D. Director
- ----------------------------------
BENJAMIN H. SAFIRSTEIN, M.D.
/s/ THOMAS A. SCULLY Director
- ----------------------------------
THOMAS A. SCULLY
23
24
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Independent Auditors' Report.............................................................................. 25
Consolidated Balance Sheets as of December 31, 1996 and 1995.............................................. 26
Consolidated Statements of Earnings for the years ended December 31, 1996, 1995 and
1994.................................................................................................. 27
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996,
1995 and 1994......................................................................................... 28
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994.................................................................................................. 29
Notes to Consolidated Financial Statements................................................................ 30
24
25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Oxford Health Plans, Inc.:
We have audited the accompanying consolidated balance sheets of Oxford
Health Plans, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We 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 financial position of Oxford
Health Plans, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 18, 1997
25
26
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets: 1996 1995
---------- ----------
Cash and cash equivalents ............................................. $ 72,160 $ 58,450
Short-term investments - available-for-sale, at market value .......... 767,312 310,197
Premiums receivable ................................................... 315,126 96,278
Other receivables ..................................................... 26,343 15,260
Prepaid expenses and other current assets ............................. 5,814 3,563
Deferred income taxes ................................................. 13,771 8,443
---------- ----------
Total current assets .................................. 1,200,526 492,191
---------- ----------
Property and equipment, at cost:
Land and buildings .................................................... 226 41
Furniture and fixtures ................................................ 24,472 19,430
Equipment ............................................................. 104,902 78,835
Leasehold improvements ................................................ 45,093 29,182
---------- ----------
174,693 127,488
Less accumulated depreciation and amortization ........................ 69,739 30,074
---------- ----------
Net property and equipment ........................................ 104,954 97,414
---------- ----------
Deferred income taxes ...................................................... 5,700 --
Other noncurrent assets .................................................... 35,559 19,171
========== ==========
Total assets ...................................................... $1,346,739 $ 608,776
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical costs payable ................................................. $ 624,359 $ 300,508
Trade accounts payable and accrued expenses ........................... 51,160 36,396
Income taxes payable .................................................. 9,902 1,428
Unearned premiums ..................................................... 63,052 50,299
Other current liabilities ............................................. 96 112
---------- ----------
Total current liabilities ......................................... 748,569 388,743
---------- ----------
Shareholders' equity:
Preferred stock, $.01 par value, authorized 2,000,000 shares .......... -- --
Common stock, $.01 par value, authorized 200,000,000 shares; issued and
outstanding 77,376,282 shares in 1996 and
34,390,401 shares in 1995 ......................................... 774 343
Additional paid-in capital ............................................ 391,602 116,639
Retained earnings ..................................................... 195,790 96,167
Unrealized net appreciation of investments ............................ 10,004 6,884
---------- ----------
Total shareholders' equity ........................................ 598,170 220,033
---------- ----------
Total liabilities and shareholders' equity ........................ $1,346,739 $ 608,776
========== ==========
See accompanying notes to consolidated financial statements.
26
27
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
----------- ----------- -----------
Revenues:
Premiums earned .............................................. $ 3,022,168 1,734,098 741,916
Third-party administration, net .............................. 10,401 11,877 10,916
Investment income, net ....................................... 42,439 19,392 7,438
----------- ----------- -----------
Total revenues .............................................. 3,075,008 1,765,367 760,270
----------- ----------- -----------
Expenses:
Health care services ......................................... 2,421,167 1,344,669 549,896
Marketing, general and administrative ........................ 477,373 325,643 158,429
----------- ----------- -----------
Total expenses .............................................. 2,898,540 1,670,312 708,325
----------- ----------- -----------
Operating earnings .............................................. 176,468 95,055 51,945
Equity in net loss of affiliate ................................. (4,600) (3,873) (2,060)
Other income, net ............................................... 181 319 41
----------- ----------- -----------
Earnings before income taxes .................................... 172,049 91,501 49,926
Provision for income taxes ...................................... 72,426 39,103 21,695
----------- ----------- -----------
Net earnings .................................................... $ 99,623 52,398 28,231
=========== =========== ===========
Earnings per common and common equivalent share:
Primary ..................................................... $ 1.24 .71 .40
Fully diluted ............................................... $ 1.24 .71 .40
Weighted average common and common equivalent shares outstanding:
Primary ..................................................... 80,019 73,454 70,682
Fully diluted ............................................... 80,643 74,154 71,110
See accompanying notes to consolidated financial statements.
