wellpoint impact of health care reform

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The Impact of 2010 Health Care Reform

on Health Carriers

WellPoint, Inc.

February 6, 2011

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Agenda

• WellPoint, Inc. Basics

• Health Care Reform Requirements Summary

• Brief Review of the Select Key Issues

•Review of Select WellPoint Financials

•Review of Select WellPoint Actuarials

•WellPoint Marketing & Advertising Options

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WellPoint, Inc. Basics

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Key People: Angela Braly-President & CEO

A publicly traded company (NYSE: WLP)

Founded: Anthem Insurance and WellPoint Health Networks merger in 2004

Headquartered in Indianapolis, Indiana

Products:Blue Cross Blue Shield

42,000+ Employees

WellPoint, Inc.

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WellPoint, Inc.WellPoint is the leading health

plan in the U.S. with more than 33 million medical members.

One in nine Americans receives coverage for their medical care through WellPoint's affiliated health plans.

WellPoint is a Blue Cross or

Blue Cross Blue Shield licensee in 14 states: California, Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri, Nevada, New Hampshire, New York, Ohio, Virginia, and Wisconsin.

WellPoint offers a broad range of medical and specialty products.

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WellPoint, Inc.

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Performance Trend

3Q2010 2009 2008(000s) (000s) (000s)

Total Revenues 44,153,900$ 65,082,100$ 61,251,100$ Total Expenses 40,552,200$ 57,625,100$ 56,126,700$ Net Income 2,338,300$ 4,745,900$ 2,490,700$ Expenses to Revenue 91.8% 88.5% 91.6%Profit Margin 5.3% 7.3% 4.1%

Consolidated Financials

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Stock Performance Trend

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WellPoint, Inc. Competitors

Aetna, Inc.

CIGNA Corporation

United Health Group Inc.

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WellPoint SWOT Analysis

Strengths Weaknesses

Market leader in most Blue states Commercial membership lossesLargest commercial health benefits company Systems integration to support market growth and national accountsStrong Blues brand recognition Highly visible target for litigation and political agendasDiverse line of specialty and ancillary products and services Concentration of business in states hit hardest by recessionImproved visibility into cost trends Medical benefit ratios below mandates in some segmentsEastern expansion from NY and CA strongholds Management turnoverOnline and retail sales initiatives

Market Opportunities Market Threats

Medicare market Economic uncertaintySpecialty products cross-selling High unemploymentHealth and wellness programs Increased regulatory oversight/complianceNational accounts Undefined regulatory and public policy changesAcquisition opportunities Financial pressure on providers and plan sponsorsInternational markets Impact to Medicaid programs due to state budget issues

Impact of federal Mental Health Parity Act of ASO business and employer groups of 51 or more

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Mission

WellPoint's mission is to improve the health of the people they serve. The WellPoint Companies provide health security by offering a choice of quality branded health and related financial services designed to meet the changing expectations of individuals, families and their sponsors throughout a lifelong relationship.

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Vision

WellPoint’s vision is to transform the industry, becoming the most valued health plan through a new generation of consumer-friendly products that put individuals back in control of their health and financial future.

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Business Strategy

Create the best health care value in industry. Make health care fundamentally more affordable for their customers Provide access and guidance to the right care Advocate healthy living

Excel at day-to-day execution. Deliver reliable, caring service Make our work processes more efficient and effective Integrate our systems to simplify operations

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Business Strategy

Capitalize on new opportunities to drive growth.

Win in the changing marketplace Target expansion of existing businesses Invest in complementary new businesses

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Health Care Reform Requirements Summary

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Heath Care Reform

Overview of Health Care Reform

The Patient Protection and Affordable Care Act (PPACA) was signed into law on March 23, 2010, followed by the Health Care and Educational Reconciliation Act (HCERA) signed on March 30, 2010. Together, this legislation makes up the federal health care reform law which mandates many changes to our health care system over the next several years.

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Health Care Reform Timeline 2010 – 2020

2010 Insurance Reforms

• Dependent coverage for adult children up to age 26 • No lifetime dollar limits on essential benefits• 100% coverage for preventive services in network • No pre-existing condition exclusions for children (under 19 yrs

of age)

Most carriers were already offering the first three benefits prior to HCR.

