Effective as of January 1, 1996, the Company entered into a lease for Blue Cross of California's headquarters facility in Woodland Hills, California, which provides for a term expiring in December 2019 with two options to extend the term for up to two additional five-year terms. In 1997, the Company entered into a lease, which expires in December 2019, for a new facility located in Thousand Oaks, California housing certain corporate and specialty services. This facility was completed in January 1999. The Company and its subsidiaries have additional offices in the greater Los Angeles and Ventura County area. As a result of the Company's continuing national expansion efforts, the Company leases or owns offices in various other locations, including Atlanta and Columbus, Georgia; St. Louis, Missouri; Springfield, Charlestown and Andover, Massachusetts; the greater Chicago, Illinois area; Dearborn, Michigan; and Houston and Plano, Texas. As a result of the PrecisionRx acquisition, the Company now owns an approximately 79,000 square foot mail-order pharmacy distribution facility in the greater Fort Worth, Texas area.
(A)The Company's consolidated results of operations for the years presented above include the results of several acquisitions, which are components of the Company's national expansion strategy. (See "
This discussion contains forward-looking statements, which involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those set forth under "Factors That May Affect Future Results of Operations."
The Company is one of the nation's largest publicly traded managed health care companies. As of December 31, 2002, WellPoint had approximately 13.2 million medical members and approximately 48.1 million specialty members. Through its subsidiaries, the Company offers a broad spectrum of network-based managed care plans to the large and small employer, individual, Medicaid and senior markets. The Company's managed care plans include PPOs, HMOs, POS plans and other hybrid medical plans and traditional indemnity plans. In addition, the Company offers managed care services, including underwriting, actuarial services, network access, medical management and claims processing. The Company also provides a broad array of specialty and other products, including pharmacy, dental, vision, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. The Company markets its products in California primarily under the name Blue Cross of California, in Georgia primarily under the name Blue Cross Blue Shield of Georgia, in various parts of Missouri (including the greater St. Louis area) under the name Blue Cross Blue Shield of Missouri and in various parts of the country under the name UNICARE or HealthLink. The Company holds the exclusive right in California to market its products under the Blue Cross name and mark and in Georgia and in 85 counties in Missouri (including the greater St. Louis area) to market its products under the Blue Cross and Blue Shield names and marks.
On April 30, 2002, the Company completed its acquisition of MethodistCare (see Note 2 to the Consolidated Financial Statements), which served over 70,000 members in Houston, Texas and surrounding areas at the time of acquisition. As a result of the acquisition, the Company recognized an extraordinary gain from negative goodwill on acquisition of $8.9 million, or $0.06 per share assuming full dilution, for the year ended December 31, 2002. (See Note 22 to the Consolidated Financial Statements.)
On October 17, 2001, the Company entered into an Agreement and Plan of Merger with RightCHOICE, through its wholly owned subsidiary, RWP Acquisition Corp. (see Note 2 to the Consolidated Financial Statements). On January 31, 2002, the Company completed this transaction, pursuant to which RightCHOICE became a wholly owned subsidiary of the Company. The acquisition was valued at approximately $1.5 billion on the closing date, which was paid with $379.1 million in cash and approximately 16.5 million shares of WellPoint Common Stock. RightCHOICE, through its HealthLink subsidiary, also provides network rental, administrative services, workers' compensation managed care services and other non-underwritten health benefit programs. As of January 31, 2002, RightCHOICE served approximately 2.2 million medical members in Missouri, Arkansas, Illinois, Indiana, Iowa, Kentucky and West Virginia. RightCHOICE has historically experienced a higher general and administrative expense ratio than the Company's core businesses due to its higher concentration of administrative services business. For the year ended December 31, 2002, the RightCHOICE business experienced a higher general and administrative expense ratio than the Company's core businesses.