27
28
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
Common Stock Equity
----------------------- Additional Adjustment-
Number Par Paid-In Retained Short-term
of Shares Value Capital Earnings Investments
--------- -------- -------- -------- -----------
Balance at January 1, 1994 ............................ 16,153 $ 162 78,954 15,538 --
--
Exercise of stock options ............................. 335 3 4,853 -- --
Tax benefit realized upon exercise of stock options ... -- -- 5,030 -- --
Issuance of OakTree capital stock ..................... 24 -- 1,247 -- --
Net earnings .......................................... -- -- -- 28,231 --
Increase in value of available-for-sale securities,
net of deferred income taxes ....................... -- -- -- -- 661
Decline in value of available-for-sale securities,
net of deferred income taxes ....................... -- -- -- -- (2,285)
-------- -------- -------- -------- --------
Balance at December 31, 1994 .......................... 16,512 165 90,084 43,769 (1,624)
Exercise of stock options ............................. 1,240 12 10,529 -- --
Two-for-one stock split ............................... 16,638 166 (166) -- --
Tax benefit realized upon exercise of stock options ... -- -- 16,192 -- --
Net earnings .......................................... -- -- -- 52,398 --
Appreciation in value of available-for-sale securities,
net of deferred income taxes ....................... -- -- -- -- 8,508
-------- -------- -------- -------- --------
Balance at December 31, 1995 .......................... 34,390 343 116,639 96,167 6,884
Exercise of stock options ............................. 2,965 30 21,200 -- --
Proceeds from public offering, net .................... 5,227 53 220,487 -- --
Two-for-one stock split ............................... 34,794 348 (348) -- --
Tax benefit realized upon exercise of stock options ... -- -- 33,624 -- --
Net earnings .......................................... -- -- -- 99,623 --
Appreciation in value of available-for-sale securities,
net of deferred income taxes ....................... -- -- -- -- 3,120
-------- -------- -------- -------- --------
Balance at December 31, 1996 .......................... 77,376 $ 774 391,602 195,790 10,004
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
28
29
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net earnings .......................................................... $ 99,623 52,398 28,231
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ...................................... 42,886 23,014 8,255
Deferred income taxes .............................................. (13,196) (6,123) (2,365)
Equity in net loss of affiliate .................................... 4,600 3,873 2,060
Net realized losses (gains) on sale of short-term investments ...... (4,734) (3,365) 984
Other, net ......................................................... 480 274 99
Changes in assets and liabilities:
Premiums receivable .............................................. (218,848) (47,256) (35,678)
Other receivables ................................................ (11,083) (9,894) (378)
Other noncurrent assets .......................................... (3,747) (3,610) (649)
Medical costs payable ............................................ 323,851 134,854 100,109
Trade accounts payable and accrued expenses ...................... 14,764 19,325 9,484
Income taxes payable ............................................. 42,098 14,216 10,937
Unearned premiums ................................................ 12,753 38,894 8,977
Other, net ....................................................... (2,251) (2,157) (732)
--------- --------- ---------
Net cash provided by operating activities ...................... 287,196 214,443 129,334
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .................................................. (48,348) (83,946) (31,173)
Purchases of available-for-sale securities ............................ (794,099) (255,841) (110,313)
Sales of available-for-sale securities ................................ 311,783 96,182 23,780
Maturities of available-for-sale securities ........................... 33,298 36,340 19,900
Additions to long-term investment ..................................... -- -- (1,015)
Maturities of long-term investment .................................... -- 13,505 2,204
Acquisitions and other investments .................................... (18,597) (8,243) (8,875)
Other, net ............................................................ 723 175 (154)
--------- --------- ---------
Net cash used by investing activities .......................... (515,240) (201,828) (105,646)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from public offerings, net ................................... 220,539 -- 1,250
Proceeds from exercise of stock options ............................... 21,215 10,491 4,808
--------- --------- ---------
Net cash provided by financing activities ...................... 241,754 10,491 6,058
--------- --------- ---------
Net increase in cash and cash equivalents ................................ 13,710 23,106 29,746
Cash and cash equivalents at beginning of year ........................... 58,450 35,344 5,598
--------- --------- ---------
Cash and cash equivalents at end of year ................................. $ 72,160 58,450 35,344
========= ========= =========
Supplemental cash flow information - cash paid for income taxes .......... $ 51,931 35,132 14,140
Supplemental schedule of noncash investing and financing activities:
Tax benefit realized on exercise of stock options ..................... 33,624 16,192 5,030
Unrealized appreciation (depreciation) of available-for-sale securities 5,288 14,547 (2,879)
One-for-one stock dividend ............................................ $ 348 166 --
See accompanying notes to consolidated financial statements.
29
30
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Oxford Health Plans, Inc. ("Oxford") is a regional health care company
providing health care services in New York, New Jersey, Connecticut, New
Hampshire and Pennsylvania. Oxford was incorporated on September 17, 1984 and
began operations in 1986. Oxford owns and operates five health maintenance
organizations ("HMOs"), three of which are federally qualified as Competitive
Medical Plans, and an accident and health insurance company, and offers a health
benefits administrative service.
