By Greg Markus (TMF Boring)
PRINCEVILLE, HI (Aug. 5, 1997) /Foolwire/ -- Oxford Health Plans today reported revenues of $1.062 billion for the second quarter ended June 30, 1997, a 46% increase from $725.3 million a year ago. Net earnings increased 66% to $37.2 million, and earnings per share increased 61% to $0.45 per share versus $0.28 per share in the prior year's second quarter.
SIX MONTH RESULTS. Through the first two quarters of 1997, revenues totaled $2.05 billion, a 48% increase from $1.38 billion for the first six months of 1996. Operating earnings rose to $123.0 million, an increase of 69%, while net earnings for the first six months of 1997 increased 75% to $71.6 million, or $0.87 per share, from $41.0 million, or $0.53 per share, for the first six months of 1996.
MEMBERSHIP. Enrollment totaled approximately 1,833,500 members at June 30, 1997, an increase of almost 95,000 during the second quarter of 1997 and almost 39% higher than membership at the end of last year's second quarter. All of this new membership has come from fully insured enrollment. More than 80,000 net new members have enrolled since the end of June 1997, bringing total membership to approximately 1,915,000 as of August 1, 1997.
MEDICAL EXPENSE. Oxford's medical-loss ratio (MLR) for second quarter of 1997 was 79.7% compared with 80.3% in the second quarter of 1996 and 80.2% for the first quarter of 1997. The decline in MLR is attributable to renegotiated contracts with all New York hospitals pursuant to the New York Health Care Reform Act (NYHCRA) and strengthened medical management programs, including the private practice partnerships, high-risk care programs, and specialty management initiatives.
SPECIALTY MANAGEMENT CARE. This program now has 570 physicians on the various specialty care teams, and a total of 670 members have received care from specialty teams to date. The goal is $100 million in annualized revenues by year-end. This initiative has been an exciting way for Oxford to related to the academic medical centers and medical specialists' community and for the company to increase its range of medical expertise.
ADMINISTRATIVE EXPENSES. These expenses were 15.8% of operating revenue for the second quarter of 1997, compared with 15.9% for the second quarter of 1996. Service performance challenges arising from the computer systems changeover continue to impact productivity and administrative expense.
INCOME STATEMENT DETAILS. Operating earnings jumped 59% to $63.2 million compared with $39.8 million in the second quarter of 1996. Operating margin was 4.7% for the quarter, up from 4.1% in the year-ago period. Net margin was 3.5% versus 3.1% last year.
BALANCE SHEET. Reserves for claims at the end of the quarter were $532 million, net of $271 million in advances to providers. The advances were made to mitigate cash flow problems for providers resulting from Oxford's tardiness in paying claims and protect its members from compromised or denied care. As claims are processed they will be charged against those advances, so reserves are effectively $803 million. The balance sheet also continues to show high levels of premiums receivable resulting from delays earlier this year in billing associated with the conversion of Oxford's operations to a new computer system. Receivables have decreased as measured by days in operating revenues outstanding, however, as the company's billing has returned to normal cycles.
NY STATE SETTLEMENT. As part of an agreement with New York Attorney General Dennis Vacco, Oxford will guarantee payment of interest on New York provider claims not paid within thirty days. Additionally, Oxford concluded that the policy could benefit all providers and therefore is offering similar interest guarantees in its New Jersey and Connecticut service areas. The policy will be effective for "clean" claims -- those with no inaccurate or incomplete information -- paid on or after July 25, 1997.
SERVICE PERFORMANCE. The computer system changeover was perhaps Oxford's greatest challenge in its history. Backlogged processing began to mount late last year and continued through March of this year. Oxford's upgraded computer system has already allowed the company to pay over 91% of clean claims received in June within thirty days and to continue progress toward the goal of paying 100% of clean claims within thirty days by the end of August. Oxford is now paying claims at a faster rate than at any time in its history. The company added more than 400 dedicated service managers to handle the backlog. Telephone service as measured by internal quality measures has returned to excellent levels.
MARKET EXPANSION. Oxford expects to get full ownership of the business in the Chicago market area that was Compass Health Plans. A number of Oxford staff have moved into place there, and the company is very optimistic about this new market. Oxford is hoping to expand its presence in Florida and expects to make a number of announcements in that regard shortly. Oxford is also offering its products to several new large employee groups, including AMERICAN EXPRESS (NYSE: AXP), IBM (NYSE: IBM), MERRILL LYNCH (NYSE: MER), PFIZER (NYSE: PFE), SEARS (NYSE: S), and others.
ALTERNATIVE MEDICINE. Oxford's alternative medicine program has been a big success. A total of 153 employee groups have already purchased the optional rider. The program has also benefited Oxford's marketing efforts significantly by helping further to distinguish Oxford from competitors in the public's eyes.
NEW CLINIC. During the quarter, Oxford opened its second clinic in medically underserved community -- in Brooklyn. Oxford is proud of constructing a large, attractive, state-of-the-art health facility in a tough neighborhood that has been underserved and staffing it with physicians and support staff from the neighborhood.
HEALTH PARTNERS. As reported earlier, Oxford has signed an agreement to sell its interest in Health Partners to FPA. The transaction is expected to close some time in the current quarter, and Oxford will book a net gain of $20 million to $26 million in connection with sale.
MEDICARE REFORM. The Medicare reform plan agreed to by the U.S. House and Senate is generally very good news for HMOs. Oxford anticipates no less than a 2% annual increase in its Medicare reimbursement rates over the next five years in its "A" counties, and somewhat more in its "B" counties. The reform plan will repeal the 50/50 rule whereby HMOs must currently have one commercial member for each Medicare member. The repeal frees Oxford to move into new markets by using its Medicare products as an entry strategy, which should materially lower the cost of market entry and open a number of new expansion opportunities -- a "very exciting proposition" for Oxford. Medicare reform also includes a carve-out for medical education that will require HMOs to renegotiate their contracts with hospitals; Oxford is already well-experienced in these negotiations as a result of its recent experience with NYHCRA.
SULLIVAN PROMOTED TO CEO. Oxford also announced the promotion of William Sullivan to the position of Chief Executive Officer. Stephen Wiggins, the Company's founder, will remain an officer of the Company as Oxford's Chairman. Wiggins said that Sullivan had effectively filled the role of CEO for the past twelve months, so this promotion is really just a reflection of the status quo." Wiggins will continue as a company officer and board chairman to focus on strategy, new business opportunities, new markets, government relations, and employee development.
GUIDANCE. For the balance of 1997, management's guidance is for an MLR of 79.2 for Q3, 79.1 for Q4, and 79.5 for the full year. Management is projecting slightly higher administrative expenses as a proportion of revenues for the remainder of the year, with most of that increase going toward strategic expenditures associated with entering new markets and increased marketing and the rest to covering costs associated with the service performance recovery. Administrative expenses are now projected to be about 16.1% of revenues for the year, which raises Q3 and Q4 projections by about 80 basis points from where they had been. Oxford management is still actively involved in the budgeting process for 1998 and is therefore not prepared to provide firm guidance on 1998 expectations. At this point, 1998 earnings projections are in the neighborhood of $2.45 per share, based on about a 35% growth rate. Administrative expenses are expected to decline as a percentage of revenue, and net margins to improve. Oxford continues to be able to sell its products at a premium to the market.
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