National Medicare Prescription Drug Congress The Perspective of Health Plans Leonard D. Schaeffer Chairman and CEO WellPoint Health Networks Inc. February 26, 2004

Agenda The Need For Change Role of Health Plans Challenges Conclusion

The Need For Change Rising Costs Shift to Chronic Illness Medicare must be enhanced to address: Rising Costs Shift to Chronic Illness The Baby Boomers Spending vs. Outcomes

Medicare Spending, 1966-2001 Rising Health Care Costs $236.8B $1.8B The Need for Change Medicare Spending, 1966-2001 $236.8B $1.8B Source: Centers for Medicare and Medicaid Services, 2003

Shift to Chronic Illness The Need for Change Shift to Chronic Illness Age and demographic change drive evolution to a system to manage health status and chronic illness Percent of health care services used by people with chronic conditions 88% Prescriptions 72% Physician visits 76% Inpatient stays Source: Agency for Healthcare Research and Quality, Medical Expenditure Survey, 1998

Seniors Consume More Health Care The Need for Change The Baby Boomers Seniors Consume More Health Care Relative Per Capita Health Spending, By Age Cohort (Age 35-44 Equals 1), 1999 Relative Spending Source: Health Affairs, Nov/Dec 2003

Senior Population To Expand The Need for Change The Need for Change The Baby Boomers The Baby Boomers Senior Population To Expand

Tools & Information to Support Boomers Expect Choice The Baby Boomers The Need For Change Choice Plan PPO POS Open access HMO ASO Choice Price Choice Provider Choice Treatment Tools & Information to Support

The Need for Change Spending vs. Outcomes Dartmouth Study: Medicare patients receiving the most care did not fare better Patients in higher-spending areas received 60% more care, but not improved survival Utilization driven by local supply of physicians, specialists and hospital resources Study concluded that savings of up to 30% of Medicare spending might be possible Source: Annals of Internal Medicine, 2003; darker shading = higher spending

Agenda The Need For Change Role of Health Plans Challenges Conclusion

Product Opportunities Role of Health Plans Product Opportunities MMA provides two-year window for: M+C HMO Payment Increases Rx Drug Discount Card Medicare Advantage Plans Stand-alone Prescription Drug Plans Medigap Changes Health Savings Accounts

Quality Opportunities Role of Health Plans Quality Opportunities MMA will support current efforts and stimulate others: Plans required to have quality assurance systems Hospital annual payment updates tied to quality reporting IOM to develop pay-for-performance strategy for Medicare FFS disease management demonstrations Electronic prescribing standards

Health Plan Experience Role of Health Plans Health Plan Experience Serving Seniors IT Infrastructure for Data Collection Chronic Care Management Physician Connectivity Pay-For-Performance Consumer Information

Private sector familiar with seniors’ needs and managing drug benefits Role of Health Plans Health Plan Experience Serving Seniors Private sector familiar with seniors’ needs and managing drug benefits Medigap plans serve 10 million* Medicare+Choice serves 4.6 million** Rx benefit nearly universal in commercial market PBMs serve 200 million** PBMs currently administer Drug Discount Cards for 17-18 million enrollees*** *GAO/2001; **2003; ***GAO-03-912/Feb 2003 ( administered on behalf of retail pharmacies, employee assns, and insurance companies)

IT Infrastructure for Data Collection Role of Health Plans Health Plan Experience IT Infrastructure for Data Collection Shift to using information --not controls-- to improve efficiency & quality Intersection of key data flows --claims, Rx, lab-- creates opportunity Capture, integration, & analysis of data used to identify effective care Emergence of Infomediaries Knowledge transfer to providers and patients to improve outcomes Sources: James C. Robinson, “Beyond Managed Care” (presentation); AcademyHealth Reports: Knowledge Transfer: Building Better Bridges

Admissions per 1000 members Role of Health Plans Health Plan Experience Chronic Care Management Admissions per 1000 members 500 2000 Baseline 400 2001 -53% 300 2002 2003 200 -29% 100 -16% -36% Asthma- CHF-Total Diabetes- Diabetes- Related Total Related Program Source: WellPoint Experience with Prior Disease Management Programs

Physician Connectivity: iDOC Health Plan Experience Role of Health Plans Physician Connectivity: iDOC WLP invested over $100M in its own IT strategy in ‘03. To encourage physicians to adopt technology, WLP will: Provide an additional $40 million in new information technology to 19,000 network physicians Enhance patient care, reduce admin costs and improve physician communication Offer physicians a choice of: Prescription Improvement Package Paperwork Reduction Package Negotiate discounts for 170,000 physicians in our networks

Role of Health Plans Why WLP? “Somebody has to do something and it is just incredibly pathetic it has to be us.” Jerry Garcia Courtesy Martha Marsh, President & CEO, Stanford Hospital & Clinics

Health Plan Experience Role of Health Plans Pay-For-Performance Historically, both mistakes and corrections reimbursed Providers paid the same regardless of outcomes Leading plans now using pay-for-performance programs Providers respond to comparative information and financial incentives Challenge is raising consumer sensitivity to clinical quality differences

Consumer Information: Subimo Role of Health Plans Health Plan Experience Consumer Information: Subimo

Agenda The Need For Change Role of Health Plans Challenges Conclusion

Immediate Challenges Product development without knowing: Regulatory requirements MA payment rates Definitions (e.g. “actuarial equivalence”) Degree of design flexibility (e.g. formularies) Late enrollment penalty Service areas Regional PPO Networks NAIC Redesign of Medigap Beneficiary Education

Estimated $35/month premium Immediate Challenges Beneficiary Education Outreach & education needed to: Explain “donut hole” design Understand plan choices Underscore importance of enrolling early to minimize selection problems Out of Pocket Spending Catastrophic Coverage 5% $5,100 No Coverage $2,850 $2,250 Partial Coverage 25% $250 Deductible Estimated $35/month premium Source: Kaiser Family Foundation, 2003

Long-Term Issues Senior response to new coverage options Feasibility and flexibility of regulations CMS resources and staffing Sustained commitment to quality incentives Risk inherent in government partner Legislative amendments/new requirements

Agenda The Need For Change Role of Health Plans Challenges Conclusion

Conclusion MMA complex, but most plans optimistic Successful implementation requires feasible, flexible regulations Modernizing Medicare requires meeting the needs and expectations of baby boomers A 21st century health care system should provide seamless transitions Ultimately. . .

Conclusion, cont. Health care systems are a reflection of social values– not science and not economics A system that works for all should be evidence-based, choice-based, equitable and affordable We can hope that outcomes will improve, but we can count on patient expectations continuing to rise and total cost continuing to increase