Healthcare - Managed Care 2013.12

Please see General Disclaimers on the last page of this report.
Current Environment ............................................................................................ 1

Industry Profile .................................................................................................... 22
Industry Trends ................................................................................................... 24
How the Industry Operates ............................................................................... 41
Key Industry Ratios and Statistics ................................................................... 47
How to Analyze a Managed Care Company .................................................. 49
Glossary ................................................................................................................ 55
Industry References ........................................................................................... 57
Comparative Company Analysis ...................................................................... 59
This issue updates the one dated May 2013.
The next update of this Survey is scheduled for May 2014.

Industry Surveys
Healthcare: Managed Care
Phillip M. Seligman, Managed Health Care Equity Analyst

NOVEMBER 2013
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Topics Covered by Industry Surveys
Aerospace & Defense
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Apparel & Footwear:
Retailers & Brands
Autos & Auto Parts
Banking
Biotechnology
Broadcasting, Cable & Satellite
Chemicals
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Computers: Consumer Services &
the Internet
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Computers: Software
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Environmental & Waste Management
Financial Services: Diversified
Foods & Nonalcoholic Beverages
Healthcare: Facilities
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Tools & Services
Healthcare: Managed Care
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Household Nondurables
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Investment Services
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Paper & Forest Products
Publishing & Advertising
Real Estate Investment Trusts
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Retailing: General
Retailing: Specialty
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Telecommunications: Wireless
Telecommunications: Wireline
Thrifts & Mortgage Finance
Transportation: Commercial
Global Industry Surveys
Airlines: Asia
Autos & Auto Parts: Europe
Banking: Europe
Food Retail: Europe
Foods & Beverages: Europe
Media: Europe
Oil & Gas: Europe
Pharmaceuticals: Europe
Telecommunications: Asia
Telecommunications: Europe

S&P Capital IQ Industry Surveys
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INDUSTRY SURVEYS HEALTHCARE: MANAGED CARE / NOVEMBER 2013 1
CURRENT ENVIRONMENT
Evolution in managed care
The federal government, through passage of the Patient Protection and Affordable Care Act (ACA) in 2010,
is attempting to strengthen the overall US healthcare system by setting regulations that will govern the
industry. The first set of provisions took effect on September 23, 2010, with more implemented in 2011 and
subsequent years. As these new rules have begun to take effect, managed care organizations (MCOs) are
being forced to evolve and adapt to the changing conditions. S&P Capital IQ (S&P) believes that all sectors
of the healthcare industry are being affected, but the managed care group will see the greatest impact.
The cloud of uncertainty surrounding the legality of the healthcare reform law was removed by the June
2012 decision of the US Supreme Court to uphold the individual mandate provision of the law, while also
giving states the choice to opt out of the Medicaid expansion plan. (The decision is discussed in more detail
below.)
Until late 2007, a confluence of trends helped the managed care industry thrive: a strong economy, pricing
discipline, moderating medical cost trends, enrollment gains (including an influx of Medicare and Medicaid
beneficiaries into private managed care programs), geographic expansion, and ongoing consolidation.
Disciplined control of administrative functionsincluding above-average cost cuts and information system
upgradeswas another positive driver.
Then, a recession began in December 2007. Although it officially ended in June 2009, unemployment rates
rose until October 2009 before trending down, albeit slowly. This rise in unemployment created obstacles to
growth for MCOs, as commercial
membership rolls dropped meaningfully.
However, the number and percentage of
those insured increased in 2012, to
263.2 million and 84.6%, respectively,
from 260.2 million and 84.3% in 2011.
According to the US Census Bureau,
2011 was the first year in 10 years that
the percentage of those insured did not
decline, and 2012 showed further
progress.
The Henry J. Kaiser Family Foundation
(KFF), a nonprofit healthcare research
and analysis firm, attributed this reversal
of trend mainly to the provisions of the
ACA, and to the decline in income levels
in 2011, making more Americans
eligible for coverage. We think that this reversal was due primarily to the ACA requiring insurers to allow
parents to keep adult children on their plans until age 26. Such gains have more than offset the continued
loss of employer-sponsored coverage (at least so far), particularly among adults aged 45 to 64. Moreover,
we believe the gains were more profitable for the insurers as the newly insured younger members tend to be
healthier, as a group, than the existing or lost enrollment.
According to the Census Bureau, the percentage and number of people covered by Medicaid in 2012 were
not statistically different from 2011, at 16.4% and 50.9 million, while the percentage and number of people
covered by Medicare increased in 2012 to 15.7% and 48.9 million, from 15.2% and 46.9 million in 2011.
We believe the trend in Medicaid is as expected, given the declining unemployment rates and that real
median family and nonfamily household incomes in 2012 were not statistically different from 2011 levels.
Chart H06: THE
UNEMPLOYMENT
SITUATION
(1,250)
(1,000)
(750)
(500)
(250)
0
250
500 4
5
6
7
8
9
10
11
2008 2009 2010 2011 2012 2013
Net change in nonfarm employees (thousands, right scale)
Unemployment rate (%, left scale)
THE UNEMPLOYMENT SITUATION
Source: US Bureau of Labor Statistics.
(Inverted scale, thousands) (%)

