METROPOLITAN HEALTH NETWORKS INC (MDPA.OB)
Quarterly Report (SEC form 10QSB)
Item 2. Management's Discussion and Analysis of
OF OPERATIONS
OVERVIEW
Metropolitan Health Networks, Inc. (the "Company" or "METCARE") was incorporated in the State of Florida in January 1996 and began its operations as a Provider Service Network (PSN) in
2000. As a PSN, METCARE assumes the risk for and manages the provision of health care services for patients through "global risk" contracts entered into with HMO's and other insurers in
return for a significant portion of the insurance premiums. Presently, substantially all of the Company's revenues are generated from its PSN operations.
As of June 30, 2001, we have HMO agreements to manage patient risk in South and Central Florida and are responsible for providing healthcare services to 45,000 patient lives. We provide our
services through a network of primary care physicians, specialists, hospitals and ancillary facilities. These providers have contracted to provide services to our patients agreeing to certain fee
schedules and care requirements.
We have developed management expertise in the fields of network development; disease, quality and utilization management; and claims adjudication and payment. Under our model, the
physicians maintain their independence but are aligned with a professional staff to assist in providing cost effective medicine. Each primary care physician provides direct patient services as a
primary care doctor including referrals to specialists, hospital admissions and referrals to diagnostic services.
We believe our expertise allows us to provide a service and manage the risk that health insurance companies cannot provide on an efficient and economic level. Health insurance companies are
typically structured as marketing entities to sell their products on a broad scale. Due to mounting pressures from the industry, managed care organizations have altered their strategy, returning to
the traditional model of selling insurance and downstreaming the risk to a provider service network. Under such arrangements, managed care organizations receive premium from the government
(HCFA) and commercial groups and pass a significant percentage of the premium on to a third party such as Metcare, to provide covered health benefits to patients, including pharmacy and other
enhanced services. After all medical expenses are paid, any surplus or deficit remains with the Provider Service Network. When managed properly, accepting downstream risk can create
significant surpluses.
We also use the Internet to help process encounters, referrals and the adjudication of claims between network primary care physicians and specialists. This process helps reduce the paperwork in
the physician's office as well as provide a more efficient model for the patient in our network. Our utilization management team communicates with the physicians on a daily basis to provide
overall management of the patient.
Within the healthcare market, the Company is moving to expand its revenue base through additional managed care contracts and the expansion of its pharmacy operations. The Company believes
its proven success with its operating PSN model will allow it to enter new markets within Florida while at the same time further developing its existing relationships. As part of its continuing plan
to expand its PSN operations, effective July 1, 2001 an additional 700 member lives were added in the Palm Beach market. On an annual basis the addition of these lives will generate
approximately $3.8 million in incremental gross revenue.
Responding to rapid increases in prescription drug spending, the Company formed METCARE Rx, Inc., a wholly owned subsidiary, to better control prescription drug expenditures. An
increasing number of health plans with low-cost co-pays for drug coverage, direct-to-consumer advertising, and newer, better therapies requiring high-cost branded products all drive up the cost
of pharmacy benefits. In an effort to reduce these costs, the Company has negotiated contracts for the purchase, filling and delivery of prescriptions. Assuming that the Company can
successfully implement its pharmacy strategy throughout its Network, METCARE believes it can achieve better management and control to provide significant cost savings and incremental
revenues. As of June 1, 2001 the Company terminated its agreement with e-Medsoft.com to operate its pharmacy and has taken over the daily management of the pharmacy operation. The
company has recruited experienced executive management to operate the pharmacy.
FOR THE THREE MONTHS ENDED JUNE 30, 2001
RESULTS OF OPERATIONS
The Company had revenues of $30.6 million for the quarter ended June 30, 2001 while operating expenses were $28.6 million, resulting in income from operations of approximately $2.0
million and net income of $1.8 million, as compared to an operating profit of $543,000 and net income of $350,000 for the same period in 2000, increases of 267% and 428% respectively.
Earnings before interest, taxes, depreciation and amortization (EBITDA) increased $1.5 million, from $718,000 in the second quarter of 2000 to $2.2 million in 2001. In addition, at June 30,
2001 the Company's working capital was $8.1 million while its net worth increased to $10.8 million, both showing significant improvement over the June 30, 2000 working capital deficit and
negative net worth of $9.6 million and $6.7 million respectively.
These results continue the trend of profitability that began in the first quarter of 2000.
