Transcript No Slide Title

Merrill Lynch Health Services Investor Conference
The Waldorf Astoria, New York City
December 3, 2003
Gregory W. Scott
Executive Vice President and CFO
PacifiCare Health Systems
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 as of
September 30, 2003, and the Form 10K as of December 31,
2002.
2003 Market Expansion
Largest purchaser of health care services in the Western U.S.
2003 Market Expansion
• Medicare Supplement
• PBM
• Behavioral Health
A Fortune 200 company with
•
•
•
•
$11 billion in revenue
2.2 million commercial lives
686K Medicare+Choice HMO lives
9 million specialty lives
2002 Health Plan + Specialty Companies
2002 Specialty Companies only
2003 Market Expansion
Third Quarter Performance and FY 2003 Guidance
Q302
Q303
2003 Guidance
Operating Revenue
$2.8B
$2.7B
(1%-2%)
MLR
Commercial (Private)
Senior (Government)
86.7%
84.9%
83.0%
84.6%
84%-85%
84.5%-85.5%
Operating Margin
Commercial
Senior
Specialty & Other
12.4%
15.3%
59.9%
16.4%
15.3%
48.3%
15.0%-16.0%
14.5%-15.0%
47.0%-48.0%
EBITDA
$109M
$142M
~$550M
--
--
CFFO
$350-$360M^
= 1.4X Net Income
SG&A ratio
13.2%
13.4%
12.5%-13.0%
EPS
$1.20
$1.72
$6.00-$6.05
WANS
36.4M
39.2M
39.7M**
** Includes ef f ect of convertible debt equity of f ering on Q4
^ Assumes CMS continues to make Q1 payment in December of prior year
2003 Membership & Pricing Guidance
 Membership
 Commercial up 1%-2%, ex-CalPERS
 M+C down to 680,000
 Medicare Supplement doubles from 17,000 to ~35,000
 Pricing
 Commercial pricing up 17% after buydowns ~250 bp
 M+C premium yield up ~4%
 Specialty & Other up ~20%
Membership & Pricing Trends
•
Commercial membership up sequentially despite
modest declines in national accounts tied to slow
economy
•
gross new small group sales in Q303 up 100% y-o-y
•
retention rate higher than expected
•
Expect moderate single digit commercial membership
increase in 2004
•
Pricing for Jan ‘04 renewals up mid-teens before
buydowns ~400 bp
Issuance of 3.8 Million Shares of Common Stock
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•
•
Approximately $200 Million net proceeds
Use of proceeds
– $175M redemption of 10 3/4% Senior Notes
– accrued interest, redemption premium, other transaction costs.
Benefits:
– Improve cash flow
– Improve balance sheet platform for Medicare diversification
– Promote credit rating increase
 Decrease cost of debt
• EPS effect:
– Q4’03 guidance lowered to $0.59-$0.64 due to $17.3 million onetime expenses and 1.9 million weighted share increase
– 2003: Full-year guidance lowered by $0.52 to $6.00-$6.05
– 2004: Net Income increases $12 million net of tax; modestly
dilutive to EPS
Issuance of 3.8 Million Shares of Common Stock
• Why Equity?
• Why Now?
• Credit Ratios
– Debt / book cap (9/30/03)
 From 33.3% to 25.7%
– Debt / EBITDA (LTM 9/30/03)
 From 1.5x to 1.1x
Free Cash Flow Growth Before Note Redemption
$300
$275
$200
Millions
$156
$129
$100
$0
2001*
2002*
2003 est.
