health reform - opportunities in payer & health services - march 2017

March 2017

Opportunities in Payer & Health Services

Strategy& | PwC

Reform observations & opportunities

1

Strategy& | PwC

The reform conversation has shifted to “rebrand & retreat,” maintaining the overall contours of the current landscape

2

Focus of reform is on reducing Federal expenditures & deregulating health insurance

Fundamental trajectory of the market remains unaltered as a result of reform; expect more significant changes to payment and delivery landscape through administrative changes

Potential reform elements & impacts

Reform Opportunity

P. Eliminating Mandate Penalties

G. Relaxing Product StandardizationH. Granting Medicaid Waivers

K. Modifying Risk Adjustment

E. Contracting Medicaid Eligibility

M. Reducing Individual Subsidies

I. Altering Rating & Issuance Rules

D. Capping Medicaid Funding

O. Creating High Risk MechanismsN. Expanding HSAs

F. Reforming Regulatory Rules

Syst

emic

impa

ct

Impact on health industry (payers, providers, services)

L. Deprioritizing Marketplaces

J. Eliminating Taxes & Fees

Q. Allowing Inter-State Purchases

B. Moving Medicare to MA-for-AllA. Imposing Caps on Drug Prices

//HighLow

Low

Hig

h

Talking point with no real-world application or relevance

Actually delayed by reform… diminished infrastructure & political capital

Lobbyists…

C. Increasing Medicare Eligibility Age

R. Dis-enrolling Lottery Winners

E

D

G

Q

L O

N IM

P

R

ABC

K

FH

J

Huh?

More likely reforms Less likely reforms

Strategy& | PwC

The Individual market and moves to shift risk to providers will be most acutely impacted by potential likely reforms…

3

Medicare Reforms

Group Reforms

Medicaid Reforms

Individual Reforms

Administrative Reforms

Move to per capita funding of Medicaid and reduce Federal funding and/or eligibility of expansion population; achieves budget savings although may be rolled-back in long-term

• Devolve eligibility standards & product/benefit to states; creates greater variation

• Eliminate ACA-supported demonstration programs

• Improve reimbursement to Medicare Advantage plans

Move from subsidies to tax credits; may expand market size

• Shut down or de-prioritize Exchanges; allow subsidies off-Exchange

Create high risk pools & expand rating bands

Replace individual mandate (effectively) with need to maintain continuous coverage

Relax Minimum Essential Benefits & product standardization; offers more flexibility in plan design

Eliminate employer mandate (effectively); virtually no change in coverage

• Relax plan standards & offer more flexibility in plan design

Advantage HSAs; increased opportunity for HSA vendors & related solutions

• Weaken Medicare value-based care and accountable care pilots; disrupt trend towards provider risk-taking

• Eliminate mandatory provider payment reforms

• Restrict demonstration programs from The Center for Medicare & Medicaid Innovation

• Weaken enforcement of Medical Loss Ratio (MLR) minimums for insurers; short-term opportunity for plans to increase profitability in select states

Moderate impact; fundamental

changes to funding, but limited political

will to reduce coverage

Limited impact; expect future

reforms transitioning to

managed care for all (2021-2025)

Significant impact; move from non-

functional market to less regulated

iteration with more covered lives

Limited impact; impacts will fall at

margins (especially in Small Group)

Significant impact; Pull back of push to

value-based care and other pilots;

relaxing of Federal accountability

Pote

ntia

l ref

orm

out

com

es o

f sig

nific

ance

Indu

stry

impa

ctReform Opportunity

Strategy& | PwC

…while the overarching trajectory of the each health insurance market segment remains unaltered

4

Medicaid nears natural ceiling;managed care opportunity matures

Medicare expands as nation ages; look for potential MA catalyst

Individual grows slowly & uncertainly;market moves towards stability

Group holds with offsetting factors;self-funding ticks higher

• Minimal growth in employment offsets modest employer exit from employer-sponsored insurance

• Trend towards self-funding continues as mandates, taxes, and fees creates economic incentive

Share capture focus for growth as markets become more competitive. Winners will leverage provider partnerships

to control spend while maintaining choice in offerings

• 24% of Americans covered limiting future growth; political pressure to not eliminate coverage as part of reform

• Private managed care nearing 75% of all lives; remaining populations are highly complex or rural

• Devolution of eligibility & benefits standards to states

Growth becomes more challenging as greenfield opportunities shrink. Look for more M&A to expand

footprint, gain scale, and acquire capabilities

• 3.5 million Americans turn 65 every year; fiscal challenges just beginning to enter national dialogue

• MA penetration continues to grow (~40%) with potential for “MA for All” in medium term, accelerated by new Administration’s belief in private sector solutions

