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Bear Stearns 15 th Annual Healthcare Conference Waldorf Astoria, New York City September 19, 2002. Gregory W. Scott Executive Vice President, Chief Financial Officer Pacificare Health Systems. Safe Harbor Statement

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Bear stearns 15 th annual healthcare conference waldorf astoria new york city

Bear Stearns 15th Annual

Healthcare Conference

Waldorf Astoria, New York City

September 19, 2002

Gregory W. Scott

Executive Vice President,

Chief Financial Officer

Pacificare Health Systems


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

Safe Harbor 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 Form 10Q as of June 30, 2002, and Form 10K as of December 31, 2001.


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

Pacificare = largest purchaser of health care services in the western U.S.

A Fortune 200 company with

  • ~$11 billion in revenue

  • 2.4 million commercial lives

  • 800 thousand Medicare+Choice lives

  • ~9 million specialty lives


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

Critical Success Factors

Executive Leadership

Capital Structure

Business Model/Mix

Operations

Regulatory Relations

Network Stability

Litigation

Technology Upgrades


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

  • Leadership

    • Strategically focused

    • Shareholder-aligned

    • Committed

  • Capital Structure

    • Issues largely resolved

    • Diversified access to working capital

“Brand New Day”at PacifiCare in 2002

Progress Report


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

“Brand New Day”at PacifiCare in 2002

Progress Report

  • Business Model & Mix

    • Reduced M+C dependency

    • Enhanced commercial profitability -Margin up > 30%

    • Improved retention

    • Offering total Health Benefit Solutions supported

      by superior quality and service platforms

  • Operations

    • Rapidly meeting/exceeding industry standards

    • Full service systems platform supports all funding solutions


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

“Brand New Day”at PacifiCare in 2002

Progress Report

  • Networks

    • More stable

    • Require vigilant monitoring

  • Legal/Regulatory

    • Suits/settlements going our way

    • Positive & collaborative regulatory relationships

    • TX AG suit remains to be resolved


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

“Brand New Day”at PacifiCare in 2002

Progress Report

  • Technology

    • Investments in “Future State” underway

    • Outsourcing generates operational savings & significant flexibility


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

“Brand New Day”at PacifiCare in 2002

Progress Report

  • Brand

    • Advertising/repositioning campaign launched

  • Quality

    • Tiered network emphasizes quality

    • Physician Quality Index™ : Market leader

    • Introduction of Hospital Quality Index™ : Will be market leader

  • Earnings

    • Visibility improved

    • Increased diversification

    • Rebuilding investor/creditor confidence


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

Top-Level Strategy

Fix the Core

  • Operational Control

  • Profit Margin

MCO Product/Segment Extensions

  • PPO

  • Med Supp

  • ASO

  • Defined Contribution

  • 3rd Party Specialty Business

HMO

Consumer-Aligned Organization

  • Drug Discount Program

  • Debit Card

  • Women’s Health Initiative

  • Stand Alone Rx Plan

  • Tight Network Operations

  • Quality Measurement

  • Rx POS Connectivity

  • Extended Service Hours

  • Customer Welcome Calls

Full Service MCO

Consumer Health Organization

(CHO)


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

Earnings Improvement- Pro Forma


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

Operating Profit* vs. Investment Income Year-over-year

Investment

Income: (65)%

Operating

Profit: 81%

Investment

Income: (91)%

Operating

Profit: 102%

*Adjusted for SFAS 142 change in accounting for goodwill as if adopted January 1, 2001 and excludes impairment, disposition, restructuring, OPM and other charges/credits


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

Specialty company net income 19%

  • Increased gross profit margin PMPM 30%

    • Commercial 33%

    • M+C 35%

  • Commercial premiums PMPM 15%

    • cost trends = 12-14%

  • M+C premiums PMPM 7%

    • cost trends = 4%

2nd Quarter 2002 Results- Drivers of Operating Profit Improvement


Earnings guidance in 2002

Earnings Guidance in 2002

  • FY ‘02 EPS Guidance =$3.37-$3.47 (w/ FAS 142)

  • EOY Membership

    • Commercial = 2.4 million

    • M+C = < 800 thousand

    • Specialty = 11 million

  • Commercial premium

    • Increase high teens before buydowns, mid teens after buydowns


Earnings guidance in 20021

Earnings Guidance in 2002

  • Consolidated MLR = 87-88%

    • Commercial = 86-87%

    • Medicare = 89-90%

  • SG&A ratio = 11.5%-12%

  • Medical cost trends:

    • Commercial- low to mid teens

    • Medicare- high single digits

    • Pharmacy (after buydowns)-

      • Commercial: mid teens

      • Medicare: negative


Bear stearns 15 th annual healthcare conference waldorf astoria new york city

  • Q2 ’02 Pre-tax loss of $43 million

  • Extensive provider recontracting

    • interpretation issues

    • unaddressed provisions

    • delayed notice by providers

  • Results not indicative of run rate

    • increase in paid claims from prior 2 quarters

    • increase in claims run rate for Q2 ’02

    • increase in claims reserves

  • Texas


    Recent events

    Recent Events

    • Keystone Health Plan partners with PacifiCare Behavioral Health

      • Effective 11/1/02

      • Covers > 200,000 Keystone enrollees in PA

  • Reader’s Digest agreement with Senior Solutions

    • Exclusive endorsement of Secure Horizons’ Medicare Supplement products

    • Access to customer database with > 100 million households

    • Working with Reader’s Digest to offer additional products

  • Significant new commercial case wins


  • Recent events1

    Recent Events

    • WebMD agreement with Prescription Solutions

      • Agreement is with WebMD sub, MedE America, which has 4 million lives

      • Prescription Solutions to provide mail order prescriptions & OTC medications

      • 300K members initially; additional mbrs. over next year


    Changes to medicare choice in 2003

    Changes to Medicare+Choice in 2003

    • Discontinuing service in 7 counties in 2 states

    • Affects > 47,300 mbrs.; > 6% of YE ’02 mbrs.

      • 3 counties in TX > 25K members

      • 4 counties in CA > 22.3K members

  • Premium and benefits change for majority of members


  • Bear stearns 15 th annual healthcare conference waldorf astoria new york city

    Thank You


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