On March 15, 2001, the Company completed its acquisition of Cerulean, the parent company of Blue Cross and Blue Shield of Georgia, Inc. (see Note 2 to the Consolidated Financial Statements). Cerulean, principally through its Blue Cross and Blue Shield of Georgia, Inc. subsidiary, offers insured and administrative services products primarily in the State of Georgia. Cerulean has historically experienced a higher general and administrative expense ratio than the Company's core businesses due to its higher concentration of administrative services business. Cerulean has also historically experienced a higher medical care ratio than the Company's core businesses due to its higher percentage of large employer group business and fewer managed care offerings. The Cerulean acquisition increased the Company's Georgia medical membership by approximately 1.9 million members as of March 31, 2001. The cash purchase price was $700.0 million. As a result of the acquisition of Cerulean, the Company also incurred $134.5 million in expenses, primarily related to change-in-control payments to Cerulean management and transaction costs. This acquisition was accounted for under the purchase method of accounting.
On November 20, 2001, WellPoint entered into a definitive agreement to acquire CareFirst, which agreement was amended and restated as of January 24, 2003. See "Item 1. Business-Recent Completed Transactions and Pending Transactions-Pending Acquisition of CareFirst." CareFirst is a not-for-profit health care company which, along with its affiliates and subsidiaries, offers a comprehensive portfolio of health insurance products, direct health care and administrative services to approximately 3.2 million people in Maryland, Delaware, the District of Columbia and Northern Virginia. CareFirst operates through three wholly owned affiliates: CareFirst of Maryland, Inc., Group Hospitalization and Medical Services, Inc., doing business under the name CareFirst BlueCross BlueShield, and Blue Cross Blue Shield of Delaware, Inc.
The consummation of the CareFirst transaction is subject to a number of conditions, including the approval of the insurance regulators in Maryland, Delaware and the District of Columbia for the conversion of CareFirst from a non-profit corporation to a for-profit entity. On March 5, 2003, the Maryland insurance commissioner issued an order disapproving this conversion. The Maryland legislature has 90 days to review the matter and has the power to veto the commissioner's decision. The Company has 30 days from the date of the commissioner's order to appeal the order.
regional expansion strategy, the Company will need to develop satisfactory networks of hospitals, physicians and other health care service providers, develop distribution channels for its products and successfully convert acquired books of business to the Company's existing information systems, which will require continued investments by the Company.
Federal legislation enacted during the last several years seeks, among other things, to ensure the portability of health coverage and mandates minimum maternity hospital stays. California legislation enacted since 1999, among other things, establishes an explicit duty on managed care entities to exercise ordinary care in arranging for the provision of medically necessary health care services and establishes a system of independent medical review. In 1997, Texas adopted legislation purporting to make managed care organizations such as the Company liable for their failure to exercise ordinary care when making health care treatment decisions. Similar legislation has also been enacted in Georgia. These and other proposed measures may have the effect of dramatically altering the regulation of health care and of increasing the Company's medical care ratio and administrative costs or decreasing the affordability of the Company's products.
The Company's consolidated results of operations for the year ended December 31, 2002 include the results of RightCHOICE from January 31, 2002 and MethodistCare from April 30, 2002, their respective dates of acquisition.
The Company's consolidated results of operations for the year ended December 31, 2001 include the results of Cerulean from March 15, 2001, the acquisition date.
(d)Senior membership includes members covered under both Medicare risk and Medicare supplement products.
(g)ASO Membership represents members for which the Company provides administrative services only and does not assume full insurance risk.
On March 15, 2002, WellPoint effected a two-for-one split of the Company's Common Stock. The stock split was in the form of a 100% stock dividend of one additional share of WellPoint Common Stock for each share outstanding. Share and per share data for all periods presented below have been adjusted to give effect to the stock split.
As of December 31, 2001, the Company's primary internal business divisions were focused on large employer group business, individual and small employer group business, and senior and specialty business. As a result of the January 31, 2002 acquisition of RightCHOICE, the organizational structure of the Company changed effective February 1, 2002. As a result of these changes, the Company has the following two reportable segments: Health Care and Specialty. (See Note 20 to the Consolidated Financial Statements for further discussion.)