Oxford's five HMOs, Oxford Health Plans (NY), Inc. ("Oxford NY"), Oxford
Health Plans (NJ), Inc. ("Oxford NJ"), Oxford Health Plans (CT), Inc. ("Oxford
CT"), Oxford Health Plans (NH), Inc. ("Oxford NH") and Oxford Health Plans (PA),
Inc. ("Oxford PA"), have each been granted a certificate of authority to operate
as a health maintenance organization by the appropriate regulatory agency of the
state in which it operates. Oxford's accident and health insurance company,
Oxford Health Insurance, Inc. ("OHI"), has been granted a license to operate as
an accident and health insurance company by the Department of Insurance in the
states of New York, New Jersey, Connecticut, Florida and New Hampshire and in
the Commonwealth of Pennsylvania.
Oxford maintains a health care network of physicians and ancillary health
care providers who have entered into formal contracts with Oxford. These
contracts set reimbursement at fixed levels or under certain risk-sharing
agreements and require adherence to Oxford's policies and procedures for quality
and cost-effective treatment.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of consolidation. The consolidated financial statements
include the accounts of Oxford Health Plans, Inc. and all majority-owned
subsidiaries ("the Company"). All intercompany balances have been eliminated in
consolidation. In July 1995, the Company completed a merger with OakTree Health
Plan, Inc. ("OakTree") whereby OakTree was merged into a subsidiary of the
Company. The merger was accounted for as a pooling of interests and,
accordingly, all prior period consolidated financial statements have been
restated as if the merger took place at the beginning of such periods (see note
8). The investment in Health Partners, Inc. is accounted for using the equity
method (see note 9).
(b) Premium revenue. Membership contracts are generally on a yearly basis
subject to cancelation by the employer group upon 30 days written notice.
Premiums are due monthly and are recognized as revenue during the period in
which Oxford is obligated to provide services to members.
(c) Medical costs payable. Costs of health care and medical costs payable
for health care services provided to enrollees are estimated by management based
on evaluations of providers' claims submitted and provisions for incurred but
not reported claims. The Company estimates the amount of the provision for
incurred but not reported claims using standard actuarial methodologies based
upon historical data including the average interval between the date services
are rendered and the date claims are paid, expected medical cost inflation,
seasonality patterns and increases in membership. The estimates for submitted
claims and incurred but not reported claims are made on an accrual basis and
adjusted in future periods as required.
(d) Health care services cost recognition. The Company contracts with
various health care providers for the provision of certain medical care services
to its members and generally compensates those providers on a fee-for-service
basis or pursuant to certain risk-sharing agreements. As part of a cost control
incentive program, the Company, until March 1, 1996, retained up to 20 percent
of the fee-for-service reimbursement as a risk-sharing fund. Amounts retained
under this arrangement were payable to the physicians at the discretion of the
Company and were included in medical costs payable in the accompanying
consolidated balance sheets. Effective March 1, 1996, the Company shifted to a
modified fee schedule under which withholds were eliminated for most
participating physicians. Medical costs payable also reflects surplus or deficit
experience for physicians participating in risk-sharing arrangements through
Private Practice Partnerships.
(e) Reinsurance. Reinsurance premiums are reported as health care services
expense, while related reinsurance recoveries are reported as deductions from
health care services expense.
30
31
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(f) Cash equivalents. The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.
(g) Financial instruments. The Company has determined that the marketable
equity and fixed income securities included in short-term investments might be
sold prior to maturity to support its investment strategies. Accordingly, such
investments have been classified as available-for-sale and are carried at market
value based on quotations obtained from brokers for those or similar
instruments, and the unrealized appreciation or depreciation, net of deferred
income taxes, has been charged to a separate component of shareholders' equity.
The carrying amount of other financial instruments approximates fair value
generally due to the short-term nature of these instruments.
(h) Property and equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets,
which range from three to five years. Leasehold improvements are amortized using
the straight-line method over the shorter of the lease terms or the estimated
useful lives of the assets.
(i) Intangible assets. Intangible assets resulting from business
acquisitions are carried at cost and currently amortized over a period of five
years. At each balance sheet date, the Company evaluates the realizability of
acquisition-related intangible assets based on expectations of nondiscounted
cash flows of the acquired entity. Based upon its most recent analysis, the
Company believes that no impairment of acquisition-related intangible assets
exists at December 31, 1996. Intangible assets are included in other noncurrent
assets in the accompanying consolidated balance sheets.
(j) Income taxes. The Company recognizes deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Accordingly, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
(k) Impairment of long-lived assets and assets to be disposed of. The
Company adopted the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did not have
any impact on the Company's financial position, results of operations or
liquidity.
(l) Earnings per share. Earnings per share is based on the weighted average
number of common shares and common share equivalents resulting from options
outstanding during the periods, after giving retroactive effect to the
two-for-one stock splits in 1993, 1995 and 1996 (see note 5) and to the merger
with OakTree in July 1995 (see note 8).