2 HEALTHCARE: MANAGED CARE / NOVEMBER 2013 INDUSTRY SURVEYS
The rise in the number and percentage of Medicare beneficiaries is also unsurprising, as seniors account for
an increasing percentage of the US population.
Impact of the ACA on employers in 2014
The reforms set to take effect in 2014 under the ACA would impose a penalty on large employers (those
with 500 or more employees) that do not offer affordable health insurance to their employees. Further, the
reforms would provide premium tax credits to lower-income persons in order to enable them to buy
insurance in state exchanges if affordable employer coverage is unavailable to them.
According to the National Institute for Health Care Reform (NIHCR), a nonprofit health policy research
organization, the ACA provides large firms with a strong economic incentive (averaging $2,503 per
employee) to provide insurance to employees. However, small firms (with fewer than 50 employees) will
have less economic incentive (averaging $990 per employee), in large part because these employers will be
exempt from the penalty. The NIHCR defines the economic incentive or disincentive as the amount
calculated by adding the dollar value of the employer-sponsored insurance tax subsidy and the value of
avoiding the penalty for not offering insurance, and then subtracting the value of the premium tax credits
that eligible workers could use in an exchange if their employer does not offer coverage.
Hence, we would not be surprised if some small businesses opt for the healthcare penalty if the total cost of
the penalties is below that of the cost of their premiums, as noted in an April 2013 Wall Street Journal
article. We are also not surprised by the findings of the US Chamber of Commerces Q2 2013 Small
Business Outlook Survey, published in July 2013. In the survey, 79% of respondents said that the ACA
will make coverage for their employees more expensive, while 71% felt that the law will make it harder for
them to hire; in addition, 27% indicated that they will cut hours to reduce their number of full-time
employees and 23% will replace full-time employees with part-timers.
The Wall Street Journal reported on May 27, 2013, that small businesses seeking to avoid the ACAs
provisions at least for a while are considering offers by some insurers to allow them to renew their
contracts in December 2013, rather than in January, when they would normally renew. The article went on
to note that some state regulators and benefits lawyers question the tactic, highlighting that Illinois and
Rhode Island are disallowing early health plan renewals for small businesses. Separately, a Wall Street
Journal article published on May 28 noted that some insurers have begun to offer small companies the
opportunity to self-insure. Under self-insurance, employers pay benefits firms or health insurers a fee to
administer the plans, but the employers are fully responsible for paying for their employees medical costs.
Under the ACA, companies that self-insure do not have to offer the richer benefits that will be required of
traditional health insurance, in which the insurer is paid a premium and absorbs the medical cost risks. Self-
insurance has long been a popular practice among large employers. They absorb the risks, but it gives them
more control over their benefit offerings, is less costly than traditional insurance, and the costs are broadly
spread over a large employee base. The risk to a small firm is that it will have to more fully absorb the
sizable medical bills of an employee who has a serious accident or disease.
HEALTHCARE REFORM ARRIVES
Healthcare reform, as defined by the Patient Protection and Affordable Care Act, which was signed into law
by President Obama on March 23, 2010, requires most US citizens and legal residents to have minimum
essential health insurance coverage. Accompanying that bill was the Health Care and Education Reconciliation
Act of 2010, which was signed into law on March 30, 2010. (To simplify, both Acts will be referred to as
the ACA in this Survey.)
In February 2013, the nonpartisan Congressional Budget Office (CBO), a research arm of Congress, and the
staff of the Joint Committee on Taxation (JCT) estimated that the ACA (including only those provisions
related to healthcare in the Reconciliation Act) would have a gross cost of around $1.6 trillion (about $60
billion lower than the projection in August 2012) and would increase the deficit to around $1.2 trillion (about
the same amount as projected in August 2012) over the 11-year period from 2013 to 2023. The CBO and JCT
believe that more people will obtain health insurance through the newly established health insurance

exchanges and that the reductions in spending from lower Medicaid enrollment are expected to outweigh
the increased costs from greater participation in the exchanges. It also expects more people to be uninsured.
US Supreme Court finds healthcare reform law constitutional
On June 28, 2012, the US Supreme Court upheld the constitutionality of the ACA in a 54 vote. The court
upheld the individual mandate provision, which will require Americans who can afford health insurance to
purchase it as of 2014, saying Congress could impose the mandate under its power to lay and collect taxes
(as provided in the US Constitution). However, the court rejected the part of the law that made it mandatory
for the states to expand their Medicaid programs to include citizens under age 65 with family incomes below
138% of the federal poverty level under the threat of losing their Medicaid funding. The court ruled that this
part was unconstitutional because it was coercive. The states now have the option to join the expanded plan
and receive enhanced federal funding.
What does healthcare reform do?
The ACA requires most individuals and their families to have health insurance, and imposes financial
penalties on those who choose not to purchase it. The law also requires employers to provide coverage for
their employees, with tax breaks to help them provide it and penalties if they do not. It expands Medicaid
eligibility and provides funding to states to set up special health plans to cover those ineligible for Medicaid,
but too poor to pay for their own coverage. It also sets up exchanges where individuals and employers may
obtain health insurance at competitive prices. It prevents insurers from limiting, dropping, or refusing to
provide coverage, and allows dependent children to remain on their parents plans until they are 26.
The reform legislation includes the following features: an insurance program from 2010 to 2014 for adults
who have been without insurance for at least six months and who have a pre-existing condition; a provision
for children under 19 having a pre-existing condition; an early-retiree reinsurance program; and discounts
on prescription drugs to Medicare Part D beneficiaries when the beneficiaries reach the coverage gap. The
rules and regulations regarding coverage will be phased in over a multiyear period.
The legislation originally aimed to cover 94% of all non-elderly residents (excluding undocumented
immigrants) by reducing the number of uninsured by an estimated 32 million by 2019, or 34 million by
2021. We note that an estimated 23 million people would still have remained uncovered in 2019. However,
according to the CBO, the Supreme Court decision would lead to an increase in the number of uninsured:
29 million in 2019 and 30 million in 2023.
To further its goal of higher enrollment, the ACA includes provisions for Medicaid coverage, reduced
premium costs, and lower cost-sharing for families that cannot afford health insurance coverage (those with
incomes ranging from 100% to 400% of the federal poverty level). According to the June 2012 ruling by
the US Supreme Court, states have the option of providing Medicaid coverage to most people with income
levels below 138% of the poverty level. According to a study by the KFF published in November 2012, if all
states agreed to the expansion, Medicaid coverage would increase by 41%, and an additional 21.3 million
people would get coverage by 2022. Beginning January 1, 2014, the ACA would include lower premium
costs through tax credits to people with income levels up to 400% of the poverty level and insurance plans
with reduced cost-sharing to people with income levels up to 250% of the poverty level.
As of this writing, each state has its own laws to regulate how insurance companies set premium rates for
those seeking coverage, including such factors such as their health condition and demographic status.
However, starting on January 1, 2014, federal law will govern the premium rates applied to individuals and
small businesses. As per the ACAs minimum premium rating rule, premium rates can vary based on only
the following four factors: individual versus family enrollment, geographic area, age, and tobacco use. Also
effective from January 1, 2014, under the revised ACA guaranteed issue laws, all individual and small-group
applicants will be guaranteed the issuance of policies, irrespective of their health status or any other factors.
Many will buy their insurance via public (state-based) and private exchanges
Starting October 1, 2013, individuals without employer-covered health insurance and some small businesses
have been able to shop for health insurance for the 2014 calendar year (starting January 1) through online
marketplaces known as health insurance exchanges. The health insurance exchange concept was set into law

