Gregory W. Scott

1
.a health and consumer services company making
peoples lives better
Financial Fundamentals
Gregory W. Scott Executive Vice President and
Chief Financial Officer
2
Key Balance Sheet Events

• Share repurchase program canceled 8/00
• Unihealth repurchase program restructured 11/00
• Recapitalization transaction withdrawn 7/01
• Bank facility extended 8/01
• Acqua Wellington equity agreement 12/01
• OPM resolved 4/02
• Bank facility extended two years, conditionally
  4/02
• High yield debt issued 5/02

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High Yield Debt

• Bank facility extension through 1/05 secured
• FHP bonds funded
• Avoids July 2003 interest rate step up of 50
  basis points
• Lower cost of capital compared to equity
  transactions
• 0.18 EPS 2002 dilution 0.30 EPS annual dilution

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Capitalization Table
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Commercial Premium HCC
Gross Profit PMPM 16.61 17.70 15.63 16.19 16
.13 20.45 21.39 Membership (000s) 3,023 2,991
2,730 2,634 2,567 2,473 2,440 MLR 87.9 8
7.2 89.5 89.2 89.5 86.9 87.5
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Senior Premium HCC
Gross Profit PMPM 46.71 47.47 50.52 53.82 62
.03 48.74 60.72 Membership (000s) 1,026 1,05
8 1,050 1,008 1,002 959
850 MLR 91.0 91.0 90.7 90.3 89.0 91.3
89.8
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Consolidated SGA
Dollars (in Millions)
of Operating Revenue(1)
(1) excludes investment income
8
2002 Net Income Guidance
(In Millions)
Restated for SFAS 142 cumulative effect change
in accounting principle, excludes restructuring
charges Excludes SFAS 142 cumulative effect
change in accounting principle, OPM credits, bank
fee write-offs
9
Operating Profit Before Change in Investment
Income Improves 61 Year Over Year
Investment Income -37 Operating Profit
61
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
10
EBITDA/Free Cash Flow
(In Millions)
11
Free Cash Flow
12
Medical Claims and Benefits Payable
13
Medical Claims and Benefits Payable
14
Liabilities are Based on Contractual Arrangements
Capitated Physician, Non-Capitated Hospital
Fee-for-Service Providers
Capitation/IBNR
IBNR
HMOs

• physician services to members
• fixed monthly payment to medical group
• can be delegated or administered for specialist
  services
• hospital contracts negotiated separately,
  generally on a per-diem basis

• comprehensive services to members
• no fixed monthly payment
• cost based on discounted fee for specific
  service rendered
• HMOs responsible for paying claims

Capitated, Administered Providers
Capitated, Delegated Providers
Withhold Pools/Capitation
Capitation

• comprehensive services to members
• fixed monthly payment
• amount withheld by HMO monthly to pay providers
  cost of referral claims to specialists, hospitals
• HMOs adjudicate and process referral claims on
  providers behalf using cash withheld

• comprehensive services to members
• fixed monthly payment
• providers responsible for paying referral claims
  to specialists, hospitals
• HMOs have no contractual relationship with
  referral providers

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Variables that Impact IBNR Reserves
Variable Variable Measurement
Change IBNR Risk Membership of risk
members Cost per risk
service provider contracts
Utilization of services bed days/k and
other indicators Speed of claims
payment days between date of service
and check date
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Changes in Incurred But Not Reported Liabilities
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What Do Investors See?
Days Claims Payable
WLP (62)
UNH (66)
HNT (56)
PHSY (39)
Source Banc of America Securities
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MCBP and Days Information
(In Millions)
1,275.4
1,095.9
1,078.5
19
Commercial MCBP and Days Information
(In Millions)
659.0
569.1
607.9
(In 000s)
Hospital risk members 1,338 1,286
1,318 Physician risk members
464 519 536
20
Senior MCBP and Days Information
(In Millions)
616.4
526.8
470.6
(In 000s)
Hospital risk members 399 401
366 Physician risk members
136 221 204
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Membership Losses Decrease Days Claims Payable
PHS on average turns IBNR claims in 68.9 days
Health Care Costs avoided with member exits
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Medical Claims and Benefits Payable Information
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Medical Claims and Benefits Payable Information
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Medical Claims and Benefits PayableAppendix
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What are Provider Withhold Pools?How are they
recorded?

• Withhold pools cash withheld from capitation to
  pay referral claims on providers behalf
• Liability withheld amount less claims paid to
  date

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What are Risk Program Reserves?How are they
recorded?

• Provider incentives based on risk sharing
• Liabilities estimated
• Settled quarterly or annually, in arrears

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Capitation is Prepaid.Why is there a liability
for it?

• Capitation Liabilities may arise from
• retroactive membership changes not yet paid to
  providers
• low enrollment or capitation guarantees
• retroactive changes in capitation contracts
  million

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What are Insolvency Reserves?How are Insolvency
Reserves Estimated?

• Some of the insolvency reserves relate to
  specific provider bankruptcies.
• Estimate may also include reserves for
  potentially insolvent providers where evidence
  indicates non-payment or slow payment of referral
  claims.
• Estimates of amounts owed by providers for
  referral claims - essentially, the providers
  IBNR for services covered by our capitation
  payment. Liabilities are specific to state law.
  reserves
• Insolvency expense may also include reserves for
  provider receivables (claims paid in excess of
  capitation withheld or risk programs.
  Receivables are fully reserved unless provider
  has agreed to a firm collection plan.