<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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.)
48 Monroe Turnpike, Trumbull, Connecticut 06611
(Address of principal executive offices) (Zip Code)
(203) 459-6000
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of common
stock, par value $.01 per share, outstanding on November 9, 1999 was 81,520,129.
1
<PAGE> 2
OXFORD HEALTH PLANS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1 Financial Statements
Consolidated Balance Sheets at September 30, 1999 and December 31, 1998................................ 3
Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 1999 and 1998...................................................................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 ..................................................................... 5
Notes to Consolidated Financial Statements............................................................. 6
Report of Independent Accountants...................................................................... 10
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................................. 11
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk ............................................ 26
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings ..................................................................................... 27
ITEM 5 Other Information ..................................................................................... 34
ITEM 6 Exhibits and Reports on Form 8-K ...................................................................... 33
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
Sep. 30, Dec. 31,
Current assets: 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 289,409 $ 237,717
Investments - available-for-sale, at market value 778,057 922,990
Premiums receivable, net 85,879 110,254
Other receivables 28,589 36,540
Prepaid expenses and other current assets 7,253 9,746
Deferred income taxes 31,361 43,385
- -----------------------------------------------------------------------------------------------------
Total current assets 1,220,548 1,360,632
Property and equipment, net of accumulated depreciation and
amortization of $154,094 in 1999 and $160,431 in 1998 58,104 112,941
Deferred income taxes 68,456 94,182
Restricted cash and investments 61,532 56,493
Other noncurrent assets 19,118 13,502
- -----------------------------------------------------------------------------------------------------
Total assets $ 1,427,758 $ 1,637,750
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical costs payable $ 688,424 $ 850,197
Trade accounts payable and accrued expenses 156,868 176,833
Unearned premiums 44,174 105,993
Current portion of capital lease obligations 12,278 15,938
Deferred income taxes - 2,228
- -----------------------------------------------------------------------------------------------------
Total current liabilities 901,744 1,151,189
Long-term debt 350,000 350,000
Obligations under capital leases 8,357 18,850
Redeemable preferred stock 332,778 298,816
Shareholders' equity (deficit):
Preferred stock, $.01 par value, authorized 2,000,000 shares - -
Common stock, $.01 par value, authorized 400,000,000
shares; issued and outstanding 81,410,514 shares in 1999
and 80,515,872 shares in 1998 814 805
Additional paid-in capital 484,696 506,243
Accumulated deficit (640,160) (692,290)
Accumulated other comprehensive earnings (loss) (10,471) 4,137
- -----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 1,427,758 $ 1,637,750
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
--------------------------------------------------------------------
Revenues: 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums earned $ 1,025,518 $ 1,143,064 $ 3,085,774 $ 3,512,101
Third-party administration, net 4,419 4,070 12,120 13,383
Investment and other income, net 22,512 23,857 65,641 66,242
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 1,052,449 1,170,991 3,163,535 3,591,726
- -----------------------------------------------------------------------------------------------------------------------------
Expenses:
Health care services 809,219 1,015,934 2,567,928 3,389,585
Marketing, general and administrative 142,578 172,914 447,525 601,915
Interest and other financing charges 12,009 16,160 38,239 43,761
Restructuring charges 19,963 - 19,963 123,500
Write-downs of strategic investments - - - 38,341
- -----------------------------------------------------------------------------------------------------------------------------
Total expenses 983,769 1,205,008 3,073,655 4,197,102
- -----------------------------------------------------------------------------------------------------------------------------
Operating earnings (loss) before income taxes 68,680 (34,017) 89,880 (605,376)
Income tax expense (benefit) 28,846 1,905 37,750 (16,532)
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) 39,834 (35,922) 52,130 (588,844)
Less preferred dividends and amortization (11,503) (11,067) (33,962) (16,785)
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) attributable to common shares $ 28,331 $ (46,989) $ 18,168 $ (605,629)
=============================================================================================================================
Earnings (loss) per common share:
Basic $ .35 $ (.58) $ .22 $ (7.57)
Diluted $ .34 $ (.58) $ .22 $ (7.57)
Weighted-average common shares outstanding-basic 81,354 80,384 81,098 80,006
Effect of dilutive securities:
Stock options 2,867 - 3,057 -
Warrants - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding-diluted 84,221 80,384 84,155 80,006
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30
--------------------------
Cash flows from operating activities: 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net earnings (loss) $ 52,130 $(588,844)
Adjustments to reconcile net earnings (loss) to
net cash used by operating activities:
Depreciation and amortization 43,301 50,553
Noncash restructuring charges and write-downs 15,060 107,246
Deferred income taxes 37,750 (18,437)
Provision for doubtful accounts and advances 13,800 41,209
Realized gain on sale of investments 4,462 (5,144)
Gain on sale of Direct Script and Ralin (9,500) -
Other, net 1,751 12,329
Changes in assets and liabilities, net of effect of acquisitions:
Premiums receivable 24,375 89,851
Other receivables 11,289 4,736
Prepaid expenses and other current assets (865) (81)
Medical costs payable (175,573) 106,542
Trade accounts payable and accrued expenses (12,298) 70,767
Income taxes payable/refundable - 116,637
Unearned premiums (61,819) (88,581)
Other, net (8,119) 5,437
- ---------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (64,256) (95,780)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (7,443) (38,736)
Purchases of available-for-sale investments (706,221) (988,218)
Sales and maturities of available-for-sale investments 815,182 669,006
Proceeds from sale of Direct Script and Ralin 12,450 -
Other, net 5,460 (6,483)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 119,428 (364,431)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 10,673 1,577
Proceeds from sale of preferred stock, net of expenses - 271,148
Proceeds from sale of warrants - 67,000
Proceeds from sale of common stock - 10,000
Proceeds of notes and loans payable - 550,000
Redemption of notes payable - (200,000)
Debt issuance expenses - (11,693)
Payments under capital leases (14,153) (3,385)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (3,480) 684,647
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 51,692 224,436
Cash and cash equivalents at beginning of period 237,717 4,141
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 289,409 $ 228,577
===============================================================================================================
Supplemental cash flow information:
Cash payments (refunds) for income taxes, net $ (851) $(107,685)
Cash payments for interest expense 35,488 20,058
Supplemental schedule of noncash investing and financing activities:
Unrealized appreciation (depreciation) of available-for-sale investments (16,836) 7,603
Capital lease obligations incurred - 21,707
Preferred stock dividends and amortization $ 33,962 $ 16,785
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been
prepared by Oxford Health Plans, Inc. ("Oxford") and subsidiaries (collectively,
the "Company") without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been omitted
pursuant to SEC rules and regulations; nevertheless, management of the Company
believes that the disclosures herein are adequate to make the information
presented not misleading. The financial statements include amounts that are
based on management's best estimates and judgments. The most significant
estimates relate to medical costs payable and other policy liabilities and
liabilities and asset impairments related to operational restructuring
activities. These estimates may be adjusted as more current information becomes
available, and any adjustments could be significant. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position and results of
operations of the Company with respect to the interim consolidated financial
statements have been made. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for the full year.
The consolidated financial statements and notes should be read in
conjunction with the audited consolidated financial statements and notes thereto
as of and for each of the years in the three-year period ended December 31,
1998, included in the Company's Form 10-K/A filed with the SEC for the fiscal
year ended December 31, 1998, as amended.
(2) RESTRUCTURING CHARGES
During the third quarter of 1999, the Company recognized a net
restructuring charge of approximately $19.9 million incurred in connection with
additional steps taken under the Company's plan ("Turnaround Plan") to improve
operations and restore the Company's profitability. The charge was comprised of
$8.7 million related to severance costs associated with work force reductions,
$7.4 million related to costs associated with additional consolidation of the
Company's office facilities inclusive of the net write-off of $6.4 million in
fixed assets, consisting primarily of leasehold improvements, $4.6 million
related to the write-off of certain computer equipment and $1.7 million related
to leases for equipment no longer used in operations. These charges were
partially offset by a pretax gain of $2.5 million related to the disposal of the
Company's minority investment in Ralin Medical, Inc., which was written down in
value as part of the Company's 1998 restructuring charge.
During the first half of 1998, the Company recognized restructuring
charges primarily associated with implementation of the Turnaround Plan. These
restructuring charges totaled $123.5 million for the nine months ended September
30, 1998.
The tables that follow present the activity in the first nine months of
1999 related to the restructuring charge reserves established in 1999 and 1998
as part of the Turnaround Plan. The Company believes that the remaining
restructuring reserves as of September 30, 1999 are adequate and that no
revisions of estimates are necessary at this time.
6
<PAGE> 7
<TABLE>
<CAPTION>
Restructuring 9/30/99
Charge Cash Noncash Restructuring
1999 Reserves (In thousands) Reserves Activity Activity Reserves
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance and related costs $ 8,750 $ (2,830) $ - $ 5,920
Costs of consolidating operations 2,756 - - 2,756
-----------------------------------------------------------
$ 11,506 $ (2,830) $ - $ 8,676
===========================================================
</TABLE>
The reduction in the reserve for severance and related costs reflects
payments of $2.8 million to employees terminated as a result of the Company's
reduction in force during the third quarter of 1999. Approximately 650 employees
were affected by this reduction. Under the terms of the respective severance
arrangements the Company expects to pay substantially all amounts due to former
employees by the end of the first quarter of 2000. The costs of consolidating
operations reserve was primarily established for the net costs associated with
the Company's relocation of its corporate headquarters and the cessation of
operations at its Ireland facility. The reserve is comprised of $4.6 million of
future rentals and occupancy costs less $4.0 million of estimated subrental
income, $1.7 million related to leases for equipment no longer used in
operations and approximately $0.3 million related to other incremental closing
costs. The difference between the $11.5 million restructuring charge reserves
shown in the table above and the $19.9 million shown in the income statement is
due to an $11.0 million net write-off of fixed assets net of the previously
mentioned gain on the sale of Ralin Medical, Inc.
<TABLE>
<CAPTION>
12/31/98 9/30/99
Restructuring Cash Noncash Restructuring
1998 Reserves (In thousands) Reserves Activity Activity Reserves
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provisions for loss on noncore businesses $ 13,805 $ (3,296) $ (4,184) $ 6,325
Severance and related costs 9,354 (2,253) - 7,101
Costs of consolidating operations 17,685 (12,595) - 5,090
-----------------------------------------------------------
$ 40,844 $(18,144) $ (4,184) $ 18,516
===========================================================
</TABLE>
Cash expenses charged against the reserve for loss on noncore
businesses amounted to $3.3 million during the first nine months of 1999. These
charges include payments of $3.1 million related to premium deficiencies and
$0.2 million related to professional fees and other incremental withdrawal
costs. Noncash charges against the reserve of $4.2 million relate to the
specific write-off of assets of the HMO and insurance businesses in the
Company's noncore markets. The reduction in the reserve for severance and
related costs reflects contractual payments of $2.3 million to former
executives. The reduction in the reserve for costs of consolidating operations
reflects lease payments and occupancy costs of approximately $12.6 million, net
of sublease income, related to unused office space.
(3) WRITE-DOWNS OF STRATEGIC INVESTMENTS
In October 1997, the Company disposed of its 47% interest in Health
Partners, Inc. ("Health Partners"), and received 2,090,109 shares of common
stock of FPA Medical Management, Inc. ("FPAM") with a market value of
approximately $76.4 million, resulting in a pretax gain of $63.1 million. As of
December 31, 1997, the market value of the FPAM stock had dropped to $38.4
million, and the Company wrote down its investment and reduced its gain by $38.0
million. During the second quarter of 1998, the Company sold 540,000 shares of
FPAM and recognized a loss of $8.1 million. In July 1998, FPAM filed for
protection under Chapter 11 of the U.S. Bankruptcy Code and the market value per
share of its common stock fell below one dollar. The Company wrote its remaining
investment in FPAM down to nominal value and recognized a loss in the second
quarter of 1998 of $30.2 million. The total 1998 recognized loss and write-down
of $38.3 million, or $0.49 per share, have been recognized as write-downs of
strategic investments in the accompanying financial statements.
7
<PAGE> 8
(4) REDEEMABLE PREFERRED STOCK
The Company currently has outstanding 263,606.55 shares of Series D
Cumulative Preferred Stock ("Series D Preferred Stock") and 115,899.27 shares of
Series E Cumulative Preferred Stock ("Series E Preferred Stock", the Series D
Preferred Stock and the Series E Preferred Stock, together, being the "Preferred
Stock"). The Series D Preferred Stock accumulates dividends at a rate of
5.129810% per year, payable quarterly in cash, provided that prior to May 13,
2000, the Series D Preferred Stock accumulates dividends at the rate of
5.319521% per year, payable annually in cash or additional shares of Series D
Preferred Stock, at the option of the Company. The Series E Preferred Stock
accumulates dividends at a rate of 14% per year, payable quarterly in cash,
provided that prior to May 13, 2000, the Series E Preferred Stock accumulates
dividends at the rate of 14.589214% per year, payable annually in cash or
additional shares of Series E Preferred Stock, at the option of the Company. The
Company must redeem all of the outstanding shares of Preferred Stock on May 13,
2008 and may redeem all of the outstanding shares of either series of Preferred
Stock on or after May 13, 2003. In addition, the holders of the Preferred Stock
may require the Company to redeem any or all of the shares of the Preferred
Stock upon the occurrence of a change of control. The redemption price for each
share of Preferred Stock is equal to all unpaid dividends accumulated to the
date of payment of the redemption price, plus the stated value per share of
$1,000. Prior to May 13, 2001, the holders of the Series D Preferred Stock may
not use the Series D Preferred Stock in connection with the exercise of the
Company's Series A Warrants or Series B Warrants unless they use a percentage of
the total amount of Series D Preferred Stock issued on February 13, 1999 that
does not exceed the percentage of the total number of shares of Series E
Preferred Stock issued on February 13, 1999 that have been redeemed, repurchased
or retired by the Company, or used as consideration in connection with the
exercise of the Company's Series A Warrants or Series B Warrants by the holders.
