Our principal executive offices are located at 120 Monument Circle, Indianapolis, Indiana. In addition to this property, our principal operating facilities are located in Denver, Colorado; North Haven, Connecticut; Indianapolis, Indiana; Mason/Cincinnati, Ohio; Worthington/Columbus, Ohio; Manchester, New Hampshire; Louisville, Kentucky; South Portland, Maine and Richmond, Virginia. In total, we own approximately 15 facilities and lease approximately 75 facilities. These locations total 6.2 million square feet, of which we occupy 5.8 million square feet, and are located in 15 states. We believe that our properties are adequate and suitable for our business as presently conducted.
Cost of Care-Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002
Results of Operations-Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
Our health business segments are strategic business units delineated by geographic areas within which we offer similar products and services. We manage our health business segments with a local focus to address each market’s unique competitive, regulatory and health care delivery characteristics. Our health business segments are: Midwest, which includes Indiana, Kentucky and Ohio; East, which includes Connecticut, New Hampshire and Maine; West, which includes Colorado and Nevada; and Southeast, which is Virginia, excluding the immediate suburbs of Washington D.C.
Our operating revenue consists of premiums, administrative fees and other revenue. The premiums come from fully-insured contracts where we indemnify our policyholders against costs for health benefits. Our administrative fees come from contracts where our customers are self-insured, from the administration of Medicare programs and from other health-related businesses including disease management programs. Other revenue is principally generated from member co-payments and deductibles associated with the mail-order sale of drugs by our pharmacy benefit management company.
On October 27, 2003, we and WellPoint Health Networks Inc., or WellPoint, announced that we entered into a definitive agreement and plan of merger, or Merger Agreement, pursuant to which WellPoint will merge into our wholly-owned subsidiary. WellPoint offers a broad spectrum of network-based managed care plans through its subsidiaries operating under the trade names of Blue Cross of California, Blue Cross Blue Shield of Georgia, Blue Cross Blue Shield of Missouri, Blue Cross Blue Shield United of Wisconsin, HealthLink and UNICARE. WellPoint’s managed care plans include PPOs, HMOs, POSs, traditional indemnity and other hybrid plans. In addition, WellPoint offers managed care services, including underwriting, actuarial services, network access, medical management and claims processing. WellPoint also provides a broad array of specialty and other products, including pharmacy benefits management, dental, vision, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration.
Part II, Item 8, of this Form 10-K for additional information concerning the pro forma impact of Trigon on our consolidated financial statements.
On May 31, 2001, we and Blue Cross and Blue Shield of Kansas, or BCBS-KS, announced that we signed a definitive agreement pursuant to which BCBS-KS would become our wholly owned subsidiary. On February 11, 2002, the Kansas Insurance Commissioner disapproved the proposed transaction, which had been previously approved by the BCBS-KS policyholders in January 2002. We joined BCBS-KS in an appeal of the Commissioner’s decision, which was filed with the Shawnee County District Court on March 7, 2002. On June 7, 2002, the Shawnee County District Court ruled in favor of us and BCBS-KS. The Shawnee County District Court directed the Commissioner to re-evaluate her decision in accordance with the Court’s very specific interpretation of the Kansas law. On June 10, 2002, the Kansas Insurance Commissioner appealed the District Court’s ruling to the Kansas Supreme Court. On August 6, 2003, the Kansas Supreme Court overturned the Shawnee County District Court’s ruling and reinstated the Kansas Insurance Commissioner’s 2002 disapproval of the proposed transaction. We and BCBS-KS decided not to appeal this decision and the definitive agreement was terminated.
National Accounts customers are multi-state employer groups headquartered in an Anthem service area with 1,000 or more eligible employees, including 50 or more located in a service area where Anthem is not a BCBSA licensee. Included within the National Accounts business are customers who represent enrollees of other Blue Cross and Blue Shield Plans, or the “home” plans, who receive health care services in our Blue Cross and Blue Shield licensed markets. These customers are primarily BlueCard members.
BlueCard membership, reported with National Accounts membership, is calculated based on the amount of BlueCard administrative fees we receive from the BlueCard members’ home plans. We perform certain administrative functions for BlueCard members, while other administrative functions, including maintenance of enrollment information, is performed by the home plan. The administrative fees we receive are based on one of two methods of reimbursement. Accordingly, we calculate our BlueCard membership differently based on each method of reimbursement. The first method of reimbursement is derived from the number and type of claims we process, both institutional and professional, and a portion of the network discount on those claims. To calculate BlueCard membership from this reimbursement method, administrative fees are divided by an average per member per month, or PMPM, factor. The average PMPM factor is determined using a historical average administrative fee per claim and an average number of claims per member per year based on our experience and BCBSA guidelines. The second method of reimbursement is a negotiated per contract basis. To calculate BlueCard membership from this reimbursement method, the number of contracts in force are multiplied by an assumed member per contract ratio.
The renewal patterns of our fully-insured Local Large Group and Small Group business are as follows: approximately 35% of renewals occur during the first quarter, approximately 20% of renewals occur during the second quarter, approximately 30% of renewals occur during the third quarter and approximately 15% of renewals occur during the fourth quarter. These renewal patterns have remained relatively consistent over the past several years and allow us to adjust our pricing and benefit plan designs in response to market conditions throughout the year.
The following table presents our health membership by customer type, funding arrangement and segment as of December 31, 2003 and 2002. The membership data presented is unaudited and in certain instances includes estimates of the number of members represented by each contract at the end of the period, rounded to the nearest thousand.
Includes 2,816 BlueCard members as of December 31, 2003 and 2,419 BlueCard members as of December 31, 2002.
in our other self-funded National Accounts business. BlueCard growth is primarily attributed to increased sales by other Blue Cross Blue Shield licensees to accounts with members who reside in or travel to our licensed areas. Our National Accounts self-funded business growth is attributed to increased sales in our existing markets due to recognition of the value of our networks and the related discounts we can secure, and our competitive advantage resulting from the breadth of our product offerings and distinctive customer service.
Self-funded membership increased 795,000, or 14%, primarily due to increases in BlueCard activity and our other self-funded National Accounts business. Fully-insured membership increased by 79,000 members, or 1%, primarily in our Individual and Small Group businesses, as explained above. In addition, we experienced a change in our mix of business by funding arrangement as certain Local Large Group and National Accounts customers shifted from fully-insured to self-funded during the year ended December 31, 2003. Due to current economic conditions, certain large accounts are assuming the health care risk associated with insuring their employees. This shift in funding arrangements did not have a material impact on our financial results for the year ended December 31, 2003.
