RightChoice posts net profit during second quarter 1998

RightChoice Managed Care Inc. reported solid revenues and a net profit for the second quarter of 1998, according to a July 30 press release from RightChoice.

The company had revenues of $191.8 million for the three months ended June 30, 1998, up 8.9 percent from $176.1 million for the same period one year ago. Net income for the second quarter of 1998 was $1.2 million, or 6 cents per share, compared with a loss of $2.3 million, or 12 cents per share, in the second quarter of 1997, the release stated.

The company's pre-tax operating loss of $615,000 in the second quarter of 1998 improved over a pre-tax operating loss of $11 million in the second quarter of 1997, due in part to the strength of premium rate increases and controlled general and administrative expense.

For the six months ended June 30, 1998, RightChoice reported net income of $2.2 million, or 12 cents per share, compared with net income of $3.9 million, or 21 cents per share, for the same period last year.

The decrease in net income is due primarily to significantly lower pre-tax investment gains in the first half of 1998 as compared with the same period of 1997, RightChoice stated. Pre-tax gains from the sale of investment securities in the first half of 1998 were $700,000, compared with $16.1 million in the same period last year.

"The company experienced operating improvements in the second quarter, both year over year and sequentially," said John A. O'Rourke, chairman, president and chief executive officer, in the release. "We attribute these improvements to raising premiums in line with the marketplace and our continuing focus on core operations and controlling overhead expenses. We continue to be cautious, however, about medical expense trends into the second half of 1998, which are increasing at a somewhat higher-than-expected rate."

Increases in premiums and fees contributed to higher total revenues, and generally flat general and administrative expenses contributed to improved operating results. Premium revenue increased 7.3 percent to $173.7 million in the second quarter of 1998, from $168.1 million in the same period a year ago.

Fees and other income, primarily from HealthLink and other self-funded membership, increased 26.8 percent over the same period in 1997.

Higher medical costs and utilization increased health care services expenses by 3.6 percent to $144.3 million, from $139.3 million in the same period last year.

The second quarter medical loss ratio decreased to 83.1 percent from 86.1 percent, due in part to this year's increased premiums and also to the $1.8 million reserve increase in the second quarter of 1997, which raised the medical loss ratio in that period.

For the first six months of 1998, the medical loss ratio was 83.1 percent, compared with 83.4 percent in the same period last year, the release stated.

Underwritten membership at June 30, 1998, decreased to 481,000 members from 496,000 members at June 30, 1997. About one-third of the decrease was due to the company's exit from the Medicaid business, which was completed in March 1998.

The remaining decrease was primarily in membership reductions in preferred provider organization programs.

However, the

AllianceChoice point-of-service program and the health maintenance organization posted year-over-year membership increases of 5.8 percent and 8.7 percent, respectively.

Membership in self-funded plans, primarily HealthLink, increased 9.3 percent to 1.5 million members as of the end of the second quarter of 1998, compared with 1.4 million members at the end of the second quarter of 1997.

The company reduced the general and administrative expense ratio to 20.7 percent of revenues in the second quarter of 1998, compared with 22.7 percent in the same period last year, as general and administrative (G&A) expenses, including depreciation and amortization, were generally flat at $39.8 million compared with $40 million.

G&A includes both general overhead and investments in ongoing corporate initiatives, such as the multi-year plan for improving information and operating systems, and programming to accommodate the year 2000. The G&A expense ratio for the first six months of 1998 was 21 percent, compared with 22.7 percent in the comparable period last year.

Excluding depreciation and amortization, the adjusted G&A ratio also decreased to 18.3 percent for the second quarter of 1998 from 19.6 percent for the same period of 1997.

The adjusted G&A ratio for the first six months of 1998 was 18.6 percent, compared with 19.7 percent for the same period last year.

On July 17, 1998, RightChoice's parent company, Blue Cross and Blue Shield of Missouri, joined the Missouri attorney general and the Missouri Department of Insurance to announce that they are continuing to work together to complete the proposed settlement announced April 22 for the resolution of litigation and regulatory issues. They expect a definitive agreement will be signed by Sept. 15, 1998.

The parties also announced that they will extend the previously announced standstill of certain litigation until Sept. 15, 1998.

When settlement documents are finalized, they will be presented to the Cole County Circuit Court for approval. The circuit court informally advised the parties that it has substantial reservations about the terms of the tentative settlement, and will scrutinize any final settlement presented to it very carefully.

In addition to court approval, the definitive agreement would include a number of conditions and contingencies, such as approvals by the Blue Cross and Blue Shield Association and shareholders, and securities registration filings, which may take several months to complete.

Meanwhile, "Our progress toward achieving operating profitability by year-end may be challenged by medical expense trends, which are running somewhat ahead of original forecasts and may result in (a medical loss ratio) approaching the mid-80s, rather than the low 80s, which we had been targeting," O'Rourke said in the release.

"We believe that operating losses will widen in the third quarter, consistent with the company's seasonal trends, and that gains from operations may not be realized until late in the year," he said. "We also see a number of encouraging factors that support our outlook for profitability in 1999."

These factors include:

1. Improvement in the marketing, sales and service organization that should yield results during the January 1999 enrollment period;

2. Increased penetration of the three-tier pharmacy benefit program through year-end;

3. The introduction of value-added programs, such as the BlueCard PPO (see related story on page 24), which provides members access to the Blue Cross and Blue Shield Association's national network at local network benefit levels;

4. Proven ability to control core overhead; and

5. The opportunity to reduce legal expenses and further streamline operations upon successful settlement of litigation and the implementation of the proposed framework announced in April.

The company's performance outlook for the remainder of 1998 includes:

?Average annual premium revenue growth rate per member per month in the 9 percent to 10 percent range;

?Adjusting the medical cost per member per month trend increase to the 7 percent to 9 percent range, and a medical loss ratio approaching the mid-80s for the year.

?Maintaining the G&A expense ratio

in the low 20s, inclusive of $10 mil-

lion in non-cash amortization expense for programming to accommodate the year 2000.

The company estimates that its systems are currently more than 50 percent compliant, and it is on track to achieve full year 2000 compliance by April 1999.

INSET CAPTION:

Medical expense trends are running ahead of original forecasts.[[In-content Ad]]