Health Net 1998 Annual Report Download - page 21

F O U N DAT IO N HEALT H SYSTEMS, I N C . 1 9
Revenues and Health Care Costs
The Company’s revenues grew by $1.7 billion or
23% for the year ended December 31,1998 as com-
pared to 1997. Growth in health plan revenues of
$1.6 billion for the year was due primarily to the
acquisitions that occurred in the fourth quarter of
1997,including Physicians Health Services,Inc.
(“PHS”), FOHP, Inc. (“FOHP”) and PACC HMO,
Inc. and PACC Health Plans, Inc. (collectively
“PACC”).Excluding these acquisitions, revenues
grew by $1 billion for the year ended December 31,
1998.The growth from existing health plan busi-
nesses was due to increases in premium rates in
virtually all markets and significant increases in
Medicaid enrollment in California.Growth in gov-
ernment contracts revenues totaled $40.3 million
and growth in specialty services revenues totaled
$24.5 million. See “Segment Reporting”for discus-
sion of Government Contracts/ Specialty Services.
The Company ’s reve nues grew by $525.8 mil-
lion or 7.8% for the year ended December 31, 1997
as compared to 19 9 6 . G rowth in reve nues for the ye a r
was due to slightly higher health plan premiums for
the Company ’s commercial membership and member-
ship growth in Medicaid contracts in California,
commercial membership growth in the Northeast,
and the partial year impact of acquisitions that
occurred in the second and fourth quarters of 1997.
Investment and other income was $99.0 million,
$114.3 million and $88.4 million in 19 98, 1997 and
19 9 6 , r e s p e c t i v e l y.The increase in 19 9 7 was primarily
related to non-recurring gains from the sale of
certain holdings and Medicaid contracts.
The overall medical care ratio (“MCR”)
(medical costs as a percentage of revenue) for the
year ended December 31,1998 was 86.5% as com-
pared to 83.1% for the year ended December 31,
1997.The increase was primarily due to higher
pharmacy costs in all divisions,benefit cost increases
which exceeded premium rate increases, increased
utilization and continued pricing pressures through-
out the Company’s health plans.Excluding the 1998
Charges,the MCR was 85.0%.
The overall MCR for the year ended Decem-
b e r 31,1997 was 83.1% compared to 84.5% for the
year ended December 31, 1996.The decline is due
primarily to higher medical costs and loss contracts
that negatively impacted the MCR in 1996 as well
as favorable reserve development in 1997 in certain
of the Company’s health plans as well as improved
health care and subcontractor performance on cer-
tain government contracts.The 1997 reduction in
MCR was offset slightly by escalating health care
costs including higher pharmacy costs coupled with
a relatively flat premium environment,particularly
in the California market and throughout the
Company’s health plans.
Selling, General and Administrative Costs
The Company’s selling,general and administrative
(“SG&A”) expenses increased by $190.7 million or
22.4% for the year ended December 31, 1998 as
compared to 1997.The increase in SG&A expenses
during 1998 is primarily due to the SG&A expenses
associated with the businesses a c q u i red duri n g
1 9 9 7 .The administrative expense ratio (SG&A as a
percentage of health plan and government contracts
revenue) d e c reased to 12.4% for the year ended
D e c e m b e r 31,1998 from 12.6% for the year ended
December 31, 1997.This decrease is primarily attrib-
utable to the Company’s ongoing efforts to aggres-
sively control its SG&A expenses and synergy
savings associated with the integration of its 1997
acquisitions which we re partially offset by incre a s e d
e x p e n d i t u res re l a t e d to consolidation and i n t e gr a t i o n
of the Company ’s administrative fa c i l i t i e s . Excluding
the 1998 Charges,the administrative expense ratio
was 12.2%.
The Company’s SG&A expenses decreased by
$8. 2 million or 1.0% for the year ended December 31,
1997 as compared to 19 9 6 .The administrative
expense ratio decreased to 12.6% for the year ended
December 31,1997 as compared to 13.6% for the
year ended December 3 1 ,1 9 9 6 .This decrease re f l e c t s
the Company ’s ongoing efforts to aggre s s ively contro l
its SG&A expenses and synergy savings associated
with the integration of Health Systems Intern a t i o n a l ,
Inc. and Foundation Health Corporation after the
merger transaction (the “FHS Combination”) invo l v-
ing such entities.This decrease was offset partially by
additional SG&A expenses associated with the new
acquisitions during 1997.
A m o rtization and Depre c i a t i o n
Amortization and depreciation expense increased
by $29.7 million in 1998 due to increases in intan-
gible assets and fixed assets as a result of the acquisi-
tions that occurred in the fourth quarter of 1997
and increased expenditures primarily related to the
consolidation and integration of the Company’s
administrative facilities.
A m o rtization and depreciation expense
declined by $14.6 million for the year ended
D e c e m b e r 3 1 , 1997 as compared to 1996 due to