(m) Stock option plans. Prior to January 1, 1996, the Company accounted for
its stock option plans in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue
31
32
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS 123 (see note 6).
(n) Marketing costs. Marketing costs associated with the acquisition of plan
member contracts are expensed as incurred.
(o) Use of estimates. Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(p) Reclassifications. Certain reclassifications have been made to prior
years' financial statement amounts to conform to the 1996 presentation.
(3) FINANCIAL INSTRUMENTS
Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt and equity securities have been classified as available-for-sale and
recorded at fair value, with unrealized gains and losses, net of income taxes,
reported in a separate component of shareholders' equity. Realized gains and
losses are included in results of operations.
The methods and assumptions used to estimate the fair value of each class of
financial instruments are described in note 2. The following is a summary of
available-for-sale securities as of December 31, 1996 and 1995:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
December 31, 1996:
U.S. government obligations .. $357,944 1,739 741 358,942
Corporate obligations ........ 150,662 782 574 150,870
Municipal tax-exempt bonds ... 188,441 1,561 115 189,887
-------- -------- -------- --------
Total debt securities ...... 697,047 4,082 1,430 699,699
Equity securities ............ 53,309 15,360 1,056 67,613
-------- -------- -------- --------
Total short-term
investments.............. $750,356 19,442 2,486 767,312
======== ======== ======== ========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
December 31, 1995:
U.S. government obligations .. $102,891 1,917 260 104,548
Corporate obligations ........ 101,536 1,487 180 102,843
Municipal tax-exempt bonds ... 56,638 592 28 57,202
-------- -------- -------- --------
Total debt securities ...... 261,065 3,996 468 264,593
Equity securities ............ 37,464 9,457 1,317 45,604
-------- -------- -------- --------
Total short-term
investments................ $298,529 13,453 1,785 310,197
======== ======== ======== ========
32
33
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and estimated fair value of available-for-sale debt
securities at December 31, 1996, by contractual maturity, are shown below.
Actual maturities may differ from contractual maturities because the issuers of
securities may have the right to prepay such obligations without prepayment
penalties.
Amortized Fair
Cost Value
---- -----
(In thousands)
Due in one year or less ................. $ 60,752 60,913
Due after one year through five years.... 605,726 608,039
Due after five years through ten years... 30,569 30,747
-------- --------
$697,047 699,699
======== ========
Included in investment income are net recognized gains on disposals of
available-for-sale securities of $4,734,000 in 1996 and $3,365,000 in 1995, and
net recognized losses of $984,000 in 1994. The cost of securities sold is
determined on a specific identification basis. Proceeds from the sale or
maturity of available-for-sale securities aggregated $345,081,000 in 1996,
resulting in gross recognized gains of $9,036,000 and gross recognized losses of
$4,302,000. Proceeds from the sale or maturity of available-for-sale securities
aggregated $132,522,000 in 1995, resulting in gross recognized gains of
$5,654,000 and gross recognized losses of $2,289,000. Proceeds from the sale or
maturity of available-for-sale maturities aggregated $43,680,000 in 1994,
resulting in gross realized gains of $1,001,000 and gross unrealized losses of
$1,985,000. The change in the net unrealized gains on available-for-sale
securities included in the separate component of shareholders' equity during
1996 totaled $5,288,000 before deferred income taxes of $2,168,000; during 1995,
net unrealized gains totaled $14,547,000 before deferred income taxes of
$6,039,000; and during 1994, net unrealized losses totaled $4,039,000 before a
deferred income tax benefit of $1,754,000.
33
34
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) INCOME TAXES
Income tax expense consists of:
Current Deferred Total
------- -------- -----
(In thousands)
Year ended December 31, 1996:
U.S. Federal ............ $64,358 (10,093) 54,265
State and local ......... 21,264 (3,103) 18,161
------- ------- -------
Total ................. $85,622 (13,196) 72,426
======= ======= =======
Year ended December 31, 1995:
U.S. Federal ............ $34,672 (4,743) 29,929
State and local ......... 10,554 (1,380) 9,174
------- ------- -------
Total ................. $45,226 (6,123) 39,103
======= ======= =======
Year ended December 31, 1994:
U.S. Federal ............ $16,828 (1,294) 15,534
State and local ......... 7,232 (1,071) 6,161
------- ------- -------
Total ................. $24,060 (2,365) 21,695
======= ======= =======
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to earnings before income taxes as a result of
the following:
1996 1995 1994
-------- -------- --------
(In thousands)
Income taxes at statutory tax rate.................... $ 60,217 32,025 17,474
State and local income taxes, net
of Federal income tax benefit...................... 11,805 5,963 4,005
Equity in net loss of affiliate ..................... 1,610 1,356 721
Tax-exempt interest on municipal bonds................ (1,630) (726) (505)
Other, net............................................ 424 485 -
-------- ------- --------
Actual tax provision.................................. $ 72,426 39,103 21,695
======== ====== ========
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets at December 31, 1996 and 1995 are as
follows:
1996 1995
------- --------
(In thousands)
Deferred tax assets:
Medical costs payable ................................ $11,467 6,906
Unearned premiums .................................... 5,790 4,694
Trade accounts payable and accrued expenses........... 5,073 1,248
Losses of unconsolidated affiliate ................... 4,837 2,768
Property and equipment................................ 3,593 405
Other ................................................ 3,206 2,347
-------- --------
Total gross deferred tax assets 33,966 18,368
Valuation allowance .................................. (4,837) (2,768)
-------- --------
Total deferred tax assets ........................ 29,129 15,600
-------- --------
Deferred tax liabilities:
Unrealized appreciation of short-term
investments.......................................... 6,952 4,784
Other................................................. 2,706 2,373
-------- --------
Total deferred tax liabilities.................... 9,658 7,157
-------- --------
Net deferred tax assets .......................... $19,471 8,443
======== ========
34
35
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The valuation allowance as of December 31, 1996 and 1995 relates to the
Company's equity in the cumulative losses of an unconsolidated affiliate. At
December 31, 1996, 1995 and 1994, there were no other valuation allowances
associated with the deferred tax assets as management believes that future
operations will generate sufficient taxable income to realize the unreserved
deferred tax assets.