IV. Cost of Care-Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002
Our aggregate cost of care trend was approximately 9%, driven primarily by increased professional services costs and outpatient services costs. We believe that our cost of care trends will range from 9.5% to 10.5% in 2004, an increase from 2003 trends primarily due to expected increases in our 2004 pharmacy costs.
Pharmacy benefit costs increased approximately 8%. Our pharmacy trend increased approximately 75% due to unit cost and approximately 25% due to utilization. Unit costs were increased primarily by price increases on existing brand drugs and, to a lesser extent, the introduction of new, higher cost drugs. However, unit cost growth has slowed due to an increase in the use of generic alternatives to branded drugs and price reduction on certain older generic drugs. Growth in utilization has slowed due to plan design changes; the impact of Claritin, an antihistamine drug, becoming available over-the-counter in late 2002; the impact of a study that concluded that hormone replacement therapy for most post-menopausal women is not recommended; and lower antibiotic usage. The introduction of new drugs continues to increase trends, supported by direct-to-consumer advertising by pharmaceutical companies and expanded physician prescriptions of drugs that manage chronic conditions such as high cholesterol and gastrointestinal disease.
Premium equivalents, which are not revenue, are measures of the amount of claims attributable to non-Medicare, self-funded health business where we provide a complete array of customer service, claims administration, billing and enrollment services, but the customer retains the risk of funding payments for health benefits provided to members. We add premium equivalents to operating revenue to allow for a comparison of business volume among companies with differing levels of revenues from fully-insured and self-funded businesses. We believe operating revenue and premium equivalents is a useful analytical measure because it eliminates fluctuations in operating revenue caused by changes in the mix of fully-insured and self-funded business. Premium equivalents, which are not included in operating revenue above, for the years ended December 31, 2003 and 2002 were $7,692.5 million and $5,271.0 million, respectively.
Net income as a percentage of total revenue = net income ÷ total revenue.
Throughout the following discussion of our results of operations, “same-store” excludes the operating results of our Southeast segment, which was formed following our Trigon acquisition, for the year ended December 31, 2003 and the five months ended December 31, 2002.
Premiums increased $3,229.2 million, or 27%, to $15,170.2 million in 2003. Our premium yields, net of buy-downs for our fully-insured Local Large Group and Small Group businesses, were approximately 10% on a rolling 12-month basis as of December 31, 2003. On a same-store basis, premiums increased $1,108.9 million, or 10%, primarily due to premium rate increases in our Local Large Group, Small Group and Federal Employee Program businesses. Also contributing to premium growth was higher fully-insured membership, primarily in our Individual and Small Group businesses, which was partially offset by changes in the mix of our fully-insured products with members selecting less rich benefit designs, resulting in lower priced products. Also offsetting the growth were shifts by certain Local Large Group and National Accounts customers to self-funding arrangements, resulting in lower revenues. The claims costs in certain Southeast lines of business were much lower than anticipated. Therefore, our Southeast segment issued premiums refunds to certain Individual business policyholders in the aggregate amount of $40.4 million, offsetting our premium growth.
results was an unfavorable $23.0 million adjustment recorded to reflect the accrual of additional premium taxes in the state of Ohio and a $10.1 million reduction in the carrying value of our investment in MedUnite. On a same-store basis, administrative expense increased $160.8 million, or 7%, primarily due to increases in volume-sensitive costs such as higher commissions, premium taxes and other expenses associated with growth in our business and higher salary and benefits costs resulting from normal merit and benefit increases. On a same-store basis, our administrative expense ratio decreased 60 basis points to 18.9% in 2003, primarily due to our growth in operating revenue and the leveraging of costs over these higher revenues.
A summary of our net realized gains on investments is as follows:
During 2004, the Company began reallocating securities in its fixed maturity portfolio, primarily to optimize after tax investment income. This reallocation will result in realized gains and losses during 2004.
Amortization of other intangible assets increased $17.4 million, or 58%, to $47.6 million in 2003, primarily due to additional amortization expense on intangible assets resulting from our Trigon acquisition. This amortization expense was included for twelve months in 2003 and five months in 2002.
Income tax expense increased $184.9 million, or 72%, to $440.1 million in 2003, primarily due to increased income before taxes. In addition, our effective income tax rate increased to 36.1% in 2003 from 31.6% in 2002. This 450 basis point increase in the effective income tax rate is primarily due to the release of a deferred tax valuation allowance in 2002. Our current effective tax rate is more consistent with our expected rate on future earnings.
Our Midwest segment is comprised of health benefit and related services for members in Indiana, Kentucky and Ohio. Our Midwest segment’s summarized results of operations for the years ended December 31, 2003 and 2002 are as follows:
Operating gain increased $169.4 million, or 62%, to $441.0 million, primarily due to improved underwriting results in our Medicare + Choice, Local Large Group and Small Group businesses, the recognition of a $24.5 million favorable adjustment for resolution of a litigation matter in the first quarter of 2003, and an unfavorable $23.0 million adjustment recorded in 2002 to reflect the accrual of additional premium taxes in the state of Ohio. Partially offsetting these improved results were lower operating gains recorded by our Individual business, primarily due to spending on systems to replace our claims, enrollment and customer service technology and members selecting Individual products with less rich benefit designs. Also included in our operating results were the recognition of a net favorable prior year reserve development of $12.5 million recorded during the second quarter of 2003 and a $15.7 million net favorable prior year reserve development in 2002.
Membership increased 454,000, or 9%, to 5.7 million, primarily due to additional BlueCard activity and enrollment gains in our other National Accounts and Individual businesses. Individual sales benefited from a wider variety of product offerings. This membership increase included a shift in membership from fully-insured business to self-funded business, primarily due to group employers’ choosing self-funded insurance benefits in a weakening economy.
Our East segment is comprised of health benefit and related services for members in Connecticut, New Hampshire and Maine. Our East segment’s summarized results of operations for the years ended December 31, 2003 and 2002 are as follows:
Operating revenue increased $357.1 million, or 9%, to $4,508.6 million in 2003, primarily due to premium rate increases in our Local Large Group, Small Group and Federal Employee Program businesses. These increases were partially offset by the termination of a third party administrator arrangement in 2002 and changes in the mix of our products with members selecting less rich benefit designs, resulting in lower priced products. Also offsetting the growth were shifts by certain Local Large Group customers from fully insured to self-funding arrangements, resulting in lower revenues.
Membership increased 166,000, or 7%, primarily due to enrollment gains in our National Accounts business, including BlueCard activity. East membership also experienced a shift in membership from fully-insured business to self-funded business, primarily due to group employers’ choosing self-funded insurance benefits in a weakening economy.