by the ACA. Some states (14 states and the District of Columbia) operate their own exchanges; in other
states, the federal government has set up and runs the public exchanges directly (26 states), or worked in
partnership with some states (10 states) to establish and run the exchanges.
In addition to the public exchanges, private exchanges offering health plans conforming to the ACA
regulations have been created by human resource consultancies to offer choices for the employees of many
mid-sized and large companies. The employer mandatethe requirement that employers with 100 or more
workers obtain health insurance for their employeeswas delayed to 2015. Also delayed was the
implementation of the Small Business Health Options Program, or SHOP exchange, which would give
employees of small businesses (less than 50 employees, but up to 100 in 2016) a choice of health plans in
the states where the federal government is involved in operating the exchanges. However, a few states
running their own exchanges, including California and Connecticut, have offered the employee choice
model for small businesses for the 2014 plan year, though it is not required by the federal government.
When one applies for insurance from the exchange, the application will require such information as
household size, income, location, and citizenship status. Those earning between 100% of the federal poverty
level, or FPL ($11,490 in 2013 for an individual and $23,550 for a family of four in the 48 contiguous
states and the District of Columbia) to 400% ($45,960 and $94,200, respectively) will be eligible for a
subsidy in the form of a tax credit called the Advance Premium Tax Credit. This tax credit is applied to the
monthly premiums, enabling the applicant to get the lower insurance price immediately. Hence, for
applicants with incomes within the ranges, the net price they will have to pay is below the full price listed in
the exchange. Those with incomes above the ranges pay the full listed price out of pocket. Participating
MCOs receive the full premium price, whether or not part of it is subsidized.
On the public exchanges, the health plans are grouped by levels of coverage, including how much the plan
will pay for ones healthcare and what services are covered. All of the health plans have to offer the same
essential benefits, but each can provide additional benefits to attract buyers. Each level is named after a
metal (Bronze, Silver, Gold, and Platinum), and they vary by the percentage of costs one has to pay, on
average, for the healthcare received. Bronze plans offer the lowest coverage, and platinum the most, and the
plans vary by the percentage of costs one pays on average toward the healthcare one receives. At the bronze
level, one pays 40% of the costs out-of-pocket whenever one sees a doctor or purchases a medicine, while at
the platinum level, one pays only 10%. However, bronze has the lowest premium, and platinum the highest.
On the exchanges, the health plans are organized by metal level, then by brand (i.e., by insurer), and then by
type of health plan, such as HMO, PPO, POS, or high-deductible plans with a savings account.
Interestingly, an analysis of the 1,923 plans being sold on 34 federally run exchanges (published in October
2013 by KFFs daily online newsletter, Kaiser Health News) found that the exchange plans vary within
counties and across the country, even if they are the same type of plan. This is unsurprising, since the cost of
living differs in different parts of the US. In any event, 806 of these plans are HMOs and 714 are PPOs.
S&P believes there will be plenty of healthier enrollees in the public exchanges to keep the ratio of healthy
and sick applicants in the risk pool relatively steady. Some businesses that employ a large percentage of
part-timers and provide insurance for those employees are likely to opt to drop that insurance coverage and,
instead, provide a small subsidy to help them purchase insurance through the public exchanges. One outfit
following this path is Trader Joes, a closely held grocery-store chain, which will provide these workers with
a $500 stipend. In addition, various news sources report that to save on employee costs, a number of
employers (including some public school systems) have been reducing their part-time workers hours to
under 30 per week (regardless of whether they previously provided health insurance to such workers). These
workers are being encouraged to obtain subsidized health insurance via the public exchanges. (The ACA
requires firms to provide employer coverage to employees working 30 hours per week or more.)
As noted earlier, in addition to the public exchanges, multi-insurer private (or corporate) exchanges have
been created by human resource consultancies Aon Hewitt, Towers Watson, and Mercer, a division of
Marsh & McLennan Companies Inc. The insurance offered via the private exchanges must comply with the
ACA and state regulations. One major difference between the two types is that the government does not
subsidize the purchase of policies in private exchanges. Instead, employers will give eligible employees a

