FOOL CONFERENCE CALL
SYNOPSIS*
By Debora Tidwell
(MF Debit)
Oxford Health Plans, Inc.
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800 Connecticut Ave.
Norwalk, CT 06856
(203) 851-2308
http://www.oxhp.com
ANN ARBOR, Mich. (Feb. 18, 1997) -- Oxford Health's product lines include traditional health maintenance organizations (HMOs), point-of-service plans, third-party administration of employer-funded benefit plans, Medicare and Medicaid plans, and dental plans. Oxford markets its health plans to employers in New York, New Jersey, Pennsylvania, Connecticut, and New Hampshire through its direct sales force and through independent insurance agents and brokers.
FOURTH QUARTER AND FULL YEAR REVENUE AND EARNINGS
Oxford reported that fourth quarter 1996 net earnings rose 105% over the year-ago quarter, to $32.0 million, or $0.39 per share, on a revenue increase of 64%, to $880.3 million. As in past quarters, the earnings growth was driven by increased enrollment in the company's fully insured programs, stable medical expense trends, and sustained improvement in the ratio of administrative expenses to operating revenues.
For the year ended December 31, 1996, revenues totaled $3.08 billion, a 74% increase from $1.77 billion for 1995. Operating earnings rose to $176.5 million, an increase of 86% from $95.1 million in 1995, while net earnings for the year 1996 increased 90% to $99.6 million, or $1.24 per share, from $52.4 million, or $.71 per share, for the year ended December 31, 1995.
REVENUE DETAILS AS OF 4Q 1996
On an annualized revenues basis, at the end of the fourth quarter, the Freedom plan was approximately a $2.1 billion per year business, HMO $360 million, Medicare $726 million, and Medicaid $273 million, yielding a total annualized run rate of approximately $3.5 billion, not including new 1997 business. The mix has not changed much, except that Medicare has gone from 17% to 21% of revenues. The company expects that in 1997, Medicare will remain at roughly 21% of the total business on a revenue basis.
Average monthly revenue per member reached $196.41 in the fourth quarter, up 5.8% from the average revenue yield in 1995. The increase is attributable to changes in the mix of membership (notably the increase in Medicare membership as percentage of total) and premium increases that were instituted during the year. Medicare enrollees yield $499 per member in monthly revenue versus approximately $170 for the other programs.
EXPENSES
New cost-control programs the company has instituted have driven efficiencies.
Administrative expenses were 15.4% of operating revenue for the fourth quarter of 1996, compared with 19.4% for the fourth quarter of 1995. Oxford's medical loss ratio (MLR) dropped to 80.0% in the fourth quarter, as compared to 80.2% for the third quarter. Full year 1996 MLR was 80.1%.
Net margin increased to 3.6% during the 4Q which is higher than at any point during the last eight quarters. For the full year, the net margin was 3.2%.
Employee count increased for the year by 1300, reaching 5012 by year-end.
Oxford's physician practice management affiliate has not yet become profitable, losing $1.05 million for Oxford in the fourth quarter, down from a $1.4 million loss in the year-ago quarter. This business has been negatively affected by reduced Medicaid reimbursements in NY. They expect profitability during the current year, but Oxford holds open the possibility of selling their stake in this business.
MEMBERSHIP GROWTH
Oxford's enrollment totaled approximately 1,535,500 members at December 31, 1996, an increase of more than 93,000 during the fourth quarter of 1996 and approximately 52% higher than membership at the end of last year's fourth quarter. Membership breakdown at the end of 1996 and percentage change from 1995 was as follows:
1996 % change Freedom Plan 1,015,100 +49% HMO 192,300 +72% Medicare 125,000 +86% Medicaid 162,000 +53% Total Fully Insured 1,494,400 +55% Self-funded 41,100 - 4% Total Membership 1,535,500 +52%
SYSTEMS PERFORMANCE PROBLEMS
Delays in billing, claims, and payments processing occurred a result of Oxford's ongoing conversion of a new computer and database system. As a consequence, reserves for claims payable increased to $624 million, or 95.9 days of claims payable, versus 88 days in the preceding quarter. Billing delays led to an increase in accounts receivable. For approximately 10 days during the quarter, Oxford had virtually no throughput of claims and billings, and for four to five weeks throughput was only 20% of normal.
Problems in both the software and hardware elements of the system did not become evident until the system was under the full strain of thousands of simultaneous users. The company moved some employees to a second shift to distribute the load, which has speeded up processing considerably.
The database and computers systems changeover was a major challenge for the company, and they are now "over the hump." More than half of the backlog has been processed, and the company is making headway to eliminate the balance within another six to eight weeks. The company is also spending approximately $800,000 per month on systems consultants; that amount is ramping down and should be pretty well gone by June or so, according to Oxford.
The new system will create greater efficiencies for the company going forward. Oxford is back to processing new group applications within 8 to 10 business days of receipt, and processing new individual group members within 24 to 48 hours after that.
NEW YORK HEALTHCARE REFORM ACT
The State of New York passed a law effective January 1, 1997, that changed the way teaching hospitals are subsidized for the education of graduate medical students and for mitigating costs arising from uncollectable bills and charity care. The state moved from raising the revenues directly out of hospital reimbursements to a new tax on health insurance premiums. This shifted costs from hospitals to insurers.
As a result, Oxford added a 3% increase to its premiums and renegotiated its contracts with hospitals to reflect the shift. One of Oxford's competitors just announced that no insurer had yet to successfully renegotiate any contracts with NY hospitals. In fact, Oxford has signed contracts with 72 of the 97 hospitals with which it works, including virtually all of the major teaching hospitals, and has verbal agreements in place with the remaining 25. Oxford had an advantage over competitors in this renegotiation in that Oxford has a history of utilizing the somewhat higher cost (and higher quality) teaching hospitals, whereas some competitors tended to utilize smaller, non-teaching hospitals and therefore had little leverage in renegotiating fees or taking advantage of changed legal environment. As a consequence, while Oxford's hospital bills will go down -- on average about 18% -- it's likely that some competitors may see dramatic increases in their hospital costs.