Operating revenue increased $118.9 million, or 13%, to $1,039.0 million in 2003, primarily due to higher premium rates in our Local Large Group and Small Group businesses. Also contributing to operating revenue growth was higher membership in our Individual and Federal Employee Program businesses. These increases were partially offset by the impact of decreases in membership in our Local Large Group and Small Group businesses.
Spending on our current claims, enrollment and customer service technology is expected to continue throughout 2004. Additionally, during the third quarter of 2003 we exited the Medicaid market in Nevada. As a result of these factors, operating gain and operating margins are expected to decline in 2004.
Membership increased 103,000, or 12%, primarily due to increased BlueCard activity. Also impacting this membership growth were increases in our Individual and our other National Account businesses due to improved marketing efforts.
Our Southeast segment is comprised of health benefit and related services for members in Virginia, excluding the immediate suburbs of Washington D.C. Our Southeast segment was established with the acquisition of Trigon on July 31, 2002. Results of operations for this segment have been included in our consolidated financial statements beginning August 1, 2002. Our Southeast segment’s summarized results of operations for the year ended December 31, 2003 and the five months ended December 31, 2002 are as follows:
Membership increased 151,000, or 6%, to 2.7 million members in 2003, primarily due to increased BlueCard activity and increased membership in our other self-funded National Accounts business, reflecting the strength of the Blue Cross Blue Shield networks and distinctive customer service.
Operating revenue increased $208.5 million, or 40%, to $732.0 million in 2003, primarily due to increased mail-order prescription volume and increased wholesale drug costs which are passed through to our customers at Anthem Prescription, as well as the results of ABH, which evolved from our acquisition of PRO Behavioral Health on June 1, 2002. The increased mail-order prescription volume resulted from both membership increases and additional utilization of Anthem Prescription’s mail-order pharmacy option. For the year ended December 31, 2003, mail-order prescription volume increased 26% and retail prescription volume increased 12% compared to the year ended December 31, 2002. Effective January 1, 2004, Anthem Prescription began to provide pharmacy benefit management services to our Southeast segment. Operating revenue from our behavioral health business is increasing as we begin to provide these services to more of our existing health membership.
Operating gain increased $18.4 million, or 36%, to $69.1 million in 2003, primarily due to increased mail-order prescription volume. Improved behavioral health results due to additional revenues from existing Anthem health members who were converted to ABH during 2003 also contributed to Specialty’s increasing operating gains. These improvements in operating gain were partially offset by start-up and integration expenses associated with our dental and vision operations.
Our Other segment includes administration of Medicare programs in Indiana, Illinois, Kentucky, Ohio, Maine and New Hampshire; elimination of intersegment revenue and expenses; and corporate expenses not allocated to operating segments. Our summarized results of operations for our Other segment for the years ended December 31, 2003 and 2002 are as follows:
The following table presents our health membership by customer type, funding arrangement and segment as of December 31, 2002 and 2001, comparing total and same-store membership respectively. We define same-store membership as our membership at a given period end for a particular customer type, funding arrangement or in a segment after excluding the impact of members obtained through acquisitions or lost through dispositions during such period. We believe that same-store membership best captures the rate of organic growth of our operations period over period. The membership data presented is unaudited and in certain instances includes estimates of the number of members represented by each contract at the end of the period, rounded to the nearest thousand.
Individual membership increased 94,000, or 13%, with the majority of this growth resulting from higher sales in our under age 65 business in all segments due to the introduction of new, more affordable product designs and an overall increase in consumer awareness of our product offerings.
VII. Cost of Care-Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
The following discussion summarizes our aggregate cost of care trends for the 12-month period ended December 31, 2002 compared to the 12-month period ended December 31, 2001, for our Local Large Group and Small Group fully-insured businesses only. Membership in these two customer groups represented approximately 61% of our premium income for the year ended December 31, 2002. Our cost of care trends are calculated by comparing the year over year change in average per member per month claim costs for which we are responsible, which excludes member co-payments and deductibles. Our cost of care trends as of December 31, 2002 are as follows:
Our aggregate cost of care trend for the rolling 12-month period ended December 31, 2002 was approximately 12%. This trend includes the Southeast segment, including information from the former Trigon for periods prior to our July 31, 2002 acquisition. Our aggregate cost of care trend excluding the impact of our Trigon acquisition was approximately one-half percentage point higher, driven primarily by increased professional services costs and outpatient services costs.
Inpatient services costs increased approximately 9% including the impact of our Trigon acquisition for both rolling 12-month periods, including periods prior to our July 31, 2002 acquisition. Excluding the impact of our Trigon acquisition, our inpatient services trend was approximately one percentage point lower. Approximately two thirds of this trend resulted from unit cost increases and approximately one third of this trend resulted from utilization increases. The unit cost trend was primarily due to a health care industry shift of lower-cost procedures to outpatient settings, leaving more expensive procedures performed in inpatient settings. In addition, growth in inpatient trend was due to implementation of new provider contracts that reflect the hospital industry’s more aggressive stance in their contracting with health benefit companies. Utilization increases resulted primarily from increases in the frequency of inpatient surgeries. We are implementing advanced care management programs and disease management programs which have shown to reduce deterioration in health and the need for hospitalization. As a result of these programs, hospital utilization has been essentially stable.
VIII. Results of Operations-Year Ended December 31, 2002 Compared to the Year Ended
For the remaining footnote explanations, see “Results of Operations-Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002” table.
On a same-store basis, other revenue, which is comprised principally of co-payments and deductibles associated with Anthem Prescription’s sale of mail-order drugs, increased $24.2 million, or 42%. Mail-order revenues increased primarily due to additional volume. Anthem Prescription launched mail conversion campaigns to inform members of the benefits and convenience of using Anthem Prescription’s mail-order pharmacy option during 2002. In addition, Anthem Prescription increased its penetration of our health benefits membership, with a resulting larger enrollment base and therefore greater demand for mail-order service.
Net realized gains from the sale of equity securities decreased $68.4 million primarily due to our realization of $65.2 million of gains in 2001 resulting from the restructuring of our portfolio. In 2002, we realized a $3.1 million loss on a limited partnership, and in 2001 we recognized $28.9 million of impairment losses on equity securities.
Net income increased $206.9 million, or 60%, primarily due to our Trigon acquisition, the improvement in our operating results in each health business segment as described below, higher net investment income, lower amortization of goodwill and other intangible assets resulting from the adoption of FAS 142 on January 1, 2002 and our reduced effective tax rate. Assuming FAS 142 had been in effect for the year ended December 31, 2001, our net income would have increased $191.8 million, or 54%.