fixed amount for individual or family coverage, regardless of the plan, and the employee chooses among the
differently priced plans offered by the various insurers participating in the private exchange. The employee
contributes from his or her salary, on a pre-tax basis, the difference between the price of insurance
premiums and the subsidy from the employer. This model has been referred to as defined contribution
health care, given its similarity to a 401(k) retirement plan, wherein employers monetize their commitment
in the form of a defined contribution rather than a defined benefit, as defined in a report by the Society for
Human Resource Management, a trade group. We believe the use of private exchanges will have a neutral
impact on MCOs profitability.
According to CBO estimates as of May 2013, seven million people would buy health insurance through the
public exchanges for the 2014 health plan year, while employment-based coverage would total 157 million.
The CBO estimated, as of May 2013, that public exchange enrollment by individuals and their families
would reach 24 million by 2023, while employment-based coverage would increase by 12 million, to 169
million.
but the selection in the public exchanges might be somewhat limited at first
For the 2014 health plan year, some large publicly traded MCOs, including Aetna Inc., Cigna Inc., and
UnitedHealth Group Inc., severely limited their participation in the public exchanges. S&P believes they
wanted to test the waters first to see the profitability of exchange participation. Indeed, UnitedHealth pulled
out of Californias individual market in early July 2013, while Aetna has exited seven of the 14 public
health insurance exchanges in which it originally intended to participate. However, Coventry Health Care,
which was acquired by Aetna in 2012, also filed plans under its own name for some exchanges. Aetna
decided to drop out of some states where Coventry filed plans and dropped Coventry plans in some states
where it decided to file plans under its own name. All told, Aetna and Coventry combined have plans
available statewide in 10 states and with limited geographies in seven others. Cigna Corp. is selling plans in
only five states, half of the states in which it had been selling individual plans. In any event, these MCOs
have a relatively small presence in the individual market. Humana Inc. and WellPoint Inc., which have large
individual businesses, appear to be more committed to the public exchanges. All large MCOs will be
actively participating in the private exchanges, however.
The large, publicly traded MCOs were not alone in pulling out of exchanges in which they initially planned
to participate. Interestingly, FirstCarolinaCare Insurance Co., a subsidiary of the private, not-for-profit
healthcare services network FirstHealth of the Carolinas, exited the public exchange of its home state,
North Carolina. However, Coventry Health Care of the Carolinas, a part of Aetna, remained in the
exchange. FirstHealthcares exit appears to us to parallel Aetnas exit from the public exchange of its home
state, Connecticut.
Some smaller, publicly traded MCOs with a significant percentage of Medicaid enrollment (such as Molina
Healthcare Inc., Health Net Inc., and Centene Corp.) are participating in the public exchanges for the 2014
plan year, while WellCare Health Plans Inc. is not. However, Health Net has been a long-term player in the
individual, non-Medicaid market. At its September 19, 2013, investor meeting, Molina indicated that it is
not participating in the exchanges to get new Medicaid beneficiaries (which are assigned by the states), but
mainly to retain members they are poised to lose due to a change in status (e.g., new employment that gives
the member an income too high to qualify for Medicaid). Those members may wish to remain with their
insurers to keep their providers (doctors and hospitals), and we do not see pent-up demand from them.
However, given these MCOs Medicaid market experience, we believe they are reasonably well equipped to
handle the initial pent-up demand from the previously uninsured who sign up with them through the public
exchanges.
The transition begins
A number of companies have already begun to transition employees and/or retirees (both those under 65
years of age and those Medicare-eligible) to private exchanges. The public exchanges are not available for
Medicare beneficiaries. Those without access to private exchanges could continue to go to Medicare.gov
during its open enrollment period, which began October 15. Early users of Aon Hewitts exchange for the
2013 plan year include employees of Sears Holding Corp. and Darden Restaurants. International Business