(5) CAPITAL STOCK
On March 15, 1996, Oxford's Board of Directors approved a two-for-one split
of the Company's common stock to be effected by distribution of a dividend of
one share of common stock for each share of common stock outstanding, payable to
shareholders of record on March 25, 1996. A total of 34,793,720 shares of common
stock were issued in connection with the split. The stated par value of $0.01
was not changed and the amount of $347,937 was reclassified from additional
paid-in capital to common stock.
On October 28, 1994, Oxford's Board of Directors unanimously adopted a
resolution authorizing an amendment to Oxford's certificate of incorporation to
increase the number of authorized shares of common stock from 25,000,000 shares
to 200,000,000 shares, subject to shareholder approval. On March 3, 1995, the
Company's shareholders approved such amendment. On the same date, the Board of
Directors approved a two-for-one split of the Company's common stock effected by
distribution of a dividend of one share of common stock for each share of common
stock outstanding on March 6, 1995. The two-for-one split was effectuated on
March 27, 1995. A total of 16,638,339 shares of common stock were issued in
connection with the split. The stated par value of $0.01 was not changed and the
amount of $166,383 was reclassified from additional paid-in capital to common
stock.
On July 30, 1993, Oxford's Board of Directors unanimously adopted a
resolution authorizing an amendment to Oxford's certificate of incorporation to
increase the number of authorized shares of common stock from 13,000,000 shares
to 25,000,000 shares, subject to shareholder approval. On September 17, 1993,
the Company's shareholders approved such amendment. On the same date, the Board
of Directors approved a two-for-one split of the Company's common stock effected
by distribution of a dividend of one share of common stock for each share of
common stock outstanding on October 8, 1993. The two-for-one split was
effectuated on October 27, 1993. A total of 8,015,677 shares of common stock
were issued in connection with the split. The stated par value of $0.01 was not
changed and the amount of $80,157 was reclassified from additional paid-in
capital to common stock. All appropriate share, weighted-average share and
earnings per share amounts in the consolidated financial statements were
restated to retroactively reflect the stock splits.
(6) STOCK OPTION PLANS
The Company grants fixed stock options under its 1991 Stock Option Plan, as
amended, to certain key employees and consultants and under its Nonemployee
Directors' Stock Option Plan, as amended, to outside directors to purchase
common stock at a price not less than 100% of quoted market value at date of
grant.
The employee plan provides for granting of nonqualified stock options and
incentive stock options which vest as determined by the Company and expire over
varying terms, but not more than seven years from date of grant. The employee
plan is administered by a committee consisting of three members of the Board of
Directors, selected by the Board. The committee determines the individuals to
whom awards shall be granted as well as the terms and conditions of each award,
the option price and the duration of each award. The Company's previous
nonqualified employee stock option plan terminated in 1991, except as to options
theretofore granted.
The nonemployee plan provides for granting of nonqualified stock options to
eligible nonemployee directors of the Company. The Plan provides that each year
on the first Friday following the Company's annual meeting of stockholders, each
individual elected, reelected or continuing as a nonemployee director will
automatically receive a nonqualified stock option for 5,000 shares of common
stock. The plan further provides that one-fourth of the
35
36
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
options granted under the plan vest on each of the date of grant and the Friday
prior to the second, third and fourth annual meeting of stockholders following
the date of such grant.