Plans investing to win long-term in Medicare with favorable demographics & economics. MedEx control

critical given opportunity for significant losses

• Reforms focus on “fixes” with eye to restructuring for long-term stability – erosion of Essential Benefits & addition of reinsurance/high risk pools lower premium levels

• Marketplaces at risk (some state holdouts) to be replaced with tax credits; move towards Off Exchange enrollment

After transition, smaller (premium), larger (membership), and more profitable segment. Value pricing remains

critical with long-term view towards risk capture/reporting

Reform Opportunity

Strategy& | PwC

Reform will accentuate a number of opportunities across the health services landscape

5

Decision Support

Financial Management

Ancillary & Supplemental

Benefits

Intermediary & Purchase Services

• Plan Selection SupportErosion of standardized plan design, with disparate options, drives need for guidance, including tools for individuals & brokers

• Healthcare Service Support - Cost & Treatment Move to greater financial responsibility (across more cost sensitive groups) incents use of tools to better manage financial exposure

• Funding & Contribution ManagementUse of savings vehicles, contributions, and incentives to fund long-term health expenses, including across populations with limited financial system exposure

• Payment AdministrationNeed for automated solutions to collect & manage individual financial responsibility

Exam

ple

Opp

ortu

nitie

s

• Individual DistributionShift to tax credits & wind-down of Exchanges shifts sale of individual health insurance product to 3rd party channels (limited in some states)

• Medicare DistributionAcceleration of trend towards managed care in Medicare & long-term premium support model drives MA distribution

• Supplemental BenefitsRelaxation of required benefits & exclusion of services to control costs leads to opportunity to sell standalone buy-ups

• Cross-sell BenefitsExpansion of tax credits yields more affluent customer segments with potential interest in other insurance & lifestyle benefits

Privatization of Health

(long-term)

• MA for All Acceptance of premium support model & revised individual market infrastructure supports transition to MA over FFS Medicare

• Military Health Movement of government-sponsored provision & financing of health for military members & dependents to private sources

Cat

egor

yReform Opportunity

Segm

ent*

*Note – All referenced opportunities do not apply to all segments listed

Medicare

Group

Medicaid

IndividualGroup

Medicaid

IndividualMedicareIndividual

Group

Medicaid

Individual

Other

MedicareMedicaid

Strategy& | PwC

Given the politics of reform, the growing potential exists that meaningful legislation is unable to pass

6

Reform Opportunity

Health policy is complicated…and achieving politically tenable compromise not easy.

Expenditure Considerations

Market Considerations

Other Policy Considerations(Tax Reform)

Revenue Considerations

Political Considerations

Coverage Considerations

In the absence of legislative action on healthcare:

Look NorthChallenges will continue in Individual markets without sufficient scale to support a diverse risk poolState intervention will be required to ensure functioning markets; Alaska’s assessment on all insurers helped to maintain a functioning individual market and limited rate increases

Fixes may be delayed until after the next electoral cycle when market fundamentals & politics may convergePotential compromises on Individual fixes & constraining health expenditure growth may suffer from politicization of health; more transformational changes to Medicare pushed further in the future

Look OutLook InAdministrative actions will look to maintain base levels of market support while advancing policy goalsExpect HHS/CMS to quickly grant significant flexibility in benefit and plan designs in individual & Medicaid, limit enforcement of mandates and rules, and ACA-mandated pilot programs

Strategy& | PwC

Irrespective of reform, the payer business remains challenged, with margin pressure & limited avenues for organic growth

7

• With payers controlling flow of funds, benefitting from government-mandated purchase, and offering products and services relatively unchanged over time, market interest increasing with challengers looking to capture profitable share

• Given constraints around profitability, risk-based capital requirements, and high barriers to entry, numerous challengers will look to make a play in the payer market, yet most will either fail outright (such as the CO-OPs) or retrench to niche, sub-scale positions with limited broad market impact

• Through 2025, only MA posts above-population growth with greater managed care. Medicaid grows modestly but gains in managed care flatten

• Individual market will grow with reform from small base, but not be outsized contributor to overall financial performance; Group market flat and stagnant

• Heightened local market competition as growth outside MA will be largely reliant on share gains; inorganic growth continues to be pathway of least resistance

• Consolidation and commodity-like status of health insurance product and network will force long-term erosion of margins, outside players with significant scale or differentiated health management capabilities

• State regulators look to step into Federal gap and exert greater influence over rates, networks, and insurer conduct/profitability, including rate approvals and more defined standards on network adequacy