Investment income consists of gross investment income, net of investment expenses and net realized investment gains or losses. Investment income was $314.0 million for the year ended December 31, 2002, compared to $241.8 million for the year ended December 31, 2001, an increase of $72.2 million or 29.9%. This $72.2 million increase was a result of a net realized investment gain of $55.4 million for the year ended December 31, 2002, compared to a net realized investment loss of $4.2 million for the year ended December 31, 2001. The net realized investment gains in 2002 were primarily due to a pre-tax investment gain of $64.9 million realized from WellPoint's investment in Trigon Healthcare, Inc., which was acquired by Anthem, Inc. during 2002. In accordance with generally accepted accounting principles, WellPoint realized the gain related to its investment upon completion of the Trigon transaction. Excluding this gain on the Trigon transaction, net realized investment losses for the years ended December 31, 2002 and 2001 would have been $9.5 million and $4.2 million, respectively. This increase in net realized investment losses of $5.3 million resulted primarily from the Company's restructuring of its investment portfolio mix in 2002. Gross investment income increased $16.1 million, or 6.4%, for the year ended December 31, 2002 from the year ended December 31, 2001 as a result of higher average investment balances during the year ended December 31, 2002 (for which gross investment income was $267.9 million) versus the year ended December 31, 2001 (for which gross investment income was $251.8 million). As a partial offset to this increase, net investment expenses increased by $3.5 million from $5.8 million for the year ended December 31, 2001 to $9.3 million for the year ended December 31, 2002, due primarily to higher investment manager fees.
percentage of large employer group business and fewer managed care offerings. For both segments combined, health care services and other benefits expense attributable to the acquired RightCHOICE and Cerulean businesses for the year ended December 31, 2002 was $3,313.4 million and health care services and other benefits expense attributable to the acquired Cerulean business for the year ended December 31, 2001 was $1,551.4 million. Excluding the RightCHOICE and Cerulean acquisitions, the medical care ratio for both segments combined would have been 80.9% for the year ended December 31, 2002 and 80.9% for the year ended December 31, 2001. The health care services and other benefits expense includes an estimate of claims incurred during the period but which have not been reported to the Company. This estimate is actuarially determined based on a variety of factors and is inherently subject to a number of highly variable circumstances. Consequently, the actual results could differ materially from the amount recorded in the consolidated financial statements. See "Critical Accounting Policies" for a discussion of this item and its potential effect on the Company's reported results of operations.
Interest expense increased $10.5 million to $60.4 million for the year ended December 31, 2002, compared to $49.9 million for the year ended December 31, 2001. The increase in interest expense was related to the higher average debt balance for the year ended December 31, 2002 in comparison to the year ended December 31, 2001, primarily due to the issuance of the $350.0 million aggregate principal amount at maturity of 63/8% Notes on January 16, 2002 (see Note 9 to the Consolidated Financial Statements) as a result of the RightCHOICE acquisition. Partially offsetting the increase in interest expense was a reduction in the borrowing rates. The weighted average interest rate for all debt for the years ended December 31, 2002 and 2001, including the fees associated with the Company's borrowings and interest rate swap agreements, was 6.0% and 6.7%, respectively.
Earnings per share for the year ended December 31, 2002 is based upon weighted average shares outstanding of 144.2 million shares, excluding potential Common Stock, and 150.9 million shares, assuming full dilution. Earnings per share for the year ended December 31, 2001 is based on 126.9 million shares, excluding potential Common Stock, and 132.4 million shares, assuming full dilution. The increase in weighted average shares outstanding primarily resulted from the issuance of shares related to the RightCHOICE acquisition and the Company's employee stock option and purchase plans.
The following table depicts management services and other revenue by reportable segment:
The selling expense ratio for the year ended December 31, 2001 decreased to 4.1%, compared to 4.4% for the year ended December 31, 2000. The acquired Cerulean business has traditionally experienced a lower selling expense ratio due primarily to its lower percentage of individual and small employer group business. Excluding Cerulean, the selling expense ratio would have remained unchanged at 4.4% for the year ended December 31, 2001.