With respect to dividend rights, the Series D Preferred Stock and Series E
Preferred Stock rank on a parity with each other and prior to the Company's
common stock.
Under certain circumstances, the Company has the right to exchange the
Series D Preferred Stock or the Series E Preferred Stock on any dividend payment
date for junior subordinated debentures issued pursuant to an indenture. The
indenture that would govern the junior subordinated debentures would have terms
comparable to the terms of the series of Preferred Stock that is exchanged,
including an interest rate that is the same as the dividend rate on that series
of Preferred Stock.
(5) SUBSEQUENT EVENTS
In October 1999, the Company purchased new insurance policies providing
additional coverage of certain legal defense costs, including judgments and
settlements, if any, incurred by the Company and individual defendants in
certain pending lawsuits and investigations, including, among others, the
securities class action pending against the Company and certain of its directors
and officers and the pending stockholder derivative actions. Subject to the
terms of the policies, the insurers have agreed to pay 90% of the amount, if
any, by which covered costs exceed $175 million, provided that the aggregate
amount of insurance under these new policies is limited to $200 million and the
aggregate amount of new insurance in respect of defense costs other than
judgments and settlements, if any, is limited to $10 million. The policies do
not cover taxes, fines or penalties imposed by law or the cost to comply with
any injunctive or other nonmonetary relief or any agreement to provide any such
relief. The coverage under the new policies is in addition to approximately $40
million of coverage remaining under preexisting insurance that is not subject to
the $175 million retention applicable to the new policies. A nonrecurring charge
of $24 million for premiums and other costs associated with the new insurance
coverage will be included in the Company's results of operations for the fourth
quarter of 1999.
(6) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statement amounts to conform to the 1999 presentation. Certain nonrecurring
items that were previously classified as write-downs of strategic investments
(formerly "unusual charges") and restructuring charges in the second quarter of
1998 have been reclassified to operating and income tax captions in the 1998
statement of operations. These reclassifications do not affect the reported net
loss for the first nine months of 1998, but do have the effect of increasing the
medical loss ratio and administrative loss ratio from the levels previously
reported for the first nine months.
8
<PAGE> 9
The effects of these reclassifications are summarized as follows.
<TABLE>
<CAPTION>
Before After
Nine months ended September 30, 1998 (dollars in thousands) Reclassification Reclassification
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenues $3,512,101 $3,512,101
Health care services expenses 3,270,636 3,389,585
Marketing, general and administrative expenses 577,606 601,915
Restructuring charges 199,266 123,500
Write-downs of strategic investments* 111,790 38,341
Income tax benefit 22,489 16,632
Medical loss ratio 93.1% 96.5%
Administrative loss ratio 16.4% 17.1%
</TABLE>
* Previously shown under the caption "Unusual charges."
9
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Oxford Health Plans, Inc.
We have reviewed the accompanying consolidated balance sheet of Oxford
Health Plans, Inc. and subsidiaries (the "Company") as of September 30, 1999 and
the related consolidated statements of operations for the three-month and
nine-month periods ended September 30, 1999 and 1998, and the consolidated
statements of cash flows for the nine-month periods ended September 30, 1999 and
1998. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with the standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the accompanying consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Stamford, Connecticut
October 29, 1999
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table shows membership by product:
<TABLE>
<CAPTION>
As of September 30 Increase (Decrease)
---------------------------- --------------------------
Membership: 1999 1998 Amount %
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Freedom and Liberty Plans 1,238,900 1,331,600 (92,700) (7.0%)
HMO 238,400 271,500 (33,100) (12.2%)
- ---------------------------------------------------------------------------------------------------------
Total commercial 1,477,300 1,603,100 (125,800) (7.8%)
- ---------------------------------------------------------------------------------------------------------
Medicare 101,100 156,900 (55,800) (35.6%)
Medicaid - 102,900 (102,900) (100.0%)
- ---------------------------------------------------------------------------------------------------------
Total government programs 101,100 259,800 (158,700) (61.1%)
- ---------------------------------------------------------------------------------------------------------
Total fully insured membership 1,578,400 1,862,900 (284,500) (15.3%)
Third-party administration 50,700 62,000 (11,300) (18.2%)
=========================================================================================================
Total 1,629,100 1,924,900 (295,800) (15.4%)
========================================================================================================================
</TABLE>
The following table provides certain statement of operations data
expressed as a percentage of total revenues for the three month and nine month
periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------------------ --------------------------------
Revenues: 1999 1998 1999 1998
------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Premiums earned 97.4% 97.6% 97.5% 97.8%
Third-party administration, net .4% .3% .4% .4%
Investment and other income, net 2.2% 2.1% 2.1% 1.8%
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 100.0%
- ----------------------------------------------------------------------------------------------------------------------------
Expenses:
Health care services 76.9% 86.8% 81.2% 94.4%
Marketing, general and administrative 13.5% 14.8% 14.1% 16.8%
Interest and other financing charges 1.2% 1.3% 1.3% 1.2%
Restructuring charges 1.9% - .6% 3.4%
Write-downs of strategic investments - - - 1.1%
- ----------------------------------------------------------------------------------------------------------------------------
Total expenses 93.5% 102.9% 97.2% 116.9%
- ----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 6.5% (2.9%) 2.8% (16.9%)
Income tax expense (benefit) 2.7% .2% 1.2% (.5%)
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) 3.8% (3.1%) 1.6% (16.4%)
Less preferred dividends and amortization (1.1%) (.9%) (1.1%) (.5%)
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) attributable to common shares 2.7% (4.0%) .5% (16.9%)
============================================================================================================================
Selected Information:
Medical loss ratio 78.9% 88.9% 83.2% 96.5%
Administrative loss ratio 13.8% 15.1% 14.4% 17.1%
PMPM premium revenue $ 214.70 $ 202.64 $ 210.44 $ 199.79
PMPM medical expense $ 169.41 $ 180.10 $ 175.13 $ 192.82
Fully insured member months (000's) 4,776.6 5,640.9 14,663.1 17,579.2
</TABLE>
11
<PAGE> 12
RESULTS OF OPERATIONS
Overview
The Company's revenues consist primarily of commercial premiums derived
from its Freedom Plan, Liberty Plan and health maintenance organizations
("HMOs"), reimbursements under government contracts relating to its
Medicare+Choice ("Medicare") programs (and, prior to 1999, its 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 or
paid 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's results for the nine months ended September 30, 1999 and
1998 and the year ended December 31, 1998 were also adversely affected by
significant restructuring charges and write-downs of strategic investments.
Since it began operations in 1986 and through 1997, the Company
experienced substantial growth in membership and revenues. The membership and
revenue growth has been accompanied by increases in the cost of providing health
care in the Company's service areas. The Company experienced declines in
membership and revenue during 1998 and such declines are expected to continue
through the end of 1999 and beyond. The Company does not intend to promote
significant membership or revenue growth in the remaining quarter of 1999
because, through strategic initiatives, the Company has redirected its efforts
to establish profitability. Since the Company arranges for provision of services
primarily on a prepaid basis, with premium levels fixed for one-year periods,
unexpected cost increases during the annual contract period ordinarily cannot be
passed on to employer groups or members.
Software and hardware problems experienced in the conversion of a
portion of the Company's computer system in September 1996 resulted in
significant delays in the Company's billing of group and individual customers.
The Company's revenues were adversely affected by adjustments of approximately
$218.2 million in 1998 and $173.5 million in 1997 related to estimates for
terminations of group and individual members and for nonpaying group and
individual members. In 1998, approximately $135.6 million of these adjustments
related to termination of members, approximately $65.2 million of these
adjustments related to nonpaying members, and approximately $17.4 million of
these adjustments related to other manual billing adjustments posted during the
year. A similar breakout for 1997 is not available since, prior to January 1,
1998, source documents for the adjustments did not specify whether the
adjustment related to group and member terminations, nonpaying members or other
manual billing adjustments. Retroactive terminations occur when a group notifies
Oxford that an employee is no longer eligible for coverage and there is a lag
between the effective date of the termination and the receipt or posting of the
notice of termination by Oxford. Reserves for retroactivity in 1998 and 1997 are
estimated based on historical experience and are affected by the time it takes
to process enrollment and termination forms. Retroactivity can also arise when
employer groups terminate coverage without providing notice to Oxford. The
Company continues to experience retroactive member and group terminations
impacting revenue. The Company has taken steps to attempt to improve billing
timeliness, reduce billing errors, reduce lags in recording enrollment and
disenrollment notifications, and improve the Company's collection processes and
is attempting to make requisite improvements in management information systems
concerning the value and aging of outstanding accounts receivable. However, the
Company continues to show significant aged receivable balances from certain
large group customers. The Company believes it has made adequate provision in
its estimates for group and individual member terminations and for nonpaying
groups and individual members as of September 30, 1999. Adjustments to the
estimates may be necessary, however, and any such adjustments would be included
in the results of operations for the period in which such adjustments were made.
The Company's results of operations could also be adversely affected if efforts
to collect overdue balances result in terminations of such groups.
12
<PAGE> 13
Restructuring Charges
During the third quarter of 1999, the Company recognized a net
restructuring charge of approximately $19.9 million incurred in connection with
additional steps taken under the Company's plan ("Turnaround Plan") to improve
operations and restore the Company's profitability. The charge was comprised of
$8.7 million related to severance costs associated with work force reductions,
$7.4 million related to costs associated with additional consolidation of the
Company's office facilities inclusive of the net write-off of $6.4 million in
fixed assets, consisting primarily of leasehold improvements, $4.6 million
related to the write-off of certain computer equipment and $1.7 million related
to leases for equipment no longer used in operations. These charges were
partially offset by a pretax gain of $2.5 million related to the disposal of the
Company's minority investment in Ralin Medical, Inc., which was written down in
value as part of the Company's 1998 restructuring charge.
During the first half of 1998, the Company recognized restructuring
charges primarily associated with implementation of the Turnaround Plan. These
restructuring charges totaled $123.5 million for the nine months ended September
30, 1998.
The tables that follow present the activity in the first nine months of
1999 related to the restructuring charge reserves established in 1999 and 1998
as part of the Turnaround Plan. The Company believes that the remaining
restructuring reserves as of September 30, 1999 are adequate and that no
revisions of estimates are necessary at this time.
<TABLE>
<CAPTION>
Restructuring 9/30/99
Charge Cash Noncash Restructuring
1999 Reserves (In thousands) Reserves Activity Activity Reserves
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance and related costs $ 8,750 $ (2,830) $ - $ 5,920
Costs of consolidating operations 2,756 - - 2,756
-----------------------------------------------------------
$ 11,506 $ (2,830) $ - $ 8,676
===========================================================
</TABLE>
The reduction in the reserve for severance and related costs reflects
payments of $2.8 million to employees terminated as a result of the Company's
reduction in force during the third quarter of 1999. Approximately 650 employees
were affected by this reduction. Under the terms of the respective severance
arrangements, the Company expects to pay substantially all amounts due to former
employees by the end of the first quarter of 2000. The costs of consolidating
operations reserve was primarily established for the net costs associated with
the Company's relocation of its corporate headquarters and the cessation of
operations at its Ireland facility. The reserve is comprised of $4.6 million of
future rentals and occupancy costs less $4.0 million of estimated subrental
income, future lease payments of $1.7 million related to leases for equipment no
longer used in operations and $0.3 million related to other incremental closing
costs. The difference between the $11.5 million restructuring charge reserves
shown in the table above and the $19.9 million shown in the income statement is
due to an $11.0 million net write-off of fixed assets net of the previously
mentioned gain on the sale of Ralin Medical, Inc.
<TABLE>
<CAPTION>
12/31/99 9/30/99
Restructuring Cash Noncash Restructuring
1998 Reserves (In thousands) Reserves Activity Activity Reserves
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provisions for loss on noncore businesses $ 13,805 $ (3,296) $ (4,184) $ 6,325
Severance and related costs 9,354 (2,253) - 7,101
Costs of consolidating operations 17,685 (12,595) - 5,090
-----------------------------------------------------------
$ 40,844 $(18,144) $ (4,184) $ 18,516
===========================================================
</TABLE>
Cash expenses charged against the reserve for loss on noncore
businesses amounted to $3.3 million during the first nine months of 1999. These
charges include payments of $3.1 million related to premium deficiencies and
$0.2 million related to professional fees and other incremental withdrawal
costs. Noncash charges against the reserve of $4.2 million relate to the
specific write-off of assets of the HMO and insurance businesses in the
Company's noncore markets. The reduction in the reserve for severance and
related costs reflects contractual payments of $2.3 million to former
executives. The reduction in the reserve for costs of consolidating operations
reflects lease payments and occupancy costs of $12.6 million, net of sublease
income, related to unused office space.
13
<PAGE> 14
Three months ended September 30, 1999 compared with three months ended
September 30, 1998
Total revenues for the quarter ended September 30, 1999 were $1.05
billion, down 10% from $1.17 billion during the same period in the prior year.
Net income attributable to common stock for the third quarter of 1999 totaled
$28.3 million, or 34 cents per diluted share, compared with a net loss of $47.0
million, or 58 cents per diluted share, for the third quarter of 1998. Results
of operations for the third quarter of 1999 were impacted by favorable net
changes in prior period estimates of medical costs aggregating $19.6 million and
other nonrecurring items. The Company recognized a pretax gain of $7.0 million
on the sale of the business and certain assets of Direct Script, Inc., the
Company's mail order pharmacy ("Direct Script"). These gains were partially
offset by a net restructuring charge of approximately $19.9 million.
