Transcript No Slide Title

UBS Annual Global Health Care Services
Conference
February 15, 2005
The Plaza, New York City
PacifiCare Health Systems
Gregory W. Scott
Executive Vice President and
Chief Executive Officer
Cautionary Statement
The statements made during this presentation that are not
historical facts are forward-looking statements within the
meaning of the Federal securities laws, and may involve a
number of risks and uncertainties. Factors that could cause
actual results to differ materially from expectations include, but
are not limited to, the risks discussed in the company's most
recent filings with the SEC, including the Form 10Q filed as of
September 30, 2004, and the Form10K filed as of December
31, 2003.
Strategy of a growth company
PHS 8 health plan markets before acquisitions
2004 Markets – Pre-AMS Acquisition
PHS Only Markets
A Fortune 200 company with:
• $12 billion in revenue
• 2.6 million commercial lives
• 704K Medicare Advantage
lives
• 11.8 million specialty lives
Expansion through recent acquisitions
28 Additional medical states after AMS acquisition
Completed 12/04
2005 Markets – Post-AMS Acquisition
PHS Only Markets
AMS Only Markets
PHS & AMS Overlaps
Expansion through recent acquisitions
Significant additional overlap with Pacific Life
acquisition
1Q ‘05 Close
Target
2005 Markets - Post Acquisitions
PHS Only Markets
AMS Only Markets
PHS/AMS/Pac Life Overlaps
ISG Market Segment Acquisitions
American Medical Security Group (AMS)
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Adds ~314K ISG PPO lives- 13% commercial member
increase
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Lower cost PPO operations on scalable ISG platform
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Network of 32,000 independent agents increases
distribution for PHS products/services
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$100 million in excess statutory capital
•
Commercial growth/diversification balances Medicare
Advantage business
•
Geographic expansion diversifies away from CA
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Potential network, PBM & cross sell synergies
ISG Market Segment Acquisitions
Pacific Life’s Group Health Business
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Leverages AMS acquisition
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Adds ~140K small/large group PPO lives- 6%
commercial member increase
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Network of 30,000 agents increases distribution for
PHS products/services
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Commercial growth/diversification balances Medicare
Advantage business
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Geographic expansion diversifies away from CA
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55% member overlap w/ PHS; 95% overlap w/ combined
PHS/AMS = network synergies
2005 Guidance- Excluding Pacific Life
Includes effect of FAS 123R on equity based compensation
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Commercial mbrshp. growth: 3.0%-3.5%
Medicare Advantage ending mbrs: 743K
Revenue increase:15%
MLRs
• Consolidated = 84%-85%
• Private Commercial = 81%-82%
• Private Senior = 73%-74%
• Government Senior = 87.5%-88.5%
Gross Margins
• Commercial = 18%-19%
• Senior = 11.5%-12.5%
• Specialty & Other = 36%-37%
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EBITDA: $745-$770 million
CFFO:$500-$525 million
Free Cash Flow: $320-$335 million
SG&A ratio: 12.5%-13%
Depreciation/Amortization: $85 million
Capital expenditures: $120-$125 million
Net Income: $360-$375 million
Average outstanding shares: 98.8 million
EPS: $3.64-$3.80
• Q1 = $0.85-$0.89
Tax rate: 39.1%
= 19%-24%
Net Income Growth
Earnings growth
Net Income
$360-$375
$400
$303
$300
$243
$200
$139
$100
$19
$0
2001
2002*
2003
2004
* Excluding effect of the adoption of FAS 142 relating to the amortization of goodwill
^ Includes acquisition of American Medical Security Group & proposed acquisition of
Pacific Life’s group health insurance business
2005 est.^
PacifiCare Vision
Planned evolution from a traditional health maintenance organization into a
leading consumer health organization
HMO
DIVERSIFIED
INSURANCE
COMPANY
CONSUMER
HEALTH
ORGANIZATION
The rise of HSAs & CDHPs
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Continued cost shifting to employees, but without a
value proposition
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5% HSA penetration rate by 12/31/06
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HSAs appeal to healthy/wealthy
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HSAs likely to replace traditional PPO vs. HMO
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Hewitt survey finds:
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61% of employers likely to offer HSAs in near future
93% of employees willing to take more responsibility for
health care decisions
Not total replacement, but additional option
PacifiCare offers a total solution
SignatureValue
Select Hospital
Plan
SignatureValue
Traditional
Plan
SignatureOptions
Advantage
SignatureValue
Advantage
Signature
Freedom
Signature
Independence
HSA/SDHP
Front End
Decision Support
•Quality Index Profiles
•Benefit Selection Pricer
•Health Risk Assessment
•Worksite/Web Based Tools
•On-Line Enrollment
SignatureOptions
Traditional
Plan
Indemnity
On-Going Support Care Management
•Disease Mgmt/ Web Admin
•Health Credits
•Women’s Health
•Flexible Spending Account
•Ethnic Diversity Programs
Specialty Offerings
•Pharmacy
•Dental & Vision
•Behavioral
•Life/STD/LTD
•Caregiver
•PAN
SignatureFreedom Plan Design
Self Directed
Account
$1,000
Covered Services (apply to deductible):
• Physician Office Visits
• Wellness & Preventive Care
• Office-based Diagnostic Tests
Annual
Deductible
$2,000
Rx
$10
generic
$35
brand
Employee Responsibility
Employee Responsibility
$1,000 to $2,000
$1,000 to $2,000
Out-of-Network
