In connection with consolidating and reorganizing our company operations, we plan to consolidate or close certain locations currently used for subsidiary operations, customer service, computer processing and administrative offices. Costs for consolidating and/or closing such office space have been identified and are included in the fourth quarter 2001 restructuring charge. See Note 9 of the Notes to Consolidated Financial Statements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF 	FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Effective January 1, 2002, we reduced 	benefits and increased premiums in our Medicare+Choice health 	plan. These actions affected the majority of our 	0.9 million members currently enrolled in our 	Medicare+Choice health plans and have and may continue to result 	in disenrollment of some of our Medicare membership in counties 	where we continue to offer plans. In addition, effective 	January 1, 2002, we withdrew our Medicare+Choice products 	in 44 counties in Arizona, California, Oklahoma, Oregon, 	Texas and Washington. In January 2002, this withdrawal had 	affected approximately 50,000 members, representing about 	5% of our Medicare health maintenance organization, or HMO, 	membership as of December 31, 2001.
In December 2001, in connection with the IBM 	outsourcing contract, we sold IBM computer equipment with a net 	book value of $42 million. The consideration we received 	from IBM for the sale included $25 million in cash, and a 	note receivable for the $17 million balance. In January 	2002, we paid and permanently retired $25 million of the 	outstanding balance on our term loan with proceeds we received 	from this sale. See Note 5 of the Notes to Consolidated 	Financial Statements.
In September 2001, we retired $12 million of 	the FHP International Corporation, or FHP, senior notes that we 	assumed when we acquired FHP in 1997 by exchanging approximately 	0.8 million shares of common stock for those notes. We 	reissued treasury stock to provide the common stock used in the 	exchange. Retirement of these notes resulted in a pretax 	extraordinary gain of $2 million ($0.9 million or 	$0.02 diluted earnings per share, net of tax), and a net equity 	increase of $10 million. See Notes 5 and 6 of the 	Notes to Consolidated Financial Statements.
provides for a $650 million term loan and a 	$150 million revolving line of credit. See Note 5 of 	the Notes to Consolidated Financial Statements.
Effective March 1, 2001, we withdrew our 	commercial HMO product from 24 Texas counties. This exit 	affected approximately 3,000 members.
Commercial and Medicare Premiums. We receive per-member per-month payments on behalf of each member enrolled in our commercial HMOs and our behavioral health services, life and health insurance and dental and vision services plans. Generally, our Medicare+Choice contracts entitle us to per-member per-month payments from the Centers for Medicare and Medicaid Services, or CMS, which until recently was known as the Health Care Financing Administration, on behalf of each enrolled Medicare beneficiary. We report prepaid health care premiums received from our commercial plans’ enrolled groups, CMS, and our Medicare plans’ members as revenue in the month that members are entitled to receive health care. We record premiums received in advance as unearned premium revenue.
Premiums for our commercial products and Medicare+Choice products are generally fixed in advance of the periods covered. Of our commercial business, more than 50% of our membership renews on January 1 of each year, with premiums that are generally fixed for a one-year period. In addition, each of our subsidiaries that offers Medicare+Choice products must submit adjusted community rate proposals, generally by county or service area, to CMS by July 1 for each such product that will be offered in a subsequent year. As a result, increases in the costs of health care service in excess of the estimated future health care costs reflected in the premiums or the adjusted community rate proposals generally cannot be recovered in the applicable contract year through higher premiums or benefit designs.
a fee per claim processed rather than a premium, for the services that it provides. Prescription Solutions generates mail-service revenue where we, rather than network retail pharmacies, collect the member copayments. We provide similar administrative services to employer groups that want to be self-insured for behavioral health services and dental and vision services.
Net Investment Income. Net investment income consists of interest income, gross realized gains and gross realized losses experienced based on the level of cash invested over each period. As we have increased the number of our contracts that are risk-based rather than capitated contracts, our net investment income has been and continues to be an important component in managing health care cost risk of our business. Under risk-based contracts, cash disbursements to health care providers for services provided to members are made after the related claim has been submitted and adjudicated. Under capitated contracts, health care providers are prepaid on a fixed-fee per-member per-month basis, regardless of the services provided to members.