Membership in the Company's fully insured health care programs as of
September 30, 1999 decreased by approximately 285,000 members (15%) from the
level of such membership as of September 30, 1998 and by 247,000 members (14%)
since year-end 1998. Membership in government programs decreased by
approximately 159,000 members (61%) compared with September 30, 1998, reflecting
the Company's exit of the Medicaid market and the withdrawal from or
restructuring of the Medicare business in several markets. The balance of the
decline of fully insured membership from September 30, 1998 is due to reductions
in members in noncore states and in the Company's core commercial markets. The
decline since year-end 1998 is primarily due to reductions in the Company's
commercial membership, complete withdrawal from Medicaid and exit from certain
Medicare counties. The Company is withdrawing from the Medicare market in
Suffolk County, New York and intends to reduce the benefits offered to Medicare
members in New Jersey and certain other locations at the end of 1999. These
steps are expected to result in a significant decrease in Medicare membership
and revenue by January 1, 2000 and continuing into 2000. The Company also has
ceased offering certain benefit designs in its commercial small group business
and has reduced available rate options in an effort to ensure that new and
renewing small groups are charged appropriate rates. While the Company expects
that these steps will improve the underwriting results for the groups affected,
it expects that certain small group membership and revenue will be reduced over
the next 12 months as a result of price increases received by new and renewing
groups. The extent of the reduction in membership cannot be predicted at this
time.
Total commercial premiums earned for the three months ended September
30, 1999 increased 0.2% to $840.6 million compared with $839.0 million in the
same period in the prior year. The slight increase in premiums earned is
attributable to an 8.9% increase in average premium yield partially offset by an
8% decrease in member months in the Company's commercial health care programs.
As a result of improvements in billing and collection operations, premiums
earned in the third quarter of 1999 benefited from reduced levels of
retroactivity approximating $14 million compared with the same period in the
prior year. Average premium renewal rates for the full year 1999 are expected to
be approximately 9% higher in these programs than in the full year 1998, but the
increase in premium yields is expected to be lower due to changing business mix
and benefit designs and other factors.
Premiums earned from Medicare programs decreased 28% to $184.9 million
in the third quarter of 1999 from $257.2 million in the third quarter of 1998.
The revenue decline was caused by membership declines as member months of
Medicare programs decreased 35% when compared with the prior year third quarter,
partially offset by increases in average premium yields of Medicare programs of
5.9% over the level of the prior year third quarter. This yield increase
exceeded the average rate increase granted by the Health Care Financing
Administration ("HCFA") as membership losses occurred primarily in lower
reimbursement counties. Premiums earned from Medicaid programs were $65.1
million in the third quarter of 1998 and zero in 1999, reflecting the Company's
total withdrawal from the Medicaid market during 1998 and 1999.
Investment and other income, net for the three months ended September
30, 1999, decreased 5.6% to $22.5 million from $23.9 million for the same period
last year. Net investment income other than capital gains in the third quarter
of 1999 was $2.7 million lower than in the previous year quarter due to lower
invested balances and a slightly lower average yield. Investment and other
income for the third quarter of 1999 included realized capital losses of $1.1
million and a $7.0 million pretax gain on the sale of the business and certain
assets of Direct Script, while the 1998 third quarter included realized capital
gains of $3.0 million.
The medical loss ratio (health care services expense stated as a
percentage of premium revenues) was 78.9% for the third quarter of 1999 compared
with 88.9% for the third quarter of 1998. The improvement in
14
<PAGE> 15
the third quarter of 1999 over the third quarter of 1998 reflects a 6.0%
increase in average overall premium yield and a 6.0% decrease in per member per
month medical costs. Results for the third quarter of 1999 were favorably
impacted by net changes in prior period estimates of medical costs aggregating
approximately $19.6 million. The net changes in prior period estimates consisted
primarily of favorable changes in estimates for professional and inpatient
costs, a reduction of the individual product premium deficiency reserve and a
reduction in the reserve for disputed claims. These favorable changes were
partially offset by an increase in reserves and establishment of a premium
deficiency reserve for the Company's New Jersey Medicare business, a reduction
in estimated recoveries under certain other provider risk-sharing contracts and
a write-off of certain other receivables. These adjustments are based on the
Company's estimates in light of current operating results and, in the case of
the premium deficiency reserves, current projections. Absent these net favorable
effects, the medical loss ratio for the third quarter of 1999 would have been
80.8%. The reduction in medical costs is also attributable to a significant
change in the Company's membership composition (for example, a reduction in the
number of members in government programs) and initiatives to improve health care
utilization and costs. The Company believes it has made adequate provision for
medical costs as of September 30, 1999. There can be no assurance, however, that
additional reserve additions will not be necessary as the Company continues to
review and reconcile delayed claims and claims paid or denied in error.
Additions to reserves could also result as a consequence of regulatory
examinations, and such additions would also be included in the results of
operations for the period in which such adjustments are made.
Marketing, general and administrative expenses totaled $142.6 million
in the third quarter of 1999 compared with $172.9 million in the third quarter
of 1998. The decrease when compared with the third quarter of 1998 is primarily
attributable to a $18.7 million decrease in payroll and related costs due to
reduced staffing. In addition, depreciation, occupancy, telephone, equipment
rental and maintenance were $11.8 million lower in the aggregate in the third
quarter of 1999 due in part to the implementation of the Company's Turnaround
Plan. Administrative expenses as a percent of operating revenue were 13.8%
during the third quarter of 1999 compared with 15.1% during the third quarter of
1998 and 16.7% for the full year 1998. The Company has taken steps since the end
of the third quarter, and intends to take additional steps, to reduce its
administrative expenses in light of improvements in service performance and
reductions in claims and correspondence inventories. These reductions are
intended to reduce the Company's administrative loss ratio and enhance its
competitive position over the next 12 months, particularly in view of expected
reductions in membership in the Company's Medicare business, primarily as a
result of the Company's planned withdrawal from Medicare in Suffolk County, New
York and benefit plan design changes, and certain other rationalized businesses.
Administrative costs in future periods may be adversely affected by costs
associated with responding to regulatory inquiries and investigations and
defending pending litigation. The Company expects to record a fourth quarter
charge of $24 million for premiums and other costs associated with the purchase
of additional insurance for the pending securities class action and stockholder
derivative litigation. See "Liquidity and Capital Resources".
The Company incurred interest and other financing charges of $10.0
million in the third quarter of 1999 related to its outstanding debt and capital
lease obligations, compared with $10.4 million in the third quarter of 1998.
Interest expense on delayed claims totaled $2.0 million in the third quarter of
1999 compared with $5.8 million in the third quarter of 1998 and $2.1 million in
the second quarter of 1999, reflecting the reduction in claim payments backlogs
since the end of the third quarter of 1998. Interest payments have been made in
accordance with the Company's interest payment policy and applicable law. The
Company's future results will continue to reflect interest payments by the
Company on delayed claims as well as interest expense on outstanding
indebtedness and capital lease obligations.
The Company recognized income tax expense of $28.8 million for the
third quarter of 1999 reflecting an effective tax rate of 42%. The Company
performed analyses to assess the realizability of the Company's deferred tax
assets. These analyses included an evaluation of the results of operations for
1999 and prior periods, the progress to date in its Turnaround Plan and
projections of future results of operations, including the estimated impact of
the Turnaround Plan. Based on these analyses, the Company does not currently
believe it is more likely than not that all of its deferred tax assets will be
fully realizable, and the Company continues to carry a valuation allowance of
$282.6 million in order to reflect deferred tax assets related to net operating
loss carryforwards and other net tax deductible temporary differences at their
currently estimated realizable value. The Company will continue to evaluate the
realizablity of its net deferred tax assets in future periods and will make
adjustments to the valuation allowance when facts and circumstances indicate
that a change is necessary. The amounts of future taxable income necessary
during the carryforward period to utilize the net deferred tax assets is
approximately $230 million.
15
<PAGE> 16
Nine months ended September 30, 1999 compared with nine months ended
September 30, 1998
Total revenues for the nine months ended September 30, 1999 were $3.16
billion, down 12% from $3.59 billion during the same period in the prior year.
Net income attributable to common stock for the first nine months of 1999
totaled $18.2 million, or 22 cents per diluted share, compared with a net loss
of $605.6 million, or $7.57 per diluted share, for the first nine months of
1998. Results of operations for the first nine months of 1999 were impacted by
favorable net changes in prior period estimates of medical costs aggregating
$13.9 million and other nonrecurring items. The Company recognized a pretax gain
of $7.0 million on the sale of the business and certain assets of Direct Script
and a pretax gain of $13.5 million on the sale of its New York Medicaid
business. These gains were offset by additions to provider advance reserves of
$13.8 million and reserves established for the unwinding of the Heritage
Agreement in New Jersey. See "Liquidity and Capital Resources". In addition, the
Company recognized a net restructuring charge of approximately $19.9 million.
The charge was comprised of $8.7 million related to severance costs associated
with work force reductions, $7.4 million related to costs associated with
additional consolidation of the Company's office facilities including the net
write-off of $6.4 million in fixed assets, consisting primarily of leasehold
improvements, and $4.6 million related to the write-off of certain computer
equipment and $1.7 million related to leases for equipment no longer used in
operations. These charges were partially offset by a pretax gain of $2.5 million
related to the disposal of the Company's minority investment in Ralin Medical,
Inc.
Results of operations for the first nine months of 1998 were adversely
affected by (i) significantly higher medical costs, (ii) premium deficiency
reserves aggregating $51.0 million relating to government contracts and reserves
of $48 million and $25 million, respectively, established for medical claims and
losses on provider advances, (iii) approximately $123.5 million of charges for
severance and other costs expected to be incurred in connection with the
restructuring of certain administrative and management functions, (iv)
write-downs of strategic investments and other asset impairments and (v)
accruals of certain litigation defense and other costs.
Total commercial premiums earned for the nine months ended September
30, 1999 decreased 1.1% to $2.51 billion compared with $2.54 billion in the same
period in the prior year. The prior year period was adversely affected by a
$52.9 million adjustment related to estimates for termination of group and
individual members and for nonpaying groups and individual members. Absent this
adjustment, commercial premiums earned decreased by 3.1%. As a result of
improvements in billing and collection operations, premiums earned in the first
nine months of 1999 benefited from reduced levels of retroactivity approximating
$29 million compared with the same period in the prior year. The year to year
decrease in premiums earned is attributable to a 7.9% decrease in member months
in the Company's commercial health care programs, partially offset by a 5.2%
increase in average premium yield. Average premium renewal rates for the full
year 1999 are expected to be approximately 9% higher in the Company's core
commercial business than in the full year 1998, but the increase in premium
yields is expected to be lower due to changing business mix and benefit designs
and other factors.
Premiums earned from Medicare programs decreased 28% to $560.6 million
in the first nine months of 1999 from $778.7 million in the first nine months of
1998. The revenue decline was caused by membership declines as member months of
Medicare programs decreased 34% when compared with the prior year period,
partially offset by increases in average premium yields of Medicare programs of
5.5% over the level of the prior year period. This yield increase exceeded the
average rate increase granted by HCFA as membership losses occurred primarily in
lower reimbursement counties. Premiums earned from Medicaid programs decreased
94% to $11.9 million in the first nine months of 1999 compared with $191.6
million in the first nine months of 1998. The decline reflects the Company's
total withdrawal from the Medicaid market during 1998 and 1999.
Investment and other income, net for the first nine months of 1999,
included a $13.5 million gain from the sale of the Company's New York Medicaid
business and a $7.0 million pretax gain on the sale of the business and certain
assets of Direct Script, while the first nine months of 1998 included a gain of
$5.0 million from the sale of the Company's New Jersey Medicaid business. In
addition, net investment income for the nine months ended September 30, 1999
decreased 22% to $44.5 million from $57.3 million for the same period last year.
The decline is primarily due to a $17.9 million decrease in capital gains
realized in the first nine months of 1999 compared with the prior year period,
partially offset by an increase in average invested balances in the first nine
months of 1999 compared with the first nine months of 1998. The higher
16
<PAGE> 17
invested balances are primarily attributable to the funds received in the
Company's May 1998 financing transaction.
The medical loss ratio (health care services expense stated as a
percentage of premium revenues) was 83.2% for the first nine months of 1999
compared with 96.5% for the first nine months of 1998. The improvement in the
first nine months of 1999 over the first nine months of 1998 reflects a 5.3%
increase in average overall premium yield and a 9.2% decrease in per member per
month medical costs when compared to the prior year period. The reduction in
medical costs is primarily the result of a significant change in the Company's
membership composition (for example, a reduction in the number of members in
government programs), significant nonrecurring charges incurred in the second
quarter of 1998 as described above, initiatives to improve health care
utilization and costs and, to a lesser extent, net positive changes to prior
period estimates of medical costs. The net changes in prior period estimates
consisted primarily of favorable changes in estimates for professional and
inpatient costs, a reduction of the individual product premium deficiency
reserve and a reduction in the reserve for disputed claims. These favorable
changes were partially offset by an increase in reserves and establishment of a
premium deficiency reserve for the Company's New Jersey Medicare business, a
reduction in estimated recoveries under certain other provider risk-sharing
contracts and a write-off of certain other receivables. These adjustments are
based on the Company's estimates in light of current operating results and, in
the case of the premium deficiency reserves, current projections. Health care
services expense was adversely affected in the first nine months of 1999 by a
provision for loss on claims advances totaling $13.8 million and $10.0 million
for additional reserves related to the unwinding of the Heritage Agreement in
New Jersey. See "Liquidity and Capital Resources." The Company believes it has
made adequate provision for medical costs as of September 30, 1999. There can be
no assurance, however, that additional reserve additions will not be necessary
as the Company continues to review and reconcile delayed claims and claims paid
or denied in error. Additions to reserves could also result as a consequence of
regulatory examinations, and such additions would also be included in the
results of operations for the period in which such adjustments are made.