On February 28, 2002, a subsidiary of Anthem Insurance, Anthem Health Plans of Maine, Inc., completed its purchase of the remaining 50% ownership interest in Maine Partners Health Plan, Inc. for an aggregate purchase price of $10.6 million. We had previously consolidated the financial results of this entity in our consolidated financial statements and recorded minority interest for the percentage we did not own.
Our West segment is comprised of health benefit and related services for members in Colorado and Nevada. Our West segment’s summarized results of operations for the years ended December 31, 2002 and 2001 are as follows:
Operating gain increased $54.6 million to $74.7 million in 2002, primarily due to improved underwriting results in our Local Large Group fully-insured and Small Group businesses. Also contributing to the improvement was a $10.9 million net favorable prior year reserve development recorded during the third quarter of 2002. These reserve releases were offset by a $10.1 million reserve increase for case specific reserves incurred during the normal course of business in 2002.
Our Southeast segment is comprised of health benefit and related services for members in Virginia, excluding the immediate suburbs of Washington D.C. Our Southeast segment’s summarized results of operations for the five months ended December 31, 2002 are as follows:
Our Specialty segment includes our group life and disability insurance benefits, pharmacy benefit management, dental and vision administration services and behavioral health benefits services. During the third quarter of 2002, we sold our third party occupational health services businesses, the operating results of which were not material to the earnings of this segment or our consolidated results. On June 1, 2002, we acquired certain assets of PRO Behavioral Health, a Denver, Colorado-based behavioral health company in order to broaden our specialty product offerings. Results from this acquisition are included from that date forward and are not material to the operating revenue or operating gain of this segment in the year ended December 31, 2002.
Operating gain increased $17.8 million, or 54%, primarily due to increased mail-order prescription volume and additional margin resulting from further penetration of generic drug prescriptions at Anthem Prescription. Improved results in the life and dental businesses also contributed to the growth in operating gain, which was modestly offset by start-up and integration expenses associated with our behavioral health, vision and dental operations.
The most significant accounting estimate in our consolidated financial statements is our liability for unpaid life, accident and health claims. At December 31, 2003, this liability was $1,866.8 million and represented 25% of our total consolidated liabilities. We record this liability and the corresponding benefit expense for pending claims and claims that are incurred but not reported, including the estimated costs of processing such claims. Pending claims are those received by us but not yet processed through our systems. Liabilities for both incurred but not reported and reported but not yet paid claims are determined for each of our business segments employing actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice. These Actuarial Standards of Practice require that the claim liabilities be adequate under moderately
For the most recent incurred months, the percentage of claims paid for claims incurred in those months is generally low. This makes the completion factor methodology less reliable for such months. Therefore incurred claims for recent months are not projected from historical completion and payment patterns; rather they are projected by estimating the claims expense for those months based upon recent claims expense levels and health care trend levels, or “trend factors”.
Because the reserve methodology is based upon historical information, it must be adjusted for known or suspected operational and environmental changes. These adjustments are made by our actuaries based on their knowledge and their estimate of emerging impacts to benefit costs and payment speed. Circumstances to be considered in developing our best estimate of reserves include changes in utilization levels, unit costs, mix of business, benefit plan designs, provider reimbursement levels, processing system conversions, claim inventory levels, claim processing patterns and claim submission patterns. A comparison of prior period liabilities to re-estimated claim liabilities based upon subsequent claims development is also considered in making the liability determination. In the actuarial process, the methods and assumptions are not changed as reserves are recalculated, but rather the availability of additional paid claims information drives our changes in the re-estimate of the unpaid claim liability. To the extent appropriate, changes in such development are recorded as a change to current period benefit expense.
Management regularly reviews its assumptions regarding our claims liabilities and makes adjustments to benefit expense recorded, when necessary. If it is determined that management’s assumptions regarding cost trends and utilization are significantly different than actual results, our income statement and financial position could be impacted in future periods. Adjustments of prior year estimates may result in additional benefit expense or a reduction of benefit expense in the period an adjustment is made. Further, due to the considerable variability of health care costs, adjustments to claims liabilities occur each quarter and are sometimes significant as compared to the total benefit expense recorded in that quarter. Prior year development is recognized immediately upon the actuary’s judgment that a portion of the prior year liability is no longer needed or that additional liability should have been accrued. That determination is made when sufficient information is available to ascertain that the re-estimate of the liability is accurate and will not fluctuate significantly with future development.
Amounts incurred related to prior years vary from previously estimated liabilities as the claims are ultimately settled. Liabilities at any year end are continually reviewed and re-estimated as information regarding actual claims payments, or runout, becomes known. This information is compared to the originally established year end liability. Negative amounts reported for incurred related to prior years result from claims being settled for amounts less than originally estimated. The redundancy of $226.1 million shown in the table above and in Note 8 to our audited consolidated financial statements for the year ended December 31, 2003, represents an estimate based on paid claim activity from January 1, 2003 to December 31, 2003. Medical claim liabilities are usually described as having a “short tail”, which means that they are generally paid within several months of the member receiving service from the provider. Accordingly, the majority, or approximately 90%, of the $226.1 million redundancy relates to claims incurred in calendar year 2002, with the remaining 10% related to claims incurred in 2001 and prior.
We calculate the percentage of prior year redundancies in the current period to total incurred claims recorded in each prior year in order to demonstrate the development of the prior year reserves. This metric was 2.3% for 2003, 1.9% for 2002 and 1.5% for 2001. Having only five months of incurred claims for our Southeast segment during 2002 impacted the ratio for 2003. Had the Southeast segment been included for the full year 2002, the ratio would have been approximately 2.0%.
the deferred tax asset or liability is recorded. A valuation allowance must be established for deferred tax assets if it is “more likely than not” that all or a portion may be unrealized. Our judgement is required in making this analysis.
the forecasted future taxable income and therefore likely future deduction of the deferred tax item; and
During 2003, we utilized additional alternative minimum tax, or AMT, credits and net operating losses on our federal tax return for which we had a deferred tax asset with a corresponding valuation allowance. As deferred tax assets related to those deductions are recognized in the tax return, a valuation allowance is no longer required and is reduced. While the valuation allowance decreased $81.9 million, we recorded additional deferred tax liabilities of $81.9 million for uncertainty on several tax items. These items include uncertainty arising from the lack of clear guidance from the Internal Revenue Service on various tax issues relating to our conversion in 1987 from tax exempt to tax paying status.