The general and administrative expense ratio decreased to 13.7% for the year ended December 31, 2001 from 14.0% for the year ended December 31, 2000. The acquired Cerulean business has historically experienced a higher general and administrative expense ratio than the Company's core businesses due to its higher percentage of administrative services business. Excluding Cerulean, the general and administrative expense ratio would have been 13.6% for the year ended December 31, 2001. The lower general and administrative expense ratio for the year ended December 31, 2001, excluding Cerulean, is primarily attributable to savings from the integration of information systems centers related to acquired businesses onto the Company's information systems platform, economies of scale associated with premium revenue growth in relation to fixed corporate general and administrative expenses in addition to technology investments made by the Company (e.g., electronic claims submission, internet self-service and interactive voice response).
Overall claims liabilities, which is comprised of medical claims payable and reserves for future policy benefits, increased $485.8 million, or 21.9%, to $2,705.6 million as of December 31, 2002 from $2,219.8 million as of December 31, 2001. This increase was due to claims liabilities associated with the RightCHOICE acquisition of $156.5 million and an increase in the claims liabilities associated with the Company's core businesses of $329.3 million, primarily resulting from an increase in insured member months of 12.4% for the year ended December 31, 2002. See "Critical Accounting Policies" for a discussion of medical claims payable and reserves for future policy benefits.
Stockholders' equity totaled $3,976.7 million as of December 31, 2002, an increase of $1,844.1 million from $2,132.6 million as of December 31, 2001. The increase was primarily due to (i) the issuance of the Company's Common Stock of $1,109.1 million in connection with the RightCHOICE acquisition, (ii) net income of $703.1 million for the year ended December 31, 2002, (iii) a net increase of $217.8 million from the reissuance of treasury stock related to the Company's employee 401(k) plan, stock option and stock purchase plans, (iv) the issuance of the Company's Common Stock of $140.1 million related to the conversion of the Debentures, (v) net unrealized gains from investment securities of $8.8 million, net of taxes and (vi) proceeds from sales of put options of $3.1 million. Partially offsetting these increases were the repurchase of 4.6 million shares of the Company's Common Stock for $304.3 million and an increase in the minimum pension liability of $33.5 million.
As of December 31, 2002, consolidated cash and investments were $6.8 billion, of which $1.4 million was in cash and cash equivalents. The Company's primary sources of cash are premium and management services revenues received and investment income. The primary uses of cash include health care services and other benefits, capitation payments, income taxes, repayment and repurchases of long-term debt, interest expense, broker and agent commissions, general and administrative expenses, Common Stock repurchases and capital expenditures. In addition to the foregoing, other uses of cash include costs of provider networks, technology investments and systems development and costs associated with the integration of acquired businesses.
The Company's strategy for achieving its investment goals is broad diversification of its investments, both across and within asset classes. As of December 31, 2002, the Company's investment portfolio consisted primarily of investment grade fixed-income securities. The Company's portfolio also included large capitalization and small capitalization domestic equities, foreign equities, tax-exempt municipal bonds and a small amount of non-investment grade debt securities. The fixed-income assets include both short- and long-duration securities with an attempt to match the Company's funding needs. The Company's investment policy contains limitations regarding concentration in individual securities and industries and generally prohibits speculative and leveraged investments. Cash and investment balances maintained by the Company are currently sufficient to meet applicable regulatory
WellPoint, as the parent company, requires cash for debt repayment, stock repurchases, acquisitions and other general corporate purposes. A substantial portion of WellPoint's cash requirements are funded by dividends received from its regulated operating subsidiaries. Payments of dividends to WellPoint by its regulated operating subsidiaries are subject to certain restrictions imposed by state regulations. There is no assurance that the Company will receive regulatory approval for future dividend payments. As of December 31, 2002, the Company, as a stand-alone entity, had $85.7 million in cash and investments.