Marketing, general and administrative expenses totaled $447.5 million
in the first nine months of 1999 compared with $601.9 million in the first nine
months of 1998. The decrease when compared to the prior year period is primarily
attributable to a $52.4 million decrease in payroll and related costs due to
reduced staffing and a $14.7 million decrease in consulting fees as the prior
year period reflects significant expenses related to enhancements to management
information systems. In addition, depreciation, occupancy, telephone, equipment
rental and maintenance were $35.4 million lower in the aggregate due in part to
the implementation of the Company's Turnaround Plan. Administrative expenses in
the first nine months of 1998 included approximately $24 million related to the
write-down of government program accounts receivable, accruals of litigation
defense costs and other expenses associated with the Company's Turnaround Plan.
Administrative expenses as a percent of operating revenue were 14.4% during the
first nine months of 1999 compared with 17.1% during the first nine months of
1998 and 16.7% for the full year 1998. The Company has taken steps since the end
of the third quarter, and intends to take additional steps, to reduce its
administrative expenses in light of improvements in service performance and
reductions in claims and correspondence inventories. These reductions are
intended to reduce the Company's administrative loss ratio and enhance its
competitive position over the next 12 months, particularly in view of expected
reductions in membership in the Company's Medicare business, primarily as a
result of the Company's withdrawal from Medicare in Suffolk County, New York and
benefit plan design changes and certain other rationalized businesses.
Administrative costs in future periods may be adversely affected by costs
associated with responding to regulatory inquiries and investigations and
defending pending and future litigation. The Company expects to record a fourth
quarter charge of $24 million for premiums and other costs associated with the
purchase of additional insurance for pending securities class action and
stockholder derivative litigation. See "Liquidity and Capital Resources".
The Company incurred interest and other financing charges of $30.2
million in the first nine months of 1999 related to its outstanding debt and
capital lease obligations, compared with $33.1 million in the first nine months
of 1998. The first nine months of 1998 included $7.7 million in charges related
to the issuance of bridge financing notes which were retired in May of 1998.
Absent the charge-off of the issuance expenses, interest expense on indebtedness
for the first nine months of 1999 was $4.8 million higher than in the first nine
months of 1998, primarily attributable to the issuance of $350 million of
long-term debt in May of 1998. Interest expense on delayed claims totaled $8.0
million in the first nine months of 1999, compared with $10.7 million in the
first nine months of 1998, reflecting the reduction in claim payments backlogs
since the end of 1998. The Company's future results will continue to reflect
interest payments by
17
<PAGE> 18
the Company on delayed claims as well as interest expense on outstanding
indebtedness and capital lease obligations.
The Company had income tax expense of $37.8 million for the first nine
months of 1999 reflecting an effective tax rate of 42%. The Company performed
analyses to assess the realizability of the Company's deferred tax assets. These
analyses included an evaluation of the results of operations for 1999 and prior
periods, the progress to date in its Turnaround Plan and projections of future
results of operations, including the estimated impact of the Turnaround Plan.
Based on these analyses, the Company does not currently believe it is more
likely than not that all of its deferred tax assets will be fully realizable,
and the Company continues to carry a valuation allowance of $282.6 million in
order to reflect deferred tax assets related to net operating loss carryforwards
and other net tax deductible temporary differences at their currently estimated
realizable value. The Company will continue to evaluate the realizablity of its
net deferred tax assets in future periods and will make adjustments to the
valuation allowance when facts and circumstances indicate that a change is
necessary. The amounts of future taxable income necessary during the
carryforward period to utilize the net deferred tax assets is approximately $230
million. See "Liquidity and Capital Resources".
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations during the first nine months of 1999 aggregated
$64.3 million, compared with $95.8 million used by operations for the first nine
months of 1998. Despite a $641 million improvement in net earnings, cash flow
from operations in the first nine months of 1999 improved by only $31.5 million
over the same period in 1998 as the prior year period included noncash
restructuring charges of $107.2 million and noncash additions to reserves of
$94.1 million and was favorably affected by tax refunds of approximately $116.6
million. In addition, cash flow for the first nine months of 1999 was negatively
affected by the runoff of claims reserves relating to discontinued or
restructured businesses of approximately $98 million and reductions of claim
inventories. The Company expects cash flow from operations will be adversely
affected in the fourth quarter by efforts to reduce current claims inventories
and the payment of certain excess liability insurance premiums and other costs
(as discussed below). Cash flows from operations for the first nine months of
1999 and 1998 included only eight months of Medicare premiums because the
January 1999 and January 1998 premiums of $68.4 million and $85.9 million,
respectively, were each received in the preceding December.
The Company's capital expenditures for the first nine months of 1999
totaled $7.4 million. The Company currently has no definitive commitments for
use of material cash except for (i) certain excess liability insurance premiums
and other costs of $24 million (as discussed below), (ii) anticipated capital
expenditures and (iii) requirements to provide the required levels of capital to
its operating subsidiaries, including any requirement arising from
nonadmissibility of provider advances (as discussed below) or other assets or
from operating losses
As of September 30, 1999, cash and investments aggregating $61.5
million have been segregated in the accompanying balance sheet as restricted
investments to comply with federal and state regulatory requirements. In May
1999, the Company set aside $15 million as collateral for certain advances made
by the Company's New Jersey subsidiary (see below). As of September 30, 1999,
the amount set aside had been reduced to $5 million reflecting a reduction in
the amount of advances shown as admitted assets on the New Jersey subsidiary's
balance sheet. The Company's subsidiaries are also 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, including debt service and other financing costs.
In September 1998, the National Association of Insurance Commissioners
("NAIC") adopted new minimum capitalization requirements, known as risk-based
capital ("RBC") rules, for health care coverage provided by HMOs and other
risk-bearing health care entities. Depending on the nature and extent of the new
minimum capitalization requirements ultimately adopted by each state, there
could be an increase in the capital required for certain of the Company's
regulated subsidiaries. Connecticut has enacted legislation and the Connecticut
Department of Insurance ("CTDOI") is in the process of promulgating regulations
based on the NAIC model. The New York State Insurance Department ("NYSID") has
proposed legislation similar to the NAIC model rules. The New Jersey Department
of Banking and Insurance ("NJDBI") has not proposed similar legislation.
However, NJDBI has published solvency regulations that it estimates will result
in additional asset requirements for many New Jersey health care
18
<PAGE> 19
plans. The Governor of New York has proposed legislation to strengthen current
solvency regulations to allow the NYSID to take over failing health plans
without a court order. Furthermore, legislation has been proposed in both New
York and New Jersey to establish an HMO guaranty fund association which, in the
event a plan becomes insolvent, would have the power of assessing plans a
premium tax to cover the insolvent plan's medical losses. To the extent the
Company's future profits are not sufficient to maintain statutory capital
compliance, the Company will fund any required increase in statutory capital in
regulated subsidiaries from available parent company cash reserves; however,
there can be no assurance that such cash reserves will be sufficient to fund
these minimum capitalization requirements.
As a result of delays in claims payments, the Company made over $280
million in advances to providers in periods prior to 1998. Outstanding advances
aggregated approximately $62.4 million at September 30, 1999, net of a valuation
reserve of $48 million, have been netted against medical costs payable in the
Company's consolidated balance sheet. The Company believes that it will be able
to recover net outstanding advance payments, either through repayment by the
provider or application against future claims, but any failure to recover funds
advanced in excess of the reserve would adversely affect the Company's results
of operations. There can be no assurance that insurance regulators will continue
to recognize such advances as admissible assets. In 1999 the New Jersey
Department of Banking (the "NJDBI") required the Company to provide collateral
for repayment of the advances by setting aside $15 million in trust at the
parent company. In September of 1999, the NJBDI allowed the Company to reduce
this amount to $5 million. If all or a portion of the advances were deemed
nonadmitted, the capital of the Company's operating subsidiaries would be
impaired and additional capital contributions would be required for the
subsidiaries to meet statutory requirements.
The Company's medical costs payable was $688.4 million as of September
30, 1999 (including $674.9 million for IBNR and before netting advance claim
payments of $62.4 million) compared with $989.7 million as of December 31, 1998
(including $864.5 million for IBNR and before netting advance claim payments of
$139.5 million). The decrease reflects runoff of claims reserves for
discontinued or restructured business and progress in paying backlogged claims.
The Company estimates the amount of its reserves primarily using standard
actuarial methodologies based upon historical data, including the average
interval between the date services are rendered and the date claims are paid and
between the date services are rendered and the date claims are received by the
Company, expected medical cost inflation, seasonality patterns and changes in
membership. The Company believes that its reserves are adequate to satisfy its
ultimate claim liabilities. However, the Company's prior rapid growth, delays in
paying claims, paying or denying claims in error and changing speed of payment
may affect the Company's ability to rely on historical information in making
reserve estimates.
The liability for medical costs payable is also affected by shared risk
arrangements, including arrangements related to the Company's Medicare business
in certain counties, Private Practice Partnerships ("Partnerships") and certain
other contracts for medical services, such as contracts for pharmacy benefit
management, laboratory services and radiology services. In the case of
Partnership providers subject to deficits, the Company has established reserves
to account for delays or other impediments to recovery of those deficits. The
Company has reviewed its partnership program and has terminated most of its
partnership arrangements as a result of difficulties and expense associated with
administering the program as well as other considerations. The Company
recognized estimated costs in taking these actions in the second quarter of
1998. In determining the net liability for medical costs, the Company accounts
for the financial impact of these shared risk arrangements based on the most
recent information available and makes changes in estimates as facts and
circumstances dictate.
In September 1998, the Company's New Jersey HMO subsidiary, Oxford
Health Plans (NJ), Inc., entered into an agreement with Heritage New Jersey
Medical Group, P.C. ("Heritage") to provide network management services for the
Company's Medicare members who reside in New Jersey (the "Heritage Agreement").
In view of uncertainties in the regulatory environment and other considerations,
in July 1999, the Company decided to wind down the Heritage Agreement. The
wind-down resulted in an increase in the Company's health care costs for this
business for the second quarter of 1999 due to the establishment of a reserve of
$8 million applicable to the second quarter of 1999 and prior quarters. Health
care services and administrative costs for the third quarter of 1999 increased
by approximately $1.4 million as a result of the wind-down. In addition the
Company recorded a premium deficiency reserve of $3.3 million during the third
quarter of 1999. The Company also expects that there will be a significant
decrease in New Jersey Medicare membership going into next year primarily as a
result of benefit plan design changes.
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During the first nine months of 1999, the Company made cash
contributions to the capital of two of its HMO subsidiaries aggregating
approximately $4.5 million. The capital contributions were made to ensure that
each subsidiary had sufficient surplus under applicable regulations after giving
effect to operating losses and reductions to surplus resulting from the
nonadmissibility of certain assets. The Company does not expect that any
significant additional capital contributions to the subsidiaries will be
required during the remainder of 1999.
The Company currently has outstanding 263,606.55 shares of Series D
Cumulative Preferred Stock ("Series D Preferred Stock") and 115,899.27 shares of
Series E Cumulative Preferred Stock ("Series E Preferred Stock", the Series D
Preferred Stock and the Series E Preferred Stock, together, being the "Preferred
Stock"). The Series D Preferred Stock accumulates dividends at a rate of
5.129810% per year, payable quarterly in cash, provided that prior to May 13,
2000, the Series D Preferred Stock accumulates dividends at the rate of
5.319521% per year, payable annually in cash or additional shares of Series D
Preferred Stock, at the option of the Company. The Series E Preferred Stock
accumulates dividends at a rate of 14% per year, payable quarterly in cash,
provided that prior to May 13, 2000, the Series E Preferred Stock accumulates
dividends at the rate of 14.589214% per year, payable annually in cash or
additional shares of Series E Preferred Stock, at the option of the Company. The
Company must redeem all of the outstanding shares of Preferred Stock on May 13,
2008 and may redeem all of the outstanding shares of either series of Preferred
Stock on or after May 13, 2003. In addition, the holders of the Preferred Stock
may require the Company to redeem any or all of the shares of the Preferred
Stock upon the occurrence of a change of control. The redemption price for each
share of Preferred Stock is equal to all unpaid dividends accumulated to the
date of payment of the redemption price, plus the stated value per share of
$1,000. Prior to May 13, 2001, the holders of the Series D Preferred Stock may
not use the Series D Preferred Stock in connection with the exercise of the
Company's Series A Warrants or Series B Warrants unless they use a percentage of
the total amount of Series D Preferred Stock issued on February 13, 1999 that
does not exceed the percentage of the total number of shares of Series E
Preferred Stock issued on February 13, 1999 that have been redeemed, repurchased
or retired by the Company, or used as consideration in connection with the
exercise of the Company's Series A Warrants or Series B Warrants by the holders.
With respect to dividend rights, the Series D Preferred Stock and Series E
Preferred Stock rank on a parity with each other and prior to the Company's
common stock.
Under certain circumstances, the Company has the right to exchange the
Series D Preferred Stock or the Series E Preferred Stock on any dividend payment
date for junior subordinated debentures issued pursuant to an indenture. The
indenture that would govern the junior subordinated debentures would have terms
comparable to the terms of the series of Preferred Stock that is exchanged,
including an interest rate that is the same as the dividend rate on that series
of Preferred Stock.
In October 1999, the Company purchased new insurance policies providing
additional coverage of certain legal defense costs, including judgments and
settlements, if any, incurred by the Company and individual defendants in
certain pending lawsuits and investigations, including, among others, the
securities class action pending against the Company and certain of its directors
and officers and the pending stockholder derivative actions. Subject to the
terms of the policies, the insurers have agreed to pay 90% of the amount, if
any, by which covered costs exceed $175 million, provided that the aggregate
amount of insurance under these new policies is limited to $200 million and the
aggregate amount of new insurance in respect of defense costs other than
judgments and settlements, if any, is limited to $10 million. The policies do
not cover taxes, fines or penalties imposed by law or the cost to comply with
any injunctive or other nonmonetary relief or any agreement to provide any such
relief. The coverage under the new policies is in addition to approximately $40
million of coverage remaining under preexisting insurance that is not subject to
the $175 million retention applicable to the new policies. A charge of $24
million for premiums and other costs associated with the new insurance coverage
will be included in the Company's results of operations for the fourth quarter
of 1999.