Stock option activity for all fixed option plans, adjusted for all stock
splits, is summarized as follows:
Weighted-Average
Shares Exercise Prices
---------- ----------------
Outstanding at January 1, 1994..... 10,087,668 $ 4.29
Granted ....................... 3,216,300 15.01
Exercised ..................... (1,339,444) 3.59
Canceled ...................... (68,164) 6.62
----------- -----------
Outstanding at December 31, 1994... 11,896,360 7.25
Granted ....................... 2,521,104 23.84
Exercised ..................... (2,734,050) 3.84
Canceled ...................... (133,978) 9.82
----------- -----------
Outstanding at December 31, 1995... 11,549,436 11.65
Granted ....................... 1,518,176 42.58
Exercised ..................... (3,368,208) 6.30
Canceled ...................... (407,592) 20.51
----------- -----------
Outstanding at December 31, 1996... 9,291,812 $ 18.25
=========== ===========
Information about fixed stock options outstanding at December 31, 1996, is
summarized as follows:
Weighted-Average
Range of Number Weighted-Average Remaining
Exercise Prices Outstanding Exercise Price Contractual Life
-------------------- ----------- -------------- ----------------
$ 0.32 - 10.32 3,466,264 $ 5.72 1.8 Years
10.66 - 19.82 2,280,622 16.25 3.1 Years
21.22 - 29.25 2,031,428 23.88 3.7 Years
32.88 - 57.63 1,513,498 42.44 4.6 Years
--------- -----
$ 0.32 - 57.63 9,291,812 $ 18.25 3.0 Years
========= =====
Information about fixed stock options exercisable at December 31, 1996, is
summarized as follows:
Range of Number Weighted-Average
Exercise Prices Exercisable Exercise Price
-------------------- ----------- --------------
$ 0.32 - 10.32 2,453,281 $ 5.15
10.66 - 19.82 957,286 16.19
21.22 - 29.25 421,260 23.92
32.88 - 57.63 21,379 40.43
--------- -------
$ 0.32 - 57.63 3,853,206 $ 10.14
========= =======
The Company applies APB Opinion 25 and related interpretations in accounting
for the plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plans. Had compensation cost for the Company's stock option
plans been determined based on the fair value at the grant dates for grants
under this plan consistent with the methodology of SFAS 123, the Company's net
earnings and earnings per share for the
36
37
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
years ended December 31, 1996 and 1995, would have been reduced to the pro forma
amounts indicated below:
1996 1995
------ -----
Net earnings (000) As reported....................... $ 99,623 52,398
Pro forma......................... $ 90,011 49,416
Primary earnings per share As reported....................... $ 1.24 .71
Pro forma......................... $ 1.12 .67
Fully diluted earnings per share As reported....................... $ 1.24 .71
Pro forma......................... $ 1.12 .67
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $19.58 and $10.70, respectively, estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants: no dividend yield for both years;
expected volatility of 48.99% in 1996 and 50.25% in 1995, risk-free interest
rates of 6.5% in 1996 and 6.3% in 1995; and expected lives of four years for
both years.
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting period of
four years and compensation cost for options granted prior to January 1, 1995 is
not considered.
As of December 31, 1996, there were 10,158,995 shares reserved for issuance
under the plans, including 867,183 shares reserved for future grant.
(7) LEASES
Oxford leases office space and equipment under operating leases. Rent
expense for the years ended December 31, 1996, 1995 and 1994 was $18,546,000,
$13,792,000 and $6,623,000, respectively. Future minimum lease payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year at December 31, 1996 were as follows:
(In thousands)
1997................................................................... $ 21,154
1998................................................................... 21,904
1999................................................................... 18,030
2000................................................................... 12,582
2001................................................................... 4,769
Thereafter............................................................. 4,846
----------
Total minimum future rental payments................................... $ 83,285
==========
(8) ACQUISITIONS
On July 3, 1995, the Company issued 1,177,047 shares of its common stock in
connection with the merger of a wholly-owned subsidiary of the Company with
OakTree Health Plan, Inc., the holding company for a Philadelphia- based HMO.
The merger has been accounted for as a pooling of interests and, accordingly,
the Company's consolidated financial statements have been restated to include
the accounts and operations of OakTree for all periods prior to the merger.
37
38
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Separate operating revenues, net earnings and other changes in shareholders'
equity for all periods prior to the merger are as follows:
Six Months
Ended Year Ended
June 30, December 31,
1995 1994
--------- ------------
(In thousands)
Operating revenues:
Oxford ........................... $ 697,623 713,577
OakTree .......................... 42,535 39,255
--------- ---------
Combined ......................... $ 740,158 752,832
========= =========
Net earnings (loss):
Oxford ........................... $ 22,329 27,916
OakTree .......................... (608) 315
--------- ---------
Combined ......................... $ 21,721 28,231
========= =========
Other changes in shareholders' equity:
Oxford ........................... $ 16,680 8,262
OakTree .......................... (1) 1,247
--------- ---------
Combined ......................... $ 16,679 9,509
========= =========
In connection with the merger, approximately $1,500,000 of merger costs and
expenses ($865,000 after taxes, or $.01 per share) were incurred and charged to
expense in the second and third quarters of 1995. These costs and expenses
consisted of merger-related legal, accounting and investment banking fees.