Net cash provided by financing activities totaled $232.6 million for the year ended December 31, 2002, compared to $512.6 million for the year ended December 31, 2001. The net cash provided in 2002 was primarily attributable to additional debt of $350.0 million in principal amount incurred to finance the RightCHOICE acquisition, $86.6 million related to proceeds received under securities lending arrangements and the receipt of proceeds of $152.5 million from the issuance of the Company's Common Stock in connection with the Company's employee stock option and purchase programs, less $304.3 million in Company Common Stock repurchases. During 2002, the Company repaid the entire outstanding principal balance under the revolving credit facility of $235.0 million at December 31, 2001, funded in part by net borrowings of commercial paper totaling $199.8 million. Additionally, approximately $304.3 million was used to repurchase the Company's Common Stock.
In April 2002, the Company commenced a commercial paper program providing for the issuance of up to $1.0 billion in aggregate maturity value of short-term indebtedness (known generally as "commercial paper"). The commercial paper is being issued by the Company without registration under the Securities Act of 1933, as amended (the "1933 Act") in reliance upon the exemption from registration contained in Section 4(2) of the 1933 Act. The commercial paper is issued in denominations of $100,000 or integral multiples of $1,000 in excess thereof and will bear such interest rates, if interest-bearing, or will be sold at such discount from their face amounts, as agreed upon by the Company and the dealer or dealers acting in connection with the commercial paper program. The commercial paper may be issued with varying maturities up to a maximum of 270 days from the date of issuance. The commercial paper ranks equally with all other unsecured and unsubordinated indebtedness of the Company. As of December 31, 2002, the outstanding commercial paper borrowings totaled $199.8 million with various maturity dates and had interest rates ranging from 1.60% to 1.65%. The weighted average yield on the outstanding commercial paper as of December 31, 2002 was 1.62%. The Company intends to maintain commercial paper borrowings of at least the amount outstanding at December 31, 2002 for more than one year. Accordingly, for financial reporting purposes, the commercial paper has been classified under non-current liabilities in the Consolidated Financial Statements.
In anticipation of the RightCHOICE acquisition on January 31, 2002, the Company on January 16, 2002 issued $350.0 million aggregate principal amount at maturity of 63/8% Notes due January 15, 2012 (the "2012 Notes"). The net proceeds of this offering totaled approximately $348.9 million. The 2012 Notes bear interest at a rate of 63/8% per annum, payable semi-annually in arrears on January 15 and July 15 of each year commencing July 15, 2002. Interest is computed on the basis of a 360-day year of twelve 30-day months.
1) 100% of the principal amount of the 2006 Notes being redeemed on the redemption date; and 2) the sum of the present values of the remaining scheduled payments of principal and interest on the 2006 Notes being redeemed on that redemption date (not including any portion of any payments of interest accrued to the redemption date) discounted to the redemption date on a semi-annual basis at the Treasury rate as determined by the designated Reference Treasury Dealer (Salomon Smith Barney Inc. or UBS Warburg LLC or their respective successors), plus 25 basis points. In each case, the redemption price will also include accrued and unpaid interest on the 2006 Notes to the redemption date.
During 2001, the Company entered into foreign currency forward exchange contracts for each of the fixed-maturity securities on hand denominated in foreign currencies in order to hedge asset positions with respect to currency fluctuations related to these securities. As of December 31, 2001, however, the Company had liquidated its non-dollar foreign bond holdings and entered into a hedge to offset the remaining currency hedge. During 2002, the Company recognized a gain of $20,000 related to
In March 2002, the Company received a letter from the IRS notifying the Company that the IRS was considering revoking the September 1998 private letter ruling. The letter stated that the IRS was considering, in essence, reversing its earlier position and concluding that the $800.0 million payment was not an ordinary and necessary business expense. The letter further stated that the IRS was withdrawing the private letter ruling and that the Company could no longer rely on the private letter ruling. Under Section 7805(b) of the Code, the IRS has discretionary authority to limit the retroactive effect of any revocation of a letter ruling. In March 2002, the Company submitted a written request for such relief under Section 7805(b).