Machines Corp., Time Warner Inc., Caterpillar Inc., and E.I. du Pont de Nemours and Co. are among those
large companies reported to be moving their retirees to private exchanges run by Aon Hewitt and the other
consultancies for the 2014 plan year. Walgreen Co. has announced that it will give employees a
contribution toward coverage in a private exchange. Employers are also raising deductibles, giving workers
health savings accounts that look like 401(k) retirement plans, setting up private in-house exchanges that
mimic the online insurance exchanges, and encouraging workers to compare prices and shop around for
treatments, according to a September 17, 2013 article in Kaiser Health News.
Note, though, that the ACA does not require companies with fewer than 50 workers to offer coverage for
their workers. It created online exchanges for the small employers to purchase insurance similar to policies
offered through the online exchanges for individuals. However, employees of small businesses will be unable
to choose from multiple plans in most states until 2015.
but there will still be millions who remain uninsured
Adults living with dependent children and single adults with disabilities whose income falls below 100% of
the FPL, or all adults with incomes below 138% in states that accepted the ACAs Medicaid eligibility
expansion, can qualify for his or her states Medicaid program. This can be determined when one applies
for insurance via a public exchange. S&P believes only a very small percentage of those applying through
the exchanges will fall into the below-100% category. In any event, once a person is deemed eligible for
Medicaid, that person does not choose his or her health plan. The state assigns the Medicaid coverage either
through direct coverage or to an insurer operating in the new Medicaid beneficiarys home county. That
said, S&P believes MCOs will continue to see enrollment expansion from states still transitioning their
Medicaid populations to private insurers.
However, in many states, impoverished adults under 65 years of age, without disabilities and without
dependent children, are currently ineligible for Medicaid. Under the ACA, their coverage would be
subsidized if their incomes are at least 100% of the FPL. However, the Commonwealth Fund, a private
foundation supporting research on healthcare issues, estimates that some two in five uninsured adults who
are living in the 26 states that have decided not to expand their Medicaid programs (or are undecided) will
not have access to Medicaid or to subsidized health insurance plans on the public exchanges. The CBO
projected in May 2013 that the number of uninsured non-elderly people (including unauthorized
immigrants, as well as people who are eligible for but not enrolled in Medicaid) will decline from 55 million
in 2013 to 30 million by 2017, and will remain in the 30 million31 million range through 2023.
RESISTANCE TO THE ACA BECOMES SHARPER
The implementation of the healthcare reforms contained in the ACA became more certain with the Supreme
Court decision on the ACAs constitutionality in June 2012 and President Obamas re-election in November
2012. Nevertheless, resistance to the ACA has continued. At the federal level, in March 2013, the US Senate
rejected Republican Paul D. Ryans attempt to repeal the ACA.
The fight later became more extreme. From September 20 to October 1, 2013, the Republican-controlled US
House of Representatives sent a bill to raise the federal debt ceiling four times to the Democratic-led Senate.
However, it also included provisions to strip financing for the ACA in the first attempt, to delay the healthcare
law by one year and repeal the tax on medical devices in the second attempt, to delay the individual mandate
in the third attempt, and to cancel subsidies for lawmakers in the fourth attempt. In each of the first three
times, the Senate stripped the healthcare provisions and sent the bill back to the House.
The government shutdown began at 12 a.m. October 1, and later that morning, the Senate rejected the
House measure. Senate Majority Leader Harry Reid (D., Nevada) and President Obama refused to negotiate
on the ACA and sought a clean spending bill. Neither side was giving in and many federal government
departments and services shut down. On October 17, after the Democratic-led Senate passed an agreement
between Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell (R., Kentucky) to end
the tense political standoff by an 8118 vote, the House voted 285144 to pass the deal, and President
Obama quickly signed it.

Interestingly, a conservative group of House Republicans, known as the Republican Study Committee,
unveiled a healthcare reform alternative on September 18, 2013, called American Health Care Reform
Act. This calls for the full repeal of the ACA and, instead, would provide $20,000 in tax deductions to
families and a $7,500 deduction to individuals, so they can purchase insurance from vendors in any state. It
also creates a 10-year, $25 billion fund to lower costs for those with pre-existing conditions such as cancer,
and allows consumers to carry their insurance from job to job. On October 15, this proposed bill was
referred to the Subcommittee on Regulatory Reform, Commercial and Antitrust Law. As this Survey went
to press in mid-November 2013, the bill had not yet been reviewed on the floor of the House of
Representatives.
Meanwhile, at the state level, the setting up of insurance exchanges had generated opposition, with 26 states
defaulting to fully federally built and operated exchanges for individuals and families without employment-
based insurance. Another example of state resistance, according to an article published September 17, 2013, in
the New York Times, is Florida, which is not participating in the exchange program (thus leaving the federal
government fully responsible for setting one up in the state and running it). In addition, however, the state has
required that health navigators (i.e., individuals assigned to help people enroll in the exchanges) undergo
fingerprinting and criminal background checks, and bars them from conducting any business on property
controlled by the state or county health agencies. In an article posted on the website of The Hill, a
Washington, D.C.based newspaper that specializes in coverage of the US Congress, at least 18 states have
taken steps to restrict the counselors activities or have imposed additional training. And, among these states,
several that are Republican-led have imposed criminal background checks and examination requirements
that exceed whats mandated by federal law. The Republicans have argued that they are trying to protect
people from fraud and that without this additional scrutiny, the program could admit felons as counselors.
Indeed, in October 2013, the websites of several conservative media outlets (Fox News and the National
Review) provided examples of some people they felt should not have been hired as navigators.
Republican-led states, for the most part, have continued to oppose Medicaid expansion to cover people with
incomes up to 138% of the FPL. For example, the Republican governor of Texas, Rick Perry, rejected
Medicaid expansion in his state. Even Republicans who support Medicaid expansion, such as Florida
Governor Rick Scott, faced opposition from the Republican-controlled Florida House and Senate.
As of September 23, 2013, the governors of 22 states and the District of Columbia supported Medicaid
expansion, 12 opposed, and 16 were weighing options. Many governors opposing expansion said they could
not support expansion without program reforms, legislative approval, or permission to use the Medicaid funds
to purchase private health insurance, according to KFFs statehealthfacts.org website. Interestingly, despite the
laws unpopularity in Southern states, the expansion of Medicaid is supported by about two-thirds of adults in
Alabama, Georgia, Louisiana, Mississippi, and South Carolina, according to the Joint Center for Political and
Economic Studies, a think tank. Separately, according to the a May 23, 2013, Politico article, many states
mired in the fight over Medicaid expansion are starting to give up on their first year of full funding, and its
unclear whether they would be able to tap into the funds before 2015. This could mean the loss of hundreds of
millions, and in some cases, billions, of dollars to cover low-income residents. The challenge many face is the
set-up of the infrastructure to accommodate the influx of enrollees.
and some once in favor are having second thoughts
Having once supported the ACA, some unions are now concerned that it will jeopardize benefits for millions
of their members, according to a May 24, 2013, Associated Press article. The problem is that multi-employer
plans, which cover over 20 million unionized workers in retail, construction, transportation, and other
industries with seasonal or temporary employment, are more costly to run than single-employer plans. They
have been facing higher costs as a result of certain ACA mandates: that health plans cover dependents up to
age 26, extend coverage to people with pre-existing conditions, and eliminate annual and lifetime coverage
limits. The unions fear that employers will be tempted to drop coverage and have members fend for themselves
in the health insurance exchanges. Interestingly, while workers seeking coverage through the exchanges can
qualify for subsidies, the ACA does not allow union members to receive similar subsidies. S&P believes these
union plans will not disappear quickly, as workers are covered under collective bargaining agreements. The