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• Early retiree reinsurance program• Small business tax credit for qualifying businesses• $250 rebate for Medicare members who reach the ”donut

hole”• Temporary high-risk pool for individuals with pre-existing

conditions • Small employer grants for wellness programs for Fiscal Year

2011

2010 New Programs

The impact of these changes on carriers is negligible.

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• Medicare Advantage plans begin restructure of payments and freezes 2011 payments at 2010 level

• Provisions for 50% discount on brand-name drugs in the Medicare Part D coverage gap

• Must have minimum medical loss ratios.

Carriers with high exposure in the Medicare market such as Humana will be more impacted.

2011 Medicare Reforms

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• Physician payment reforms and incentives to form "accountable care organizations"

• Hospitals with high rates of preventable readmissions will face reduced Medicare payments

• Implementation of uniform standards for electronic exchange of health information

2012 Reforms

The will be ACO opportunities for carriers with strong provider relationships.

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• Higher Medicare payroll tax of 2.35% earned income, up form 1.45%

• Threshold for deducting medical expenses on taxes goes up from 7.5 % to 10%

• Medical device manufacturers have 2.9% sales tax on medical devices; with some exemptions

• Increased Medicaid payment for primary care doctors• Employee notification of exchanges, premium subsidies and

free choice vouchers

2013 Reforms

Marketing and communications about offerings on the exchange will be big.

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• No more deductions for expenses allocated to Medicare part D subsidy

• New Individual Mandate and employer coverage responsibility• Health insurance exchange is established for individual and

small group markets• New Individual affordability tax credit and expanded small

business tax credit• No more lifetime or annual dollar limits for essential benefits

2014 Reforms

Estimating consumer and small employer behavior will be critical for carriers.

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No pre-existing condition exclusions

Tax on health insurance imposed

40% excise tax ( “Cadillac tax”) on employer sponsored high-cost health plans that offer policies with generous coverage levels

2018 Reforms

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And finally…

Donut hole coverage gap in Medicare prescription benefit is fully phased out. Seniors continue to pay the standard 25% of their drug costs until they reach the threshold for Medicare catastrophic coverage.

2020 Reforms

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Select Issues Affecting Health Insurers

Significant margin pressures in risk-based books MLR floors; and later from the competitive nature of exchange-based distribution

Membership Mix Employer dropping coverage in the face of rising costs Employees going to the exchanges Newly the newly insured going to the exchanges and Medicaid

Unfavorable market shift Employers transition from fully-insured to ASO contracts

Distribution The implementation of exchanges in 2014 means that carriers will compete only on

price, brand and network Reshaping the broker relationship

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Key dynamics regarding employer “dumping”

Each ASO life lost results in an incremental “headwind” of about $35/member, while each risk-based employer life lost results in an incremental headwind of about $220/member.

For each life “won back” via the exchange, the insurer recoups about $123 to $142/member in 2014 – 2017.

Nearly 75% of dropped employees are expected to go to the exchanges. The 25% that do not represent a pool of lost earnings power.

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Many health insurers will have to lower administrative expenses to meet the new medical loss ratio (MLR) of 85% for the large group market and 80% for the small group and individual markets.

Successful insurers will have to shift their attention from group to individual plans, which are expected to triple between 2010 and 2019.

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WellPoint Health Insurance Enrollment and Financials

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Review of Select Markets Affected

Individual Market Higher wage employees Previously insured under an employer plan Never insured Affect of subsidies and penalties

Broker Community MLR minimum requirements adverse impact Reposition Expansion/partnerships New commission structure

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WellPoint, Inc. Membership Mix

WellPoint Membership Mix 2Q10

Local Groups46%

National Accounts21% BlueCard

14%

Individual6%

Medicaid5%

FEP4%

Senior4%

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Changes in Membership MixComparing 2Q09 to 2Q10 enrollment we see

enrollment declines in markets that are expected to experience growth under HCR:

Individual, down 10.1%Local Group (Small, Midsize, Jumbo), down 4.5%Medicaid, down 1.5%BlueCard, down 0.6%

Managing set medical loss ratios (MLRs) are expected to be challenge in the Individual, Medicaid and Small Group segments.