• Free cash flow is defined as net income plus depreciation and amortization, less capital expenditures
• Best measure of resources available at Parent to pay down debt, build statutory capital, pursue opportunistic acquisitions
*Excluding non-recurring items
Excess Statutory Capital
$574
$600
millions
$500
$375
$400
$276
$300
$218
$200
$100
2000
2001
2002
9/30/03 est
Weighted average company total > 300% RBC
Expanding Commercial Insured Gross Margin
$210
Premium
$ PMPM
$190
$33.10
$170
$22.81
$150
$16.37
Health Care Costs
$130
2001 A
2002 A
2003 E
2001-2003 Improvement = $335 million or 65%
2003 - 2004 Product Leadership Strategy
•
Growing Commercial Business
• New product introductions
• Diversify to Individual/ Small/ Mid-sized groups
• Advertising/Branding Campaign
•
Build Senior Solutions Products/ Distribution
• Medicare Supplement
• Disease Management
• Caregiver
•
Expanded Specialty Company Membership
• Organic growth
• Small acquisitions
Recently Launched Products and Services
• PPO
• Self Directed Health Plan
• Medicare Supplement
• Self-Funded PPO
• Tiered HMO Hospital Product
• Value Plan
• Senior Rx Card- complement to Med Supp
• PPO Dental
• Medicare PPO (pilot)
Recently Launched Products and Services
• A Solution for Caregivers
• Healthy Renewal Pass
• Hospital Quality Index
• Latino Health Solutions
• Women’s Health Solutions
• African American Health Solutions
• Private Label Life & Disability Insurance
• Flexible Spending Account Debit Card
• Premier Pass (physician concierge service- pilot)
• Extended customer service hours
Building Our Brands
Relative Ad Spending
9%
3%
10%
36%
Results
13%
13%
Blue Cross / Blue Shield
Kaiser
Health Net
PacifiCare
Source: BrandEconomics®
16%
Cigna
Aetna
United
Secure
PacifiCare Horizons
Brand Strength up 19% up 9%
Brand Stature up 180% up 144%
New Forecasted Gross Profit Goal (after Q203)
100%
80%
52.0%
53.0%
61.5%
75.3%
60%
83.6%
90.4%
40%
20%
48.0%
47.0%
38.5%
24.7%
16.4%
0%
2001 A
2002 A
2003 F
Senior HMO
2004 F
All Other
2005 F
9.6%
2006 F
Managing Medicare+Choice
2002
Exits
Affected m em bers
2003
44 cos.; 5 states 5 cos.; 2 states
2004*
0
64,000
37,000
0
Prem ium s up
6.0%
~4%
~4%
Benefits dow n
5.10%
1.60%
~1%
(~200,000)
(~83,000)
~10,000
dow n 350 bp
flat
up
Mbrship (loss)/gain
MLR vs Prior Year
* Before Medicare reform bill; revisions in progress
Medicare Reform Summary
• Key Benefits to PHS are
• ‘04 and ‘05 M + C reimbursement increase
• ’04 prescription drug benefit for low income M + C
enrollees
• ‘06 prescription drug benefit also conferred to M + C
enrollees
• PBM participation in management of Rx Discount Card
& drug benefit
• Medicare Supplement plans without Prescription
benefit not affected
Medicare Strategy 2004 and Beyond
Before Reform
Maximize Cash Flow
Current Strategy
Growth
New life for strengthened Medicare+Choice program
Medicare+Choice After Reform
Focus on growth from membership expansion
rather than margin expansion:
2004-- modest net income growth (~5%-5.5% premium increase)
2005-- keep pace with cost trend (high single digit increase)
2006-- substantial new reimbursement with Rx benefit
Medicare Reform Bill
• Passed by Congress 11/25/03
• Will be signed by Bush in Dec. ‘03
• CMS county calculations
• Revised ACRs
• Increased reimbursements to begin ~3/04
• Drug card to start ~4/04
• PPO/PDP regions announced by 1/1/05
• PDP/MA regulations in early ‘05
• Drug benefit & new private plan options start 1/1/06
Medicare Disease Management Pilot Program
• HeartPartners- collaboration of PHS, Prescription Solutions, QMED,
Alere Medical, Inc.
• Enroll up to 15,000 members w/ heart condition starting 1/04
• Estimated revenue = $120 million in 2004; up to $1 billion over 3 years
Disease Management
Total Membership
40,000
35,700
30,000
23,700
20,000
17,660
10,000
9/30/01
9/30/02
9/30/03
Savings > $117 million over last 12 months
Equity & Debt Value Appreciation
• Stock appreciation since 12/31/01 ~ 300%
$70.00
$64.35
$60.00
$49.33
$50.00
$40.00
$27.20
$30.00
$20.00
$16.30
$10.00
6/30/01
6/30/02
6/30/03
12/1/03
• 10 ¾ % High Yield Note appreciation since issuance:
 issued at 99.4%
 recently indicated at ~116%
 total return since issuance ~30%