Commercial and Medicare Health Care Services. Health care service expenses for our commercial plans and our Medicare plans primarily comprise payments to physicians, hospitals and other health care providers under capitated or risk-based contracts for services provided to our members. Health care service expenses also include expenses for health care provided and administrative services performed under our specialty products and services companies.
The cost of health care provided is accrued in the month services are provided to members, based in part on estimates for hospital services and other health care costs that have been incurred but not yet reported. We develop these estimates using actuarial methods based upon historical data for payment patterns, cost trends, product mix, seasonality, utilization of health care services and other relevant factors. These estimates are adjusted in future periods as we receive actual claims data, and can either increase or reduce our accrued health care costs. The cost of prescription drugs covered under our commercial and Medicare plans is expensed when the prescription drugs are dispensed. Our commercial and Medicare plans also provide incentives, through a variety of programs, for health care providers that participate in those plans to control health care costs while providing quality health care. Expenses related to these programs, which are based in part on estimates, are recorded in the period in which the related services are provided.
We have experienced a significant increase in our health care service expenses as we have increasingly covered our membership through risk-based contracts. Our profitability declined beginning with the third quarter of 2000 because we did not fully anticipate the extent to which our reimbursement methodology would shift to risk-based contracts. The shift toward risk-based contracts exposed us to increased health
Membership. Total HMO membership decreased 16% to approximately 3.4 million members at December 31, 2001 from approximately 4.0 million members at December 31, 2000. Our total HMO membership excludes employer self-funded, PPO, indemnity and Medicare supplement members.
Commercial HMO membership decreased approximately 17% at December 31, 2001 compared to the prior year primarily due to a:
Decrease of 83,500 members in Colorado, primarily 	due to premium rate increases that averaged 14% in 2001 and 2001 	county exits; and
Decrease of 35,000 members as a result of our 	exit of all HMO operations in Ohio.
Medicare membership decreased approximately 10% at December 31, 2001 compared to the prior year primarily due to a:
Decrease of 101,900 members primarily as a result 	of 2000 and 2001 county exits, capacity waivers and voluntary 	closure notices in California, Colorado, Oregon and Washington;
Pharmacy benefit management, or PBM, unaffiliated membership at December 31, 2001 increased approximately 79% compared to the prior year due to new membership from five additional customers of approximately 512,300 members, partially offset by membership losses of approximately 13,700 members primarily in connection with the loss of two customers.
Medicare Premiums. Medicare premiums increased 5% or $348 million for the year ended December 31, 2001 compared to the prior year as follows:
Other Income. Other income increased approximately 24% or $33 million for the year ended December 31, 2001 compared to the prior year primarily due to increased mail-service revenues of Prescription Solutions, our PBM.
For the year ended December 31, 2001, our increases in commercial health care costs outpaced our premium rate increases primarily in California, Texas and Washington. In these states more members accessed more services, at a higher cost, from providers with whom we have shared-risk, rather than capitation contracts. Additionally, our Texas HMO experienced increased health care costs because we paid hospitals and doctors for expenses that were otherwise the obligations of our contracted providers. See Note 10 of the Notes to Consolidated Financial Statements.
In the fourth quarter of 2001, our commercial health care costs were partially offset by the impact of favorable claims experience for our new indemnity products, including PPO, Medicare supplement, and in our behavioral health business. We do not expect these favorable changes in estimates to continue in 2002. In 2002, we expect our commercial medical loss ratio to be in the range of 86% to 87%. We expect the decrease to be driven by price increases, exits from high-cost markets, and the positive effect on utilization of our medical management investments.
Higher inpatient, physician and outpatient 	service utilization under fee-for-service or risk-based 	contracts; largely offset by
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $1.2 million for the year ended December 31, 2001 were comparable to the prior year. For the year ended December 31, 2001, selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income) decreased compared to the same period in the prior year primarily due to higher operating revenue in 2001. Our expectation for selling, general and administrative expenses as a percentage of operating revenue for 2002 is that the percentage will rise to at least 11.5%, primarily as a result of the $80 million that we expect to spend for IT investments, PBM expansion and a branding advertising campaign. We plan to fund these expenditures in part through savings that result from the restructuring program that we began in the fourth quarter of 2001.