1997 OUTLOOK
FREEDOM PLAN AND HMO PRICING. In terms of 1997 pricing, the NY small-case product (groups with fewer than 50 lives) originally had a 3-5% increase projected; that is now a 6-8% increase, due to implementation of the NY Healthcare Reform Act. Oxford added 3% to premiums as a consequence of NYHCRA. Large-case NY, which is experience-rated, also had a 3% increase added. For the HMO members, Oxford expects a 1% increase. In NJ, small case rates are up 1%, large case is experience-rated, which probably means that for NJ Oxford's rates will drop due to cost reductions there. NJ HMO premiums will rise approximately 1%.
MEDICARE AND MEDICAID PRICING. The Health Care Finance Administration increased Oxford's Medicare yields in 1997 by approximately 1.6%, on average. The company's average yield should rise closer to 4-5%, however, because Oxford will be adding Medicare members faster in the counties with higher reimbursements and slowly in the counties with lower reimbursements. The estimate Medicaid reimbursement increase was for 1.38% in 1997, but the NY component of Oxford's Medicaid business could adjust upward on April 1. Moreover, the company has mitigated its exposure to reimbursement economies in New York: only 30% of Oxford's Medicaid caseload is in New York, and the company is getting good capitation increases in Philadelphia -- from $158 in 1996 to $190 for 1997.
MEMBERSHIP GROWTH. Almost 155,000 net new members have enrolled since the end of December 1996, bringing total membership to approximately 1,690,000 as of February 1, 1997. On an annualized basis this projects to $3.98 billion, or close to a 32% growth in revenues for the full year 1997, even though the company is only two months into the new year.
ADDITIONAL GUIDANCE. Looking forward, expecting MLR to average roughly 80.2% to 80.3% for the full year -- slightly higher earlier in the year, slightly lower later on. If Oxford does achieve its efficiency objectives, that may permit the company to reduce rates later in the year and become even more competitive while preserving net margins. A projection of $4.3 billion to $4.36 billion in revenues is plausible for 1997 revenues. That yields an EPS forecast around $1.80 for 1997. Looking further out, EPS growth could increase faster than top-line growth.
PROPOSALS FOR MEDICARE REFORM
Three main elements of proposed Medicare reform at the federal level have been publicized. One is that the federal government will cut reimbursements to HMOs for Medicare members. The second is a change in funding for graduate medical education, similar to what just occurred in NY State. Third is regional shifts in funding patterns -- taking money from urban environments and moving it to rural environments.
The federal budgetary process is a long and complicated one, with many opportunities for dialog and debate, so there is no way to forecast what will ultimately occur. CEO Wiggins has no doubt that whatever happens, Oxford can adapt.
The first proposal -- cut in reimbursements to HMOs -- would effectively become a tax on the elderly, especially the lower income elderly who tend to be the first to join HMOs. HMOs could respond by cutting benefits, which could have the effect of slowing growth of Medicare enrollment in HMOs, which in turn would lower rather than increase savings in the overall Medicare program. Wiggins does not think this will happen. The HMOs have been the major source of efficiencies in Medicare, and it makes little sense "to kill the goose that lays the golden egg."
Wiggins argues that President Clinton can best achieve his targeted cost reductions by increasing incentives for Medicare recipients to move into HMOs -- using a market-based solution that is generally working well for the government and for Medicare recipients rather than using a heavy-handed regulatory approach.
As for the second issue -- funding graduate medical education -- Oxford's success with the NY reform bodes well for how the company would cope with any comparable reform at the federal level. Also, Oxford is able to point to the NY experience to demonstrate that the outcome increases net costs rather than decreases them.
On the third issue, Oxford could cope by shifting its marketing emphases from less profitable counties to more profitable ones, instituting rate or service adjustments, and other moves. Oxford intends to move into new geographic markets fairly soon in any event. The company does not anticipate a large, "block-buster" acquisition but rather a move into a large, fragmented market with a small footprint to begin with, building from there.
According to Wiggins, the main thing to bear in mind is that, whatever the policy changes, they don't change Oxford's position relative to competitors -- except perhaps to enhance Oxford's competitive posture.
RESPONSES TO QUESTIONS
Competitors' reactions to Oxford's price changes have been all over the map -- some raised prices, some lowered them. Oxford may have lost some members with the price increases but has obviously gained many more. The vast majority of new members joining Oxford are migrating from traditional fee-for-service insurers. Empire of NY recently announced some significant rate increases for their HMO products, which could impact their membership growth negatively.
Oxford will begin to see the benefits of a number of cost efficiency initiatives this year. The company has nine specialty-based management initiatives under way, with a staff of 40. To date, 24 requests for proposals (RFPs) for particular kinds of cases have gone out for bid or are about to go out. The focus of Oxford's medical advisory teams in this initiative is not only on developing RFPs but on developing strategies for identifying at-risk members, developing patient information materials, patient satisfaction surveys, and case management guidelines. Wiggins said, "We're convinced we're on the leading edge of a revolution in the way that healthcare can be organized and financed."
Oxford also has a new private-practice partnership model, is expanding electronic commerce at the Oxford Website (http://www.oxhp.com), developing whole new ways of re-enrolling groups and individuals, empowering members to reduce the need to visit the primary physician before getting a referral, an on-call service -- a whole variety of things about to happen. The company is in a stronger position -- not just on the cost side but in all aspects of the company. Oxford's biggest enrollment years are still ahead of it, said Wiggins.
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