MARKET RISK DISCLOSURES
The Company's consolidated balance sheet as of September 30, 1999
includes a significant amount of assets whose fair value is subject to market
risk. Since the substantial portion of the Company's investments are in fixed
income securities, interest rate fluctuations represent the largest market risk
factor affecting the Company's consolidated financial position. Interest rates
are managed within a tight duration band, 2.25 to 2.5 years, and credit risk is
managed by investing in U.S. government obligations and in corporate debt
securities with high average quality ratings and maintaining a diversified
sector exposure
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within the debt securities portfolio. The Company's investment in equity
securities as of September 30, 1999 was not significant.
In order to determine the sensitivity of the Company's investment
portfolio to changes in market risk, valuation estimates were made on each
security in the portfolio using a duration model. Duration models measure the
expected change in security market prices arising from hypothetical movements in
market interest rates. Convexity further adjusts the estimated price change by
mathematically "correcting" the changes in duration as market interest rates
shift. The model used industry standard calculations of security duration and
convexity as provided by third party vendors such as Bloomberg and Yield Book.
For certain structured notes, callable corporate notes, and callable agency
bonds, the duration calculation utilized an option-adjusted approach, which
helps to ensure that hypothetical interest rate movements are applied in a
consistent way to securities that have embedded call and put features. The model
assumed that changes in interest rates were the result of parallel shifts in the
yield curve. Therefore, the same basis point change was applied to all
maturities in the portfolio. The change in valuation was tested using positive
and negative adjustments in yield of 100 and 200 basis points. A hypothetical
immediate increase of 100 basis points in market interest rates would decrease
the fair value of the Company's investments in debt securities as of September
30, 1999 by approximately $19.3 million, while a 200 basis point increase in
rates would decrease the value of such investments by approximately $38.0
million. A hypothetical immediate decrease of 100 basis points in market
interest rates would increase the fair value of the Company's investments in
debt securities as of September 30, 1999 by approximately $19.7 million, while a
200 basis point decrease in rates would increase the value of such investments
by approximately $39.2 million. Because duration and convexity are estimated
rather than known quantities for certain securities, there can be no assurance
that the Company's portfolio would perform in line with the estimated values.
YEAR 2000 READINESS
The Company has completed its assessment, planning, remediation and
testing of its computer codes associated with its mission critical systems that
could be affected by the "Year 2000" date issue. The Year 2000 problem is the
result of computer programs being written using two digits rather than four to
define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize the date "00" as the year 1900 rather than
the year 2000. This could result in system failure or miscalculations. The
Company completed certification testing of its mission critical systems during
the second quarter of 1999. The Company's Year 2000 compliance program requires
remediation of certain programs within particular time frames in order to avoid
disruption of the Company's operations. These time frames include certain dates
throughout 1999. Although the Company believes it has completed the remediation
of these programs within the applicable time frames, there can be no assurance
that the Company's operations will not be disrupted to some degree.
The Company is communicating with certain material vendors to determine
the extent to which the Company may be vulnerable to such vendors' failure to
resolve their own Year 2000 issues. The Company is attempting to mitigate its
risk with respect to the failure of such vendors to be Year 2000 compliant by,
among other things, requesting project plans, status reports and Year 2000
compliance certifications or written assurances from its material vendors,
including certain software vendors, business partners, landlords and suppliers.
The effect of such vendors' noncompliance, if any, is not reasonably estimable
at this time. The inability of other companies with which the Company does
business to complete their Year 2000 modifications on a timely basis could
adversely affect the Company's operations.
The Company is required to submit periodic reports regarding Year 2000
compliance to certain of the regulatory authorities that regulate its business.
The Company is in compliance with such Year 2000 reporting requirements. Such
regulatory authorities have also asked the Company to submit to certain reviews
regarding its Year 2000 compliance.
The Company has incurred associated expenses of approximately $4
million in 1999 and expects that the remaining costs for 1999 related to the
project will not be material. Through September 30, 1999, the Company had
cumulatively incurred approximately $14 million of expenses in connection with
its Year 2000 compliance efforts. The costs of the project are based on
management's best estimate, which include assumptions of future events. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from estimated results.
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The Company has completed detailed plans to support its Year 2000
contingency strategy. The plans will be reviewed and updated throughout the
remainder of 1999. There can be no assurance that these plans will protect the
Company from experiencing a material adverse effect on its financial condition
or results of operations.
Potential consequences of the Company's failure to timely resolve its
Year 2000 issues could include, among others: (i) the inability to accurately
and timely process claims, enroll and bill groups and members, pay providers,
record and disclose accurate data and perform other core functions; (ii)
increased scrutiny by regulators and breach of contractual obligations; and
(iii) litigation in connection therewith.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations", are forward-looking
statements (as defined in the Securities Exchange Act of 1934). Forward-looking
statements include statements concerning future results of operations or
financial position, future liquidity, future health care and administrative
costs, future premium rates and yields for commercial and Medicare business,
the employer renewal process, future growth or reductions in membership and
membership composition, future health care benefits, future provider network,
future provider utilization rates, future medical loss ratio levels, future
claims payment, service performance and other operations matters, future
administrative loss ratio levels, the Company's information systems and
readiness for Year 2000, proposed efforts to control health care and
administrative costs, future provider payment and risk-sharing agreements
with health care providers, the Turnaround Plan, future enrollment levels,
future government regulation and relations and the impact of new laws and
regulations, the future of the health care industry, and the impact on the
Company of recent events, legal proceedings and regulatory investigations and
examinations, and other statements regarding matters that are
not historical facts. Because such forward-looking statements involve risks
and uncertainties, actual results may differ materially from those expressed or
implied by such statements. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed below.
Net losses; restructuring charges and write-downs of strategic
investments
The Company incurred net losses attributable to common stock of $624
million in 1998 and $291 million in 1997. As a result of losses at certain of
its HMO and insurance subsidiaries in 1998 and 1997, the Company has had to make
capital contributions to these subsidiaries and additional capital contributions
may be required to be made by the Company in the future. The Company has also
made significant additions to its reserves for medical claims, and has
experienced significant levels of retroactive member and group terminations as
well as difficulties with collection of premium receivables.
A significant portion of the loss incurred by the Company in 1998 was
associated with restructuring charges and write-downs of strategic investments
(previously reported as unusual charges) relating to the Company's Turnaround
Plan.
Despite the Company's efforts to the contrary, the continued
implementation of the Turnaround Plan could adversely affect members and
employer groups, or physicians, hospitals and other health care providers and
ultimately sales and renewals of the Company's health plans. The Turnaround Plan
has also called for increasing commercial premiums to appropriately reflect the
Company's healthcare and administrative costs. There can be no assurance that
the Company will be successful in achieving appropriate premium increases or
that recent or future regulatory changes will not adversely affect its premium
pricing. Moreover, the Company cannot predict the impact of adverse publicity,
legal and regulatory proceedings or other future events on the Company's
membership, operations and financial results, including ongoing financial
losses. Reductions in membership associated with the above factors would
adversely affect the Company's future results.
Inability to control, and unpredictability of, health care costs
Oxford's future results of operations depend, in part, on its ability
to predict and maintain influence over health care costs (through, among other
things, appropriate benefit design, utilization review and case management
programs and risk-sharing and other payment arrangements with providers) while
providing members with coverage for the health care benefits provided under
their contracts. However, Oxford's
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ability to influence such costs may be affected by various factors, including:
new technologies and health care practices, hospital costs, changes in
demographics and trends, new legally mandated benefits or practices, selection
biases, increases in unit costs paid to providers, major epidemics,
catastrophes, inability to establish acceptable compensation arrangements with
providers, operational and regulatory issues which could delay, prevent or
impede those arrangements, and higher utilization of medical services, including
higher out-of-network utilization under point of service plans. 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 or paid claims ("IBNR") which are estimated by
Oxford. Oxford estimates the amount of such reserves primarily using standard
actuarial methodologies based upon historical data including the average
interval between the date services are rendered and the date claims are paid and
between the date services are rendered and the date claims are received by the
Company, expected medical cost inflation, seasonality patterns and changes in
membership. The estimates for submitted claims and IBNR are made on an accrual
basis and adjusted in future periods as required. Oxford believes that its
reserves for IBNR are adequate in order to satisfy its ultimate claim liability.
However, Oxford's prior rapid growth, delays in paying claims, paying or denying
claims in error and changing speed of payment affect the Company's ability to
rely on historical information in making IBNR reserve estimates. There can be no
assurances as to the ultimate accuracy of such estimates. Any adjustments to
such estimates could adversely affect Oxford's results of operations in future
periods.
The effect of high administrative costs on results
The Company expects that results in 1999 may continue to be adversely
affected by high administrative costs associated with the Company's efforts to
strengthen its operations and service levels and address systems issues.
Although a key element of the Company's Turnaround Plan is a reduction in
administrative expenses, no assurance can be given that the Company will not
continue to experience significant service and systems infrastructure problems
in 1999 and beyond which could have a significant impact on administrative
costs. Further, the Company has been adversely affected by high administrative
costs in connection with increased levels of employee attrition over the last
several quarters, and there can be no assurance that the Company will not
continue to experience employee attrition in the remainder of 1999.
Changes in laws and regulations could adversely impact operations,
financial condition and prospects
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. State regulations require the Company's HMO and insurance subsidiaries
to maintain restricted cash or available cash reserves and restrict their
ability to make dividend payments, loans or other transfers of cash to the
Company.
In recent years, significant federal and state legislation affecting
the Company's business was enacted. For example, New York State implemented a
requirement that health plans pay interest on delayed payment of claims at a
rate of 12% per annum, effective January 1998, and that managed care members
have a right to an external appeal of certain final adverse determinations,
effective July 1999. In addition, Connecticut and New Jersey enacted legislation
in 1999 concerning prompt payment of claims, mental health parity and other
mandated benefits and practices. State and federal government authorities are
continually considering changes to laws and regulations applicable to Oxford and
are currently considering regulations relating to mandatory benefits and
products, defining medical necessity, provider compensation, health plan
liability to members who fail to receive appropriate care, disclosure,
composition of physician networks and mandated health benefit plans for
individuals, all of which would apply to the Company. New York State is
currently considering regulation and legislation concerning the Health Care
Reform Act, individual and small group risk pools and subsidies and managed care
mandates and practices. In addition, Congress is considering significant changes
to Medicare legislation and proposals relating to health care reform, including
a comprehensive package of regulations on managed care called the "Patient Bill
of Rights" legislation. Separate and distinct versions of the Patient Bill of
Rights have passed both the United States House of Representatives and the
United States Senate. The
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most notable difference is that the House version expands health plan liability
by permitting state causes of action under ERISA to recover damages resulting
from personal injury or wrongful death against any person or entity in
connection with the provision of insurance or administrative or medical
services. Differences between the House and Senate versions are expected to
be settled by a Congressional Conference Committee in early 2000, and then the
revised legislation must be passed by both chambers and signed by the
United States President before becoming law.
Current or prospective changes in federal and state laws or
regulations, could increase health care costs and administrative expenses, could
result in reductions to Medicare reimbursement rates and could adversely affect
the Company's ability to satisfactorily manage and administer its government
programs. 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 where much of the Company's business
is located, could have a material adverse impact on the Company's operations,
financial condition and prospects.
Premiums for Oxford's Medicare programs are determined through formulas
established by HCFA for Oxford's Medicare contracts. Federal legislation enacted
in 1997 provides for future adjustment of Medicare reimbursement by HCFA which
could reduce the reimbursement received by the Company. Premium reductions, or
premium rate increases in a particular region that are lower than the rate of
increase in health care service expenses for Oxford's Medicare members in such
region, could adversely affect Oxford's results of operations. Risk transfer
provider agreements entered into by Oxford could be adversely affected by
federal and state legislative and regulatory actions or by the failure of the
providers to comply with the terms of such agreements. Such agreements could
also have an adverse effect on the Company's membership or its relationship with
its other providers. Oxford's Medicare programs are subject to certain
additional risks compared to commercial programs, such as higher comparative
medical costs and higher levels of utilization. Oxford's Medicare programs are
subject to higher marketing and advertising costs associated with selling to
individuals rather than to groups. Further, there can be no assurance that the
Company will be successful in completing or operationalizing such risk transfer
and other provider arrangements.
Service and systems infrastructure problems
The Company experienced rapid growth in its business and in its staff
in the period from 1986, when the Company began operations, through 1997. The
Company has been affected and will continue to be affected by its ability to
manage such growth effectively, including its ability to continue to develop
processes and systems to support its operations. In September 1996, the Company
converted a significant part of its business operations to a new computer
operating system. Unanticipated software and hardware problems arising in
connection with the conversion resulted in significant delays in the Company's
claims payments and group and individual billing and adversely affected claims
payment and billing. See "Results of Operations" above. The Company does not
intend to promote significant membership or revenue growth in the remaining
quarter of 1999 because the Company's priority in 1999 will continue to be to
attempt to strengthen its service and systems infrastructure, reduce medical and
administrative spending and increase premium rates. No assurance can be given
that, in the remainder of 1999 and beyond, the Company will not continue to
experience significant service and systems infrastructure problems, high levels
of medical and administrative spending and difficulties in obtaining premium
rate increases, or that the Company would be able to develop processes or
systems to support any future growth. In addition, the Company has experienced
attrition of its Medicare and commercial business in 1998 and 1999 and expects
additional attrition. There can be no assurance that the Company will be
successful in the future in promoting membership growth and will not continue
to experience membership attrition.