During 2002, based on our assessments of the valuation allowance it was determined that the only items that require a valuation allowance are those that relate to specific deferred tax temporary differences as opposed to those that relate to the anticipation of future taxable income. This determination was due to the levels of taxable income reported on our 2001 tax return, income generated during 2002 and taxable income expected in future periods. As a result of this determination, during 2002, we reduced our valuation allowance. The net decrease in the valuation allowance for 2002 was $112.4 million. During 2002, $18.0 million of the change in the valuation allowance was recorded as a reduction to goodwill. This adjustment resulted from recognition of deferred tax assets previously determined to be unrealizable. Because of uncertainties noted above regarding both the timing and the amount of deductions, we recorded a $57.2 million deferred tax liability. We also recorded a reduction to income tax expense of $37.2 million. This reduction contributed to a reduced effective tax rate of 31.6% for the year ended December 31, 2002.
Our consolidated goodwill at December 31, 2003 was $2,450.1 million and intangible assets were $1,227.0 million. The sum of goodwill and intangible assets represented 27% of our total consolidated assets at December 31, 2003.
Under FAS 142, goodwill and other intangible assets (with indefinite lives) will not be amortized but will be tested for impairment at least annually. We completed our annual impairment test of existing goodwill and other intangible assets (with indefinite lives) for the year ended December 31, 2003 during the fourth quarter of 2003. In addition, for the year ended December 31, 2002, we completed our transitional impairment test of goodwill and other intangible assets (with indefinite lives) during the second quarter of 2002 and our annual impairment test during the fourth quarter of 2002. Based upon these tests we have not incurred any impairment losses related to any goodwill and other intangible assets (with indefinite lives).
Total investment securities were $6,915.2 million at December 31, 2003 and represented 51% of our total consolidated assets at December 31, 2003. Our fixed maturity and equity securities are classified as “available-for-sale” securities and are reported at fair value. We have determined that all investments in our portfolio are available to support current operations, and accordingly, have classified such securities as current assets. Investment income is recorded when earned, and realized gains or losses, determined by specific identification of investments sold, are included in income when the securities are sold.
Through our investing activities, we are exposed to financial market risks, including those resulting from changes in interest rates and changes in equity market valuations. Our primary objective is the preservation of the asset base and maximization of portfolio income given an acceptable level of risk. We manage the market risks through our investment policy, which establishes credit quality limits and limits of investments in individual issuers. If we are unable to effectively manage these risks, it could have an impact on our future earnings and financial position.
Amounts for 2001 include pro forma earnings per share prior to the initial public offering.
Basis of Presentation: On November 2, 2001, Anthem Insurance Companies, Inc. (“Anthem Insurance”) converted from a mutual insurance company to a stock insurance company in a process known as a demutualization. Concurrent with the demutualization, Anthem Insurance became a wholly owned subsidiary of Anthem, Inc. (“Anthem”), and Anthem completed an initial public offering of common stock. The demutualization was accounted for as a reorganization using the historical carrying values of the assets and liabilities of Anthem Insurance. Accordingly, immediately following the demutualization and the initial public offering, Anthem Insurance’s policyholders’ surplus was reclassified to par value of common stock and additional paid in capital.
The accompanying consolidated financial statements of Anthem and its subsidiaries (collectively, the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is licensed in 49 states and is the Blue Cross Blue Shield Association licensee in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado, Nevada, and Virginia (excluding the immediate suburbs of Washington, D.C.). Products include health and group life insurance, managed health care, pharmacy benefit management, dental and vision benefits and government health program administration.
Premium and Self-Funded Receivables: Premium and self-funded receivables include the uncollected amounts from insured and self-funded groups, and are reported net of an allowance for doubtful accounts of $18.0 and $29.5 at December 31, 2003 and 2002, respectively. The allowance for doubtful accounts is based on historical collection trends and management’s judgment regarding the ability to collect specific accounts.
Other Receivables: Other receivables include amounts for interest earned on investments, proceeds due from brokers on investment trades, government programs, pharmacy sales, claim recoveries and other miscellaneous amounts due to the Company. These receivables have been reduced by an allowance for uncollectible amounts of $25.1 and $20.4 at December 31, 2003 and 2002, respectively.
Property and Equipment: Property and equipment is recorded at cost, net of depreciation. Depreciation is computed principally by the straight-line method over estimated useful lives ranging from 15 to 39 years for buildings, three to seven years for furniture and equipment, and three to ten years for computer software. Leasehold improvements are depreciated over the term of the related lease. Certain costs related to the development or purchase of internal-use software are capitalized and amortized in accordance with AICPA Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.
Postretirement benefits represent outstanding obligations for retiree medical, life, vision and dental benefits. These benefits are accrued in accordance with FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pension. The Company accrues the estimated costs of retiree health and other postretirement benefits during the periods in which eligible employees render service to earn the benefits.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 became law in December 2003 and expanded Medicare, primarily adding a prescription drug benefit for Medicare-eligible retirees starting in 2006. The Company anticipates that the retiree medical benefits it pays in 2006 and beyond will be lower as a result of the new Medicare provisions; however, the retiree medical obligations and costs reported in the accompanying consolidated financial statements do not reflect the impact of this legislation. As permitted by Financial Accounting Standards Board Staff Position 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the Company has deferred the recognition of the impact of the new Medicare provisions due to open questions about some of the new Medicare provisions and a lack of authoritative accounting guidance about certain matters. The final accounting guidance could require changes to previously reported information.
Policy Liabilities: Liabilities for unpaid claims include estimated provisions for both reported and unreported claims incurred on an undiscounted basis, as well as estimated provisions for expenses related to the processing of claims. The liabilities are determined by actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice, which require that claim liabilities be adequate under moderately adverse circumstances. The liabilities are regularly reviewed and adjusted for known or suspected operational and environmental changes. Circumstances considered in developing the estimate of the liability include changes in utilization levels, unit costs, mix of business, benefit designs, provider reimbursement levels, processing system conversions, claim inventory levels, claim processing patterns and claim submission patterns. Due to the considerable variability of health care costs, adjustments to claims liabilities occur each quarter. Although it is not possible to measure the degree of variability inherent in such estimates, management believes these liabilities are adequate and has consistently applied the methodology in determining the best estimate for unpaid claims liability at each reporting date.
Premium deficiencies are recognized when it is probable that expected claims and loss adjustment expenses will exceed future premiums on existing health and other insurance contracts without consideration of investment income. For purposes of premium deficiencies, contracts are deemed to be either short or long duration and are grouped in a manner consistent with the Company’s method of acquiring, servicing and measuring the profitability of such contracts. Once established, premium deficiencies are amortized over the remaining life of the contract.