In December 1994, the Company completed the acquisition for $2,017,000 in
cash of a company that operates smoking cessation programs. The acquisition has
been accounted for as a purchase and the excess of the purchase price over the
value of net assets acquired was approximately $1,685,000.
(9) RELATED PARTY TRANSACTIONS
As of December 31, 1996, the Company had invested approximately $24,947,000,
representing a 47% interest, in Health Partners, Inc. ("Health Partners"), a
company established to provide management and administrative services to
physicians, medical groups and other providers of health care. The investment
has been accounted for using the equity method since April 1994 when the
Company's share of Health Partners increased from 16% to 47%. Under this method,
the Company recognized losses of $4,600,000 in 1996, $3,873,000 in 1995 and
$2,060,000 in 1994. The remaining net investment of $14,414,000 is included in
other noncurrent assets. As of December 31, 1996, the Company has fulfilled its
commitment to invest up to a total of $25,000,000 in Health Partners. The
Company contracts with provider groups managed by Health Partners in the
Company's service areas.
(10) DEFINED CONTRIBUTION PLAN
Effective October 1, 1990, the Company adopted a qualified defined
contribution plan ("the Savings Plan"). The Savings Plan covers all employees
with six months of service and at least a part-time employment status as
defined. The Savings Plan also provides that the Company make matching
contributions, up to certain limits, of the salary contributions made by the
participants. The Company's contributions to the Savings Plan were approximately
$1,798,000 in 1996, $901,000 in 1995 and $402,000 in 1994.
38
39
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) REGULATORY AND CONTRACTUAL CAPITAL REQUIREMENTS
Certain restricted investments at December 31, 1996 and 1995 are held on
deposit with various financial institutions to comply with federal, New York,
New Jersey and Pennsylvania regulatory requirements. With respect to Oxford NY,
the amount of cash required to be available in addition to restricted
investments is based on a formula established by the State of New York. These
additional cash requirements amounted to approximately $106,200,000 and
$58,500,000 at December 31, 1996 and 1995, respectively, and are included in
short-term investments.
In addition to the foregoing requirements, Oxford NY, Oxford NJ, Oxford CT,
Oxford NH, Oxford PA and OHI are subject to certain restrictions on their
abilities to make dividend payments, loans or other transfers of cash to Oxford.
Such restrictions limit the use of any cash generated by the operations of
Oxford NY, Oxford NJ, Oxford CT, Oxford NH, Oxford PA and OHI to pay obligations
of Oxford and limit the Company's ability to declare and pay dividends.
(12) CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to premiums receivable are
limited due to the large number of employer groups comprising the Company's
customer base. As of December 31, 1996 and 1995, the Company had no significant
concentrations of credit risk. Financial instruments which potentially subject
the Company to concentrations of such credit risk consist primarily of
short-term investments in equity securities, obligations of certain state
governmental entities, the United States government and high-grade corporate
bonds and notes. These short-term investments are managed by professional
investment managers within the guidelines established by the Board of Directors,
which, as a matter of policy, limit the amounts which may be invested in any one
issuer and prescribe certain minimum investee company criteria.
(13) CONTINGENCIES
The Company is involved in legal actions in the normal course of business,
some of which seek monetary damages, including claims for punitive damages which
are not covered by insurance. The Company believes any ultimate liability
associated with these contingencies would not have a material adverse effect on
the Company's consolidated financial position or results of operations.
39
40
(14) QUARTERLY INFORMATION (UNAUDITED)
Tabulated below are certain data for each quarter of 1996 and 1995.
Quarters Ended
--------------------------------------------------------------
Mar. 31 Jun. 30 Sep. 30 Dec. 31
---------- ---------- ---------- ----------
(In thousands, except membership and per share amounts)
Year ended December 31, 1996:
Net operating revenues ......................... $ 651,364 715,114 800,006 866,085
Operating expenses ............................. 624,976 685,569 763,471 824,524
Net earnings ................................... 18,517 22,458 26,650 31,998
Earnings per common and common equivalent share:
Primary ..................................... $ .25 .28 .33 .39
Fully diluted ............................... $ .25 .28 .33 .39
Membership at quarter-end ...................... 1,200,400 1,321,100 1,442,200 1,535,500
Year ended December 31, 1995:
Net operating revenues ......................... $ 331,055 409,103 474,872 530,945
Operating expenses ............................. 315,381 392,303 453,825 508,803
Net earnings ................................... 10,373 11,348 15,093 15,584
Earnings per common and common equivalent share:
Primary ..................................... $ .14 .16 .21 .21
Fully diluted ............................... $ .14 .16 .20 .21
Membership at quarter-end ...................... 671,100 807,000 918,000 1,007,700
Net operating revenues include premiums earned and third-party
administration, net. Operating expenses include health care services and
marketing, general and administrative expenses.