On April 9, 2002, the Company received a letter from the IRS notifying the Company that its request had been granted and that the September 1998 private letter ruling would not be revoked on a retroactive basis. Based on this April 9, 2002 letter, the Company intends to continue to rely on the September 1998 private letter ruling in its treatment of the $800.0 million cash payment made in May 1996.
Health care services and other benefits expense includes the costs of health care services, capitation expenses and expenses related to risk-sharing agreements with participating physicians, medical groups and hospitals and incurred losses on the Company's disability and life products. The costs of health care services are accrued as services are rendered, including an estimate for claims incurred but not yet reported.
For many of the Company's HMO plans (including substantially all of its California HMO plans), the Company contracts with physicians, hospitals and other health care providers through capitation fee arrangements as a means to manage health care costs. The Company has two general types of capitation arrangements. The predominant type is the so-called "professional" capitation arrangement. Under professional capitation arrangements, the Company pays the health care provider, such as a participating medical group, a fixed amount per member per month, and the health care provider assumes the risk of the member's utilization of certain specified health care services. Typically, under professional capitation arrangements, the health care provider does not assume the risk of the member's utilization of any hospital-based services. The second type is the so-called "global" capitation arrangement. Under global capitation arrangements, the Company also pays the health care provider, such as a participating medical group, a fixed amount per member per month. However, under global capitation arrangements, the health care provider generally assumes the risk of the member's utilization of all health care services (subject to certain limited exceptions and state regulatory requirements). As of December 31, 2002, 2001 and 2000, the Company had approximately 10, 16 and 29 global capitation arrangements, respectively, covering approximately 2.1 million, 2.2 million and 3.2 million member months, respectively. In addition, one of the Company's subsidiaries owns a 51% equity interest in a community health partnership network (the "CHPN") operating in the greater Atlanta area (see "Item 1. Business-Managed Health Care Networks and Provider Relations-Blue Cross Blue Shield of Georgia"). The CHPN is a locally based equity venture between the Company's subsidiary and local physician and hospital groups. The Company's subsidiary has entered into a global capitation
For the years ended December 31, 2002, 2001 and 2000, the Company's capitation expenses of $1,496.9 million, $1,198.0 million and $1,074.1 million represented 11.3%, 12.7% and 15.5%, respectively, of the Company's total health care services and other benefits expense. As of December 31, 2002 and 2001, the Company's capitation expenses payable of $137.0 million and $99.8 million represented 5.7% and 5.2%, respectively, of the Company's total medical claims payable.
The Company has made several acquisitions in the past several years that included a significant amount of goodwill and other intangible assets. Under generally accepted accounting principles in effect through December 31, 2001, these assets were amortized over their useful lives, and were tested periodically to determine if they were recoverable from operating earnings on an undiscounted basis over their useful lives.
As of December 31, 2002, the Company's investment securities at market value, totaled $5.3 billion, of which 89.6% was invested in fixed-income securities and the remaining 10.4% was invested in equity securities. As of December 31, 2001, the Company's investment securities at market value totaled $3.8 billion, of which 87.5% was invested in fixed-income securities and the remaining 12.5% was invested in equity securities. These investment securities are generally used to support current operations and, accordingly, have been classified as current assets. The Company's long-term investments as of December 31, 2002 and 2001 were $134.3 million and $124.6 million, respectively, and consisted primarily of restricted assets, certain equities and other investments. Total current and long-term investments comprised 47.9% and 53.0% of total assets as of December 31, 2002 and 2001, respectively.
With the majority of investments in fixed-income securities, the Company maintains an investment portfolio that is primarily structured to maximize investment income while preserving the principal asset base and provide a source of liquidity for operating needs. The Company records investment income when earned, and realized gains or losses when sold, as determined using the first-in-first-out method.