Health care provider network
The Company is subject to the risk of disruption in its health care
provider network. The network physicians, hospitals and other health care
providers could terminate their contracts with the Company, demand higher
payments or take other actions which could have a material adverse effect on the
Company's ability to market its products and service its membership. In
addition, disputes often arise under provider contracts which could adversely
affect the Company or could expose the Company to regulatory or other
liabilities. Risk transfer provider arrangements entered into by Oxford could be
adversely affected by regulatory actions or by the failure of the providers to
comply with the terms of such agreements. Furthermore, the effect of mergers and
consolidations of health care providers or potential
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unionization of, or concerted action by, physicians in the Company's service
areas could enhance the providers' bargaining power with respect to demands for
higher reimbursement levels and changes to the Company's utilization review and
administrative procedures.
Management of information systems
There can be no assurance that the Company will be successful in
eliminating the system problems that have resulted in payment delays and claims
processing errors, in developing processes and systems to support its operations
and in improving its service levels. Moreover, operating and other issues can
lead to data problems that affect performance of important functions, including,
but not limited to, claims payment and group and individual billing. There can
also be no assurance that the process of improving existing systems, developing
processes and systems to support the Company's operations and improving service
levels will not be delayed or that additional systems issues will not arise in
the future. See "Other Information - Status of Information Systems".
Year 2000 readiness
Although the Company believes that it has completed its Year 2000
readiness project, there can be no assurance that additional Year 2000 issues
will not arise or that the Company's external vendors will be able to resolve
their Year 2000 issues, all of which could have a material adverse effect on the
Company's results of operations, liquidity and financial condition. See "Year
2000 Readiness" above.
Events at the Company and related publicity
Certain events at the Company over the course of the last two years
have resulted in adverse publicity. Such events and related publicity may
adversely affect the Company's provider network, the employer renewal process
and future enrollment in the Company's health benefit plans.
Other negative publicity
In addition, the managed care industry, in general, receives
significant negative publicity. This publicity has led to increased legislation,
regulation and review of industry practices. Certain litigation, including
purported class actions on behalf of plan members recently commenced against
certain large, national health plans, has resulted in additional negative
publicity for the managed care industry. These factors may adversely affect the
Company's ability to market its products and services, may require it to change
its products and services and may increase the regulatory burdens under which
the Company operates and the potential for additional litigation, further
increasing the costs of doing business and adversely affecting the Company's
results of operations.
Collectibility of advances
As part of its attempts to ameliorate delays in processing claims for
payment in 1997, the Company advanced approximately $280 million to providers
pending the Company's disposition of claims for payment. As of September 30,
1999, approximately $62 million, net of allowances, remained outstanding. The
NYSID is requiring the Company to obtain written acknowledgments of such
advances from the recipients of the advances, and the NJDBI has required the
Company to provide collateral for repayment of the advances by setting aside $5
million in trust at the parent company as of September 30, 1999. See "Liquidity
and Capital Resources" above. There can be no assurance that the insurance
regulators will continue to recognize such advances as admissible assets for
regulatory purposes. If the insurance regulators do not recognize such advances
as admissible assets, the capital of certain of the Company's regulated
subsidiaries could be impaired. The Company may be required to make additional
capital contributions to compensate for any such impairment. Although the
Company believes that the advances will be repaid, there can be no assurance
that this will occur.
Concentration of business
The Company's commercial and Medicare business is concentrated in New
York, New Jersey and Connecticut, with more than 80% of its tri-state premium
revenues received from New York business. As a result, changes in regulatory,
market or health care provider conditions in any of these states, particularly
New York, could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company's
revenue under its contracts with HCFA represented 21.9% of its premiums earned
during the year 1998 and 18.8% of premiums earned during the first nine months
of 1999.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See information contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Market Risk Disclosures."
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SECURITIES CLASS ACTION LITIGATION
As previously reported by the Company, following the October 27, 1997
decline in the price per share of the Company's common stock, more than fifty
purported securities class action lawsuits were filed against the Company and
certain of its officers in the United States District Courts for the Eastern
District of Arkansas, the Eastern District of New York, the Southern District of
New York and the District of Connecticut. The captions of these actions have
previously been reported by the Company.
By order dated April 29, 1998, the Judicial Panel on Multidistrict
Litigation ("JPML") transferred these actions together with the federal
shareholder derivative actions discussed below, for coordinated or consolidated
pretrial proceedings in the United States District Court for the Southern
District of New York before Judge Charles L. Brieant. Judge Brieant consolidated
the class actions for pretrial purposes under the caption In re Oxford Health
Plans, Inc. Securities Litigation, MDL-1222 (CLB). On July 15, 1998, Judge
Brieant appointed the Public Employees Retirement Associates of Colorado
("ColPERA"), three individual shareholders (the "Vogel plaintiffs") and The PBHG
Funds, Inc. ("PBHG"), as co-lead plaintiffs and ColPERA's counsel (Grant &
Eisenhofer), the Vogel plaintiffs' counsel (Milberg Weiss Hynes Lerach &
Bershad), and PBHG's counsel (Chitwood & Harley), as co-lead counsel. (ColPERA
appealed this decision; the United States Court of Appeals for the Second
Circuit dismissed the appeal.)
On October 2, 1998, the co-lead plaintiffs filed a Consolidated and
Amended Class Action Complaint ("Amended Complaint"). The Amended Complaint
(which has since been further amended by stipulation) names as defendants
Oxford, Oxford Health Plans (NY), Inc., KPMG LLP (which was Oxford's outside
independent auditor during 1996 and 1997) and several current or former Oxford
directors and officers (Stephen F. Wiggins, William M. Sullivan, Andrew B.
Cassidy, Brendan R. Shanahan, Benjamin H. Safirstein, Robert M. Smoler, Robert
B. Milligan, David A. Finkel, Jeffery H. Boyd, and Thomas A. Travers). The
Amended Complaint purports to be brought on behalf of purchasers of Oxford's
common stock during the period from November 6, 1996 through December 9, 1997
("Class Period"), purchasers of Oxford call options or sellers of Oxford put
options during the Class Period and on behalf of persons who, during the Class
Period, purchased Oxford's securities contemporaneously with sales of Oxford's
securities by one or more of the individual defendants. The Amended Complaint
alleges that defendants violated Section 10(b) of the Exchange Act and Rule
10b-5 promulgated thereunder by making false and misleading statements and
failing to disclose certain allegedly material information regarding changes in
Oxford's computer system and the Company's membership, enrollment, revenues,
medical expenses and ability to collect on its accounts receivable. The Amended
Complaint also asserts claims against the individual defendants alleging
"controlling person" liability under Section 20(a) of the Exchange Act. The
Amended complaint also alleges violations of Section 20A of the Exchange Act by
virtue of the individual defendants' sales of shares of Oxford's common stock
while the price of that common stock was allegedly artificially inflated by
allegedly false and misleading statements and omissions. The Amended Complaint
seeks unspecified damages, attorneys' and experts' fees and costs, and such
other relief as the court deems proper.
On December 18, 1998, Oxford, the individual defendants and,
separately, KPMG LLP, moved to dismiss the Amended Complaint. On May 25, 1999
and June 8, 1999, Judge Brieant issued decisions denying the motions to dismiss.
On June 10, 1999, KPMG LLP moved for reconsideration of the decision denying its
motion to dismiss. On July 9, 1999, Judge Brieant granted KPMG LLP's motion for
reconsideration, and on reconsideration adhered to the prior disposition.
By order dated July 9, 1999, the Court approved a Case Management Plan
submitted by counsel for both plaintiffs and defendants, which Plan provides,
inter alia, that (1) discovery and briefing of class certification issues shall
be completed by December 10, 1999, (2) the parties shall attempt to complete all
merits discovery in the case by September 15, 2000, and (3) summary judgment
motions shall be filed by August 17, 2001.
The State Board of Administration of Florida ("SBAF") has also
commenced an action against Oxford and certain individuals captioned State Board
of Administration of Florida v. Oxford Health Plans, Inc. et al.,
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No. 397 CV 02670 (D. Conn.). Pursuant to the JPML order discussed above, that
action has been transferred to Judge Brieant for coordination with the pretrial
proceedings in the class actions. In addition to asserting claims similar to
those asserted in the Amended Complaint, SBAF has asserted claims alleging: (i)
violations of Section 18(a) of the Exchange Act, by virtue of alleged false and
misleading information disseminated in the 10-K report Oxford filed for the year
ended December 31, 1996; (ii) violations of the Florida Blue Sky laws; and (iii)
common law fraud and negligent misrepresentation. SBAF is seeking unspecified
damages, attorneys' and experts' fees and costs, and such other relief as the
court deems proper. The parties have stipulated, and Judge Brieant has ordered,
that SBAF will be bound by the dismissal of any claims it has that are asserted
in the Amended Complaint. In addition, the parties have stipulated that Oxford
has until November 25, 1999 to file an answer or move to dismiss the SBAF
action. Defendants intend to move to dismiss the SBAF action, to the extent it
includes claims not addressed by Judge Brieant's decisions denying the motions
to dismiss the Amended Complaint.
The outcomes of these actions cannot be predicted at this time,
although the Company believes that it and the individual defendants have
substantial defenses to the claims asserted and intends to defend the actions
vigorously.
STOCKHOLDER DERIVATIVE LITIGATION
As previously reported by the Company, in the months following the
October 27, 1997 decline in the price per share of the Company's common stock,
ten purported stockholder derivative actions were commenced on behalf of the
Company in Connecticut Superior Court (the "Connecticut derivative actions") and
in the United States District Courts for the Southern District of New York and
the District of Connecticut (the "federal derivative actions") against the
Company's directors and certain of its officers (and the Company itself as a
nominal defendant).
The complaints in the Connecticut derivative actions generally allege
that defendants breached their fiduciary obligations to the Company, mismanaged
the Company and wasted its assets in planning and implementing certain changes
to Oxford's computer system, by making misrepresentations concerning the status
of those changes in Oxford's computer system, by failing to design and to
implement adequate financial controls and information systems for the Company,
and by making misrepresentations concerning Oxford's membership enrollment,
revenues, profits and medical costs in Oxford's financial statements and other
public representations. The complaints further allege that certain of the
defendants breached their fiduciary obligations to the Company by disposing of
Oxford common stock while the price of that common stock was artificially
inflated by their alleged misstatements and omissions. The complaints seek
unspecified damages, attorneys' and experts' fees and costs and such other
relief as the court deems proper. None of the plaintiffs has made a demand on
the Company's Board of Directors that Oxford pursue the causes of action alleged
in the complaint. Each complaint alleges that plaintiff's duty to make such a
demand was excused by the directors' alleged conflict of interest with respect
to the matters alleged therein.
In March 1998, Oxford and certain of the individual defendants moved to
dismiss or, alternatively, to stay the Connecticut derivative actions. Since
then, the parties to the Connecticut derivative actions have stipulated, under
certain conditions, to hold all pretrial proceedings in those actions in
abeyance during the pretrial proceedings in the federal derivative actions, and
to allow the plaintiffs in the Connecticut derivative actions to participate to
a limited extent in any discovery that is ultimately ordered in the federal
derivative actions. On February 19, 1999, Judge Brieant entered an order in the
federal derivative actions permitting the plaintiffs in the Connecticut
derivative actions to participate to a limited extent in any discovery that
occurs in the federal derivative actions.
Meanwhile, January 27, 1998, defendants filed an application with the
JPML to transfer the federal derivative actions for consolidated or coordinated
pretrial proceedings before Judge Charles L. Brieant of the Southern District of
New York. On April 28, 1998, the JPML entered an order transferring all of these
actions for consolidated or coordinated pretrial proceedings, together with the
securities class actions discussed above, before Judge Brieant. The parties to
the federal derivative actions agreed to suspend discovery in those actions
until the filing of a consolidated amended derivative complaint in those actions
and during the pendency of any motion to dismiss or to stay the federal
derivative actions or the securities class actions. A stipulation memorializing
this agreement, consolidating the federal derivative actions under the caption
In re Oxford Health Plans, Inc. Derivative Litigation, MDL-1222-D, and
appointing lead
28
<PAGE> 29
counsel for the federal derivative plaintiffs, was entered and so ordered by
Judge Brieant on September 26, 1998.
On October 2, 1998, the federal derivative plaintiffs filed an amended
complaint. On January 29, 1999, they filed a second amended derivative complaint
(the "Amended Derivative Complaint"). The Amended Derivative Complaint names as
defendants certain of Oxford's directors and a former director (Stephen F.
Wiggins, James B. Adamson, Robert B. Milligan, Fred F. Nazem, Marcia J.
Radosevich, Benjamin H. Safirstein and Thomas A. Scully) and the Company's
former auditors KPMG LLP, together with the Company itself as a nominal
defendant. The Amended Derivative Complaint alleges that the individual
defendants breached their fiduciary obligations to the Company, mismanaged the
Company and wasted its assets in planning and implementing certain changes to
Oxford's computer system, by making misrepresentations concerning the status of
those changes to Oxford's computer system, by failing to design and implement
adequate financial controls and information systems for the Company and by
making misrepresentations concerning Oxford's membership, enrollment, revenues,
profits and medical costs in Oxford's financial statements and other public
representations. The Amended Derivative Complaint further alleges that certain
of the individual defendants breached their fiduciary obligations to the Company
by selling shares of Oxford common stock while the price of the common stock was
allegedly artificially inflated by their alleged misstatements and omissions.
The Amended Derivative Complaint seeks declaratory relief, unspecified damages,
attorneys' and experts' fees and costs and such other relief as the court deems
proper. No demand has been made upon the Company's Board of Directors that
Oxford pursue the causes of action alleged in the Amended Derivative Complaint.