Limited options for growth outside of

Medicare Advantage–focus on deals & share

capture

Market dynamics & regulators constrain profitability – need to

look for emerging diversification plays

Increased challengers look to disrupt -

many (most?) will fail

See Appendix A for additional detail

Macro TrendsReform Opportunity

Strategy& | PwC

With or without reform, opportunities exist around macro industry growth drivers & trends across several core theses

8

Follow the Government as a payor Create the services & infrastructure platforms of the future

Roll-up sub-scale Medicaid assets

Place bets on Medicare Advantage

Address the needs of the most

medically needy

Enable and optimize revenue & risk

capture• 73% of Medicaid

beneficiaries are in a private managed care plan, up from 50% four years ago

• Across all lines of business, Medicaid, with the tightest margins, would to benefit the most from administrative scale

• Yet, Medicaid remains the least concentrated line of business; average plan has only 155,000 members

• New regulations driving greater standardization of Medicaid supports rolling-up sub-scale assets

• ~4 million Americans age in to Medicare each year

• Political tailwinds, fiscal challenges, & solvency concerns will advantage managed care

• Independently, Medicare Advantage continues to grow at a far faster rate than overall Medicare, posting a ~9% CAGR over the past five years

• High reimbursement rates & opportunities to drive cost savings allow for premium valuations for MA plans

• With a majority of Americans insured in markets where payer revenue is risk-adjusted, services & solutions to appropriately identify and track member risk profiles is becoming increasingly critical to financial performance

• Aside from enhanced revenue through risk adjustment benefits, more optimal stratification of members is possible, leading to more targeted interventions and successful outcomes

• Disproportionate spend is on members with multiple chronic conditions, behavioral health challenges, and/or receiving long-term services/supports

• Payers are increasingly focusing on such groups, as the upside from better managing the highest acuity members becomes clear

• Given the specialization & complexity involved, plans are turning to outsourced solutions, including risk arrangements

Own the overlooked spaces of health

• The significant scope of health & resulting spend creates opportunities in areas traditionally over-looked by the market, both emerging categories of service & (relatively) low dollar mandates

• With the continued focus on spend and a greater willingness to explore new arrangements, focused solution opportunities exist in such areas as specialty pharmacy, infertility, and non-emergency transportation

Macro TrendsD

escr

iptio

nG

row

th T

hese

s

Strategy& | PwC9

Existing health services entities will need to look at the world differently to drive profitable growth in the future

1 2 3

Enable growth through selective

market expansion, accentuated by Deals

Expand portfolio of non-regulated & less-

regulated service offerings

Export capabilities, experience, and competencies to global markets

With limited options for growth, a increasingly onerous regulatory environment, and enhanced competitive landscape and new challengers, how should payers and related health

services businesses look to drive profitable growth in the future?

Macro Trends

Strategy& | PwC10

Health services businesses will continue to rely on deals to achieve growth, with an emphasis on buying business

1 2 3

Aetna/Humana**: Significantly strengthen AET presence in Medicare Advantage LOB, along with increase scale efficiencies/capabilities around MA

Anthem/Cigna*: Achieve greater scale efficiencies, a greater presence/ value proposition in Self Funded, & some geographic diversification

Centene/Health Net: Entered Group Commercial & TRICARE, greatly expands MA book & capabilities; substantially grows CA presence

Blue Shield of California/Care 1st: Entered Medicaid in California; provided some geographic diversification into Arizona (divested) and Texas

Molina/PHS, Total, Better Health, HAP Midwest:Medicaid deals drive efficiencies through Medicaid scale & new geographies; PHS adds capability depth

Capabilities

Lines ofBusiness

Efficiencies

Geographies

Select payer sector deal drivers

Kaiser Permanente/Group Health Cooperative:Expands KP’s integrated care & coverage model to new geography (WA), make GHC more efficient

UnitedHealth Group/Amil: Geographic expansion into Brazil along with modest international and integrated health capabilities

Gundersen/Unity: Combined two sub-scale players with efficiencies enhancing competitiveness; complementary footprints add geographic depth

*deal enjoined by US District Court** deal terminated prior to consummation

Source: Company Reports; PwC Strategy& analysis

Macro Trends

Strategy& | PwC11

Established and emerging businesses will need to look into new opportunity spaces across the landscape for growth