New York Times reported that on September 13, 2013, the US Treasury Department denied federal tax credits
to workers who receive health coverage under employee benefit plans sponsored by more than one employer.
While not exactly resisting the ACA, some large employers may be now considering offering bare-bones plans,
according to a May 20, 2013, article in the Wall Street Journal. Some such plans may offer only preventative
services, and not cover surgery, X-rays, or prenatal care. The ACA requires only plans sold to small employers
and individuals to be comprehensive. Apparently, a close reading of the law reveals that companies with 50 or
more workers, which would have to provide coverage or pay a penalty, are not affected by the mandates of
essential benefits. Indeed, employers in low-wage industries have been concerned how they can afford these
benefits, and some of the policies being offered cost less than the penalty. Interestingly, such plans look to us
like the so-called mini-med plans currently provided by low-wage industries.
THE PUBLIC EXCHANGES OPEN WITH A BANG
The partial government shutdown did not delay the October 1 launch of the public healthcare exchanges,
whereby individuals will be able to purchase health insurance for themselves and their families. The President
and the US Senate did not budge and the exchange process is moving ahead, despite resistance to the
healthcare reform law, including attempts to delay its implementation by the Republican-controlled House.
Indeed, the US Department of Health & Human Services (HHS) has announced the opening of the exchanges
with fanfare.
However, there have been problems, as S&P and others expected, given the glitches in the federally run system
that were discovered while the system was being tested. One software glitch was the problem in determining
the level of subsidy one could receive if he or she had income in the 100%400% of the federal poverty level.
Many problems have likely been fixed, but various news sources have been reporting heavy on-line exchange
traffic on the first couple of days, suggesting better-then-expected demand, and system problems the first days
the exchanges were open. S&P believes many of the system problems relate to possible initial system overload.
S&P views this, plus the long wait times at call centers, making the individual attempts to purchase insurance
during that time difficult.
On October 15, the HHS set the deadline of November 30 to fix the system and appointed one of the
companies behind HealthCare.gov (the name of the federally run exchange website) as the general
contractor for the repairs. That company is Quality Software Services Inc. (also known as QSSI Inc.),
which was acquired by giant MCO UnitedHealth Group Inc. in September 2012, after the MCO was
selected to help set up HealthCare.gov. (The acquisition was not announced by UnitedHealth, S&P believes,
because it was small. Jenner & Block, the law firm representing QSSI in the takeover, announced it on
October 9.) QSSI had been behind the sites problematic account registration tool and its data hub, which
allows information to be transferred between different groups, but which officials said is functioning well,
according to an article posted October 25 on the website of The Hill. In this regard S&P is not surprised
that some Republican senators became concerned that QSSI might have access to information or would
build the technology in a way that would give UnitedHealths insurance business an advantage, according to
an article posted October 25 on the Washington Post website. In addition, computer engineers from tech
companies Google, Oracle, and Red Hat have been enlisted to help with the tech surge to fix the system.
S&P has viewed the technical glitches as fixable.
People who wish to be covered as of January 1 have until December 15 to sign up and pay for their first
month of the 2014 health plan year. As this Survey went to press in mid-November, the HHS had released the
enrollment data on the public exchanges covering the period of October 1 to November 2, approximately the
first month of open enrollment. According to the HHSs November 13 press release, only 106,185 Americans
had selected plans from the state and federal Health Insurance Marketplaces (the HHSs term for the public
health insurance exchanges) during that period: 79,391 enrolled through exchanges run solely by 14 states and
26,794 enrolled in federally run exchanges in the other 36 states and the District of Columbia. According to a
Wall Street Journal report on November 13, one HHS memo had projected that some 500,000 people would
obtain private health insurance coverage. However, HHS notes another 975,407 made it through the process
of applying and receiving an eligibility determination, but have not yet selected a plan. (Note that the health
insurers will not count any of those that enrolled as members until they pay their first months premium.)