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Changes in Membership Mix

Comparing 2Q09 to 2Q10 enrollment we see enrollment growth in:

National Accounts, up 3.0%FEP, up 4.5%Senior Markets, up 1.5%

National Accounts will see little impact from reform. The Senior markets are expected to do well. Good hedge markets.

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Specialty Products

Specialty products are viewed by industry leaders as a way to shore up revenues under HCR.

WellPoint has seen strong growth in specialty products popular with consumers.

Dental, 80.5%Vision, 18.1%Going global where there are opportunities in the growing

Asian middle class market and fewer regulatory hurdles is also an option for WellPoint and other national carriers.

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WellPoint 4Q2009 PMPM Financials for the Individual Market Segment

Parent Company Lives PoliciesMember Months

Premiums Claims MCRPremium PMPM

Claims PMPM

WELLPOINT INC GRP ANTHEM BLUE CROSS LIFE & HLTH INS CO 636,500 441,073 7,388,434 $1,118,315,756 $806,042,094 72.1% $151 $109WELLPOINT INC GRP ANTHEM HLTH PLANS INC 57,429 36,444 682,371 $196,602,444 $163,032,215 82.9% $288 $239WELLPOINT INC GRP ANTHEM HLTH PLANS OF KY INC 124,788 88,935 1,537,502 $320,685,521 $256,701,443 80.0% $209 $167WELLPOINT INC GRP ANTHEM HLTH PLANS OF ME INC 19,298 11,520 243,617 $64,356,120 $61,264,983 95.2% $264 $251WELLPOINT INC GRP ANTHEM HLTH PLANS OF NH 23,439 16,149 283,005 $76,196,081 $47,941,019 62.9% $269 $169WELLPOINT INC GRP ANTHEM HLTH PLANS OF VA INC 235,373 145,538 2,828,511 $650,500,576 $471,265,820 72.4% $230 $167WELLPOINT INC GRP ANTHEM INS CO INC 104,130 63,643 1,280,806 $260,332,141 $184,525,780 70.9% $203 $144WELLPOINT INC GRP BCBS HLTHCARE PLAN OF GA INC 628 457 638 $64,896 $20,460 31.5% $102 $32WELLPOINT INC GRP BCBS OF GA INC 173,019 124,422 2,178,122 $531,962,979 $401,506,043 75.5% $244 $184WELLPOINT INC GRP BCBS OF WI 23,151 16,010 331,859 $66,614,847 $55,123,757 82.7% $201 $166WELLPOINT INC GRP COMMUNITY INS CO 4,826 3,720 71,194 $23,499,705 $22,136,119 94.2% $330 $311WELLPOINT INC GRP COMPCARE HLTH SERV INS CORP 18,072 10,924 214,996 $38,999,862 $31,265,295 80.2% $181 $145WELLPOINT INC GRP EMPIRE HEALTHCHOICE ASSUR INC 13,120 10,104 153,966 $25,897,259 $21,131,850 81.6% $168 $137WELLPOINT INC GRP EMPIRE HEALTHCHOICE HMO INC 9,287 7,904 126,920 $120,843,480 $82,557,052 68.3% $952 $650WELLPOINT INC GRP HEALTHKEEPERS INC 264 198 3,500 $2,156,038 $1,993,640 92.5% $616 $570WELLPOINT INC GRP HEALTHLINK HMO INC 21 13 261 $145,294 $61,891 42.6% $557 $237WELLPOINT INC GRP HEALTHY ALLIANCE LIFE INS CO 78,582 53,903 973,168 $199,963,052 $134,192,471 67.1% $205 $138WELLPOINT INC GRP HMO CO INC 84 73 1,138 $922,372 $1,162,632 126.0% $811 $1,022WELLPOINT INC GRP HMO MO INC 712 582 10,261 $4,461,097 $3,548,163 79.5% $435 $346WELLPOINT INC GRP PENINSULA HLTH CARE INC 45 30 593 $345,537 $209,368 60.6% $583 $353WELLPOINT INC GRP PRIORITY HLTHCARE INC 61 48 833 $513,803 $438,805 85.4% $617 $527WELLPOINT INC GRP ROCKY MOUNTAIN HOSPITAL & MEDICAL 129,264 86,954 1,564,651 $336,357,425 $249,132,268 74.1% $215 $159WELLPOINT INC GRP UNICARE HLTH INS CO OF THE MIDWEST 33,900 21,568 460,557 $81,508,256 $64,307,418 78.9% $177 $140WELLPOINT INC GRP UNICARE LIFE & HLTH INS CO 121,913 68,981 1,757,033 $307,814,144 $261,092,235 84.8% $175 $149