Interest Expense. Interest expense decreased approximately 12% to $70 million for the year ended December 31, 2001 compared to the prior year due to:
Pharmacy benefit management PacifiCare HMO 	membership represents members that are in our commercial or 	Medicare HMOs. All of these members either have a prescription 	drug benefit or are able to purchase their prescriptions 	utilizing our retail network contracts or our mail service.
Dental and behavioral health PacifiCare HMO 	membership represents members that are in our commercial HMOs 	that are also enrolled in our dental or behavioral health plan.
Net membership increases from acquired membership 	in Colorado, Texas and Washington, partially offset by 	membership decreases in Colorado attributable to premium rate 	increases that averaged 14% in 2000; and
Medicare membership increased 4% at December 31, 2000 compared to the prior year due to:
Competitor exits in markets where Secure Horizons 	will remain, primarily in Arizona, Nevada and Texas; partially 	offset by
Membership decreases primarily in California due 	to disenrollment resulting from reduced benefits, increased 	copayments and instituted or increased member-paid supplemental 	premiums in some counties; and
Membership decreases as a result of our January 	2000 county exits in California, Ohio, Oregon and Washington.
Employer self-funded membership increased approximately 18% at December 31, 2000 compared to the prior year primarily due to additional membership from the Harris acquisition, partially offset by membership losses in Colorado. PPO and indemnity membership increased approximately 44% at December 31, 2000 compared to the prior year primarily due to additional Harris membership.
PacifiCare behavioral health HMO membership as of December 31, 2000 increased approximately 44% compared to the prior year primarily due to additional membership in California mainly related to the passage of mental health parity legislation and additional membership in Arizona, Oklahoma and Texas. Behavioral health unaffiliated membership as of December 31, 2000 increased approximately 4% compared to the prior year primarily due to increased membership in employee assistance programs.
Commercial Premiums. Commercial premiums include results from our specialty HMO and indemnity insurance operations. Commercial premiums increased 23% or $918 million for the year ended December 31, 2000 compared to the prior year as follows:
Medicare Premiums. Medicare premiums increased 9% or $540 million for the year ended December 31, 2000 compared to the prior year as follows:
Net Investment Income. Net investment income increased approximately 29% to $108 million for the year ended December 31, 2000 compared to the prior year due to higher average invested balances and increases in short- and long-term interest rates combined with the gradual shift of tax-exempt investments to higher yielding taxable securities.
For the year ended December 31, 2000, Medicare health care costs outpaced premium rate increases primarily in California, where more members accessed more services from providers with whom we have shared-risk, rather than capitation contracts. Additionally, our California HMO became responsible for unpaid health care claims that were previously the responsibility of providers who became insolvent. Increased Medicare health care costs were partially offset by significant premium rate increases in Colorado, Oregon and Washington.
Selling, General and Administrative Expenses. For the year ended December 31, 2000, selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income) decreased compared to the prior year due to higher operating revenue in 2000.
Impairment, Disposition, Restructuring, OPM and Other Charges (Credits). We recognized net pretax charges of $9 million ($5 million or $0.15 diluted loss per share, net of tax) for the year ended December 31, 2000. See Note 9 of the Notes to Consolidated Financial Statements.
Operating Income. Operating income decreased 30% to $367 million for the year ended December 31, 2000, compared to the prior year. Factors contributing to the change are discussed above.
Significant Fourth Quarter Items. During the fourth quarter of 2000, our claims incurred but not reported increased by $21 million for periods prior to September 30, 2000, primarily due to increased utilization and cost of claims under risk-based hospital arrangements. This increase was partially offset by $15 million of reductions in related ancillary reserves, such as reserves for claims backlog and vision and mental health claims. Additionally, during the fourth quarter of 2000, our selling, general and administrative expenses decreased by $11 million, related to incentive compensation and other accruals.
Reconciliation of Reported Results to Pro Forma Results. In our fourth quarter 2000 earnings announcement, we disclosed pro forma results as described in the following table. See Note 9 of the Notes to Consolidated Financial Statements.
In December 2001, we entered into a 10-year contract to outsource our IT operations to IBM. Under the contract, IBM is the coordinator of our IT outsourcing arrangement, and will provide IT services and day-to-day management of our IT infrastructure, including data center operations, support services and information distribution. In January 2002, we entered into a 10-year contract to outsource our IT software applications maintenance and enhancement services to Keane, Inc. Our total cash obligations for base fees under these contracts over the 10-year terms will be $1.3 billion. For a table that describes our future contractual cash obligations, see Note 5 of the Notes to Consolidated Financial Statements. In connection with the IBM outsourcing contract, we sold IBM computer equipment with a net book value of $42 million. The consideration we received from IBM for the sale included $25 million in cash, and a note receivable for the $17 million balance. We will collect the note receivable in the form of credits against our base fee payments from 2002 through 2005.
We repurchased 4.0 million shares of our 	common stock in 2000 for $173 million under our stock 	repurchase program. No shares were repurchased in 2001;
There were no material proceeds from issuing 	common shares in 2001 compared to $2 million received in 	2000; and
Receivables, Net. Receivables as of December 31, 2001, net decreased $35 million from December 31, 2000 as follows:
$58 million decrease in premium receivables, 	primarily related to a reduction in membership and an increase 	in collection efforts to reduce the overall aging of our 	receivables, partially offset by premium rate increases; and
$36 million increase in trade receivables, 	due to higher rebates and increased billings for new 	unaffiliated pharmacy benefit management customers; and
Goodwill and Intangible Assets, Net. Goodwill and intangible assets as of December 31, 2001 decreased $80 million from December 31, 2000 due to goodwill and intangible amortization expense. As more fully described in Note 2 of the Notes to Consolidated Financial Statements, we expect to record impairment charges as the cumulative effect of a change in accounting principle in connection with our adoption of Statements of Financial Accounting Standard, or SFAS, No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Excluding any impairment charges, we expect application of the goodwill nonamortization provisions of SFAS No. 142 to result in an increase in net income of approximately $56 million in 2002.
$106 million decrease in claims incurred but 	not reported or not paid due to membership declines, claims 	processing productivity improvements that resulted in faster 	claims payments and the reduction of older, high dollar claims;
$23 million decrease in withhold pools due 	to the payment of administered claims for previously capitated 	providers that switched to fee-for-service arrangements and 	additional decreases related to risk program settlements, which 	offset provider receivables;
$27 million decrease in capitation 	liabilities primarily due to payments of capitation to settle 	contracts with terminated providers; and
Reserves relating to the OPM. We have commercial contracts with OPM to provide managed health care services to federal employees, annuitants and their dependents under the Federal Employee Health Benefits Program. Periodically, OPM’s Office of Inspector General, or OIG, audits us to verify that the premiums charged are calculated and charged in compliance with OPM’s regulations and guidelines. During the audit process, OPM has referred and may continue to refer its findings to the United States Department of Justice, or DOJ, if it believes that we may have knowingly overcharged the government or otherwise submitted false documentation or certifications in violation of the False Claims Act. The resolution of these matters could result in a material adverse effect on our results of operations or cash flows. In addition, we cannot be certain that additional audits will not be referred to the DOJ, or that additional, possibly material, liability will not be incurred.
Ordinary Course Legal Proceedings. From time to time, we are involved in legal proceedings that involve claims for coverage and tort liability encountered in the ordinary course of business. The loss of even one such claim, if it results in a significant punitive damage award, could have a material adverse effect on our business. In addition, our exposure to potential liability under punitive damage theories may significantly decrease our ability to settle these claims on reasonable terms.
We may substantially reduce our participation in the Medicare+Choice program, which without a replacement for any lost premiums resulting from reduced participation in that program with revenue from other sources could adversely affect our results of operations.
We have reduced our participation in the Medicare+Choice program, which has accounted for approximately 60% of our total premiums in each year since 1998, because of shortfalls in Medicare+Choice premiums compared to our rising health care service expenses and increased Medicare administration costs. Such shortfalls contributed to our decision to cease offering or close enrollment in our Medicare+Choice products in various counties in 2002, 2001 and 2000. These premium trends also contributed to changes in our benefits, copayments and deductibles.
We use our underwriting systems to establish and assess premium rates based upon accumulated actuarial data, with adjustments for factors such as claims experience and hospital and physician contract changes. We have made significant progress in enhancing our actuarial and underwriting capabilities so that we are able to better price our commercial products, particularly in light of the continuing shift away from capitated contracts to risk-based contracts, and make market exit decisions for our Medicare+Choice markets. The further development and implementation of these capabilities is an ongoing process that will continue for a period of time. To the extent that we are not able to develop and implement these capabilities in a timely and cost effective manner, our results of operations and cash flows may be materially and adversely affected.
the effect of premium increases, benefit changes 	and member-paid supplemental premiums and copayments on the 	retention of existing members and the enrollment of new members;
the member’s assessment of our benefits, 	quality of service, our ease of use and our network stability 	for members in comparison to competing health plans;
our limits on enrollment of new Medicare+Choice 	members in selected markets, through a combination of capacity 	waivers and voluntary closure notices;
reductions in work force by existing customers 	and/or reductions in benefits purchased by existing customers;
negative publicity and news coverage about us or 	litigation or threats of litigation against us;
Our results of operations could be adversely affected by increased health care costs caused by increased utilization of health care services under risk-based contracts.
In any particular market, health care providers could refuse to contract, demand higher payments, or take other actions that could result in higher health care costs or difficulty meeting regulatory or accreditation requirements. In some markets, some health care providers, particularly hospitals, physician/hospital organizations or multi-specialty physician groups, may have significant market positions. If health care providers refuse to contract with us, use their market position to negotiate favorable contracts, or place us at a competitive disadvantage, then our ability to market products or to be profitable in those markets could be adversely affected. Our provider networks could also be disrupted by the financial insolvency of large provider groups such as those that occurred recently in Texas. A reduction in our membership resulting from disruptions in our health care provider networks would reduce our revenue and increase the proportion of our premium revenue needed to cover our health care costs.
Our results of operations could be adversely affected by understatements in our actual liabilities caused by understatements in our actuarial estimates of IBNR claims.
If our claims processing system is unable to handle an increasing claims volume, we may become subject to additional regulatory actions or less able to accurately estimate claims liabilities and establish related reserves.
Overall, prescription drug costs have been rising for the past few years. The increases are due to the introduction of new drugs costing significantly more than existing drugs, direct consumer advertising by the pharmaceutical industry creating consumer demand for particular brand drugs, patients seeking medications to address lifestyle changes, higher prescribed doses of medications and enhanced pharmacy benefits for members such as reduced copayments and higher benefit maximums. As a way of controlling this health care cost component, we have implemented a significant decrease in prescription drug benefits for our Medicare+Choice members in almost all of our geographic areas in 2002. Despite these efforts, however, we may be unable to adequately control this health care cost component, which could adversely impact our profitability.
the success or lack of success of our marketing 	and sales plans to attract new customers, and create customer 	acceptance for new products;
our need for additional advertising, marketing, 	administrative or management information systems expenditures;
HIPAA includes administrative simplification provisions directed at standardizing transactions and codes and seeking protections for confidentiality and security of patient data. We expect to modify all of our information systems and business processes to comply with HIPAA regulations regarding standardizing transactions and codes. We also expect to incur expense developing systems and refining processes and contracts to comply with HIPAA. We currently estimate that our HIPAA compliance costs will approximate $27 million in 2002 as well as $3 million in capital expenditures. We continue to evaluate the work required to meet HIPAA requirements and mandated compliance timeframes. To the extent that our estimated HIPAA compliance costs are less than our actual HIPAA compliance costs, amounts we had budgeted for other purposes will need to be used for HIPAA compliance which may adversely affect our ability to execute portions of our business strategy or may increase our selling, general and administrative expenses.
Health care providers and members are currently attacking practices of the HMO industry through a number of lawsuits, including purported class action lawsuits brought against us and other HMOs. The
providing health care providers with financial 	incentives to restrict hospitalizations, referrals to specialist 	physicians, and prescriptions for high cost drugs;
entering into capitated contracts with health 	care providers, since capitated providers have financial 	incentives to limit health care services;
manipulating prescription drug formularies by 	removing drugs from formularies after members enroll;
manipulating determinations of whether health 	care services are medically necessary by excluding expensive 	procedures and treatments from being considered medically 	necessary; and
These lawsuits, including those filed to date against us, may take years to resolve and, depending upon the outcomes of these cases, may cause or force changes in practices of the HMO industry. These cases also may cause additional regulation of the industry through new federal or state laws. These actions and actions brought by state attorney generals ultimately could adversely affect the HMO industry and, whether due to damage awards, required changes to our operating procedures, increased regulatory requirements or otherwise, have a material adverse effect on our financial position, results of operations or cash flows and prospects.
Audits by the OIG of the premiums charged under our contracts with OPM could result in material liabilities to us.
We have commercial contracts with OPM to provide managed health care services to federal employees, annuitants and their dependents under the Federal Employee Health Benefits Program, or FEHBP. Periodically, OPM’s OIG audits us to verify that the premiums charged are calculated and charged in compliance with OPM’s regulations and guidelines. OPM has the right to audit the premiums charged during any period for up to six years following that period. The final resolution and settlement of audits have historically taken more than three years and as many as seven years. During the audit process, OPM has referred and may continue to refer its findings to the DOJ if it believes that we may have knowingly overcharged the government or otherwise submitted false documentation or certifications in violation of the False Claims Act. Under the False Claims Act, an action can be considered knowingly committed if the government contractor acted with actual knowledge, or with reckless disregard or deliberate ignorance of the government’s rules and regulations. If the government were to win a False Claims Act lawsuit against us, the government could obtain the amounts overcharged and a trebling of these damages, plus interest and substantial civil penalties. The government could also permanently disqualify us from participating in all federal government programs. We have a number of pending audits that we are seeking to resolve with the DOJ. These audits claim that substantial amounts were overcharged. In addition, the DOJ has indicated an intention to seek additional recoveries under the False Claims Act in relation to some of these audits, which could include up to a trebling of any amounts that are found to have been overcharged. The resolution of these matters could result in a material adverse effect on our results of operations or cash flows. In addition, we cannot be certain that additional audits will not be referred to the DOJ, or that additional, possibly material, liability will not be incurred. Such liability could have a material adverse effect on results of operations or cash flows.
We are subject to other litigation in the ordinary course of business that may result in material liabilities to us, including liabilities for which we may not be insured.
From time to time, we are involved in legal proceedings that involve claims for coverage encountered in the ordinary course of business. We, like other HMOs and health insurers generally, exclude payment for some health care services from coverage under our HMO and other plans. We are, in the ordinary course of business, subject to the claims of our members arising out of decisions to deny or restrict reimbursement for services. The shift away from capitated contracts to risk-based contracts may result in more claims of this nature as we increase our medical management capabilities and take a more active role in managing the cost of medical care. In addition, we may be subject to more claims of this nature from our Medicare+Choice members that will be litigated in state court, rather than under the Medicare Act’s administrative review process, based on a recent California Supreme Court decision that the United States Supreme Court declined to review. The loss of even one such claim, if it results in a significant punitive damage award, could have a material adverse effect on our business. In addition, our exposure to potential liability under punitive damage theories may significantly decrease our ability to settle these claims on reasonable terms. We maintain general liability, property, managed care errors and omissions and medical malpractice insurance coverage. We are at risk for our self-insured retention on these claims. Coverages typically include varying and increasing levels of self-insured retention or deductibles that increase our risk of loss.
Regulators could terminate or elect not to renew our Medicare contracts, change the program or its regulatory requirements, or audit our proposals for Medicare plans, all of which could materially affect our revenue or profitability from our Medicare+Choice products.
The Medicare program has accounted for approximately 60% of our total premiums in each year since 1998. CMS, the Department of Health and Human Services, or DHHS, and state regulatory agencies regulate the benefits provided, premiums paid, quality assurance procedures, marketing and advertising for our Medicare+Choice products. CMS may terminate our Medicare+Choice contracts or elect not to renew those contracts when those contracts come up for renewal every 12 months. The loss of Medicare contracts or changes in the regulatory requirements governing the Medicare+Choice program or the program itself could have a material adverse effect on our financial position, results of operations or cash flows.
Recent changes in state and federal legislation have increased and will continue to increase the costs of regulatory compliance, and proposed changes in the law may negatively impact our financial and operating results. These changes may increase our health care costs, decrease our membership or otherwise adversely affect our revenue and our profitability. Regulation and enforcement is increasing both at the state and federal level. Increased regulations, mandated benefits and more oversight, audits and investigations and changes in laws allowing access to federal and state courts to challenge health care decisions may increase our administrative, litigation and health care costs. The following recent or proposed legislation, regulation or initiatives could materially affect our financial position:
proposed legislation and regulation could include 	adverse actions of governmental payers, including reduced 	Medicare premiums, discontinuance of, or limitation on, 	governmentally funded programs, recovery by governmental payers 	of previously paid amounts, the inability to increase premiums 	or prospective or retroactive reductions to premium rates for 	federal employees;
new and proposed state legislation, regulation, 	or litigation that would otherwise limit our ability to capitate 	physicians and hospitals or delegate financial risk, utilization 	review, quality assurance or other medical decisions to our 	contracting physicians and hospitals;
state regulations that may increase the financial 	capital requirements of physicians and hospitals who contract 	with HMOs to accept financial risk for health services;
new and proposed legislation that permits and 	would permit independent physicians to collectively bargain with 	health plans on a number of issues, including financial 	compensation;
state and federal regulations that place 	additional restrictions and administrative requirements on the 	use, electronic retention, transmission and disclosure of 	personally identifiable health information, such as HIPAA, and 	federal regulations that enforce the current HIPAA 	administrative simplification deadlines of April 2003 for 	privacy compliance and October 2003 for data standards 	compliance;
new state and proposed federal laws mandating 	benefits including those that mandate equal coverage for mental 	health benefits, commonly called mental health parity; and
existing and proposed legislation that would 	limit our ability to manage care and utilization such as 	“any willing provider” and “direct access” 	laws.
We may take charges for long-lived asset impairments or dispositions, or restructurings that could materially impact our results of operations or cash flows.
In the future, we may announce dispositions of assets or product exits as we continue to evaluate whether our subsidiaries or products fit within our business strategy. We may also record long-lived asset impairment charges if one or more of our subsidiaries with operating losses generates less operating cash flows than we currently expect. In addition, as we refocus and retool our work force as part of attempting to improve our operating performance, we expect some positions to change or be eliminated, which could result in future restructuring charges. We cannot be certain that dispositions, impairments or restructuring activities will not result in additional charges. In addition, disposition or restructuring charges could have a material adverse effect on our results of operations or cash flows.
Our guidance for our 2002 operating results is based on a number of assumptions that are subject to risks and uncertainties, including the risks discussed above, and our actual results may differ materially from our guidance.
We expect our full-year 2002 diluted earnings per share to range between $3.55 and $3.65, including the positive impact of the elimination of goodwill amortization under SFAS No. 142, which amounts to approximately $1.60 per share. Our earnings per share expectations do not include any anticipated goodwill impairment charges during 2002. Excluding the effect of SFAS No. 142 altogether, our expected 2002 earnings per share range of $1.95 to $2.05 indicates that we expect to achieve at least 15% growth in operating income over 2001. Our guidance assumes that during 2002, total revenues will decline approximately 6%, or approximately $700 million, from 2001 revenues. We expect to lose approximately 150,000 commercial members and 130,000 Medicare members, primarily as a result of exits of unprofitable markets and products, increased premiums and benefit reductions, and for our membership declines to more than offset our premium increases. During 2002, as a result of our efforts to expand our health services portfolio, we expect our PBM, dental and behavioral health plan membership to increase by approximately 2.0 million, including both members covered by our commercial or Medicare HMOs, and members unaffiliated with our HMOs. In 2002, we expect the commercial medical loss ratio to range from 86% to 87%, and the Medicare medical loss ratio to range from 89% to 90%. Our expectation for selling, general and administrative expenses as a percentage of operating revenue for 2002 is that the percentage
we may not be able to refinance all or any 	portion of our indebtedness or do so on terms favorable to us, 	whether by issuing non-investment grade securities, equity 	securities, equity-linked securities or otherwise;
our level of indebtedness may make us more 	vulnerable to economic or industry downturns; and