0 CSFB Healthcare Conference The Arizona Biltmore, Phoenix November 13, 2003 Howard Phanstiel President and CEO PacifiCare Health Systems.

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Presentation transcript:

0 CSFB Healthcare Conference The Arizona Biltmore, Phoenix November 13, 2003 Howard Phanstiel President and CEO PacifiCare Health Systems

1 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, Cautionary Statement

2 Medicare Supplement PBM Behavioral Health 2003 Market Expansion 2002 Health Plan + Specialty Companies 2002 Specialty Companies only 2003 Market Expansion A Fortune 200 company with $11 billion in revenue 2.2 million commercial lives 686K Medicare+Choice HMO lives 9 million specialty lives Largest purchaser of health care services in the Western U.S.

3 Third Quarter Performance and FY 2003 Guidance

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%

5 Free Cash Flow Growth Before Note Redemption 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

6 Excess Statutory Capital Weighted average company total > 300% RBC

7 Expanding Commercial Insured Gross Margin $16.37 $22.81 $ Improvement = $335 million or 65% Health Care Costs Premium

8 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 Managing M+C cash flow with or without Relief Expand Specialty Company Membership Organic Growth Small Acquisitions Product Leadership Strategy

9 Recently Launched Products and Services PPO PPO Self Directed Health Plan Self Directed Health Plan Medicare Supplement Medicare Supplement Self-Funded PPO Self-Funded PPO Tiered HMO Hospital Product Tiered HMO Hospital Product Value Plan Value Plan Senior Rx Card- complement to Med Supp Senior Rx Card- complement to Med Supp PPO Dental PPO Dental Medicare PPO (pilot) Medicare PPO (pilot) Medicare FFS Disease Mgmt. (pilot) Medicare FFS Disease Mgmt. (pilot)

10 Recently Launched Products and Services A Solution for Caregivers A Solution for Caregivers Healthy Renewal Pass Healthy Renewal Pass Hospital Quality Index Hospital Quality Index Latino Health Solutions Latino Health Solutions Women’s Health Solutions Women’s Health Solutions African American Health Solutions African American Health Solutions Private Label Life & Disability Insurance Private Label Life & Disability Insurance Flexible Spending Account Debit Card Flexible Spending Account Debit Card Premier Pass (physician concierge service- pilot) Premier Pass (physician concierge service- pilot) Extended customer service hours Extended customer service hours

11 Membership & Pricing Trends Commercial membership up sequentially despite modest declines in national accounts tied to slow economyCommercial membership up sequentially despite modest declines in national accounts tied to slow economy gross new small group sales in Q303 up 100% y-o-ygross new small group sales in Q303 up 100% y-o-y retention rate higher than expectedretention rate higher than expected Expect moderate single digit commercial membership increase in 2004Expect moderate single digit commercial membership increase in 2004 Pricing for Jan ‘04 renewals up mid-teens before buydowns ~400 bpPricing for Jan ‘04 renewals up mid-teens before buydowns ~400 bp

12 Recognition of Quality State of CA report ranks PHS as state’s top network model HMOState of CA report ranks PHS as state’s top network model HMO PHS CA, AZ & NV highest rated plans in those states, CA in top 10% nationally, in NCQA consumer assessment surveyPHS CA, AZ & NV highest rated plans in those states, CA in top 10% nationally, in NCQA consumer assessment survey PHS Named as ‘Health Financing Innovator’ by FACCT for Quality Index® profilesPHS Named as ‘Health Financing Innovator’ by FACCT for Quality Index® profiles Received ‘Innovator’s Award’ from HIAA for Quality Index® profiles, tiered/narrow networks, DM, and NCQA achievementsReceived ‘Innovator’s Award’ from HIAA for Quality Index® profiles, tiered/narrow networks, DM, and NCQA achievements ‘Best Disease Management Program’ award received from Disease Management Association of America‘Best Disease Management Program’ award received from Disease Management Association of America Branding/Marketing campaign has resulted in 2 awards:Branding/Marketing campaign has resulted in 2 awards: Global Award in ‘Communication to the Consumer’ category Global Award in ‘Communication to the Consumer’ category Caddy Award in ‘Consumer Services’ category Caddy Award in ‘Consumer Services’ category

13 Building Our Brands Relative Ad Spending Results Source: BrandEconomics®

14 1. The company is making the changes necessary to compete effectively. 2. I would recommend the company as a good place to work. 3. I am proud to work for the company. 4. I am satisfied with the information I receive from local senior mgmt about what’s going on in my part of the company. 5. The department I work in is continually improving the quality of work we do. 6. My immediate supervisor gives me honest feedback on my performance. 7. My immediate supervisor encourages diversity through an environment where individual differences are valued. 8. In my department, taking a calculated risk and failing is better than not taking a risk at all. All data provided by Genessee Survey Services, Inc. 99% 98% 97%96% % Favorable PHSNational Norm PHS in Top Decile of National Norms for Employee Satisfaction

15 9. The day-to-day decisions in my department demonstrate that quality is a top priority. 10. I understand why it is important for the company to value diversity. 11. I am satisfied with my opportunity to get a better job at the company. 12. I am satisfied with the employee benefits program the company offers. 13. The company provides me with a work environment where I can reach my full potential. 14. Corporate senior management is up front & honest about issues that may affect employees. 15. My immediate supervisor shows appreciation when I do a good job. 16. I can see a clear link between my work and the company’s objectives. All data provided by Genessee Survey Services, Inc. % Favorable 95%98%93%94%92%91%93%92% PHSNational Norm PHS in Top Decile of National Norms for Employee Satisfaction

16 Managing Medicare+Choice Goal is to maximize cash flow

17 Disease Management Savings > $117 million over last 12 months

18 Medicare Reform Summary Key Benefits to PHS areKey Benefits to PHS are ‘ 04 and ‘05 M + C reimbursement increase‘ 04 and ‘05 M + C reimbursement increase ’04 prescription drug benefit for low income M + C enrollees’04 prescription drug benefit for low income M + C enrollees ‘06 prescription drug benefit also conferred to M + C enrollees‘06 prescription drug benefit also conferred to M + C enrollees PBM participation in management of Rx Discount Card & drug benefitPBM participation in management of Rx Discount Card & drug benefit Medicare Supplement plans without Prescription benefit not affectedMedicare Supplement plans without Prescription benefit not affected

19 Equity & Debt Value Appreciation Stock appreciation since 12/31/01 > 260% 10 ¾ % High Yield Note appreciation since issuance:   issued at 99.4%   recently indicated at ~116%   total return since issuance ~30%

20 Issuance of 3.8 Million Shares of Common Stock 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 one- time 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

21 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