S&P Capital IQ believes the much smaller federal figure relates to the technical issues plaguing the federal
marketplaces (the state marketplaces, in contrast, had very few problems). We also think that those who did
not yet select a plan are still determining which one would be the most suitable. This is likely to be time-
consuming process: the associated provider networks may differ, and consumers may be trying to determine
which set of doctors and hospitals would cover most, if not all, of their needs. While we view the sign-up
figures to date as a bit disappointing, people are looking. HHS reported that there were 26,876,727 visitors to
the state- and federally run exchange websites, and an estimated 3,158,436 calls to state and federal exchange
call centers. We also think the low initial enrollment numbers may reflect the pattern seen in Massachusetts,
when that state initiated healthcare reform. According to a New York Times article published November 14,
2013, when that state expanded health coverage in 2007, only 127 people (of the 36,167 who ultimately
enrolled) signed up in the first month, while 7,000 signed up in the last month. The federally run exchanges
technical issues might also explain some of the difference between what was expected and what occurred.
Meanwhile, another problem cropped up. Millions of currently covered Americans were informed by their
insurers that their plans would be dropped as of January 1, primarily because the plans did not meet all of
the ACAs essential benefits requirements. This move by the insurers ran counter to President Obamas
promise that those who liked their insurance can keep it, and he expressed regret on an NBC News interview
on November 7. Congress wanted to legislate a change. On November 4, US Senator Mary L. Landrieu (D-
Louisiana) introduced the Keeping the Affordable Care Act Promise Act to keep the promise that if a
policyholder liked his or her health insurance, he or she could keep it as long as payments were up-to-date.
On November 7, US Senators Joe Manchin (D-West Virginia) and Mark Kirk (R-Illinois) introduced
legislation to delay the implementation of the individual mandate from January 1, 2014, to January 1,
2015. On November 8, Representative Fred Upton (R-Michigan) introduced his Keep Your Health Plan
Act, which would enable people to keep their old insurance as long as they want; it passed the House on
November 14. President Obama promised to veto it if it came across his desk.
On November 14, President Obama announced changes to the ACA to give insurers the option to keep
offering consumers plans that would otherwise be cancelled, even if they do not include all of the essential
benefits. This administrative change is only good for a one-year extension. The term optional suggests to
us that the insurers have a choice to offer it to some plans and not others. However, as this Survey went to
press, some state insurance commissioners were for the policy change and some were against. The health
insurance industry, though not unanimous, was expressing concern that the younger, healthier people will
be interested in keeping old policies, which could overburden the new plans with a greater-than-expected
proportion of high-cost members. We note that the Wall Street Journal reported on November 18 that so-
called high risk pools for people rejected by health insurance companies that were supposedly being phased
out as ACA rules kicked in are being given brief second lives in some states due to problems with the federal
exchanges. S&P believes this should help temporarily reduce the costliest members as a percentage of the
total population enrolling through the federal exchanges until the system is fully fixed. In addition, the ACA
provides for a $20 billion fund, paid for by a reinsurance tax imposed on health insurers and employers
who self-insure from 2014 to 2016, that would provide money to insurers that incur high claims for
consumers in the individual insurance market, both inside and outside the public exchanges.
However, open enrollment continues through March 31, 2014, and people have been encouraged to try to
access the system again if they encounter problems the first time. In any event, the CBO expects seven million
people to obtain coverage for the 2014 health plan year through the public exchanges, and has not yet revised
the figure.
PAYING FOR IT ALL
The federal government plans to provide significant financial help directly to eligible individuals (in the form
of premium and cost-sharing tax credits), employers (tax credits), and states (assumption of a greater
percentage of Medicaid and Childrens Health Insurance Program costs). In addition, the ACA fines
individuals who do not opt for purchasing coverage and employers who offer no coverage to their
employees. Since these fines will constitute only a small percentage of the total cost of healthcare reform, the
money has to come from elsewhere.

To compensate for the overall cost, the law has imposed certain rules in the form of cuts and deductions
that will affect different groups across the industry. For instance, the ACA calls for closing the coverage gap
in the Medicare Part D prescription drug benefit (the so-called donut holethe difference between the
initial coverage limit and the catastrophic coverage threshold) by 2020. To help accomplish this, the drug
industry will reduce prices by 50% on brand-name drugs purchased in the donut hole, saving $20 billion
over the next 10 years.
The pharmaceuticals industry agreed to increase the Medicaid rebate (which drugmakers pay to state
Medicaid funds for the drugs purchased), plus other concessions and fees on sales to other government
health programs, bringing Big Pharmas fees to about $85 billion over the next 10 years. Medical device
manufacturers will also contribute to the funding via the laws imposition of a 2.3% excise tax on the sale of
taxable products in the US starting in 2013, which is expected to raise $20 billion over 10 years. (Unlike fees,
excise taxes are tax-deductible, thereby lowering the after-tax impact and cushioning the overall effect.)
Meanwhile, in July 2009, the hospital industry agreed to a reimbursement cut of about $155 billion over 10
years, in part by reducing the size of Medicares annual market basket updates (the inflation rate adjustment).
The ACA also calls for Medicare and Medicaid disproportionate share hospital (DSH) payments to be
reduced (effective in fiscal 2014), and that payments made to hospitals will be reduced to account for
preventable hospital readmissions (effective fiscal 2013) and for hospital-acquired conditions (effective fiscal
2015), yielding a total $40 billion in savings between 2014 and 2019.
Health insurers face additional fees, minimum medical cost spending limits
The managed care group faces a fee that increases from $8.0 billion in 2014 to $14.3 billion in 2018; in
subsequent years, fees will rise by the rate of premium growth. (For not-for-profit insurers, only 50% of net
premiums are counted.) Effective in calendar 2009, the tax-deductibility of health insurer executive and
employee compensation is limited to $500,000 per applicable individual. A 40% excise tax imposed on the
value of employer-sponsored plans exceeding a certain threshold starts in 2018 and will raise an estimated
$32 billion over 10 years.
Under the medical loss ratio (MLR; also known as the medical cost ratio, or MCR) provision of the ACA,
effective January 1, 2011, health insurance plans have been required to reserve at least 80% of the
premiums towards healthcare expenditure and quality improvement initiatives, leaving only 20% for SG&A
costs. This provision required the larger group plans to set aside a higher 85% for healthcare and other such
expenses. If a plans MLR falls below the required minimum, MCOs are required to rebate the difference to
customers. In June 2012, the US Department of Health & Human Services (HHS) announced that insurance
companies that failed to comply with the MLR provision of the ACA were required to pay $1.1 billion in the
form of rebates to around 12.8 million Americans. The rebates received covered premiums collected for the
2011 plan year.
and, over time, reduced Medicare Advantage payments
Payments to Medicare Advantage (MA) plans will be restructured going forward. For 2011, MA payments
were frozen at 2010 levels. Beginning in 2012, the payments had to begin to transition to a percentage of
the fee-for-service (FFS) cost in each state, estimated by the Centers for Medicare & Medicaid Services
(CMS), a division of the US Department of Health & Human Services (HHS). These payments would
eventually range from 95% of traditional Medicare FFS payment levels in high-spending states to 115% in
low-spending states. The transition will be phased in over three years for most areas, and over four to six
years in other areas, depending on the initial difference between the current MA payments and the
benchmarks.
According to the CMS, MA premiums declined by 10% from 2010 through 2013, while enrollment in MA
programs increased by an estimated 28%. However, on February 15, 2013, the CMS proposed a 2.3%
reduction in MA payments for 2014. This outlook changed on April 1, when the CMS issued its final 2014
MA payment rate, reflecting a positive 3.3% growth percentage. The new rate assumes Congress will again
prevent physician payment rates from dropping.