REVENUE
Revenue for the quarter ended June 30, 2001 increased $1.3 million over the same period in 2000, from $29.3 million to $30.6 million. PSN revenues, the core of the Company's business,
increased 4%, from $28.9 million to $30.1 million, due primarily to funding increases in our PSN revenues from November 2000 revisions to the Balanced Budget Act of 1997. Non-PSN
revenues increased 5%, from $475,000 to $500,000, as a result of the June 2001 start-up of the Company's pharmacy operation (Metcare Rx) in the Daytona market. Management believes that
Metcare Rx will eventually account for a significant percentage of overall company wide revenues as it continues to expand in Daytona and other markets.
EXPENSES
Medical expenses decreased approximately $1.1 million in the second quarter of 2001 over the same period in 2000, from $26.9 million in 2000 to $25.8 million in 2001, reflecting a decrease in
our medical loss ratio (MLR) from 93% to 86%. This decrease is due to the Company's improved utilization efforts resulting primarily from the Company's growing experience in managing the
Daytona market.
Salaries and benefit costs for the quarter increased 54% over the same period in 2000, from $983,000 to $1.5 million. This increase results primarily from two factors, new locations and
increased management personnel. Through late 2000 and the first six months of 2001, five new locations were opened. These locations accounted for $399,000 of incremental payroll related
costs. Three of these (Port Orange, Ormond Beach and Everglades), totaling $301,000 in payroll costs, were opened February 2001 and operated as medical centers for our PSN operations in
Daytona and Palm Beach. Metlabs, which we began operating in October 2000, accounted for $82,000 of the increase in payroll expenses while Metcare Rx, opened June 2001, the Company's
pharmacy operation, accounted for $16,000 of incremental payroll costs. In addition, during the second half of 2000 and early 2001 the Company recognized the need to bolster its management,
hiring three new senior managers totaling approximately $120,000 in payroll costs for the quarter.
Depreciation and amortization for the quarter ended June 30, 2001 was $215,000 compared to $171,000 the year before. Of the increase, $31,000 is due to the amortization of goodwill on the
above mentioned acquisitions while the balance results from deprecation of fixed assets acquired over the past year in the normal course of operations.
General and administrative expense for the quarters ended June 30, 2001 and 2000 were $1.1 million and $696,000 respectively, an increase in the current period of approximately $396,000.
Significant increases occurred in marketing and consulting fees ($68,000) primarily to market and promote the company. Legal and other related costs incurred as a result of regulatory filings
accounted for $79,000 in the June 2001 quarter. In addition, approximately $227,000 in incremental general and administrative expenses were incurred by the five aforementioned new operating
locations in the quarter.
FOR THE SIX MONTHS ENDED JUNE 30, 2001
RESULTS OF OPERATIONS
The Company had revenues of $60.1 million for the six months ended June 30, 2001 while operating expenses were $56.7 million, resulting in income from operations of approximately $3.4
million and net income of $3.1 million, as compared to an operating profit of $764,000 and net income of $504,000 for the same period in 2000, increases of 340% and 507% respectively.
Earnings before interest, taxes, depreciation and amortization (EBITDA) increased $2.7 million, from $1.1 in the first half of 2000 to $3.8 million in 2001. In addition, at June 30, 2001 the
Company's working capital was $8.1 million while its net worth increased to $10.8 million, both showing significant improvement over the June 30, 2000 working capital deficit and negative net
worth of $9.6 million and $6.7 million respectively.
REVENUE
Revenue for the six months ended June 30, 2001 increased $882,000 over the same period in 2000, from $59.2 million to $60.1 million. PSN revenues, the core of the Company's business,
increased $1.4 million, from $57.8 million to $59.2 million, due primarily to funding increases in our PSN revenues from November 2000 revisions to the Balanced Budget Act of 1997.
Non-PSN revenues decreased $507,000 due to a $555,000 reduction in one-time revenue and revenue from discontinued (MRI and Datascan) and non-PSN operations which were reported in
the first quarter of 2000. This decrease in non-PSN revenues was slightly offset by $24,000 in revenues generated from the June 2001 start-up of the Company's pharmacy operation (Metcare
Rx) in the Daytona market. Management believes that Metcare Rx will eventually account for a significant percentage of overall company wide revenues as it continues to expand in Daytona and
other markets.
EXPENSES
Medical expenses decreased approximately $3.6 million in the first six months of 2001 over the same period in 2000, from $55.0 million in 2000 to $51.4 million in 2001, reflecting a decrease
in our medical loss ratio (MLR) from 95% to 87%. This decrease is due to the Company's improved utilization efforts resulting primarily from the Company's growing experience in managing
the Daytona market.