Trigon’s shareholders each received consideration of thirty dollars in cash and 1.062 shares of Anthem common stock for each Trigon share outstanding. The purchase price was $4,038.1 and included cash of $1,104.3, the issuance of 38,971,908 shares of Anthem common stock, valued at $2,708.1, Trigon stock options
In accordance with FAS 141 Anthem allocated the purchase price to the fair value of assets acquired and liabilities assumed, including identifiable intangible assets. The excess of purchase price over the fair value of net assets acquired resulted in $2,146.1 of non-tax deductible goodwill. The initial goodwill recorded in 2002 was reduced by $20.5 for purchase price allocation adjustments.
The results of operations for Trigon are included in Anthem’s consolidated income statement after the completion of the acquisition on July 31, 2002.
Remaining 50% ownership interest in Maine Partners Health Plan, Inc.; and
Goodwill adjustments for 2003 of $36.9 for the Southeast segment include a $16.4 tax benefit associated with the exercise of stock options issued as part of the Trigon acquisition and $20.5 for purchase accounting adjustments. Adjustments for the West segment of $0.8 were for purchase accounting adjustments resulting from Internal Revenue Service refunds for pre-acquisition tax years. During 2002, goodwill relating to previous acquisitions was reduced $18.0 for the postacquisition adjustment of deferred tax assets (see Note 12) and $3.6 for the postacquisition adjustment of other liabilities established in purchase accounting. Further, goodwill was also adjusted in 2002 by $11.2 for the tax benefit that resulted from the exercise of stock options issued as part of the Trigon acquisition.
The Company recorded charges for other-than-temporary impairment of securities of $24.4, $3.1 and $28.9, respectively, for 2003, 2002 and 2001. Charges for other-than-temporary impairment of securities are reported with net realized gains (losses) on investments.
The Company’s fixed maturity investment portfolio is sensitive to interest rate fluctuations, which impact the fair value of individual securities. All unrealized losses reported above were generally caused by the effect of a rising interest rate environment on certain securities with stated interest rates currently below market rates. The Company has the ability and intent to hold these securities until their full cost can be recovered. Therefore, the Company does not believe the unrealized losses represent an other-than-temporary impairment as of December 31, 2003.
and future indebtedness. Any payment of interest or principal on the surplus notes may be made only with the prior approval of the Indiana Department of Insurance (“IDOI”), and only out of capital and surplus funds of Anthem Insurance that the IDOI determines to be available for the payment under Indiana insurance laws.
Anthem will have cash requirements of approximately $3,900.0 for the pending transaction with WellPoint, including both the cash portion of the purchase price and estimated transaction costs. During October 2003, Anthem obtained a commitment for a bridge loan of up to $3,000.0. Additionally, as of December 31, 2003, Anthem had $666.4 of cash and investments and access to $1,000.0 of revolving credit facilities, as discussed above. All indebtedness under the bridge loan must be repaid in full no later than March 31, 2005. Subsequent to December 31, 2003, the Company entered into forward starting pay fixed hedging transactions with a notional amount of $500.0. These hedges are being used to eliminate the uncertainty related to future interest payments on the expected issuance of debt securities to partially fund the cash portion of the WellPoint transaction, which is expected to close in mid-2004. The hedge transactions had no impact on the Company’s financial position or results of operations at inception.
Amounts incurred related to prior years vary from previously estimated liabilities as the claims are ultimately settled. Liabilities at any year end are continually reviewed and re-estimated as information regarding actual claims payments becomes known. This information is compared to the originally established year end liability. Negative amounts reported for incurred related to prior years result from claims being settled for amounts less than originally estimated. This experience is primarily attributable to actual medical cost experience more favorable than that assumed at the time the liability was established.
The Company’s 2001 Stock Incentive Plan (“Stock Plan”) provides for the granting of stock options, restricted stock awards, performance stock awards, performance awards and stock appreciation rights to eligible employees and non-employee directors. The Stock Plan permits the Compensation Committee of the Board of Directors to make grants in such amounts and at such times as it may determine.
In accordance with the Plan, options to purchase shares of common stock at an amount equal to the fair market value of the stock at the date of grant were granted to eligible employees and non-employee directors during 2003, 2002 and 2001. Options vest and expire over terms as set by the Compensation Committee at the time of grant. These options generally vest at the end of two or three years and expire 10 years from the grant date.
In connection with the acquisition of Trigon, Anthem assumed the Trigon 1997 Stock Incentive Plan and the Trigon 1997 Non-Employee Directors Stock Incentive Plan, which collectively provided for the granting of stock options to employees and non-employee directors. Trigon stock options were converted to Anthem stock options. Pursuant to this registration, no additional options may be granted under the converted Trigon plans. The converted stock options were recorded at the acquisition date as additional paid in capital and valued at $195.5 using a Black-Scholes option-pricing model with weighted-average assumptions as follows:
During the year ended December 31, 2002, the Company granted 95,300 shares of the Company’s common stock as restricted stock awards to certain eligible executives. These shares will vest as follows: (i) 1,700 will vest on the earlier of, December 31, 2005, if certain performance measures are attained, or July 1, 2007; and (ii) the remaining 93,600 will vest equally on December 31, 2004 and 2005. During the year ended December 31, 2002, the Company granted 2,673 shares to non-employee directors.
After underwriting discount and other offering and demutualization expenses, net proceeds from the common stock offering were approximately $1,862.8. After underwriting discount and expenses, net proceeds from the Equity Security Units offering were approximately $219.8. In December 2001, proceeds from the common stock and Equity Security Units offerings in the amount of $2,063.6 were used to fund payments to eligible statutory members of Anthem Insurance who received cash instead of common stock in the demutualization.
The denominator for basic and diluted earnings per share for 2003, 2002 and for the period from November 2, 2001 (date of demutualization and initial public offering) through December 31, 2001 is as follows:
There were no shares or dilutive securities outstanding prior to the demutualization and initial public offering. For comparative pro forma earnings per share presentation, the weighted-average shares outstanding and the effect of dilutive securities for the period from November 2, 2001 to December 31, 2001 as shown above was used to calculate pro forma earnings per share for 2001.
A reconciliation of the components of accumulated other comprehensive income at December 31 is as follows:
At December 31, 2003, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted of the following: 2004, $46.8; 2005, $44.4; 2006, $37.2; 2007, $29.7; 2008, $25.4; and thereafter $122.0.
The Anthem Insurance plan is a cash balance arrangement where participants have an account balance and will earn a pay credit equal to three to six percent of compensation, depending on years of service. The Anthem Insurance plan covers part-time and temporary employees as well as full-time employees who have completed one year of continuous service and attained the age of twenty-one. In addition to the pay credit, participant accounts earn interest at a rate based on 10-year Treasury notes.