The Amended Derivative Complaint alleges that the federal derivative plaintiffs'
duty to make such a demand was excused by the individual defendants' alleged
conflict of interest with respect to the matters alleged therein.
On March 15, 1999, Oxford, the individual defendants and, separately,
KPMG LLP, moved to dismiss the Amended Derivative Complaint, and oral argument
on defendants' motion was heard on June 24, 1999. By Memorandum and Order dated
July 19, 1999, Judge Brieant ordered that the motions of Oxford, the individual
defendants and KMPG be held in abeyance until such time as the securities class
action litigation is resolved or discovery is completed, or until further order
of the Court, and that by March 1, 2000, the Court would reassess the status of
the motions to dismiss. The Court further ordered that, in the interim, the
derivative plaintiffs shall not conduct their own discovery but shall be
permitted limited participation in discovery conducted in the securities class
action litigation.
Although the outcome of the federal and Connecticut derivative actions
cannot be predicted at this time, the Company believes that the defendants have
substantial defenses to the claims asserted in the complaints.
STATE INSURANCE AND HEALTH DEPARTMENTS
On August 10, 1998, the New York State Insurance Department ("NYSID")
completed its triennial examination and market conduct examination of Oxford's
New York HMO and insurance subsidiaries. In the Reports on Examination (the
"Reports") the NYSID, based on information available through July 1998,
determined that certain assets on the December 31, 1997 balance sheets of the
Company's New York subsidiaries should not be admitted for statutory reporting
purposes and NYSID actuaries recorded additional reserves totaling approximately
$81.3 million for both subsidiaries on the balance sheet as determined by the
examiners. The Company contributed $152 million to the capital of its New York
HMO and insurance subsidiaries in satisfaction of the issues raised in the
Reports relating to the subsidiaries' financial statements, and maintaining such
subsidiaries' compliance with statutory capital requirements as of June 30,
1998. The Reports also made certain recommendations relating to financial
record-keeping, settlement of intercompany accounts and compliance with certain
NYSID regulations. The Company has agreed to address the recommendations in the
Reports. As previously reported, in December 1997, the Company made additions of
$164 million to the reserves of its New York subsidiaries at the direction of
the NYSID. The NYSID issued a Market Conduct Report identifying several alleged
violations of state law and NYSID regulations. On December 22, 1997, the NYSID
and Oxford entered into a stipulation under which Oxford promised to take
certain corrective measures and to pay restitution and a $3 million fine. The
stipulation provides that the NYSID will not impose any other fines for Oxford's
conduct up to November 1, 1997. The NYSID has directed the Company's New York
subsidiaries to obtain notes or other written evidence of agreements to repay
from each provider who has received an advance. The NYSID has continued to
review market conduct issues, including, among others, those relating to claims
processing, the level of commissions paid to brokers and the determination of
premium rates for commercial group customers.
29
<PAGE> 30
The Company has agreed to take certain other corrective actions with respect to
certain of these market conduct issues, but additional corrective action may be
required and such actions could adversely affect the Company's results of
operations.
On January 5, 1999, March 29, 1999 and July 14, 1999, the Company
agreed to pay fines of $40,900, $51,900 and $30,200, respectively, to the NYSID
in connection with certain alleged violations of New York's prompt payment law.
The NYSID has also requested additional information concerning delayed claim
payments and has informed Oxford that it will continue to review complaints on
an ongoing basis to establish violations of the prompt pay statute, and that
such violations would result in additional fines. Fines for similar alleged
violations have also been imposed on other health plans in New York.
The NYSID has also raised certain issues relating to the Company's
methodology for determining premium rates for the Company's large group
business. On May 26, 1999, the NYSID issued rule interpretations in Circular
Letter 13, effective February 1, 2000, which requires the Company and competing
health plans to fully community-rate all HMO-based point-of-service ("POS")
products. This policy will impact the current methodology for determining
premium rates for Company's large group business. In order to maintain a
substantially similar pricing methodology, the Company plans to offer its large
group Freedom Plan product through its health insurance subsidiary. The
implementation of this plan is not likely to occur until a few months after the
February 1, 2000 effective date of Circular Letter 13. The offering is subject
to NYSID approval of forms and rates and there can be no assurance approval will
be timely received. The approval process may also give rise to regulatory
issues, which could affect the terms of the products to be offered or the terms
of arrangements between the Company and healthcare providers.
At this time, the Company cannot predict the outcome of continuing
market conduct reviews by the NYSID, enforcement of the New York prompt payment
law or recent changes in premium pricing practices.
The New Jersey Department of Health and Senior Services ("NJDHSS") has
completed or is nearing completion of a routine periodic audit of the Company's
New Jersey operations. In addition, by letter dated June 15, 1999, the NJDHSS
notified Oxford that its review of complaints from Oxford providers indicated
that Oxford may be in violation of New Jersey's Prompt Pay Statute and
associated regulations, and that these alleged violations could result in the
imposition of a fine. Oxford has submitted information to the NJDHSS regarding
the alleged violations and will continue to work with the NJDHSS to resolve
these issues. At this time, Oxford cannot predict the outcome of these matters.
The NJDBI is nearing completion of its market conduct and financial
examinations of the Company's New Jersey HMO subsidiary. The market conduct
examination relates to the subsidiary's activities in 1997 and the first half of
1998 and is expected to assert deficiencies relating to, among others, claims
processing and handling of complaints. The NJDBI is likely to seek imposition of
a fine in connection with completion of the examination. In connection with the
financial examination, the NJDBI is requiring the Company to provide certain
collateral for repayment of advances made in 1997 to providers in respect of
delayed claims by setting aside in trust at the parent company funds equal to
the admitted portions of the advances on the New Jersey subsidiary's statutory
financial statements. See "Liquidity and Capital Resources."
The Company is also subject to ongoing examinations with respect to
financial condition and market conduct for its HMO and insurance subsidiaries in
other states where it conducts business. The outcome of these examinations
cannot be predicted at this time.
NEW YORK STATE ATTORNEY GENERAL
As previously reported, on November 6, 1997, the New York State
Attorney General served a subpoena duces tecum on the Company requiring the
production of various documents, records and materials "in regard to matters
relating to the practices of the Company and others in the offering, issuance,
sale, promotion, negotiation, advertisement, distribution or purchase of
securities in or from the State of New York." Since then, Oxford has produced a
substantial number of documents in response to the subpoena, and expects to
produce additional documents. In addition, some of Oxford's present and former
directors and officers have provided testimony to the Attorney General's staff.
On April 12, 1999, the Attorney General served a subpoena duces tecum
on Oxford seeking production of certain documents relating to Oxford's handling
of inquiries, claims and complaints regarding emergency medical services. The
subpoena was accompanied by a letter stating that, based on an examination of
30
<PAGE> 31
materials relating to Oxford's individual New York plans, Oxford appeared to be
in violation of certain provisions of the Managed Care Reform Act of 1996 that
relate to the provision and disclosure of emergency medical services. By letter
dated April 20, 1999, Oxford submitted a response to the Attorney General's
letter outlining the steps it has taken to comply with the relevant provisions
of the Managed Care Reform Act.
The Attorney General served another subpoena duces tecum, dated July
20, 1999, on Oxford. This subpoena was served on Oxford and other New York
health care plans as part of an investigation by the Attorney General. The
subpoena seeks production of certain documents relating to Oxford's utilization
review process. Utilization review is the review undertaken by a health care
plan to determine whether a requested health care service that has been, will be
or is being provided to an Oxford member is medically necessary. Oxford is in
the process of producing documents in response to the subpoena.
The Attorney General's Health Care Bureau also periodically inquires of
the Company with respect to hospital and provider payment issues and member
complaints.
The Company intends to cooperate fully with the Attorney General's
inquiries, the outcome of which cannot be predicted at this time.
SECURITIES AND EXCHANGE COMMISSION
As previously reported, the Company received an informal request on
December 9, 1997 from the Securities and Exchange Commission's Northeast
Regional Office seeking production of certain documents and information
concerning a number of subjects, including disclosures made in the Company's
October 27, 1997 press release announcing a loss in the third quarter. Oxford
has produced documents and has provided information in response to this informal
request.
The Commission has served the Company and certain of its current and
former officers and directors with several subpoenae duces tecum requesting
documents concerning a number of subjects, including, but not limited to, the
Company's public disclosure of internal and external audits, uncollectible
premium receivables, timing of and reserves with respect to payments to vendors,
doctors and hospitals, payments and advances to medical providers, adjustments
related to terminations of group and individual members and for nonpaying group
and individual members, computer system problems, agreements with the New York
State Attorney General, employment records of former employees, and the sale of
Oxford securities by officers and directors. Oxford and certain of its current
and former officers and directors have produced and are continuing to produce
documents in response to these subpoenae. Some of Oxford's present and former
directors, officers and employees have provided testimony to the Commission, and
others are expected to do so.
Oxford intends to cooperate fully with the Commission and cannot
predict the outcome of the Commission's investigation at this time.
ARBITRATION PROCEEDINGS
As previously reported by the Company, on February 3, 1998, the New
York County Medical Society ("NYCMS") initiated an arbitration proceeding before
the American Arbitration Association ("AAA") in New York against Oxford alleging
breach of the written agreements between Oxford and some NYCMS physician members
and failure to adopt standards and practices consistent with the intent of those
agreements. The notice of intention to arbitrate was subsequently amended to
join thirteen additional New York medical associations as co-claimants. NYCMS
and the other claimants seek declaratory and injunctive relief requiring various
changes to Oxford's internal practices and policies, including practices in the
processing and payment of claims submitted by physicians. On August 12, 1999,
the New York State Supreme Court granted Oxford's petition for a permanent stay
of this proceeding and on September 22, 1999, NYCMS filed a notice of appeal of
this decision.
In addition, on March 30, 1998, Oxford received a demand for
arbitration from two physicians purporting to commence a class action
arbitration before the AAA in Connecticut against Oxford alleging breach of
contract and violation of the Connecticut Unfair Insurance Practices Act.
31
<PAGE> 32
Also, some individual physicians claiming that payments under their
contracts with Oxford were delayed have announced their intention to commence
arbitration proceedings against Oxford. Oxford has been served with notices of
intent to arbitrate, on behalf of more than thirty-five individual physicians.
More than twenty-five arbitration proceedings have been filed by individual
physicians, one of which has been withdrawn
In November 1998, various individual physicians purported to amend
their demands for arbitration by adding a claim for punitive damages. These
claims all allege that Oxford's failure to develop the computer systems and
personnel necessary for the prompt and efficient processing of claims was
reckless and intentional, and that Oxford's failure to pay claims was arbitrary,
capricious and without good faith basis.
On May 14, 1999, Oxford filed a motion to dismiss the punitive damages
claim in one of the individual arbitration cases, Ritch v. Oxford, on the
grounds that, inter alia, plaintiff had failed to allege any tort claim and that
a complaint for breach of contract will not support punitive damages. After
briefing and oral argument on this issue in the Ritch case, plaintiff was
permitted to amend his complaint on June 17, 1999 to add a cause of action for
fraud. Oxford subsequently renewed its motion to dismiss the punitive damages
claim, which motion was granted on August 10, 1999. The Company will seek to
have the decision with respect to the punitive damages motion followed in the
other individual arbitration cases.
In September 1999, Oxford and counsel for the NYCMS and various
individual physicians agreed to suspend all arbitration proceedings on behalf of
the NYCMS and the individual physicians pending settlement talks.
The outcome and settlement prospects of the various arbitration
proceedings cannot be predicted at this time although the Company believes that
it has substantial defenses to the claims asserted and intends to defend the
arbitrations vigorously.
JEFFREY S. OPPENHEIM, M.D., ET AL. V. OXFORD HEALTH PLANS, INC., ET
AL., INDEX NO. 97/109088
As previously reported by the Company, on May 19, 1997, Oxford was
served with a purported "Class Action Complaint" filed in the New York State
Supreme Court, New York County by two physicians and a medical association of
five physicians. Plaintiffs alleged that Oxford (i) failed to make timely
payments to plaintiffs for claims submitted for health care services and (ii)
improperly withheld from plaintiffs a portion of plaintiffs' agreed
compensation. Plaintiffs alleged causes of action for common law fraud and
deceit, negligent misrepresentation, breach of fiduciary duty, breach of implied
covenants and breach of contract. The complaint sought an award of an
unspecified amount of compensatory and exemplary damages, an accounting, and
equitable relief.
On July 24, 1997, Oxford and plaintiffs reached a settlement in
principle of the class claims wherein Oxford agreed to pay, from September 1,
1997 to January 1, 2000, interest at certain specified rates to physicians who
did not receive payments from Oxford within certain specified time periods after
submitting "clean claims" (a term that was to be applied in a manner consistent
with certain industry guidelines). Moreover, Oxford agreed to provide to
plaintiffs' counsel, on a confidential basis, certain financial information that
Oxford believed would demonstrate that Oxford acted within its contractual
rights in making decisions on payments withheld from plaintiffs and members of
the alleged class. The settlement in principle provided that, if plaintiffs'
counsel reasonably does not agree with Oxford's belief in this regard,
plaintiffs retain the right to proceed individually (but not as a class) against
Oxford by way of arbitration. Oxford has supplied financial information to
plaintiffs' counsel and has exchanged draft settlement papers with plaintiffs'
counsel.
OTHER
On May 18, 1998, a purported "Class Action Complaint" was brought
against Oxford and other unnamed defendant plan administrators filed in the
United States District Court for the Eastern District of New York by four
plaintiffs who claim to be beneficiaries of defendants' health insurance plans
seeking declaratory and other relief from defendants for alleged wrongful denial
of insurance coverage for the drug Viagra. On September 8, 1998, Oxford moved to
dismiss the complaint based on plaintiffs' failure to exhaust their
administrative remedies. By Memorandum and Order dated August 23, 1999, this
motion was denied.