Salaries and benefit costs for the six months increased $977,000 over the same period in 2000, from $1.9 million to $2.9 million. This increase results primarily from two factors, new locations
and increased management personnel. Through late 2000 and the first six months of 2001, five new locations were opened. These locations accounted for $669,000 of incremental payroll related
costs. Three of these (Port Orange, Ormond Beach and Everglades), totaling $509,000 in payroll costs, were opened February 2001 and operated as medical centers for our PSN operations in
Daytona and Palm Beach. Metlabs, which we began operating in October 2000, accounted for $144,000 of the increase in payroll expenses while Metcare Rx, opened June 2001, the Company's
pharmacy operation, accounted for $16,000 of incremental payroll costs. In addition, during the second half of 2000 and early 2001 the Company recognized the need to bolster its management,
hiring three new senior managers totaling approximately $269,000 in payroll costs for the six months.
Depreciation and amortization for the six months ended June 30, 2001 was $421,000 compared to $356,000 the year before. $65,000 of the increase is due to the amortization of goodwill on the
above mentioned acquisitions while the balance results from deprecation of fixed assets acquired over the past year in the normal course of operations.
General and administrative expense for the six months ended June 30, 2001 and 2000 were $2.0 million and $1.2 respectively, an increase in the current period of approximately $833,000.
Significant increases occurred in marketing and consulting fees ($142,000) primarily to market and promote the company.
Legal and other related costs incurred as a result of regulatory filings, annual meeting and financing initiatives accounted for $206,000 in the six months ended June 30, 2001. In addition,
approximately $380,000 in incremental general and administrative expenses were incurred by the five aforementioned new operating locations while $100,000 of the increase is attributable to
additional bad debt reserves related to the Company's accounts receivable from discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically experienced liquidity and cash flow problems, the result of the Company's prior operating losses and costs associated with restructuring carried over from the year
ended December 31, 1999. Beginning in 2000, the Company began operating profitably and has been able to raise the funds required to augment its cash flow from operations. In the quarter
ended June 30, 2001, the Company raised approximately $4.2 million in equity financing, principally from three institutional investors, at prices ranging from $1.60 to $1.85. In connection with
these transactions the Company issued 2,353,778 shares of its common stock.
In March 2001, the Company secured a two-year equity line of credit in the amount of $12 million that the Company has the right, but not the obligation, to draw upon. The facility allows the
Company to draw up to an aggregate of $750,000 per month based upon certain pricing formulas at the time of the draw and a floor to be set exclusively by the Company. Management believes
that this facility, along with its other financing initiatives, will enable the Company to pursue future accretive business opportunities.
In addition to third party financing, the primary source of the Company's liquidity is derived from payments under its full-risk contracts. In connection with its January 2000 contract in the
Daytona market, the Company was required to fund a full year's IBNR (claims incurred but not reported) and, as a result, the cash flow provided from that contract was minimal for the year
ended December 31, 2000. Beginning early 2001, this contract began generating substantial cash flows. In addition, the revisions to portions of the Balanced Budget Act of 1997 began providing
increased funding of approximately $526,000 per month on the Company's existing contracts in March 2001.
The Company has certain accounts receivable, which have been financed under a line of credit. Such borrowings were available on a formula basis taking into account the amount and age of
eligible receivables and amounted to $666,050 at June 30, 2001. The Company had no additional availability under the line and has restructured it as an 18-month term loan with monthly
payments of $50,000, which includes principal and interest at 5% over prime.
At June 30, 2001 the Company had a liability for unpaid payroll taxes and related interest of approximately $1.96 million. In April 2001, the Company negotiated an installment plan with the
Internal Revenue Service (IRS) whereby it is making monthly installments ranging from $50,000 to $100,000 until the liability is retired.
In June 2001, the Company terminated its consulting and preferred provider agreement for technology software and our pharmacy management agreement with e-Medsoft.com. Under the terms
of the termination agreement we assumed some of the accounts payable concerning the pharmacy operation; assumed the lease at the pharmacy location; purchased all of the pharmacy assets;
and paid e-Medsoft.com $1,028,000, for the cost of the pharmacy assets and repayment of fees and advances received under the consulting and preferred provider agreements. There was no
material effect on the Company's operating results for the quarter ended June 30, 2001 as satisfaction of all our obligations to e-Medsoft.com |