21 3

Fitness

Wellness Decision Support

Condition Support

Health Information

Management

Transaction Management

Payments & FinancingCare Delivery

Centerbridge purchase of Superior Vision

BCBS MN owns SelectAccount

Highmark owns Davis Vision & HM Insurance

Florida Blue has GuideWell Connect

Hellman & Friedman buys MultiPlan

BCBS MI starts MA admin platform

UHG/Optum rolls-up hospice & Urgent Care

Aetna buys ActiveHealth

Humana buys American ElderCare

Anthem invests in America Well

Molina buys PHS

Florida Blue & BCBS KC form New Directions Behavioral

Aetna acquires bSwift & iTriage

Independence BC invests in Accolade

BCBS MA invests in InformedDNA

Aetna acquires Medicity

Cambia invests in lifeIMAGE

Centene buys Casenet

UHG/Optum’s Ingenix

BCBS NE & Premera invest in Everymove

BCBS TN starts OnLife

Humana acquires Vitality

Incentives

Nutrition

Trackers & Biosensors

Wellness ProgramsSe

lect

Cat

egor

y O

ppor

tuni

ties

Inve

stm

ent E

xam

ples

Brokers &Plan Decision Support

Concierge Medicine

Lab testing & Genetics

Nurse Line

Treatment Decision Support

Behavioral Health / Substance Abuse

Optical Services

Pharmacy Benefit Management -PBM

Primary Care

Telehealth

Disease Management

Durable Medical Equipment

Medical Devices

Personal Care & Home Health

SNFs, ALFs, LTC

Data Aggregation

Electronic Medical Records

Health Information Exchange

Health Wallet

Risk Score Optimization

Enrollment

Health Data Exchange

Health Plan Administration

Payment Integrity

Specialty Provider Networks

Ancillary Benefits

Discount Cards

Health Financing Solutions

Health Savings Accounts

Stop Loss

<$1BN $1BN - $5BN $5BN - $10BN >$10BNDirectional market size

Source: Company Reports; assorted reference sources, PwC Strategy& analysis. Contact author for specific market sizing sources

Macro Trends

Strategy& | PwC12

As growth in the US stalls, payers & services entities will export capabilities to global markets in a bid for growth

Australia

Cayman Islands

Republic of Korea

Spain

Developed nations are confronting the same demographic & cost challenges as the US and

turning to managed care/ private sector solutions

Developing countries are encouraging managed care / private sector solutions as they evolve their

healthcare landscape

Brazil

Indonesia

Russian Federation

South Africa

• Universal coverage through employer mandate• Requirement to have health insurance, with

foreign health insurers in market (including Aetna)

• Public insurer for government workers & indigent

• Public health insurance, Medicare, covers most residents; individuals encouraged to purchase private insurance with subsidies – nearly 50% do

• Government recently privatized Medibank, the largest health insurer in Australia & New Zealand

• National Health Insurance scheme provides basic coverage to all citizens

• Private insurers, including Cigna, offer supplementary coverage which is increasingly important to cover key gaps in NHI

• Robust private insurance market (26% of population), as universal coverage provided by government offers sub-standard care/benefits

• UnitedHealth entered via acquisition of largest player, Amil, offering integrated care

• Launched NHI with goal of universal coverage; private insurers able to participate in program

• Private insurance available as an alternative to NHI; insurers (such as Cigna) cover roughly 10% of population (more affluent)

• Universal public insurance in 1995 with access to public clinics and health services

• Private, voluntary health insurance covers private providers/additional benefits

• Private plans must be network-based MCOs

• Well established private market for those able to pay, giving access to private services. 16% of population purchase through brokers or Groups

• Government in-process of launching National Health Insurance (over 14 years)

• National health insurance programs turning to private sector (including Centene) for integrated care models

• Relatively small (roughly 13% of population in 2010) yet growing private insurance contingency

321

Source: St. Louis Post-Dispatch, Cigna, CaymanNewResident, NCBI, European Observatory on Health Systems, Kennesaw State University, The Economist, Swiss Life, Government reports, PwC Strategy& analysis

Macro Trends

Strategy& | PwC

Appendix A: Payer Market & Challenges

13

Strategy& | PwC

Today’s primary sources of health coverage are split between Government and Commercial payors

14Source: Kaiser Family Foundation, CMS, The Steadying State of Medicaid, PwC Strategy& analysis

Uni

nsur

ed32

MM

Medicaid75MM

Group - Self-funded94MM

Group - Fully insured60MM

Commercial

0%

20%

40%

60%

80%

100%

20% 40% 60% 80% 100%

Total = 322MM

Funding source

Medicare(excludes

Duals)42MM

% of population

Indi

vidu

al –

On

Exch

ange

13M

MIn

div.