32
<PAGE> 33
On October 26, 1998, Complete Medical Care, P.C. ("CMC"), United
Medical Care, P.C. ("UMC"), Comprehensive Health Care Corp. ("CHC") and Oscar
Fukilman, M.D. commenced actions in the Supreme Court of the State of New York
for New York County against Oxford and certain of its officers. The complaints
in United Medical Care, P.C. v. Oxford Health Plans, Inc. et al., Index No.
605176/98, and Complete Medical Care, P.C. v. Oxford Health Plans, Inc. et al.,
Index No. 605178/98, generally allege that Oxford and the individual defendants:
(i) breached, and have announced their intention to breach, certain agreements
with CMC and UMC for the delivery of health care services to certain of Oxford's
members; (ii) breached an implied covenant of good faith and fair dealing with
UMC and CMC; (iii) fraudulently induced CMC and UMC to enter into their
respective agreements with Oxford; (iv) tortiously interfered with CMC's and
UMC's current and prospective contractual relations with certain physicians; and
(v) defamed CMC and UMC. The complaints each seek at least $165 million in
damages, at least $500 million in punitive damages, unspecified interest, costs
and disbursements, and such other relief as the court deems proper. The
complaint in the Complete Medical Care action also alleges that Oxford has
unjustly enriched itself by withholding from CMC certain funds to which CMC
claims it is entitled, and seeks the imposition of a constructive trust with
respect to those funds. The complaint in Oscar Fukilman, M.D. et al v. Oxford
Health Plans, Inc. et al., Index No. 604177/98, alleges that Oxford and certain
officers defamed, and conspired to defame, Dr. Fukilman and CHC, and seeks at
least $25 million in damages and unspecified costs and disbursements and such
other relief as the court deems proper.
On January 8, 1999, defendants: (1) served an answer and counterclaims
in the Complete Medical Care case; (2) filed a motion to compel arbitration and
dismiss the United Medical Care complaint; and (3) moved to dismiss the Fukilman
v. Oxford complaint. Defendants' motions to dismiss have been fully briefed and
argued, and are now pending before the New York State Supreme Court.
On September 28, 1999, Travers O'Keefe & Associates, Inc. ("Travers"),
an insurance brokerage firm, brought an action against the Company and its
insurance subsidiary, Oxford Health Insurance, Inc. (for this paragraph only,
together, "Oxford") in the New York State Supreme Court, County of New York.
Travers alleges that Oxford's termination of its broker contract was in
retaliation for complaints made by Travers against Oxford with the NYSID.
Travers asserts causes of action for breach of contract, tortious interference
with contract and prima facie tort and seeks damages in an amount exceeding $10
million. Travers' motion for a preliminary injunction in the matter was denied.
Oxford has asserted counterclaims and a third-party complaint alleging that
Travers and a current Travers employee, have engaged in a pattern of wrongdoing
against Oxford.
Although the outcome of these actions cannot be predicted at this time,
the Company believes that it and the individual defendants have substantial
defenses to the claims asserted and intends to defend the actions vigorously.
Oxford, like HMOs and health insurers generally, excludes certain
health care services from coverage under its POS, HMO, PPO and other plans. In
the ordinary course of business, the Company is subject to legal claims asserted
by its members for damages arising from decisions to restrict reimbursement for
certain treatments. The loss of even one such claim, if it were to result in a
significant punitive damage award, could have a material adverse effect on the
Company's financial condition or results of operations. In addition, the risk of
potential liability under punitive damages theories may significantly increase
the difficulty of obtaining reasonable settlements of coverage claims.
In addition, several managed care organizations have recently been sued
in class action lawsuits asserting various causes of action under RICO and
ERISA. These lawsuits typically assert that the health plans have employed
criteria and procedures for providing care that are inconsistent with those
stated in the certificates and other information provided to their members, and
that because of these intentional misrepresentations and omissions, a class of
all plan members has been injured by virtue of the fact that they received
benefits of lesser value than the benefits represented to and paid for by such
members. According to recent press reports, these are the first of many lawsuits
being prepared against various HMOs.
The financial and operational impact that such evolving theories of
recovery may have on the managed care industry generally, or Oxford in
particular, is presently unknown.
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In the ordinary course of its business, the Company also 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.
For a full description of legal proceedings against the Company, see
the Company's Form 10-K/A for the year ended December 31, 1998, Form 10-Q/A for
the quarterly period ended March 31, 1999 and Form 10-Q for the quarterly period
ended June 30, 1999, all of which are incorporated herein by reference.
ITEM 5. OTHER INFORMATION
STATUS OF INFORMATION SYSTEMS
During 1999, the Company made significant progress in resolving
software and hardware problems that began in 1996 with the conversion of a
significant part of its business operations to a new computer operating system
developed at Oxford. The current system has been substantially remediated to
address issues which resulted in significant delays in the Company's claims
payments and group and individual billing. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations". However, the Company
is continuing to seek improvements to, to add needed functionality to and to
work on requisite modifications and enhancements to its computer operating
systems.
Although the Company made certain modifications and enhancements to
attempt to improve systems controls and processing efficiencies during 1998 and
1999, the Company continues to review its long-term information system strategy.
The Company's resources are currently focused on (i) making requisite
modifications and enhancements to the existing information systems and (ii)
establishing improved performance and management information.
There can be no assurance that the Company will be successful in
eliminating the system problems that have resulted in payment delays and claims
processing errors. Moreover, operating and other issues can lead to data
problems that affect performance of important functions, including claims
payment and group and individual billing. There can also be no assurance that
the process of improving existing systems will not be delayed or that additional
systems issues will not arise in the future.
For information as to the Company's "Year 2000" readiness, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Document
----------- -----------------------
<S> <C>
3(a) Second Amended and Restated Certificate of
Incorporation, as amended, of the Registrant
3(b) Amended and Restated By-laws of the
Registrant
4(a) Certificate of Designations of Series D
Cumulative Preferred Stock
4(b) Certificate of Designations of Series E
Cumulative Preferred Stock
10(a) Amendment, dated October 12, 1999, to Letter
Agreement, dated July 24, 1998, between the
Registrant and Benjamin Safirstein, M.D.
15 Letter of Ernst & Young LLP re Unaudited
Condensed Consolidated Interim Financial
Information
</TABLE>
34
<PAGE> 35
(b) Reports on Form 8-K
In a report on Form 8-K dated June 30, 1999 and filed on July
1, 1999, the Company reported under Item 5. "Other Events"
certain information regarding its Medicare programs.
In a report on Form 8-K dated July 10, 1999, and filed on July
22, 1999, the Company reported, under Item 5. "Other Events,"
certain information regarding its New Jersey Medicare program.
In a report on Form 8-K dated July 29, 1999, and filed on
August 2, 1999, the Company reported, under Item 5. "Other
Events," its second quarter 1999 earnings press release.
SIGNATURES
Pursuant to the requirements 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.
OXFORD HEALTH PLANS, INC.
-------------------------------------
(REGISTRANT)
November 15, 1999 /s/ NORMAN C. PAYSON, M.D.
- --------------------------- -------------------------------------
Date NORMAN C. PAYSON, M.D.,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
November 15, 1999 /s/ YON Y. JORDEN
- --------------------------- -------------------------------------
Date YON Y. JORDEN,
CHIEF FINANCIAL OFFICER
35
<PAGE> 36
OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
3(a) 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/A
for the fiscal year ended December 31, 1998 (File No. 0-19442)
3(b) Amended and Restated By-laws of the Registrant, incorporated
by reference to Exhibit 3(ii) of the Registrant's Form 10-Q
for the quarterly period ended September 30, 1998 (File No.
0-19442)
4(a) Certificate of Designations of Series D Cumulative Preferred
Stock, incorporated by reference to Exhibit 3(a) of the
Registrant's Annual Report on form 10-K/A for the fiscal year
ended December 31, 1998 (File No. 0-19442)
4(b) Certificate of Designations of Series E Cumulative Preferred
Stock, incorporated by reference to Exhibit 3(a) of the
Registrant's Annual Report on form 10-K/A for the fiscal year
ended December 31, 1998 (File No. 0-19442)
10(a) Amendment, dated October 12, 1999, to Letter Agreement, dated
July 24, 1998, between the Registrant and Benjamin Safirstein,
M.D.*
15 Letter of Ernst & Young LLP re Unaudited Condensed
Consolidated Interim Financial Information*
</TABLE>
*Filed herewith
36
<PAGE> 1
Exhibit 10(a)
October 12, 1999
Dr. Benjamin Safirstein
237 South Mountain Avenue
Montclair, NJ 07042
RE: Consulting Relationship with Oxford Health Plans, Inc.
Dear Ben:
This letter serves to amend that certain letter agreement dated as of
July 24, 1998 (the "Letter Agreement") between you and Oxford Health Plans, Inc.
(the "Company"). Pursuant to Section 4(c) of the Letter Agreement, the Company
agreed to retain you as a consultant for a period of one year following your
Employment Termination Date (as defined in the Letter Agreement). In
consideration of your continued services to the Company and representation on
the Company's Board of Directors, the Company hereby offers to continue your
consulting relationship until such time as you cease to act as a member of the
Company's Board of Directors. Accordingly, the Company hereby offers to add a
new Section 4(g) to the Letter Agreement, effective as of July 31, 1999, as
follows:
"(g) Commencing July 31, 1999, the Company hereby retains you
as a Consultant to the Company until such time as you cease to act as a
member of the Company's Board of Directors (the "Additional Consulting
Period"). During the Additional Consulting Period, you agree to be
reasonably available for consultation with the Company by telephone or
in person at the Company's offices in New York City or other offices in
New York City as necessary. The performance of your consulting services
shall be scheduled on reasonable notice and in such a manner so as not
to interfere with your other business activities, and so as not to
present any conflict of interest with your other business activities,
it being expressly understood that you are permitted, notwithstanding
these consulting obligations, to secure full-time employment elsewhere.
During the Additional Consulting Period, the Company shall pay you a
per diem rate for your consulting services, to be determined by the
Company, for any days on which consulting services are performed by
you. In addition, during the Additional Consulting Period, your Options
shall continue to vest and remain exercisable in accordance with their
terms. Notwithstanding anything to the contrary in this paragraph,
either party hereto may terminate your consulting arrangement and the
Additional Consulting Period hereunder upon ninety (90) days prior
notice."
The provisions of the Letter Agreement shall not affect the
compensation or benefits that
-1-
<PAGE> 2
you otherwise receive in your capacity as a member of the Company's Board of
Directors. Aside from the amendment provided hereby, all other provisions of the
Letter Agreement shall remain unchanged and unaffected by this amendment. Please
note that the provisions of Section 4(d) of the Letter Agreement which provided
for the continuation of certain welfare benefits will not apply during the
Additional Consulting Period. If this presents a hardship, please feel free to
contact me.
This amendment shall be binding on the Company and its successors and
assigns. Please confirm your acceptance of this amendment by returning to me the
enclosed copy of this letter, signed where indicated.
Very truly yours,
OXFORD HEALTH PLANS, INC.
BY: /s/ JEFFERY H. BOYD
-----------------------------------------
Jeffery H. Boyd, Executive Vice President
and General Counsel
Accepted and Agreed:
/s/ BENJAMIN SAFIRSTEIN, M.D.
- -----------------------------------------
Dr. Benjamin Safirstein
10/14/99
- -----------------------------------------
Date
-2-
<PAGE> 1
Exhibit 15
Letter of Ernst & Young LLP
Re Unaudited Consolidated Interim Financial Information
To the Board of Directors
Oxford Health Plans, Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-4 No. 333-77525) of Oxford Health Plans, Inc. for the registration of
$200,000,000 of 11% Senior Notes due 2005 of our report dated October 29, 1999
relating to the unaudited consolidated interim financial statements of Oxford
Health Plans, Inc. that are included in its Form 10-Q for the quarter ended
September 30, 1999.
Ernst & Young LLP
Stamford, Connecticut
November 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000865084
<NAME> OXFORD HEALTH PLANS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 289,409
<SECURITIES> 778,057
<RECEIVABLES> 85,879
<ALLOWANCES> 3,861
<INVENTORY> 0
<CURRENT-ASSETS> 1,220,548
<PP&E> 212,198
<DEPRECIATION> 154,094
<TOTAL-ASSETS> 1,427,758
<CURRENT-LIABILITIES> 901,744
<BONDS> 358,357
332,778
0
<COMMON> 814
<OTHER-SE> (165,935)
<TOTAL-LIABILITY-AND-EQUITY> 1,427,758
<SALES> 0
<TOTAL-REVENUES> 3,163,535
<CGS> 0
<TOTAL-COSTS> 2,567,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,239
<INCOME-PRETAX> 89,880
<INCOME-TAX> 37,750
<INCOME-CONTINUING> 52,130
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,130
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000865084
<NAME> OXFORD HEALTH PLANS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 228,577
<SECURITIES> 892,872
<RECEIVABLES> 169,586
<ALLOWANCES> 9,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,388,339
<PP&E> 279,896
<DEPRECIATION> 152,650
<TOTAL-ASSETS> 1,709,087
<CURRENT-LIABILITIES> 1,217,174
<BONDS> 361,109
287,933
0
<COMMON> 804
<OTHER-SE> (157,933)
<TOTAL-LIABILITY-AND-EQUITY> 1,709,087
<SALES> 0
<TOTAL-REVENUES> 3,591,726
<CGS> 0
<TOTAL-COSTS> 3,389,585
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 16,209
<INTEREST-EXPENSE> 43,761
<INCOME-PRETAX> (605,376)
<INCOME-TAX> (16,532)
<INCOME-CONTINUING> (588,844)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (588,844)
<EPS-BASIC> (7.57)
<EPS-DILUTED> (7.57)
</TABLE>
