1. Health Net Steve Sell President, Health Net of California & Western Region Health Plan 2010 Health Care Forecast Conference Irvine, CA February 25-26, 2010

2. 2 Agenda I.The Environment (Economy and Health Care Reform) II.Implications III.Evolution of Healthcare Model IV.The Health Net Experience V.The Outlook

3. Economic Conditions: Where Does Your Health Care Dollar Go?

4. 1. Unprecedented Unemployment (peaked) 2. Job loss increases public burden 9.0% 3. Providers increasingly cost shift to private sector 4. Premiums escalate (Start Back at Step (1) Commercial Medicare Medicaid Economic Conditions: “The Escalation of Unaffordability”

5. Health Care Reform: A Solution to Universal Affordable Access to Health Care Accelerates the “Escalation of Unaffordability”  Expands Government Programs (escalates the cost structure)  Increases Opportunity for high risk population to have access to coverage (a good thing but escalates cost structure)  Collapses administrative fees as a percentage to commercial insurers and adds additional tax burden (caps 13% of the cost structure + adds cost) The Senate Bill:  Health Insurance Reform (No Pre-Existing Conditions, UW restrictions etc.)  Insurance Exchange with Subsidies for individuals up to 400% FPL  Alternatives to the Private Market (Co-Op Plan)  Expansion of Medicaid  Medicare Advantage Cuts  Insurer Fees, Medical Loss Ratio Limits  Tax Incentives (“requirement”) for Individuals to Purchase Coverage 5

6. 6 Implications: Insurers/ Providers must Provide Affordable Solutions 1. Health Care is Unaffordable (with or without reform) Employers can not afford increases in premiums Individuals can not afford the increases in coinsurance or contributions 2. The Private Sector Must Respond (with or without reform) Legislation does not fundamentally address affordability Legislation may increase the cost shift The private sector needs to maintain affordability with an increase in risk 3. Delivery System Viability will depend on Cost Management and Commercial Volume (with or without reform) Will need increased Commercial volume to offset Medicaid expansion & Medicare cuts Commercial premium inflation is unsustainable and they are 87% of the premium dollars

7. Implications: Back to the Future of HMO 7 Re-emergence of HMO and managed care model: The HMO model manages cost without passing the burden to the consumer HMO share grew 7% since 2007 in CA HDHP growth has changed little during the same period Sources: California Health Care Foundation (CHCF)/NORC California Employer Health Benefits Survey: 2007-2009, 2005-2006, 2004, Kaiser/HRET CHCF Survey: 2001-2003, 2001-2009, December 2008 California Commercial Market Share by Product Type

8. 8 Value of Capitation/HMO Model A distinct business model built on provider relationships A “medical home” to manage overall health Predictable: costs and pricing The most cost-effective delivery system Integrates care/avoids duplicative or unnecessary procedures Care starts at low cost setting, “steps-up” only as necessary Provides health plan with a quarterback to collaborate on cost and quality initiatives (reduced risk) Capitated HMO 30% less vs. PPO (So CA) Affordable Premiums Minimum Benefit Sets HMO Model +  Implications: Back to the Future of HMO

9. The Health Net Experience Narrow Network HMO has grown through The Recession 9 Health Net Narrow Network Products Membership

10. Outlook Economic recession/HC reform serves as a catalyst (regardless of economic improvement) for a re- emergence of HMO and managed care models Industry will find ways to manage cost –Evidence of escalating healthcare cost combined with lowering revenue (not sustainable in the long run) –Requires better integration of the delivery system and aligned incentives (i.e. risk sharing) –Especially important with health care reform Commercial business will continue to subsidize government business (cost shift) –Delivery systems will strive to find innovative solutions to capture commercial business 10