1,807,906 1,209,193 22,093,936 $4,429,058,685 $3,320,652,821 75.0% $200 $150

MLR minimum will be 85% under HCR. WellPoint is well over the new MLR in ME, well under it in NH. Will have to raise it slightly in its best market, VA. It might consider exiting markets where MLR is extremely low or high AND enrollment is very low.

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WellPoint 2009 PMPM Financials for the Medicaid Segment

Parent Company Lives PoliciesMember Months

Premiums ClaimsPremiums less

ClaimsMCR

Premium PMPM

Claims PMPM

WELLPOINT INC GRP ANTHEM INS CO INC 193,686 193,686 2,147,110 $441,260,425 $389,054,088 $52,206,337 88.2% $205.51 $181.20WELLPOINT INC GRP COMPCARE HLTH SERV INS CORP 30,910 30,910 367,493 $57,965,516 $53,314,319 $4,651,197 92.0% $157.73 $145.08WELLPOINT INC GRP HEALTHKEEPERS INC 141,747 141,747 1,567,904 $352,552,864 $334,384,665 $18,168,199 94.8% $224.86 $213.27WELLPOINT INC GRP PENINSULA HLTH CARE INC 25,840 25,840 291,819 $77,921,593 $72,270,152 $5,651,441 92.7% $267.02 $247.65WELLPOINT INC GRP PRIORITY HLTHCARE INC 31,361 31,361 359,031 $101,437,688 $95,005,742 $6,431,946 93.7% $282.53 $264.62WELLPOINT INC GRP UNICARE HLTH PLAN OF KS INC 42,498 42,498 473,550 $110,145,938 $86,049,900 $24,096,038 78.1% $232.60 $181.71WELLPOINT INC GRP UNICARE HLTH PLAN OF WV INC 80,185 80,185 927,737 $155,099,634 $120,860,286 $34,239,348 77.9% $167.18 $130.27WELLPOINT INC GRP UNICARE HLTH PLANS OF TX INC 21,532 21,532 246,021 $64,148,827 $50,088,709 $14,060,118 78.1% $260.75 $203.60

567,759 567,759 6,433,872 $1,370,549,212 $1,196,330,973 $174,218,239 87.3% $213.02 $185.94

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WellPoint, Inc. on Broker CommissionsThe role of brokers is being hotly debated. Many carriers are reducing what

they pay brokers, changing how they pay brokers or eliminating commissions altogether to meet the new MLR standards.

The broker community is absolutely critical and important to health care system. One of the primary reasons many who qualify for Medicaid are not enrolled is because no one is financially incented to get them enrolled.

WellPoint, Inc. has not announced what the new broker commission structure will be.

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WellPoint, Inc. on Broker Commissions

The rules are going to vary very dramatically by state. Some states have credibility rules based on the size of the carrier’s market share, and then there are phase-ins. Some states might allow legal entity consolidations. So there's a variety of things to understand further before WellPoint announces the broker commission rates.

WellPoint anticipates that it will be aligned with the key competitors in terms of having commission structures that are somewhat similar. There's been huge outliers in the past, but essentially the playing field has been leveled on that by creating an MLR floor.

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Actuarial Focus

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Impact of health reform on insurance enrollment (percent change by year 2010-2019)

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CBO HighlightsThe largest effects would be seen in the non-group

market, which would grow, but would still account for only 17% of the overall insurance market in 2016.

The CBO and the JCT estimate that the average premium per person covered for non-group policies would be about 10 – 13% higher than average under current law in 2016.

About 50% of enrollees would receive government subsidies that would bring their cost well below the premiums that would be charged for such policies under current lay.