Prior to December 31, 2002, Anthem Health Plans of New Hampshire, Inc. sponsored a plan that was a cash balance arrangement where participants had an account balance and earned a pay credit equal to five percent of compensation. This plan generally covered all full-time employees who had completed one year of continuous service and had attainted the age of twenty-one. The participant accounts earned interest at a rate based on the lesser of the 1-year Treasury note or 7%. Effective January 1, 2002, participant accounts earned interest at a rate based on 10-year Treasury notes. This plan merged into the Anthem Insurance plan effective December 31, 2002.
In addition, the Company offers most employees postretirement benefits including certain life, medical, vision and dental benefits upon retirement. There are several postretirement benefit plans, which differ in amounts of coverage, deductibles, retiree contributions, years of service and retirement age. The Company may fund certain benefit costs through discretionary contributions to a Voluntary Employees’ Beneficiary Association (“VEBA”) trust and others are accrued, with the retiree paying a portion of the costs. Postretirement plan assets held in the VEBA trust consist primarily of bonds and equity securities.
The Company uses a September 30 measurement date each year for determining benefit obligations and the fair value of plan assets.
The following tables disclose “pension benefits” which include defined benefit pension plans described above, and “other benefits” which include other postretirement benefits described above.
In managing the plan assets, the Company’s objective is to be a responsible fiduciary while minimizing financial risk to the Company. Plan assets include a diversified mix of investment grade fixed maturity securities and equity securities across a range of sectors and levels of capitalization to maximize the long-term return for a prudent level of risk. Plan assets are not invested in Anthem stock.
Beginning in 2003, the Company implemented a quarterly funding strategy for contributions to the pension plan. The amount of quarterly funding may vary from quarter to quarter and may be adjusted based on changes in the fair value of plan assets and changes to related assumptions. The Company’s current strategy is to fund an amount at least equal to the minimum required funding as determined under ERISA with consideration of factors such as the minimum pension liability requirement and maximum tax deductible amounts. The Company may elect to make discretionary contributions up to the maximum amount deductible for income tax purposes. For the year ending December 31, 2004, the Company does not expect any required contributions under ERISA. Employer contributions related to other benefits represents payments to retirees for current benefits. Contributions to the VEBA are generally not material.
In addition to the defined benefit plans, the Company has several qualified defined contribution plans covering substantially all employees. Eligible employees may only participate in one plan. Voluntary employee contributions are matched at the rate of 50%, up to a maximum depending upon the plan, subject to certain limitations. Contributions made by the Company totaled $13.2, $14.3 and $11.2 during 2003, 2002 and 2001, respectively.
The Compensation Committee approved a one year plan, the 2004 Long Term Incentive Plan (“2004 LTIP”), for certain executives based on performance goals which include specific strategic objectives of the Company. Each participant’s target award is established as a percentage ranging from 30% to 150% of annual base salary for 2004. Awards under the 2004 LTIP become payable upon approval by the Compensation Committee and will be paid in cash or stock of the Company during 2005, with the executive having the option to defer payment.
A number of managed care organizations have been sued in class action lawsuits asserting various causes of action under federal and state law. These lawsuits typically allege that the defendant managed care organizations employ policies and procedures for providing health care benefits that are inconsistent with the terms of the coverage documents and other information provided to their members, and because of these misrepresentations and practices, a class of members has been injured in that they received benefits of lesser value than the benefits represented to and paid for by such members. Two such proceedings, which allege various violations of the Employee Retirement Income Security Act of 1974 (“ERISA”), have been filed in Connecticut against the Company or its Connecticut subsidiary. One proceeding was brought by the Connecticut Attorney General on behalf of a purported class of HMO and Point of Service members in Connecticut. No monetary damages are sought, although the suit does seek injunctive relief from the court to preclude the Company from allegedly utilizing arbitrary coverage guidelines, making late payments to providers or members, denying coverage for medically necessary prescription drugs and misrepresenting or failing to disclose essential information to enrollees. The complaint contends that these alleged policies and practices are a violation of ERISA. This case was dismissed by the trial court on September 19, 2003; the Connecticut Attorney General filed a motion for reconsideration by the trial court, which was denied on October 1, 2003. The Attorney General filed an appeal to the Eleventh Circuit on December 1, 2003. The Eleventh Circuit has not decided whether to accept the appeal. A second proceeding, brought on behalf of a purported class of HMO and Point of Service members in Connecticut and elsewhere, settled for $5,000 (actual dollars), and was dismissed with prejudice by order of the Court on July 18, 2003.
In addition, the Company’s Connecticut subsidiary is a defendant in three class action lawsuits brought on behalf of professional providers in Connecticut. The suits allege that the Connecticut subsidiary has breached its contracts by, among other things, failing to pay for services in accordance with the terms of the contracts. The suits also allege violations of the Connecticut Unfair Trade Practices Act, breach of the implied duty of good faith and fair dealing, negligent misrepresentation and unjust enrichment. Two of the suits seek injunctive relief and monetary damages (both compensatory and punitive). The third suit, brought by the Connecticut State Medical Society, seeks injunctive relief only. Two of the suits were transferred to the Multi District Litigation (“MDL”) docket in Miami, Florida, as tag-along cases. All of the tag-along cases in the MDL are being stayed, until all motions in the main provider track cases have been ruled on.
On October 10, 2001, the Connecticut State Dental Association and five dental providers filed suit against the Company’s Connecticut subsidiary. The suit alleged breach of contract and violation of the Connecticut Unfair Trade Practices Act. The suit was voluntarily withdrawn on November 9, 2001. The claims were refiled on April 15, 2002, as two separate suits; one by the Connecticut State Dental Association and the second by two dental providers, purportedly on behalf of a class of dental providers. Both suits seek injunctive relief, and unspecified monetary damages (both compensatory and punitive). Both cases were transferred to the MDL docket as tag-along cases, and have been consolidated with the MDL suits pending before Judge Moreno in Miami, Florida. Both cases are being stayed, as are all of the tag-along suits in the MDL.