The amounts shown for the first two quarters of 1995 differ from that
reported on Form 10-Q for those periods. This difference is attributable to
the acquisition of OakTree Health Plan, Inc. in a pooling of interests
transaction in July 1995.
40
41
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE
----
2 --Agreement of Plan and Merger, dated as of March 30, 1995, by
and among Oxford Health Plans, Inc., OHP Acquisition
Corporation and OakTree Health Plan, Inc.,
incorporated by reference to Registrant's
Registration Statement on Form S-3 (File No.
33-92006)
3(i) --Second Amended and Restated Certificate of Incorporation, as
amended, of the Registrant, incorporated by reference
to Exhibit 3(a) of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994 (File
No. 0-19442)
3(ii) --Amended and Restated By-laws of the Registrant, incorporated
by reference to Exhibit 3(b)(ii) of the Registrant's
Registration Statement on Form S-1 (File No.
33-40539)
4 --Form of Stock Certificate**
10(a) --Class A Convertible Preferred Stock Purchase Agreement dated
June 11, 1990, as amended**
10(b) --Registration Rights Agreement, dated June 11, 1990**
10(c) --Stockholders Agreement, dated as of June 11, 1990**
10(d) --Notice of Conversion and Agreement to Amend, dated as of
June 20, 1991**
10(e) --Stock Subscription Warrant issued on June 11, 1990 to
Donaldson, Lufkin & Jenrette Securities Corporation**
10(f) --Employment Agreement, dated August 14, 1996, between the
Registrant and Stephen F. Wiggins, incorporated by
reference to Exhibit 10(a) of Registrant's Form 10-Q
for the quarterly period ended September 30, 1996
(File No. 0-19442)
10(g) --Employment Agreement, dated August 14, 1996, between the
Registrant and William M. Sullivan, incorporated by
reference to Exhibit 10(b) of Registrant's Form 10-Q
for the quarterly period ended September 30, 1996
(File No. 0-19442)
10(h) --Employment Agreement, dated August 14, 1996, between the
Registrant and Jeffery H. Boyd, incorporated by
reference to Exhibit 10(c) of Registrant's Form10-Q
for the quarterly period ended September 30, 1996
(File No. 0-19442)
10(i) --Employment Agreement, dated August 14, 1996, between the
Registrant and Robert M. Smoler, incorporated by
reference to Exhibit 10(e) of Registrant's Form 10-Q
for the quarterly period ended September 30, 1996
(File No. 0-19442)
10(j) --Employment Agreement, dated August 14, 1996, between the
Registrant and David B. Snow, Jr., incorporated by
reference to Exhibit 10(f) of Registrant's Form 10-Q
for the quarterly period ended September 30, 1996
(File No. 0-19442)
10(k) --Employment Agreement, dated August 14, 1996 between the
Registrant and Andrew B. Cassidy, incorporated by
reference to Exhibit 10(d) of Registrant's Form 10-Q
for the quarterly period ended September 30, 1996
(File No. 0-19442)
10(l) --1991 Stock Option Plan, as amended, incorporated by
reference to Exhibit 10(h) of Registrant's Annual
Report on Form 10-K for the year ended December 31,
1995 (File No. 0-19442)
10(m) --Letter Agreement, dated April 13, 1990, between the
Registrant and Lincoln National Administrative
Services Corporation, incorporated by reference to
Exhibit 10(p) of the Registrant's Registration
Statement on Form S-1 (File No. 33-40539)
10(n) --Incentive Compensation Plan, adopted June 7, 1991**
10(o) --Oxford Health Plans, Inc. 401(k) Plan, as amended,
incorporated by reference to Exhibit 10(k) of
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-19442)
10(p) --Non-Employee Directors Stock Option Plan, as amended,
incorporated by reference to Exhibit 10(l)(ii) of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-19442)
10(q) --Letter Agreement, dated April 18, 1990, between the
Registrant and Phoenix Mutual Life Insurance Company,
incorporated by reference to Exhibit 10(q) of the
Registrant's Registration Statement on Form S-1 (File
No. 33-40539)
10(r) --Securities Purchase Agreement among Health Partners, Inc.,
Foxfield Ventures, Inc., the Registrant and certain
management investors, dated May 18, 1994,
incorporated by reference to Exhibit 10 of the
Registrant's Form 10-Q for the quarterly period ended
June 30, 1994 (File No. 0-19442)
11 --Statements re Computation of Per Share Earnings* 42
21 --Subsidiaries of the Registrant* 43
23 --Consent of KPMG Peat Marwick LLP* 44
----------
* Filed herewith.
** Incorporated by reference to the same exhibit in the
Registrant's Registration Statement on Form S-1 (File No.
33-40539).
41