CBO = Congressional Budget Office; JCT = Joint Committee on Taxation

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CBO HighlightsAdditional Information about Employment-Based Coverage

The changes in employment-based coverage shown in Table 3 of the cost estimate for the Patient Protection and Affordable Care Act are themselves the net result of several flows, which can be illustrated using the estimates for 2019. For that year, under the proposal, CBO and the JCT staff estimate that about 157 million non-elderly people would have their primary insurance coverage through an employer, or about 5 million fewer than under current law.

We estimate that about 6 million people would be covered by an employment-based plan who would not be covered by one under current law (largely because the mandate for individuals to be insured would increase workers’ demand for insurance coverage through their employers).

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CBO Highlights Additional Information about Employment-Based Coverage

We estimate that between 9 million and 10 million other people who would be covered by an employment-based plan under current law would not have an offer of such coverage under the proposal. Firms that would choose not to offer coverage as a result of the proposal would tend to be smaller employers and employers that predominantly employ lower-wage workers—people who would be eligible for subsidies through the exchanges—although some workers who would not have employment-based coverage because of the proposal would not be eligible for such subsidies. Whether those changes in coverage would represent the dropping of existing coverage or a lack of new offers of coverage is difficult to determine.

In addition, between 1 million and 2 million people who could be covered by their employer’s plan (or a plan offered to a family member) would instead obtain coverage in the exchanges, either because the employer’s offer would be deemed unaffordable and they would therefore be eligible to receive subsidies in the exchanges, or because the “firewall” for those with an offer of employer coverage would be imperfectly enforced. (Those people are counted as enrollees in the exchanges.)

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WellPoint, Inc. Case Study

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WellPoint, Inc. Case Study (cont’d.)

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Marketing & Advertising

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Marketing & Advertising BudgetUsing Horizon as a benchmark, it is estimated that WellPoint’s budget may be approximately $30 million.(campaign centered around Education)

Social Media (FaceBook & Twitter)Print Advertising (Newspapers & Magazines)Billboards (Major Highways)Television RadioeCommerce (blast emails)Retail Stores

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WellPoint Helping Businesses Navigate Health Care Changes with Online Tools and Social Media

• New Grandfathering Tool Helps Businesses Determine Best Health Plan Solution• H&R Block Tax Calculator Tool Helps Companies Determine Tax Credits and Financial Impacts

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Tools

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Websites – Healthychat.com and media – Twitter / Facebook

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WellPoint, Inc.

$195 Grant to Non-profit to run country’s only uninsured help line

With the implementation of Health Care Reform Legislation set to roll out over the next three years, current efforts to educate uninsured Americans will continue.

The number of health plan outlets is small but is expected to grow as more consumers look to buy individual policies.

The Colorado plan is the first among subsidiaries of Indianapolis-based WellPoint to open a retail store. The Anthem store is in the Denver suburb of Littleton, Colo., in the Southwest Plaza mall.

Other plans have opened retail outlets, but experts said more might consider stores as a way to reach potential customers -- especially to build a customer base for 2014, when most U.S. residents will be required to have health coverage or pay a tax penalty.

Foundation Awards01/12/11

Retail Insurance Store 10/2010

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Innovate and think like a consumer. Customers in all sectors will have greater access to information for making informed decisions; assisting them in navigating the information will be key. Know your community. Your “community” will grow as new requirements to cover and treat patients are implemented. Re-evaluate your product portfolio or lose out in the new marketplace. Provide value. With the major changes in funds flows, all sectors can take advantage of new sources of monies and mitigate anticipated reductions in funding.

Recommendations

To prosper in this changing environment, PricewaterhouseCoopers believes all sectors

should

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Resource Citations

•Congressional Budget Office (US employer-based coverage data)

•Edgar Online (WellPoint stock trend)

•Forrester Research (Consumer marketing data)

•J.P. Morgan, Morgan Stanley, Goldman Sachs (affects on HCR on carriers financial performance and membership)

•Mark Farrah Associates (WellPoint , SWOT analysis, enrollment and financial data)

•WellPoint quarterly analyst calls

•www.wellpoint.com

•www.healthreform.gov