–Pr

ivat

e6M

M

Macro Trends

Strategy& | PwC

By 2025, the Government becomes an even larger sponsor of coverage as employer-sponsored insurance remains flat

15Source: Kaiser Family Foundation, CMS, CBO, The Still Expanding State of Medicaid, PwC Strategy& analysis

Uni

nsur

ed26

MM Medicaid

79MM Group155MM

Commercial

0%

20%

40%

60%

80%

100%

20% 40% 60% 80% 100%

Total = 347MM

Funding source

Medicare(excludes

Duals)60MM

% of population

Indi

vidu

al27

MM

Potential downside to ~70 million under reform

No reform impact to market size

Modest change in market size from reform

Potential change of +/-2-4 million under reform

+/- 5-10 million under reform

Macro Trends

Strategy& | PwC

Increasing government interventions will increase payers’ regulatory burden and limit differentiation opportunities

16

Medicare GroupMedicaid Individual

Network Adequacy Requirements

Product Standardization

Intensified Rate Approval & Review

Quality-related Reimbursement/ Withholds

Profitability Caps (Medical Loss Ratio Minimums)

Fully insured

Fully insured

Fully insured

Currently in-force or proposed In-force, but potential for reduction in scope

Macro Trends

Strategy& | PwC17

A number of entities have entered the health plan space aiming to disrupt established practices, with mixed results…

Macro Trends

We did it to burn a lot of money, actually.

A more appropriate marketing message for “disruptor” health plans?

• Valued at $1BN, Clover claims to be “reinventing the health insurance model by integrating technology,” the company is focused on MA

• Focusing first on New Jersey, Clover has signed up 18,000 members, while posting $35 million in losses in 2016 and an effective Medical Loss Ratio of 104%

• Backed by a variety of marquee investors, Oscar was founded in 2012 aiming to simplify insurance, with a focus on individual in New York, amplified by catchy marketing

• Following expansion into California, New Jersey, and Texas, Oscar has yet to demonstrate a pathway to profitability in any market, posting hundreds of millions in losses

• Founded by UnitedHealthcare in 2014, the plan is built around 11 primary care centers in Chicago and Atlanta, in partnership with Iora Health, offering unlimited free visits

• Playing in the Individual & Group market, in 2016 the plan reported ~35,000 members with a pre-tax loss of $115 million, up from $72 million in the prior year

Source: Company Reports; Statutory Filings, Wall Street Journal, PwC Strategy& analysis

Strategy& | PwC18

As the most established new entrant, Oscar may be a case study in just how challenging it can be to gain traction

Source: Statutory Filings, California DMHC, United Nations, PwC Strategy& analysis. Image source: findpik.com/Oscar-health-insurance1) Interestingly, the population of São Tomé & Príncipe is nearly equal to Oscar’s composite consolidated annual membership since inception

Oscar invested heavily in consumer marketing to

support market launches

After a year, they have exited New Jersey (their

most “profitable” market) & Dallas

In California, they may have more billboards than

members

• Oscar’s lost $205MM in 2016, an acceleration from the $122MM in losses in 2015. Oscar’s underwriting margin in 2016 was -43%, with losses of $129 PMPM

• The company ended 2016 with 108,000 members & is poised to start 2017 with only 87,000 members

• Consolidated MLR was 112%, with an admin ratio of 31%. In California, SG&A was 211% of premium, with spending of $425 per member on marketing alone in 2016

• The business model has moved repeatedly from ER diversion, to experience, to technology, to small group, to …

What is he looking for?

Fellow members?

Profitability?

A viable business model?

The $366MM lost since inception – equal to São Tomé & Príncipe’s GDP1? (or $180 PMPM)

Macro Trends

Strategy& | PwC19

Even more traditional new commercial players and CO-OPs alike struggling to sustain viable business models

Source: Washington Post; Pew Charitable Trust; Pacific Business News; Hawaii Department of Insurance; Court filings; AIS Health; PwC Strategy& analysis

CO-OPs, Federally-chartered

insurers, have struggled to gain profitable traction

One of the fivenew commercial plans in 2014 -illustrates key

challenges facing start-up health

plans

23 CO-OPs formed with an average

loan of $95MM from CMS (total of $2.4

BN in taxpayer funding)

2013 Present

14 additional CO-OPs seized/

liquidated or ordered to wind down, while

Evergreen (MD) seeks to convert to

for-profit status

CO-OPs begin enrolling members in Individual and Group Commercial markets

21 experiencelosses &13 fail to

achieve membership goals2nd largest seized &

liquidated by January

23 CO-OPs

Family Health Hawaii is ordered to

liquidate after losing approximately $6.5

million5 in less than 2 years

Family Health Hawaii launches in Group market; a previous

state insurance commissioner is at

the helm

Competing against entrenched players,

FHH estimates enrollment of just

3,400 members during its first year

FHH enrolls 7,000 members during its

second year; its reserve funds dip

below capital requirements

23 CO-OPs 20 CO-OPs5 CO-OPs

2015 20162014

Strategy& | PwC

Appendix B: Payer Market Landscape

20

Strategy& | PwC

Health spend is large and growing; not surprisingly, spend is concentrated on hospitals & physicians

National Healthcare Expenditures (NHE) and % of GDP 2009-2020E

0%

5%

10%

15%

20%

25%

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

2009

2010

2011

2012

2013

2014

2015

E

2016

E

2017

E

2018

E

2019

E

Health Spend $TN% GDP

Today

Healthcare expenditures are a large and expanding portion of GDP

Hospital, physician services, and prescription drugs receive largest spend

Hospital32.1%

Physician and Clinical

22.8%

Prescription Drugs9.3%

Nursing care / retirement

5.3%

Other Health5.1%

Dental3.8%

Home Health2.7%

Non-Durable ME

1.9%

DME1.5%

Administration1.3%

Investment / Other14.2%

Healthcare expenditures across categories (2014)

21Sources: HHS, Centers for Medicare and Medicaid Services, "National Health Expenditure Projections, 2014-2024”; “NHE Summary CY1960-2014”

Strategy& | PwC

Most Americans receive coverage from the government; employers are a close second

22Source: Kaiser Family Foundation, CMS, The Steadying State of Medicaid, PwC Strategy& analysis

Uni

nsur

ed32

MM

Medicaid75MM

Group - Self-funded94MM

Group - Fully insured60MM

Commercial

0%

20%

40%

60%

80%

100%

20% 40% 60% 80% 100%

Total = 322MM

Funding source

Medicare(excludes

Duals)42MM

% of population

Indi

vidu

al –

On

Exch

ange

13M

MIn

div.

–Pr

ivat

e6M

M

Strategy& | PwC

Enrollment mix differs from funding source composition, with Medicare responsible for a disproportionate amount of spend

23Source: National Health Expenditures, Kaiser Family Foundation, CMS, The Still Expanding State of Medicaid, PwC Strategy& analysis

Out of Pocket$330B

Medicaid –Managed Care

$162B

Group$963B

Commercial

0%

20%

40%

60%

80%

100%

20% 40% 60% 80% 100%

Total = $2,467B

Funding source

Medicare(excludes Duals) –

Managed Care$155B

% of spend

Indi

vidu

al –

$81B

Medicaid – FFS$334B Medicare (excludes

Duals) – FFS$442B

Strategy& | PwC

Insurers spend nearly 87 cents of every dollar on core medical care

24Source: AHIP

Strategy& | PwC

A number of large, multi-state and national payers have considerable market share…

25

* As of Q4 2014 ** Pro forma reflecting close of Health Net acquisitionNote: Includes commercial (group and individual, Medicare Advantage and Supplement, and Medicaid membershipNote: National share based on all covered lives (Commercial, Medicaid, Medicare regardless of funding source)

Payer Membership (in Millions)

Plan Core Service Territory YE 2015 Enrollment National Share Commercial

EnrollmentMedicare

EnrollmentMedicaid

Enrollment

National 42 17% 30 7 5

14 BC/BCBS states + 18 Medicaid states 31 14% 24 1 5

National 23 10% 19 2 1

National 15 6% 14 1 <1

IL, MT, NM, OK, TX 15* 6% 14 <1 <1

CA, CO, GA, HI, MD, OR, WA 10* 4% 8 1 <1

~22 states totalCore: CA, TX, AZ, FL,GA 7 3% 1 <1 6

National 7 3% 3 3 1

Total Top 8 150 63% 114 16 19

Source: Company reports, State Health Facts, PwC Strategy& analysis

Strategy& | PwC

…while a host of single state or regional plans may dominate particular geographies

26

Plus select national and multi-state carriers

Strategy& | PwC

Medicaid is a program that delivers critical health coverage to millions of Americans

27Source: The Steadying State of Medicaid in the United States, PwC Strategy& analysis

75.2 million

Americans(23.4% of the US population)

Low Income Children

Disabled

Elderly

Blind

Low Income Adults

Pregnant Women

Refugees

Strategy& | PwC

Medicaid enrollment has increased by nearly 18 million Americans over the past three years


57.7 million

2013

66.6 million

2014

72.9 million

2015

+17.6 million (31%)

1 in 18 Americans added since 2013

1 in 4 receiving Medicaid benefits

75.2 million

2016

Strategy& | PwC

Growth in some states, like California, has been nothing short of staggering


More than 1 in 7 Californians have been added to

Medicaid…5,628,860 new Medicaid

members since 2013

Representing…

=100,000 new members

…who if were to form their own country, would be the 114th

largest in the world…

Singapore Denmark

Minnesota Wisconsin

…and if they were to form their own state, the 21st largest state in the US, with 10 Electoral College votes

New HampshireKansas

Strategy& | PwC

Today, 42 states have some form of private Medicaid health plans, up from 37 in 2013


No private managed Medicaid

65%-85% private managed

Less than 65% private managed

More than 85% private managed

DC

New

Strategy& | PwC

The growth in private Medicaid health plans has far outpaced overall program growth


57.7

66.672.9 75.2

0

10

20

30

40

50

60

70

80

2013 2014 2015 2016

Total Medicaid Beneficiaries(Millions)

+8.9M

+16%

+6.3M

+10%

+2.3M

+3%

Ben

efic

iarie

s, M

illion

s

34.2

43.5

51.354.6

0

10

20

30

40

50

60

70

80

2013 2014 2015 2016

Private Medicaid Beneficiaries(Millions)

+9.3M

+27%

+7.8M

+18%

73% now in a private Medicaid health plan

+3.3M

+6%B

enef

icia

ries,

Milli

ons

Strategy& | PwC

Private Medicaid continues to be highly fragmented and local


183 Medicaid

plans(down from 195 last year)

165 single state9 more than 4 states

11 with over 1

million members

76 with less than 50,000

members

155,000 average membership

(excluding 12 jumbos and MLTC only)

Strategy& | PwC

Medicare, the program for Seniors and the disabled, has five primary flavors

33

Part A Part B Part C Part DHospital Insurance Medical

InsuranceMedicare

AdvantagePrescription Drug Benefit

• Inpatient Hospital• Inpatient SNF• Hospice• Some Home

Health• Deductible of

$1,156 (first 60 days)

• $289/day (61-90)• $578/day (91-150)• Full coverage after

150 days

• Outpatient• Physician• Labs• PT/OT• Medical Supplies• Additional Home

Health Services• Deductible of $140

with variable co-pays and co-insurance

• Comparable to commercial insurance plans with HMO, PPO, and FFS options

• In place of Part A & Part B

• SNPs and Dual Eligible plans also available

• May include drug coverage

• Prescription Drugs • Plans have

deductibles that member must meet before coverage begins

• Member responsible for co-payments and co-insurance

• Full Coverage above specified threshold

• Standard plans (A-N) which operate like FFS insurance providing reimbursement for co-pays and deductibles

• Also can be offered by employers

• $0 - must have contributed premium taxes when working for $0 premium

• No payer premium

• $121.80 (standard premium)

• Up to $389.80 for high-income enrollees

• No payer premium

• Generally <$100, some $0, variation by plan and geography

• Average payer revenue of ~$900

• Varied by plan, generally $20-60; high-income enrollees pay up to $73 more

• Average payer revenue of ~$80-100

• Varies by plan –typically $50 to $300

• All revenue to payer with average PMPM ~$150

SupplementMedicare

Supplement

Source: Centers for Medicare and Medicaid Services, PwC Strategy& analysis

Des

crip

tion

Pre

miu

ms

PM

PM

Fee-for-Service MedicareOriginal Medicare

Strategy& | PwC

Over the past six years, growth in Medicare Advantage has steadily outpaced the broader Medicare market

34

11.7 12.4 13.7 14.9 16.4 17.8

35.9 36.4 37.1 37.5

37.6 37.7

-

10.0

20.0

30.0

40.0

50.0

2010 2011 2012 2013 2014 2015

47.6 48.850.8 52.4 54.0 55.5

Medicare Advantage

Medicare FFS

Total Medicare Enrollment (millions of lives)

3.1%

1.0%

8.8%

CAGR

(32%)

(68%)

(30%)

(70%)

(28%)

(72%)

(25%)

(73%)(75%)

(27%)(25%)

(75%)

Source: CMS Medicare Enrollment Dashboard, PwC Strategy& analysisNote: Includes all Medicare enrollees, including Dual Eligibles

Strategy& | PwC

Large plans control the lion’s share of the MA market, with the top 10 plans covering 72% of total lives

35

Plan Members*

UnitedHealthcare 3.5MM

Humana 3.2MM

Kaiser 1.3MM

Aetna 1.3MM

Anthem. 0.6MM

CIGNA 0.5MM

BCBS Michigan 0.4MM

WellCare 0.4MM

Highmark 0.3MM

Centene 0.3MM

- %

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101

106

111

116

121

126

131

136

141

146

151

156

Number of firms

Cum

ulat

ive

mem

bers

hip

shar

e

5 firms (61%)

10 firms (72%)

Medicare Advantage concentration curve*

* Excludes Dual Eligible Medicare Advantage membersSource: CMS Contract Summary Reports (data as of November 2015), PwC Strategy& analysis

Strategy& | PwC

The Medicare Advantage market is highly fragmented, and is home to many small, single-state plans

36

157 Medicare

Advantage Plans

(down from 160 last year)