Anthem’s primary Ohio subsidiary and primary Kentucky subsidiary were sued on June 27, 2002, in their respective state courts. The suits were brought by the Academy of Medicine of Cincinnati, as well as individual physicians, and purport to be class action suits brought on behalf of all physicians practicing in the greater Cincinnati area and in the Northern Kentucky area, respectively. In addition to the Anthem subsidiaries, both
suits name Aetna, United Healthcare and Humana as defendants. The first suit, captioned Academy of Medicine of Cincinnati and Luis Pagani, M.D. v. Aetna Health, Inc., Humana Health Plan of Ohio, Inc., Anthem Blue Cross and Blue Shield, and United Health Care of Ohio, Inc., No. A02004947 was filed on June 27, 2002 in the Court of Common Pleas, Hamilton County, Ohio. The second suit, captioned Academy of Medicine of Cincinnati and A. Lee Greiner, M.D., Victor Schmelzer, M.D., and Karl S. Ulicny, Jr., M.D. v. Aetna Health, Inc., Humana, Inc., Anthem Blue Cross and Blue Shield, and United Health Care, Inc., No. 02-CI-903 was filed on June 27, 2002 in the Boone County, Kentucky Circuit Court.
Both suits allege that the four companies acted in combination and collusion with one another to reduce the reimbursement rates paid to physicians in the area. The suits allege that as a direct result of the defendants’ alleged anti-competitive actions, health care in the area has suffered, namely that: there are fewer hospitals; physicians are rapidly leaving the area; medical practices are unable to hire new physicians; and, from the perspective of the public, the availability of health care has been significantly reduced. Each suit alleges that these actions violate the respective state’s antitrust and unfair competition laws, and each suit seeks class certification, compensatory damages, attorneys’ fees, and injunctive relief to prevent the alleged anti-competitive behavior against the class in the future. Motions to dismiss or to send the cases to binding arbitration, per the provider contracts, were filed in both courts. The Ohio court overruled the motions on January 21, 2003 and the Kentucky court overruled the motions on February 19, 2003. Defendants have appealed both rulings. The Ohio appeal was heard on September 23, 2003. The Ohio appellate court affirmed the trial court’s ruling on November 21, 2003. On January 2, 2004, Anthem filed a motion seeking a discretionary appeal to the Ohio Supreme Court. A ruling will issue in due course. In the Kentucky case, no date has been set for oral argument. Plaintiffs filed a motion for class certification, which was heard and rejected by the trial court on July 24, 2003. Plaintiffs have filed a renewed motion for class certification, which is set for hearing on October 24, 2003. These suits are in the preliminary stages. The Company intends to vigorously defend the suits and believes that any liability from these suits will not have a material adverse effect on its consolidated financial position or results of operations.
Appeals. On May 20, 2002 the Indiana Court of Appeals granted the Company’s motion seeking an interlocutory appeal of the class certification order. In February 2003, the Indiana Court of Appeals affirmed the trial court’s class certification. The Company filed a petition for the transfer to the Indiana Supreme Court in March 2003. The petition for transfer was argued on October 2, 2003, and the Indiana Supreme Court accepted transfer in an order dated October 2, 2003. An opinion will issue in due course. In any event, the Company intends to continue to vigorously defend the case and believes that any liability that may result from the case will not have a material adverse effect on its consolidated financial position or results of operations.
In addition to the lawsuits described above, the Company is also involved in other pending and threatened litigation of the character incidental to the business transacted, arising out of its insurance and investment operations, and is from time to time involved as a party in various governmental and administrative proceedings. The Company believes that any liability that may result from any one of these actions is unlikely to have a material adverse effect on its consolidated financial position or results of operations.
The Company, like a number of other Blue Cross and Blue Shield companies, serves as a fiscal intermediary for Medicare Parts A and B. The fiscal intermediaries for these programs receive reimbursement for certain costs and expenditures, which is subject to adjustment upon audit by the Federal Centers for Medicare & Medicaid Services, formerly the Health Care Financing Administration. The laws and regulations governing fiscal intermediaries for the Medicare program are complex, subject to interpretation and can expose an intermediary to penalties for non-compliance. Fiscal intermediaries may be subject to criminal fines, civil penalties or other sanctions as a result of such audits or reviews. While the Company believes it is currently in compliance in all material respects with the regulations governing fiscal intermediaries, there are ongoing reviews by the federal government of the Company’s activities under certain of its Medicare fiscal intermediary contracts.
AdminaStar Federal, Inc. (“AdminaStar”), a subsidiary of Anthem Insurance, has received several subpoenas prior to May 2000 from the Office of Inspector General (“OIG”) and the U.S. Department of Justice, one seeking documents and information concerning its responsibilities as a Medicare Part B contractor in its Kentucky office, and the others requesting certain financial records and information of AdminaStar and Anthem Insurance related to the Company’s Medicare fiscal intermediary (Part A) and carrier (Part B) operations. The Company has made certain disclosures to the government relating to its Medicare Part B operations in Kentucky. The Company was advised by the government that, in conjunction with its ongoing review of these matters, the government has also been reviewing separate allegations made by individuals against AdminaStar, which are included within the same timeframe and involve issues arising from the same nucleus of operative facts as the government’s ongoing review. The Company is not in a position to predict either the ultimate outcome of these reviews or the extent of any potential exposure should claims be made against the Company. However, the Company believes any fines or penalties that may arise from these reviews would not have a material adverse effect on the consolidated financial position or results of operations.
As a Blue Cross Blue Shield Association licensee, the Company participates in the Federal Employee Program (“FEP”), a nationwide contract with the Federal Office of Personnel Management to provide coverage to federal employees and their dependents. On July 11, 2001, the Company received a subpoena from the OIG, Office of Personnel Management, seeking certain financial documents and information, including information concerning intercompany transactions, related to operations in Ohio, Indiana and Kentucky under the FEP contract. The government has advised the Company that, in conjunction with its ongoing review, the government is also reviewing a separate allegation made by an individual against the Company’s FEP operations, which is included within the same timeframe and involves issues arising from the same nucleus of operative facts as the
Through its participation in the Federal Employee Program, Medicare, Medicare at Risk, and TRICARE Program, the Company generated approximately 19%, 18% and 20% of its total consolidated revenues from agencies of the U.S. government for the years ended December 31, 2003, 2002 and 2001, respectively.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that certain shared administrative expenses for each segment are recognized on a pro rata allocated basis, which in aggregate approximates the consolidated expense. Any difference between the allocated expenses and actual consolidated expense is included in other expenses not allocated to reportable segments. Intersegment sales and expenses are recorded at cost, and eliminated in the consolidated financial statements. The Company evaluates performance of the reportable segments based on operating gain or loss as
Financial data by reportable segment for the year ended December 31 is as follows:
A reconciliation of reportable segment operating revenues to the amounts of total revenues included in the consolidated statements of income is as follows:
A reconciliation of reportable segment operating gain to income before income taxes and minority interest included in the consolidated statements of income is as follows: