Results of Operations-Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002
Cost of Care-Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
In addition to our four health business segments, our reportable segments include a Specialty segment that is comprised of businesses providing 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, which were part of our Specialty segment. The results of these businesses were not material to earnings of this segment or our consolidated results. Our Specialty segment is not delineated by geography.
Our Other segment is comprised of AdminaStar Federal, which administers Medicare programs in Indiana, Illinois, Kentucky, Ohio, Maine and New Hampshire; intersegment revenue and expense eliminations; and corporate expenses not allocated to our health or Specialty segments. In 2001, our Other segment also contained Anthem Alliance Health Insurance Company, or Anthem Alliance. Anthem Alliance primarily provided health care benefits and administration in nine states for the Department of Defense’s TRICARE Program for military families. We sold our TRICARE operations on May 31, 2001.
We offer a diversified mix of managed care products, including preferred provider organizations or PPOs, health maintenance organizations or HMOs, traditional indemnity benefits to members of our fully-insured products and point of service or POS plans. We also provide a broad array of managed care services to self-funded customers, including claims processing, underwriting, stop loss insurance, actuarial services, provider network access, medical cost management and other administrative services.
Our benefit expense includes costs of care for health services consumed by our members such as outpatient care, inpatient care, professional services (primarily physician care) and pharmacy benefit costs. All four components are affected both by unit costs and utilization rates. Unit costs include the cost of outpatient medical procedures per visit, inpatient hospital procedures per admission, physician fees per office visit and prescription drug prices. Utilization rates represent the volume of consumption of health services and typically vary with the age and health of our members and their social and lifestyle choices, along with clinical protocols and customs in each of our markets. A portion of benefit expense for each reporting period consists of actuarial estimates of claims incurred but not yet paid by us.
Our results of operations depend in large part on our ability to accurately predict and effectively manage health care costs through effective contracting with providers of care to our members. Several economic factors related to health care costs such as regulatory mandates for coverage and direct-to-consumer advertising by providers and pharmaceutical companies have a direct impact on the volume of care consumed by our members. The potential effect of escalating health care costs as well as any changes in our ability to negotiate competitive rates with our providers may impose further risks to our ability to profitably underwrite our business, and may have a material impact on our results of operations.
This management’s discussion and analysis should be read in conjunction with our audited consolidated financial statements for the years ended December 31, 2003, 2002 and 2001 included in Part II, Item 8, of this Form 10-K.
Under the Merger Agreement, WellPoint’s stockholders will receive consideration of twenty-three dollars and eighty cents in cash and one share of our common stock for each WellPoint share outstanding. The value of the transaction is estimated to be approximately $16.4 billion based on the closing price of our common stock on the New York Stock Exchange on October 24, 2003. On February 26, 2004, we received notification of early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The transaction is expected to close by mid-2004, subject to, among other things, state regulatory and shareholder approvals.
WellPoint reported the following financial results for the years ended December 31, 2003, 2002 and 2001:
On July 31, 2002, we completed the purchase of 100% of the outstanding stock of Trigon Healthcare, Inc., or Trigon. Trigon was Virginia’s largest health benefits company and was the Blue Cross and Blue Shield licensee in Virginia, excluding the immediate suburbs of Washington, D.C. With the acquisition we formed our Southeast segment. The Trigon acquisition allowed us to further expand our territory as a Blue Cross Blue Shield licensee. The results of operations for Trigon are included in our consolidated income statement after completion of the acquisition. 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 approximately $4,038.1 million, which included cash of approximately $1,104.3 million, the issuance of approximately 39.0 million shares of Anthem common stock, valued at approximately $2,708.1 million, Trigon stock options converted into Anthem stock options for approximately 3.9 million shares, valued at approximately $195.5 million and approximately $30.2 million of transaction costs. Refer to the Liquidity and Capital Resources section of this discussion for more information related to the sources of funds for this acquisition. See Notes 2 and 3 of our audited consolidated financial statements for the years ended December 31, 2003, 2002 and 2001, included in
Local Large Group consists of those customers with 51 or more employees eligible to participate as a member in one of our health plans.
Individual members include those who are under age 65 as well as members who are age 65 and over and have purchased Medicare Supplement benefit coverage.
The Federal Employee Program, or FEP, provides health insurance coverage to United States government employees and their dependents within our geographic markets through our participation in the national contract between the BCBSA and the U.S. Office of Personnel Management.
In addition to reporting our membership by customer type, we report membership by funding arrangement according to the level of risk that we assume in the product contract. Our two funding arrangement categories are fully-insured and self-funded. Fully-insured products are products in which we indemnify our policyholders against costs for health benefits. Self-funded products are offered to customers, generally larger employers, who elect to retain some or all of the financial risk associated with their employees’ health care costs. Some employers choose to purchase stop-loss coverage to limit their retained risk. These employers are reported with our self-funded business.
During the twelve months ended December 31, 2003, total membership increased approximately 874,000, or 8%, primarily in our National Accounts and Individual businesses.
Also contributing to our membership increase were Individual business enrollment gains of 118,000, or 11%, primarily due to the introduction of new, more affordable product designs and an overall increase in consumer awareness of our wide variety of quality products and services.
The following discussion summarizes our aggregate cost of care trends for the 12-month period ended December 31, 2003 compared to the 12-month period ended December 31, 2002, for our Local Large Group and Small Group fully-insured businesses only. Membership in these two customer groups represented approximately 60% of our premium income for the year ended December 31, 2003. In all of our cost of care trends presented below, we have included the necessary information associated with Trigon experience for both rolling 12-month periods, including periods prior to our July 31, 2002 acquisition. 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 consolidated cost of care trends as of December 31, 2003 are as follows:
Inpatient services costs increased approximately 10%. About 80% of this trend resulted from unit cost increases and about 20% resulted from utilization increases. The unit cost increases were primarily due to implementation of new provider contracts and a health care industry shift of lower-cost procedures to outpatient settings, resulting in a mix of more complex and expensive procedures being performed in inpatient settings. Utilization increases resulted primarily from increases in cardiovascular and orthopedic admissions. In response to increasing inpatient services costs, we have implemented and continue to expand our disease management programs, which are programs that address specific diseases such as diabetes and asthma, and our advanced care management programs, which are programs designed to focus on our members with needs for care in response to complex and acute health challenges. In addition, we continue to implement performance-based contracts that reward improved clinical outcomes, quality and patient safety.
Professional services costs increased approximately 10%. Our professional services trend increased approximately 45% due to utilization and approximately 55% due to unit cost. Utilization increases were driven primarily by increases in physician office visits, radiology procedures such as Magnetic Resonance Imaging, or MRIs, Positron Emission Tomography procedures, or PET scans, and laboratory procedures. Office visit utilization was driven by increased visits to cardiology, oncology and gastroenterology specialists. Unit cost increases were driven primarily by increases in physician reimbursement schedules. In response to increasing professional services costs, we continue to promote and implement performance-based contracts that reward clinical outcomes and quality; develop clinical affiliations to advance uniform, evidence-based medical care and preventive guidelines; and expand our collaborative relationships with professional medical societies.
V. Results of Operations-Year Ended December 31, 2003 Compared to the Year Ended
Administrative fees increased $218.5 million, or 23%, to $1,180.7 million in 2003. On a same-store basis, administrative fees increased $30.8 million, or 4%, primarily due to increased BlueCard activity and increased revenues from self-funded membership, some of which resulted from the shift of customers from fully-insured arrangements. These increases were partially offset by decreased administrative fees from AdminaStar Federal’s 1-800 Medicare Help Line contract with the Centers for Medicare and Medicaid Services, or CMS. During the fourth quarter of 2002, CMS awarded a new contract for this service to a competitor. The transition of this contract was substantially completed by June 30, 2003. Administrative fee increases were also partially offset by the termination of an East segment third party administrator arrangement in 2002.
Other revenue, which is comprised principally of co-payments and deductibles associated with Anthem Prescription Management’s, or Anthem Prescription’s, sale of mail-order drugs, increased $38.9 million, or 45%, to $126.2 million in 2003. Anthem Prescription is our pharmacy benefit management company that provides its services principally to members of other Anthem affiliates. On a same-store basis, other revenue increased $34.2 million, or 42%, primarily due to additional mail-order prescription volume and increased prices of prescription drugs sold by Anthem Prescription. Increased mail-order prescription volume resulted from both membership increases and additional utilization of Anthem Prescription’s mail-order pharmacy.
Administrative expense increased $603.0 million, or 24%, to $3,109.6 million in 2003. Included in the 2003 results was a $10.0 million contribution to Anthem’s charitable foundation made by our Southeast segment and a $10.0 million contribution to Anthem’s charitable foundation made by our East segment. Included in the 2002
Both basic and diluted net income per share for 2003 increased from 2002 primarily due to increased net income. These increases were partially offset by an increase in the number of weighted average shares primarily due to shares issued in connection with our Trigon acquisition outstanding for twelve months in 2003 and five months in 2002. Partially offsetting these increases in weighted average shares was our repurchase of shares of our common stock.
We use operating gain to evaluate the performance of our reportable segments, as described in FAS 131, Disclosure about Segments of an Enterprise and Related Information. Operating gain is calculated as total operating revenue less benefit and administrative expenses. It does not include net investment income, net realized gains on investments, gain (loss) on sale of subsidiary operations, interest expense, amortization of other intangible assets, income taxes and minority interest, as these items are managed in a corporate shared service environment and are not the responsibility of operating segment management. For additional information, see Note 18 to our audited consolidated financial statements for the years ended December 31, 2003, 2002 and 2001 included in this Form 10-K. The discussions of segment results for the years ended December 31, 2003 and 2002 presented below are based on operating gain and operating margin, which is calculated as operating gain divided by operating revenue. Our definitions of operating gain and operating margin may not be comparable to similarly titled measures reported by other companies.
Operating gain increased $67.1 million, or 30%, to $290.0 million in 2003, primarily due to improved underwriting results in our Local Large Group and Small Group businesses. Operating gain increases were partially offset by a $10.0 million contribution to Anthem’s charitable foundation during 2003.
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, 2003 and 2002 are as follows:
Operating gain increased $36.8 million, or 49%, to $111.5 million in 2003, primarily due to improved underwriting results in our Local Large Group and Individual businesses. Also contributing to the improvement
was a $10.1 million case-specific reserve established during the normal course of business during 2002 and a $6.3 million reduction of this reserve upon the resolution of this case in 2003. Partially offsetting these improvements to operating gain was a $10.9 million net favorable prior year reserve development recorded during the third quarter of 2002.
Operating revenue and operating gain for the year ended December 31, 2003 included issuance of premiums refunds to certain policyholders totaling $40.4 million, which partially offset our premium growth. These refunds were issued because claims costs in certain Southeast lines of business were much lower than expected. Also impacting 2003 operating gain was a $15.8 million net favorable prior year reserve development in the second quarter and a $10.0 million contribution to Anthem’s charitable foundation. Our integration activities remain on schedule, and we expect to achieve synergy savings in 2004 of at least $75.0 million. We achieved more than $60.0 million of synergy savings in 2003, primarily related to the reduction of corporate overhead and information technology costs as we integrated our Southeast segment.
Our Specialty segment includes our group life and disability insurance benefits, pharmacy benefit management, dental and vision administration services and behavioral health benefits services. On June 1, 2002, we created Anthem Behavioral Health, or ABH, by acquiring 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. Our Specialty segment’s summarized results of operations for the years ended December 31, 2003 and 2002 are as follows:
Operating revenue from external customers increased $7.4 million, or 4%, to $185.6 million in 2003, primarily due to cost reimbursement activity being reflected in our Medicare administration operations. This increase was partially offset by the loss of AdminaStar Federal’s 1-800 Medicare Help Line contract with CMS. During the fourth quarter of 2002, CMS awarded a new contract for this service to a competitor. The transition of
the contract was substantially completed by June 30, 2003. Elimination of intersegment revenues increased $155.7 million, or 52%, reflecting additional sales by Anthem Prescription to our health segments and sales between our health segments.
National Accounts membership increased 392,000, or 14%, primarily due to a significant increase in BlueCard activity.
Cost increases for professional services were approximately 12% 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 professional services trend was approximately one and one-half percentage points higher. This trend is due to both higher utilization and higher unit costs. Utilization increases were driven primarily by increases in physician office visits, radiology procedures such as Magnetic Resonance Imaging procedures, or MRIs, Positron Emission Tomography procedures, or PET scans, and laboratory procedures. Unit cost increases were driven primarily by increases in physician fee reimbursement schedules. In response to increasing professional services costs, we continue to work with our providers through education and contracting to ensure that our members receive the most appropriate care at the proper time in the appropriate clinical setting.
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 year ended December 31, 2002 were $5,271.0 million (including $730.7 million from our Southeast segment) and for the year ended December 31, 2001 were $3,937.1 million.
December 31, 2001 amounts include pro forma earnings per share for the period prior to our initial public offering. See Note 11 to our audited consolidated financial statements for the years ended December 31, 2003, 2002 and 2001 included in Part II, Item 8 of this 10-K.
On May 31, 2001, we sold our TRICARE operations, resulting in a gain of $25.0 million. The results of our TRICARE operations were reported in our Other segment during 2001 and included $263.2 million in operating revenue and $4.2 million in operating gain for the five months ended May 31, 2001.
Throughout the following discussion of our results of operations, “same-store” excludes our TRICARE operations from 2001 and the operating results of our Southeast segment, which was formed following our Trigon acquisition, from the date of purchase in 2002.
Administrative fees increased $144.9 million, or 18%, including administrative fees following Trigon’s acquisition date in 2002. On a same-store basis, administrative fees increased $98.2 million, or 13%, primarily due to increased BlueCard activity and increased administrative fees from AdminaStar Federal’s 1-800 Medicare Help Line contract with CMS. During the fourth quarter of 2002, CMS awarded a new contract for this service to a competitor. The transition of this contract was substantially completed by June 30, 2003.
Benefit expense increased $2,024.7 million, or 26%, in 2002. On a same-store basis, benefit expense increased $1,132.7 million, or 15%, primarily due to increased cost of care trends and higher average membership. Higher costs of care were driven primarily by higher costs in professional services and outpatient services. See “Cost of Care-Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001.” Our benefit expense ratio decreased 210 basis points from 84.5% in 2001 to 82.4% in 2002 due partly to the sale of our TRICARE operations in 2001 and the impact of our Trigon acquisition in 2002. On a same-store basis, our benefit expense ratio decreased 160 basis points from 84.2% in 2001 to 82.6% in 2002, primarily due to lower than anticipated medical costs in all of our business segments. Our 2002 benefit expense was also reduced by net favorable developments of prior year reserves reported as of December 31, 2001.
Net investment income increased $22.1 million, or 9%. This increase in investment income primarily resulted from the investment of additional assets in 2002 from our Trigon acquisition, which was partially offset by decreased average yield from investment securities. Also contributing to the increase was the impact of an increased allocation of fixed maturity securities as a percentage of our investment portfolio during the third quarter of 2001.
Amortization of goodwill and other intangible assets decreased $1.3 million. Due to our adoption of FAS 142 on January 1, 2002, amortization decreased approximately $17.5 million. This decrease was partially offset by $16.2 million of new amortization expense, including $15.8 million of amortization expense on intangible assets resulting from our Trigon acquisition. See Notes 2 and 3 to our audited consolidated financial statements for the years ended December 31, 2003, 2002 and 2001 included in Part II, Item 8, of this Form 10-K for additional information concerning our adoption of FAS 142.
We use operating gain to evaluate the performance of our reportable segments, as described in FAS 131, Disclosure about Segments of an Enterprise and Related Information. Operating gain is calculated as total operating revenue less benefit and administrative expenses. It does not include net investment income, net realized gains on investments, gain on sale of subsidiary operations, interest expense, amortization of goodwill and other intangible assets, demutualization expenses, income taxes and minority interest (credit), as these items are managed in a corporate shared service environment and are not the responsibility of operating segment management. For additional information, see Note 18 to our audited consolidated financial statements for the
years ended December 31, 2003, 2002 and 2001 included in this Form 10-K. The discussions of segment results for the years ended December 31, 2002 and 2001 presented below are based on operating gain and operating margin, which is calculated as operating gain divided by operating revenue. Our definitions of operating gain and operating margin may not be comparable to similarly titled measures reported by other companies.
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, 2002 and 2001 are as follows:
Operating gain increased $110.1 million, or 68%, primarily due to improved underwriting results in our Local Large Group fully-insured and Small Group businesses. Our operating gain was also impacted by the recognition of a $15.7 million net favorable prior year reserve development recognized in the third quarter of 2002 and an $11.2 million strengthening of reserves during the third quarter of 2001. Operating gain improvements were partially offset by a $23.0 million unfavorable adjustment recorded during 2002 to reflect the accrual of additional premium taxes in the state of Ohio.
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, 2002 and 2001 are as follows:
Operating gain increased $94.1 million, or 73%, primarily due to improved underwriting results, particularly in our Individual and Local Large Group businesses, and an unfavorable reserve strengthening adjustment of $9.4 million recorded during the third quarter of 2001.
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. These five months of operating results may not be sustainable or indicative of future performance, as we were in the early stages of transitioning business practices and policies. We captured approximately $11.0 million of synergies in 2002, primarily related to corporate overhead and information technology cost savings.
Operating revenue increased $127.4 million, or 32%, primarily due to increased mail-order prescription volume at Anthem Prescription, which launched mail-order campaigns to inform members of the benefits and convenience of using Anthem Prescription’s mail-order pharmacy option for maintenance drugs. In addition, Anthem Prescription increased its penetration of our health benefits members. Anthem Prescription implemented its pharmacy benefit programs in our West segment and in Maine during the first six months of 2001. Excluding the impact of our TRICARE operations, mail-service prescription volume increased 29% and retail prescription volume increased 10%.
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. In 2001, our Other segment also contained Anthem Alliance, a subsidiary that provided the health care benefits and administration in nine states for active and retired military employees and their dependents under the Department of Defense’s TRICARE program for military families. Our TRICARE operations were sold on May 31, 2001. Our summarized results of operations for our Other segment for the years ended December 31, 2002 and 2001 are as follows:
Operating revenue from external customers decreased $225.3 million, or 56%, primarily due to the sale of our TRICARE operations. Excluding our TRICARE operations from 2001, operating revenue from external customers increased $37.9 million, or 27%, primarily due to revenue from our AdminaStar Federal’s 1-800 Medicare Help Line contract with CMS. During the fourth quarter of 2002, CMS awarded a new contract for this service to a competitor. The transition of the contract was substantially completed by June 30, 2003.
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. Application of these accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes and within this Management’s Discussion and Analysis. We consider some of our most important accounting policies that require estimates and management judgment to be those policies with respect to liabilities for unpaid life, accident and health claims, income taxes, goodwill and other intangible assets, investments and retirement benefits, which are discussed below. Our significant accounting policies are also summarized in Note 1 to our audited consolidated financial statements for the years ended December 31, 2003, 2002 and 2001 included in Part II, Item 8 of this Form 10-K.
adverse circumstances. We determine the amount of the liability for incurred but not reported claims for each of our business segments by following a detailed actuarial process that entails using both historical claim payment patterns as well as emerging medical cost trends to project our best estimate of claim liabilities. Under this process, historical data of paid claims is formatted into claim triangles which compare claim incurred dates to the dates of claim payments. This information is analyzed to create “completion factors” that represent the average percentage of total incurred claims that have been paid through a given date after being incurred. Completion factors are applied to claims paid through the financial statement date to estimate the ultimate claim expense incurred for the current period. Actuarial estimates of claim liabilities are then determined by subtracting the actual paid claims from the estimate of the ultimate incurred claims.
As described above, the completion factors and trend factors can have a significant impact on the claim liability. The following example provides the estimated impact to our December 31, 2003 unpaid claims liability assuming hypothetical changes in the completion and trend factors:
Assumes (decrease) increase in the completion factors for the most recent four months
In addition, assuming a hypothetical 1% total difference between our December 31, 2003 estimated claims liability and the actual claims paid, net income for the year ended December 31, 2003 would increase or decrease by $12.1 million while basic net income per share would increase or decrease by $0.09 per share and diluted net income per share would increase or decrease by $0.08 per share.
The reconciliation of the beginning and ending balance for unpaid life, accident and health claims for the years ended December 31, 2003, 2002 and 2001, as presented in Note 8 to our audited consolidated financial statements is as follows:
A review of the current year paid indicates that the amount of claims paid in the current year as a percentage of incurred related to current year has increased. This ratio was 85.7% for 2003, 84.3% for 2002 and 83.1% for 2001. The increase is primarily attributable to our implementation of new systems and improved electronic connectivity with our networks. The result is our ability to adjudicate and pay claims quicker.
At each financial reporting date, we assess the adequacy of the valuation allowance by evaluating each of our deferred tax assets based on the key elements that follow:
We, like other companies, frequently face challenges from tax authorities regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions that we have taken on our tax returns. In evaluating any additional tax liability associated with our various filing positions, we record additional tax liability for potential adverse tax outcomes that we judge to be appropriate. Based on our evaluation of our tax positions, we believe we have appropriately accrued for possible exposures. To the extent we prevail in matters we have accrued for, our future effective tax rate would be reduced and net income would increase. If we are required to pay more than accrued, our future effective tax rate would increase and net income would decrease. Our effective tax rate and net income in any given future period could be materially impacted. As of December 31, 2003, the Internal Revenue Service continues its examination of two of our five open tax years.
For additional information, see Note 3 to our audited consolidated financial statements for the years ended December 31, 2003, 2002 and 2001 included in Part II, Item 8, of this Form 10-K.
volatility of securities markets increase the difficulty of determining fair value and assessing investment impairment. The same influences tend to increase the risk of potential impairment of these assets. During the three months ended June 30, 2003, we recorded a $22.3 million charge for other-than-temporary impairment of our equity securities, primarily due to the length of time that the securities’ fair value had been less than cost. An additional $2.1 million impairment loss was recorded for investments in certain other restricted assets and joint ventures. Our equity securities, which are comprised of indexed mutual funds, had gross unrealized gains of $26.2 million at December 31, 2003.
We have evaluated the impact on the fixed maturity portfolio’s fair value considering an immediate 100 basis point change in interest rates. A 100 basis point increase in interest rates would result in an approximate $276.0 million decrease in fair value, whereas a 100 basis point decrease in interest rates would result in an approximate $249.9 million increase in fair value. An immediate 10% decrease in each equity investment’s value, arising from market movement, would result in a fair value decrease of $19.4 million. Alternatively, an immediate 10% increase in each equity investment’s value, attributable to the same factor, would result in a fair value increase of $19.4 million.
We have audited the accompanying consolidated balance sheets of Anthem, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Anthem, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Notes 1 and 3 to the consolidated financial statements, on January 1, 2002 the Company adopted Statement of Financial Accounting Standards No. 141, Business Combinations, and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
Investments: All fixed maturity and equity securities are classified as “available-for-sale” and are reported at fair value. The Company has determined that all investments in its portfolio are available to support current operations and, accordingly, has classified such investment securities as current assets without regard for contractual maturities. The unrealized gains or losses on these securities are included in accumulated other comprehensive income as a separate component of shareholders’ equity unless the decline in value is deemed to be other-than-temporary, in which case the loss is charged to income. The Company evaluates its investment securities for other-than-temporary declines based on quantitative and qualitative factors. Investment securities that have declines in fair value below cost, which are deemed to be other-than-temporary, are written down to fair value.
Reinsurance Receivables: Reinsurance receivables represent amounts recoverable on claims paid or incurred and are estimated in a manner consistent with the liabilities associated with the reinsured policies. There was no allowance for uncollectible reinsurance receivables at December 31, 2003 and 2002.
Retirement Benefits: Prepaid pension benefits represent prepaid benefit costs for liabilities related to defined benefit pension plans. Liabilities for pension benefits are determined in accordance with FAS 87, Employers’ Accounting for Pensions.
Future policy benefits include liabilities for life and long term disability insurance policy benefits of $176.3 and $175.3 at December 31, 2003 and 2002, respectively, and represents primarily group benefits determined using standard industry mortality tables with interest rates ranging from 2.5% to 6.5%. Future policy benefits also include liabilities for insurance policies for which some of the premiums received in earlier years are intended to pay anticipated benefits to be incurred in future years. Future policy benefits are continually monitored and reviewed, and when reserves are adjusted, differences are reflected in benefit expense. The Company believes that its liabilities for future policy benefits, along with future premiums received, are adequate to satisfy its ultimate benefit liability, however, these estimates are inherently subject to a number of variable circumstances.
Administrative fees include revenue from certain group contracts that provide for the group to be at risk for all, or with supplemental insurance arrangements, a portion of their claims experience. The Company charges
these self-funded groups an administrative fee, which is based on the number of members in a group or the group’s claim experience. In addition, administrative fees include amounts received for the administration of Medicare or certain other government programs. Under the Company’s self-funded arrangements, revenue is recognized as administrative services are performed. All benefit payments under these programs are excluded from benefit expense.
Federal Income Taxes: Anthem and the majority of its subsidiaries file a consolidated income tax return. Deferred income tax assets and liabilities are recognized for the differences between the financial and income tax reporting bases of assets and liabilities based on enacted tax rates and laws. The deferred income tax expense or benefit generally represents the net change in deferred income tax assets and liabilities during the year. The current income tax expense represents the tax consequences of revenues and expense currently taxable or deductible on various income tax returns for the year reported.
Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the dilutive effect of stock options, restricted stock and purchase contracts included in Equity Security Units, using the treasury stock method. The treasury stock method assumes exercise of stock options, vesting of restricted stock and conversion of stock purchase rights under purchase contracts included in Equity Security Units, with the assumed proceeds used to purchase common stock at the average market price for the period. The difference between the number of shares assumed issued and number of shares assumed purchased represents the dilutive shares. Under long term incentive plans, when cumulative net income, as defined, meets or exceeds threshold targets, contingently issuable shares are dilutive to earnings per share.
On October 27, 2003, Anthem and WellPoint Health Networks Inc. (“WellPoint”) announced that they entered into a definitive agreement and plan of merger (“Merger Agreement”) pursuant to which WellPoint will merge into a wholly-owned subsidiary of Anthem. 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 preferred provider organizations, health maintenance organizations and point of service and other hybrid plans and traditional indemnity 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. Under the Merger Agreement, WellPoint’s stockholders will receive consideration of twenty-three dollars and eighty cents in cash and one share of Anthem common stock for each WellPoint share outstanding. The value of the transaction was estimated to be approximately $16,400.0 based on the closing price of Anthem’s common stock on the New York Stock Exchange on October 24, 2003. The transaction is expected to close by mid-2004, subject to, among other things, regulatory and shareholder approvals.
On July 31, 2002, Anthem completed its purchase of 100% of the outstanding stock of Trigon Healthcare, Inc. (“Trigon”), in accordance with an agreement and plan of merger announced April 29, 2002. Trigon was Virginia’s largest health care company and was the Blue Cross and Blue Shield licensee in Virginia, excluding the immediate suburbs of Washington, D.C. With the acquisition, the Company formed the Southeast segment.
converted into Anthem stock options for 3,866,770 shares, valued at $195.5 and $30.2 of transaction costs. On July 31, 2002, the Company issued $950.0 of long term senior unsecured notes which were used, along with the sale of investment securities and available cash, to fund the cash portion of the purchase price.
The following unaudited pro forma summary presents revenues, net income and per share data of Anthem as if the Trigon acquisition had occurred on January 1, 2001. The pro forma financial information is presented for informational purposes only and may not be indicative of the results of operations had Trigon been owned by Anthem for the full years ended December 31, 2002 and 2001, nor is it necessarily indicative of future results of operations. The pro forma information includes the results of operations for Trigon for the periods prior to the acquisition, adjusted for interest expense on long term debt and reduced investment income related to the cash and investment securities used to fund the acquisition, additional amortization and depreciation associated with the purchase and the related income tax effects.
The aggregate purchase price for these transactions was $22.1. Goodwill recognized in these transactions amounted to $14.1 of which $9.4 was deductible for tax purposes. Goodwill was assigned to the East and Specialty segments in the amounts of $10.7 and $3.4, respectively. The pro forma effects of the acquisitions on results for periods prior to the purchase dates are not material to the Company’s consolidated financial statements.
On May 31, 2001, Anthem Insurance and its subsidiary Anthem Alliance Health Insurance Company (“Alliance”), sold the TRICARE operations of Alliance to a subsidiary of Humana, Inc. for $45.0. The transaction, which closed on May 31, 2001, resulted in a pretax gain on sale of subsidiary operations of $25.0, net of selling expenses.
A summary of the change in the carrying amount of goodwill by reportable segment (see Note 18) for 2003 and 2002 is as follows:
The components of other intangible assets as of December 31, 2003 and 2002 are as follows:
As required by FAS 142, the Company completed its annual impairment test of existing goodwill and other intangible assets with indefinite lives during the fourth quarter of 2003. This test involved the use of estimates related to the fair value of the business with which the goodwill and other intangible assets with indefinite lives is allocated. There were no impairment losses recorded during 2003. In addition, for the year ended December 31, 2002, the Company completed its transitional impairment test during the second quarter of 2002 and its annual impairment test during the fourth quarter of 2002. There were no impairment losses recorded in 2002.
With the adoption of FAS 142 on January 1, 2002, the Company ceased amortization of goodwill. The intangible asset established for Blue Cross and Blue Shield trademarks is deemed to have an indefinite life and beginning January 1, 2002 is no longer amortized. Net income and earnings per share on a comparable basis as if FAS 142 had been adopted January 1, 2001 are as follows:
Aggregate amortization expense for definitive-lived intangible assets for 2003, 2002 and 2001 was $47.6, $30.2 and $31.5, respectively. As of December 31, 2003, estimated amortization expense for each of the five years ending December 31, is as follows: 2004, $44.3; 2005, $39.6; 2006, $37.1; 2007, $34.8; and 2008, $32.7.
The amortized cost and fair value of fixed maturity securities at December 31, 2003, by contractual maturity, are shown below. Expected maturities may be less than contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
Proceeds from sales of fixed maturity and equity securities during 2003, 2002 and 2001 were $4,115.0, $4,535.9 and $3,488.8, respectively. Gross gains of $60.4, $72.7 and $164.3 and gross losses of $18.2, $39.2 and $74.6 were realized on those sales in 2003, 2002 and 2001, respectively.
A summary of investments with unrealized losses as of December 31, 2003 along with the related fair value, aggregated by the length of time that investments have been in a continuous unrealized loss position, is as follows:
Surplus notes ($300.0 of 9.125% notes due 2010 and $200.0 of 9.000% notes due 2027) are unsecured obligations of Anthem Insurance and are subordinate in right of payment to all of Anthem Insurance’s existing
On July 15, 2003, $100.0 of 6.750% senior guaranteed notes of Anthem Insurance matured and were repaid by Anthem Insurance.
On July 31, 2002, Anthem issued $950.0 of long-term senior unsecured notes ($800.0 of 6.800% notes due 2012 and $150.0 of 4.875% notes due 2005). The net proceeds of $938.5 from the note offerings were used to pay a portion of the cash consideration and expenses associated with Anthem’s acquisition of Trigon.
On July 1, 2003, Anthem renewed its $600.0 revolving credit facility with its lender group, which now expires June 29, 2004. Any amounts outstanding under this facility at June 29, 2004 (except amounts that bear interest rates determined by a competitive bidding process) convert to a one-year term loan at Anthem’s option. Anthem’s $400.0 revolving credit facility, which expires November 5, 2006, continues to be effective. The Company can select from three options for borrowing under both facilities. The first option is a floating rate equal to the greater of the prime rate or the federal funds rate plus one-half percent. The second option is a floating rate equal to LIBOR plus a margin determined by reference to the ratings of Anthem’s senior, unsecured debt. The third option, is a competitive bid process, under which borrowings may bear interest at floating rates determined by reference to LIBOR, or at fixed rates. Anthem’s ability to borrow under these credit facilities is subject to compliance with certain covenants. There were no borrowings under any of these facilities during the years ended December 31, 2003 or 2002.
On December 18, 2002, Anthem filed a shelf registration with the Securities and Exchange Commission to register any combination of debt or equity securities in one or more offerings up to an aggregate amount of $1,000.0. Specific information regarding terms of the offering and the securities being offered will be provided at the time of the offering. Proceeds from any offering will be used for general corporate purposes, including the repayment of debt, investments in or extensions of credit to Anthem’s subsidiaries or the financing of possible acquisitions or business expansion.
On January 27, 2003, the Board of Directors authorized management to establish a $1,000.0 commercial paper program. Proceeds from any future issuance of commercial paper may be used for general corporate purposes, including the repurchase of debt and common stock of the Company. There were no borrowings under this commercial paper program during the year ended December 31, 2003.
Interest paid during 2003, 2002 and 2001 was $136.4, $71.1 and $57.4, respectively.
Future maturities of debt are as follows: 2004, $0.4; 2005, $150.9; 2006, $224.9; 2007, $0.7; 2008, $0.9 and thereafter $1,285.4.
The carrying value of all other financial instruments approximates fair value because of the relatively short period of time between the origination of the instruments and their expected realization. Fair values for securities, restricted investments and Equity Security Units are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from independent pricing services. The fair value of other debt is based on quoted market prices for the same or similar debt or, if no quoted market prices were available, on the current rates estimated to be available to the Company for debt of similar terms and remaining maturities.
On January 27, 2003, the Board of Directors approved, and on May 12, 2003 the shareholders approved, amendments to the Stock Plan including the following: (i) increase the number of shares of common stock available for distribution under the plan from 7,000,000 to 20,000,000; (ii) authorize the grant of shares of restricted and unrestricted common stock in lieu of the Company’s obligations to pay cash under other plans and compensatory arrangements, including the Company’s Annual Incentive Plan and Long Term Incentive Plan; and (iii) certain other changes necessary in order for the Stock Plan to comply with the requirements of Section 162 (m) of the Internal Revenue Code.
Information about stock options outstanding and exercisable as of December 31, 2003 is summarized as follows:
As of December 31, 2003, there were 15,361,907 shares of common stock available for future grants under the Stock Plan.
The Company has registered 3,000,000 shares of common stock for the Employee Stock Purchase Plan (“Stock Purchase Plan”) which is intended to provide a means to encourage and assist employees in acquiring a stock ownership interest in Anthem. The Stock Purchase Plan was initiated in June 2002 and any employee that meets the eligibility requirements, as defined, may participate. No employee will be permitted to purchase more than $25,000 (actual dollars) worth of stock in any calendar year, based on the fair market value of the stock at the beginning of each plan quarter. Employees become participants by electing payroll deductions from 1% to 15% of gross compensation. Payroll deductions are accumulated during each plan quarter and applied toward the purchase of stock on the last trading day of each plan quarter. Once purchased, the stock is accumulated in the employee’s investment account. The purchase price per share is 85% of the lower of the fair market value of a share of common stock on either the first or last trading day of the plan quarter. Employee purchases under the Stock Purchase Plan were $18.4 and $6.9, respectively, for 2003 and 2002. Shares of 344,627 and 135,593 were issued to employees during 2003 and 2002, respectively. As of December 31, 2003, payroll deductions of $1.4 have been accumulated toward purchases for the plan quarter ending February 29, 2004. As of December 31, 2003, there were 2,519,780 shares of common stock available for issuance under the Stock Purchase Plan.
The pro forma information regarding net income and earnings per share has been determined as if the Company accounted for its stock-based compensation using the fair value method. The fair value for the stock options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:
On January 27, 2003, the Board of Directors authorized the repurchase of up to $500.0 of stock under a program that will expire in February 2005. Under the program, repurchases may be made from time to time at prevailing prices, subject to certain restrictions on volume, pricing and timing. During 2003, the Company repurchased and retired 3,390,800 shares, at an average per share price of $64.06, for an aggregate cost of $217.2. The excess of cost of the repurchased shares over par value is charged on a pro rata basis to additional paid in capital and retained earnings. Under this program, an additional $282.8 remains authorized for future repurchases. Under a previously completed stock repurchase program, the Company repurchased and retired 4,121,392 shares at a cost of $256.2 during the year ended December 31, 2002.
Effective July 31, 2002, as partial consideration for the purchase of Trigon, the Company issued 1.062 shares of Anthem common stock for each Trigon share outstanding, resulting in additional outstanding shares of 38,971,908. The $2,708.1 fair value of the common shares issued was determined based on the average closing price of Anthem’s common stock for the five trading days ranging from two days before to two days after the terms of the acquisition were agreed to and announced. Offering costs of $4.1 reduced the aggregate fair value and $2,704.0 was recorded as par value of common stock and additional paid in capital.
On November 2, 2001, Anthem completed an initial public offering of 55,200,000 shares of common stock, at an initial public offering price of $36.00 per share. The shares issued in the initial public offering were in addition to 48,095,675 shares of common stock (which was adjusted slightly as distribution issues were finalized) distributed to eligible statutory members in the demutualization. In addition, on November 2, 2001, Anthem issued 4,600,000 of 6.00% Equity Security Units. Each Equity Security Unit contains a purchase contract under which the holder agrees to purchase, for fifty dollars, shares of Anthem common stock on November 15, 2004. The number of shares to be purchased will be determined based on the average trading price of Anthem common stock at the time of settlement.
Weighted-average shares used for basic earnings per share assumes that shares distributed to eligible statutory members as consideration in the demutualization were issued on the effective date of the demutualization. Weighted-average shares used for basic earnings per share also assumes that adjustments, if any, to the common stock distributed in the demutualization occurred at the beginning of the quarter in which changes were identified.
weighted-average number of shares outstanding for basic earnings per share. However, they are included, from the grant date, in determining diluted earnings per share using the treasury stock method. The stock options are dilutive in periods when the average market price exceeds the grant price. The restricted stock awards are dilutive when the aggregate fair value exceeds the amount of unearned compensation remaining to be amortized. The shares to be contingently issued under long term incentive plans are dilutive when cumulative earnings meet or exceed threshold targets. The purchase contracts included in the Equity Security Units are dilutive to Anthem’s earnings per share, because the average market price of Anthem’s common stock exceeds a stated threshold price of $43.92 per share.
The net decrease in the valuation allowance for 2003 and 2002 was $81.9 and $112.4, respectively. The valuation allowance is attributable to the uncertainty of alternative minimum tax (“AMT”) credits and net operating loss carryforwards. As deferred tax assets related to these type of deductions are recognized in the tax return, the valuation allowance is no longer required and is reduced. During 2003, the valuation allowance
change was due to utilization of AMT credits and net operating loss carryforwards and the entire amount was recorded as additional deferred tax liabilities. During 2002, $18.0 of the change in the valuation allowance was recorded as a reduction to goodwill (see Note 3). This adjustment resulted from recognition of deferred tax assets previously determined to be unrealizable. In addition, during 2002, $57.2 of the decrease was recorded as deferred tax liabilities and $37.2 was recorded as a reduction to income tax expense.
Due to uncertainties, including industry issues, regarding both the timing and amount of deductions, the benefit of the valuation allowance releases were not reported in income but were recorded as deferred tax liabilities. The industry issues include the valuation and timing of tax deductions for intangibles in existence as of the conversion of Blue Cross Blue Shield organizations to taxable status, and the Special Tax Deduction for Blue Cross Blue Shield entities under Internal Revenue Code Section 833(b).
In certain states, the Company pays premium taxes in lieu of state income taxes. Premium taxes are reported with administrative expense.
The Company leases office space and certain computer equipment using noncancelable operating leases. Related lease expense for 2003, 2002 and 2001 was $51.3, $47.3, and $45.2, respectively.
A subsidiary of the Company acquired with the Trigon acquisition is a fifty percent limited partner in a partnership that owns a property occupied by the Company’s subsidiary. Under an operating lease with the limited partnership, the Company incurred lease expense of $2.0 and $0.8 during 2003 and 2002, respectively.
Anthem Insurance sponsors a defined benefit pension plan. Anthem Health Plans of New Hampshire, Inc. and Anthem Health Plans of Virginia, Inc. sponsored defined benefit pension plans prior to their merger with the Anthem Insurance plan.
The reconciliation of the funded status to the net benefit cost recognized is as follows:
The weighted-average assumptions used in calculating the net periodic benefit cost for all plans, are as follows:
The assumed health care cost trend rates used to measure the expected cost of other benefits at the measurement date are as follows:
The health care cost trend rate assumption can have a significant effect on the amounts reported. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
An important factor in determining the Company’s pension expense is the expected long-term rate of return on plan assets. The Company uses a total portfolio return analysis in the development of its assumption. Factors such as past market performance, the long-term relationship between fixed maturity and equity securities, interest rates, inflation and asset allocations are considered in the assumption. The assumption includes an estimate of the additional return expected from active management of the investment portfolio. Peer data and historical returns are also reviewed for appropriateness of the selected assumption. The expected long-term rate of return is calculated by the geometric averaging method, which calculates an expected multi-period return, reflecting volatility drag on compound returns. On September 30, 2003, the Company lowered its assumption of the expected long-term rate of return on plan assets to 8.00% from 8.50% for purposes of determining 2004 net periodic benefit costs. The Company believes its assumption of future return on plan assets is reasonable.
In addition to producing a reasonable return, the investment strategy seeks to minimize the volatility in the Company’s expense and cash flow. To reduce the impact of interest rate and market fluctuations, during 2003 the Company increased the duration and allocation of fixed maturity securities to more closely match the sensitivity of plan assets with the plan obligations.
As of the measurement date, the Company’s weighted-average targeted asset allocation and actual allocation by asset category are as follows:
The 21% allocation in the other category for pension benefits in 2002 represents cash contributed by the Company on the measurement date that was subsequently invested 22% in fixed maturity, 73% in equity securities, and 5% in other.
incentive and performance bonuses to providers and the Company’s staff members involved in making utilization management decisions; an alleged failure to maintain accurate books and records whereby improper payments to the plaintiffs were made based on claim codes submitted; and an alleged failure to provide senior personnel to work with plaintiffs and other similarly situated physicians. The Company appealed the class certification decision, and on September 22, 2003, the Connecticut Supreme Court reversed the class certification decision, and remanded the matter back to the trial court for further proceedings. The trial court is to consider four claims, and determine whether the claims are appropriate for treatment as class claims.
On September 26, 2002, Anthem, Inc. was added as a defendant to a MDL class action lawsuit pending in Miami, Florida brought on behalf of individual doctors and several medical societies. Other defendants include Humana, Aetna, Cigna, Coventry, Health Net, PacifiCare, Prudential, United and WellPoint. The managed care litigation around the country has been consolidated to the U.S. District Court in Miami, Florida, under MDL rules. The Court has split the case into two groups, a “provider track” involving claims by doctors, osteopaths, and other professional providers, and a “subscriber track” involving claims by subscribers or members of the various health plan defendants. The complaint against Anthem and the other defendants alleges that the defendants do not properly pay claims, but instead “down-code” claims, improperly “bundle” claims, use erroneous or improper cost criteria to evaluate claims and delay paying proper claims. The suit also alleges that the defendants operate a common scheme and conspiracy in violation of the Racketeer Influenced Corrupt Organizations Act (“RICO”). The suit seeks declaratory and injunctive relief, unspecified monetary damages, treble damages under RICO and punitive damages. The court certified a class in the provider track cases on September 26, 2002, but denied class certification in the subscriber track cases. Defendants in the provider track cases sought, and on November 20, 2002 were granted, an interlocutory appeal of the class certification in the Eleventh Circuit. Due to the Company’s late addition to the case, it was not included in the September 26, 2002 class certification order, and is therefore not part of the appeal; however, the Company may be affected by the outcome of the appeal. The appeal was argued to the Eleventh Circuit panel on September 11, 2003; a ruling will issue in due course.
On May 22, 2003, in a case titled Kenneth Thomas, M.D., et al., v. Blue Cross Blue Shield Association, et al., several medical providers filed suit in federal court in Miami, Florida against the Blue Cross Blue Shield Association and Blue Cross Blue Shield Plans across the country, including the Company. The suit alleges that the BCBS Association and the BCBS Plans violated RICO and challenges many of the same practices as other suits in the MDL. On May 8, 2003, in a case titled Dr. Allen Knecht, et al., v. Cigna, et al., several chiropractors filed a purported class action in federal court in Portland, Oregon, naming several Blue Cross Blue Shield Plans, including the Company, as well as several commercial insurers. This case also alleges that the defendants violated RICO and challenges many of the same practices in regards to chiropractors. Both cases have been transferred to the MDL docket and are now assigned to Judge Moreno in Miami. Both cases are in the early stages of the pleadings.
On October 17, 2003, in a case titled Jeffrey Solomon, D.C., et al., v. Cigna, et al., several chiropractors and a podiatrist, along with chiropractic and podiatric associations, filed suit in federal court in Miami, Florida, against ten managed care corporations, including the Company. The suit alleges that the companies violated RICO and challenges many of the same practices as other suits in the MDL. On November 4, 2003, in a case titled Jeffrey Solomon, D.C., et al., v. Blue Cross Blue Shield Association, et al., several chiropractors, podiatrists, a psychologist and a physical therapist, along with their professional corporations and trade associations, filed suit in federal court in Miami, Florida against the Blue Cross Blue Shield Association and Blue Cross Blue Shield Plans across the country, including the Company. The suit alleges that the BCBS Association and the BCBS Plans violated RICO and challenges many of the same practices as other suits in the MDL. Both cases have been transferred to the MDL docket and are now assigned to Judge Moreno. Both cases are in the early stages of the pleadings.
On March 11, 1998, Anthem Insurance and its Ohio subsidiary, Community Insurance Company (“CIC”) were named as defendants in a lawsuit, Robert Lee Dardinger, Executor of the Estate of Esther Louise Dardinger v. Anthem Blue Cross and Blue Shield, et al., filed in the Licking County Court of Common Pleas in Newark, Ohio. The plaintiff sought compensatory damages and unspecified punitive damages in connection with claims alleging wrongful death, bad faith and negligence arising out of CIC’s denial of certain claims for medical treatment for Ms. Dardinger. On September 24, 1999, the jury returned a verdict for the plaintiff, awarding $1,350 (actual dollars) for compensatory damages, $2.5 for bad faith in claims handling and appeals processing, $49.0 for punitive damages and unspecified attorneys’ fees in an amount to be determined by the court. The court later granted attorneys’ fees of $0.8. An appeal of the verdict was filed by the defendants on November 19, 1999. On May 22, 2001, the Ohio Court of Appeals (Fifth District) affirmed the jury award of $1,350 (actual dollars) for breach of contract against CIC, affirmed the award of $2.5 compensatory damages for bad faith in claims handling and appeals processing against CIC, but dismissed the claims and judgments against Anthem Insurance. The court also reversed the award of $49.0 in punitive damages against both Anthem Insurance and CIC, and remanded the question of punitive damages against CIC to the trial court for a new trial. Anthem Insurance and CIC, as well as the plaintiff, appealed certain aspects of the decision of the Ohio Court of Appeals. On October 10, 2001, the Supreme Court of Ohio agreed to hear the plaintiff’s appeal, including the question of punitive damages, and denied the cross-appeals of Anthem Insurance and CIC. In December 2001, CIC paid the award of $2.5 compensatory damages for bad faith and $1,350 (actual dollars) for breach of contract, plus accrued interest. On December 20, 2002, the Ohio Supreme Court ruled, reinstating the judgment against both Anthem Insurance and CIC, but remitted the punitive damages from $49.0 to $30.0, plus interest. The Court also ruled that the plaintiff would receive $10.0 of the judgment, the plaintiff’s attorneys would receive their contingency fee on the $30.0 plus interest, and that the remainder of the award would be given to The Ohio State University Hospital for a charitable fund named after Esther Dardinger. Anthem Insurance and CIC paid the remitted judgment in full on March 28, 2003 and a Satisfaction of Judgment was filed with the Licking County Court of Common Pleas on April 7, 2003. Following the payment and Satisfaction of Judgment, this matter has been terminated and in March 2003, the Company released pretax reserves of $24.5 to income, which resulted in an after tax benefit of $0.11 per diluted share for the twelve months ended December 31, 2003.
On October 25, 1995, Anthem Insurance and two Indiana affiliates were named as defendants in a lawsuit titled Dr. William Lewis, et al. v. Associated Medical Networks, Ltd., et al., that was filed in the Superior Court of Lake County, Indiana. The plaintiffs are three related health care providers. The health care providers assert that the Company failed to honor contractual assignments of health insurance benefits and violated equitable liens held by the health care providers by not paying directly to them the health insurance benefits for medical treatment rendered to patients who had insurance with the Company. The Company paid its customers’ claims for the health care providers’ services by sending payments to its customers as called for by their insurance policies, and the health care providers assert that the patients failed to use the insurance benefits to pay for the health care providers’ services. The plaintiffs filed the case as a class action on behalf of similarly situated health care providers and seek compensatory damages in unspecified amounts for the insurance benefits not paid to the class members, plus prejudgment interest. The case was transferred to the Superior Court of Marion County, Indiana, where it is now pending. On December 3, 2001, the Court entered summary judgment for the Company on the health care providers’ equitable lien claims. The Court also entered summary judgment for the Company on the health care providers’ contractual assignments claims to the extent that the health care providers do not hold effective assignments of insurance benefits from patients. On the same date, the Court certified the case as a class action. As limited by the summary judgment order, the class consists of health care providers in Indiana who (1) were not in one of the Company’s networks, (2) did not receive direct payment from the Company for services rendered to a patient covered by one of the Company’s insurance policies that is not subject to ERISA, (3) were not paid by the patient (or were otherwise damaged by the Company’s payment to its customer instead of to the health care provider), and (4) had an effective assignment of insurance benefits from the patient. The Company filed a motion seeking an interlocutory appeal of the class certification order in the Indiana Court of
government’s ongoing review. The Company is currently cooperating with the OIG and the U.S. Department of Justice on these matters. The ultimate outcome of these reviews cannot be determined at this time.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of investment securities and premium receivables. All investment securities are managed by professional investment managers within policies authorized by the Board of Directors. Such policies limit the amounts that may be invested in any one issuer and prescribe certain investee company criteria. Concentrations of credit risk with respect to premium receivables are limited due to the large number of employer groups that constitute the Company’s customer base in the geographic regions in which it conducts business. As of December 31, 2003, there were no significant concentrations of financial instruments in a single investee, industry or geographic location.
The Company’s principal reportable segments are strategic business units primarily delineated by geographic areas that essentially offer similar insurance products and services. They are managed separately because each geographic region has unique market, regulatory and health care delivery characteristics. The geographic regions are: the Midwest region, which operates primarily in Indiana, Kentucky and Ohio; the East region, which operates primarily in Connecticut, New Hampshire and Maine; the West region, which operates in Colorado and Nevada; and the Southeast region, which operates in Virginia, excluding the immediate suburbs of Washington, D.C. The Southeast region was added with the July 31, 2002 acquisition of Trigon.
In addition to its four principal reportable geographic segments, the Company operates a Specialty segment, which includes business units providing group life and disability insurance benefits, pharmacy benefit management, dental and vision administration services and behavioral health benefits services. Various ancillary business units (reported with the Other segment) consist primarily of AdminaStar Federal which administers Medicare programs in Indiana, Illinois, Kentucky, Ohio, Maine and New Hampshire and Anthem Alliance, which provided health care benefits and administration in nine states for the Department of Defense’s TRICARE Program for military families. The TRICARE operations were sold on May 31, 2001. The Other segment also includes intersegment revenue and expense eliminations and corporate expenses not allocated to reportable segments.
defined above. The Company evaluates investment income, interest expense, amortization expense and income taxes, and asset and liability details on a consolidated basis as these items are managed in a corporate shared service environment and are not the responsibility of segment operating management.
Amounts for 2002 represent segment results for the five month period after the completion of the Trigon acquisition on July 31, 2002.
Statutory-basis capital and surplus for Anthem’s insurance subsidiaries was $3,346.6 and $2,991.8 at December 31, 2003 and 2002, respectively. Statutory-basis net income of Anthem’s insurance subsidiaries was $565.0, $538.9 and $406.9 for 2003, 2002 and 2001, respectively. Statutory-basis capital and surplus of Anthem’s insurance subsidiaries are subject to regulatory restrictions with respect to amounts available for dividends to Anthem. Anthem’s insurance subsidiaries’ risk-based capital as of December 31, 2003 was in excess of all mandatory risk-based capital thresholds.
The Company formed Anthem Foundation, Inc. (the “Foundation”), an Indiana non-profit organization exempt from federal taxation under Section 501(c)(3) of the Internal Revenue Code, to conduct, support and assist charitable, health-related, educational, and other community-based programs and projects. The officers of the Foundation are also officers of the Company. These officers receive no compensation for the management services performed for the Foundation but are reimbursed for any cash expenditures incurred on behalf of the Foundation. The Foundation is not a subsidiary of the Company and the financial results of the Foundation are not consolidated with the Company’s financial statements. For 2003, 2002 and 2001, the Company contributed $24.0, $0.1 and $0.3, respectively, to the Foundation. The Company has no current legal obligations for future commitments to the Foundation.