121 single state15 more than 4 states

5 with over 500,000

members

61 with less than

10,000 members

41,000 average membership

(excluding 5 largest plans)

Source: CMS as of February 2016, PwC Strategy& analysis

Strategy& | PwC

The Individual market has seen recent growth due to the ACA, which has modest implications for plan sponsors

37Source: CMS, Kaiser Family Foundation, HHS

Individual Market Enrollment (millions of lives)

6.710.210.7 10.9 10.6

3.9

5.4

2010 2011 2012 2013 2014

Off-Exchange

*Represents effectuated enrollment at end of open enrollment period for year indicated

On-Exchange*

Total

10.6

15.6

On-Exchange Overview

Bronze Silver Gold Platinum

Actuarial Value 60% 70% 80% 90%

Monthly premiums Lowest Moderate Moderate Highest

Offer essential benefits? Yes Yes Yes Yes

Must offer in Exchange No At least 1 plan At least 1 plan No

Will vary by state

– Plans will be able to offer HMO, PPO and other plan types within each of the metallic levels, so long as the plans can achieve the actuarial value of the level

– With requirement to cover essential benefits and limitations on out-of-pocket expenses, payers will have limited levers to differentiate their products (e.g., deductible and co-insurance levels, provider networks, ancillary offerings, brand, customer service)

In both 2013 and 2014, 85% of

enrollees received subsidies from the federal government

Strategy& | PwC

Most Public Exchange health plans operate in Group, Medicaid, or both, with almost half of plans provider-owned

38

137 Health Insurers

Selling on Public

Exchanges

105 single state12 in 4 or more states

102 offering Group

coverage

88 holding

Medicaid contracts64 Provider-Sponsored

31 BCBS plans8 CO-OPs (as of 5/16)2 New Entrant Plans

Source: CCIIO, HHS, State Marketplaces, PwC Strategy& analysis. Note: includes all plans approved to sell in 2016

Strategy& | PwC

In the Group market, greater financial responsibility is being placed on individuals, with PPOs and HDHPs predominant

39

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

HDHP (mostly PPO)

PPO

HMO

POS

Source: Kaiser Family Foundation, 2015 Employer Benefits Survey, PwC Strategy& analysis

Share of Employer-sponsored Health Insurance Enrollment by Type of Plan 2005-2015

Other

Strategy& | PwC

Large Group enrollment comprises over 80% of the total Group market

40Source: Kaiser Family Foundation, US Census, 2015 Employer Benefits Survey, PwC Strategy& analysis

24.4

129.6

154

Small Group (1-50 EEs)

Large Group(51+ EEs)

Key Trends• Stagnant membership growth in the group market:

while current group enrollment stands at 154 million members, it is expected to reach just 155 million members by 2025

• Small Group expansion: certain states, such as New York and California, will expand the definition of “Small Group” to include firms with 51-100 employees (the previous range was 1-50)

• Stagnant rates of self funding: for both small companies and large companies, self funding rates have held relatively constant since 2010

• Different MLR requirements: Large group plans are required to spend 85% of premiums on medical expenses; for small group, the figure is 80%

2015

Commercial – Group Enrollment (millions of members)

Strategy& | PwC

Employer-sponsored healthcare can take the form of either a fully insured or self-funded arrangement

41

Fully Insured – 43% of covered lives(Insurer pays claims)

Self-Funded – 57% of covered lives(Employer pays claims)

• Insurer administers plan including paying claims, performing medical management, and contracting a network

• Insurer sets premiums and takes risk around losses. If claims greater than premiums, insurer posts loss

• Premiums subject to state premium tax (~3% in most states)

• Governed under state laws

• Nearly all individual and small group (<50 employees) fully insured

• Insurer or TPA (Third Party Administrator) administers plan including paying claims, performing medical management, and contracting a network

• Insurer or TPA charges a monthly administration fee per member

• Sponsor assumes risk that medical claims exceed “premiums”

• Sponsors may purchase stop-loss reinsurance to protect against adverse claims

• Governed under ERISA (DOL); pre-empts state laws

• No premium tax

• Nearly all large groups (>1000 employees) self-funded

Strategy& | PwC

Commercial Group is highly bifurcated – multi-state jumbos hold 70% of lives, with dozens of local, provider-owned plans

42

140 Commercial

Group Health Plans

107 single state15 in 4 or more states

53 Fully Insured

only

26 with over 1 million

members63 Provider-Sponsored

35 BCBS plans5 CO-OPs (still around)

9 For-Profit entitiesSource: HealthLeaders-InterStudy, PwC Strategy& analysis. Data of as January 2015, excludes COOPs liquidated as of June 2016

Strategy& | PwC 43

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