In-Network
Out-of-Network
50%
70%
50%
In-Network
70%
100% After Coinsurance
Maximum
PPO
Benefit
Plan
$
SignatureFreedom Growth
90,000
80,000
82,172 Members
I-Plan
WA
70,000
OR
60,000
NV
50,000
AZ
40,000
TX
30,000
OK
20,000
CO
10,000
CA
PHS
1-0 4
2 -0 4
3 -0 4
4 -0 4
5-0 4
6 -0 4
7-0 4
8 -0 4
9 -0 4
10 -0 4
11-0 4 12 -0 4 Current
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Approximately 10% from groups that did not previously offer insurance
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75% from Small Group (2 to 50 employees)
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90% from customers new to PacifiCare
Emerging SignatureFreedom Utilization Results
• Participants are using appropriate levels of preventive
services
Physician Office
Visits
Physical Exams
Well Baby Exams
140%
125%
120%
100%
80%
60%
60%
43%
40%
20%
0%
vs. PPO (High Ded - $1,500)
PacifiCare data is normalized (age/sex) incurred claims from 8/03 to 7/04 paid through 10/04
Emerging SignatureFreedom Utilization Results
• Participants are using appropriate levels of preventive
services
Inpatient
Admits
Inpatient
Days
ER visits
Ambulance
(25%)
(24%)
10%
0%
(10%)
(20%)
(23%)
(30%)
(40%)
(38%)
vs. PPO (High Ded - $1,500)
PacifiCare data is normalized (age/sex) incurred claims from 8/03 to 7/04 paid through 10/04
Specialty company growth
Prescription Solutions’ Unaffiliated Membership
4,000
3,500
Millions
3,000
2,560
2,070
2,000
1,640
1,130
1,000
630
0
2000
2001
2002
2003
2004
2005E
Specialty company growth
Prescription Solutions' Revenue
$ Millions
2000
$1,647
1500
1000
500
$704
$340
$394
$403
2000A*
2001A*
2002A
$472
0
Internal
2003A
External
* Breakout of internal vs. external revenue is not available prior to CY 2002.
^ Revenue increases related to a change in contracting methodology from the
gross method to the net method for retail prescription drug transactions ~$50M
in 2004, ~ $860M in 2005 mainly for PHS contract.
2004A^
2005E^
Specialty company growth
Mail Service Revenue & Mail Order Penetration
700
$602
600
$537
$ Millions
500
400
$296
$341
$387
$328
25.3%
300
200
26.0%
18.7%
20.6%
20.3%
18.4%
2001
2002
100
0
2000
2003
2004
2005E
Medicare opportunities
 Medicare Advantage HMO/ Private FFS
 Part D Administration
 Medicare Supplement
 Medicare Advantage Regional PPO
Local Medicare Advantage growth- Timeline
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All 2006 plan applications due March 23rd
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’06 Benchmark HMO rates issued April 4th (Parts A/B)
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Health plan bids for Parts A, B & D due June 6th
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National average monthly Part D bid announced August 3rd
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CMS benefit plan approval September 14th
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CMS website launches comparative plan data October 13th
Medicare opportunities
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Medicare Advantage HMO
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MLR rises from ~86% in ’04, to 87.5%-88.5% in ’05
Focus on increasing membership vs. margins
2006 growth depends on flexibility with benefit structure
Growth initiatives:
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Preferred provider relationships
Broker distribution
Geographic expansion
Value Plans
Community & faith-based organization marketing
Small acquisitions
Medicare opportunities
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Medicare Advantage Private FFS
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Entering as many as 16 states by the end of 2005
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Nearly identical to MA HMO program, but no contracted
provider network
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Health Plans pay providers at Medicare FFS rates
Medicare opportunities
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Part D Administration- Potential market
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Approximately 42 million Medicare eligibles in the U.S.
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MA penetration ~12% = 5 million
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Eligible for FFS Part D ~ 37 million
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Includes ~6 million dual eligibles to be auto-enrolled
Penalty for not enrolling = 1% per month
In terms of drug spend, 42 million seniors equivalent of
150 commercial lives
Medicare opportunities
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Part D Administration- PHS capabilities
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Captive PBM w/ external focus
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Broad distribution capabilities
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State-of-the-art mail facility
National pharmacy network
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Risk-based business model
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10 years of senior prescription drug data
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Managed care tools to control costs, improve outcomes
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Additional marketing channels
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Direct TV/radio advertising
Direct mail
Recent acquisitions
Broker distribution
Medicare opportunities
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Part D Administration- Short term considerations
Costs for:
• Building up infrastructure
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IT, software, processing
Local MA and Part D Administration
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Building up customer service platform
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Marketing expenses
Total ~$50 million
Fixed
Variable
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