The CBO projected the government will save $136 billion over 10 years to 2019. However, starting in
2012, bonuses were given to MA plans with quality rankings of at least three stars out of five or those that
are unrated (i.e., plans that are too new or that have too few enrollees).
On November 15, the Wall Street Journal reported that UnitedHealth Group had dropped thousands of
doctors from its networks in recent weeks, leaving many Medicare patients unsure whether they need to
switch plans to continue seeing their doctors. In its third-quarter 2013 earnings conference call on October
17, the company said it expects its 2014 earnings outlook to be impacted by overall Medicare Advantage
funding levels. It also reported spending more healthcare premiums on medical claims in the third quarter,
due mainly to government cuts in payments for Medicare Advantage services. According to the notices sent
to the doctors, the terminations can be appealed within 30 days. UnitedHealth informed the Wall Street
Journal that the company expects its Medicare Advantage network to be 85%90% of its present size by the
end of 2014. Looking ahead, we would not be surprised if other health insurers follow UnitedHealths path.
IMPACT OF HEALTHCARE REFORM ON MANAGED CARE PROFITABILITY
We believe that managed care organizations will face more restrictions as more provisions of the law come
into effect. (See the accompanying table entitled Healthcare Reform Legislation Implementation Timeline.)
Because healthcare reform extends health insurance coverage to the uninsured, the law prohibits certain
actions: denying coverage to individuals with pre-existing health conditions; rescission (rescinding enrollees
coverage); applying annual and lifetime limits on required health benefits; and requiring prior authorization
for emergency and obstetric/ gynecological services. In addition, premiums can vary by no more than 3:1 for
age and 1.5:1 for tobacco use, though these premium variations do not apply to self-insured plans (those
where employers absorb the insurance risk and pay MCOs fees to administer the plans). Of course, the margin
pressure from the new MLR rules and the industry fee also affects profitability.
What qualifies as a medical or benefit cost?
Requirements for minimum MLRs raised concerns among the insurers regarding the cost components that
will qualify as a medical or benefit cost. MCOs have sought to transfer medical-related administration
costswhich have been accounted for as selling, general and administrative (SG&A) costs on the income
statementto medical or benefit costs. On December 1, 2010, the US Department of Health & Human
Services (HHS) published its interim final rule on the MLR requirements for 2011, 2012, and 2013, after
receiving guidance from the National Association of Insurance Commissioners (NAIC), as required by the
ACA, and one year later issued its final rule.
Following the NAIC, the HHS defines medical costs (the numerator in the MLR ratio) as health care
claims, plus any expenses to improve health care quality. Expenses in the quality improvement category
could include activities that result in measurable improvements in patient safety or patient outcomes, prevent
hospital readmissions, promote wellness, or enhance health information technology (IT) to improve quality,
transparency, or outcomes. Under the ACA, the provider credentialing is a part of the quality improvement
expenses; however, insurance broker and agent compensation are viewed as administrative expenses and
funds used to fight medical fraud are viewed as cost-containment expenses. The denominator of the MLR
calculation comprises earned premium revenue, minus federal and state taxes (including regulatory licenses
and fees). The taxes, however, do not include taxes on investment income and capital gains.
In any event, some rules do not apply until 2014 and later. This is due to changes to the marketplace in
2014 related to the offering of individual and small group plans through the exchanges, and to adjustments
required by statute to the MLR formula to account for payments or receipts for risk adjustment, risk
corridors (which pertain to the potential for changes in risk), and reinsurance. In the absence of waivers,
many insurers paid rebates in 2012 for below-floor medical loss ratios they realized in 2011.
Competition from CO-OPs?
The ACA created the Consumer Operated and Oriented Plan (CO-OP), a new kind of nonprofit health insurer
run by its customers. CO-OPs are designed to offer affordable and consumer-friendly health insurance options
to individuals and small businesses, who may come together to create a CO-OP and apply for a federal loan.
The federal government has committed to offer loans to non-profit organizations to help establish CO-OPs.

They are still required, however, to meet the same state and federal quality and financial standards as other
health insurance plans and, like insurers, offer a variety of health plans. The aim of the CO-OP is to increase
competition, leading to a reduction of premiums, and improving healthcare quality and customer service.
Consumer-governed health insurers have a 40-year history, but they cover only two million Americans and,
therefore, experts are skeptical about CO-OPs.
Nevertheless, CO-OPs have generated much interest. The government had set an October 17, 2012, deadline
for nonprofit groups to apply for the first round of $3.8 billion in funding to start CO-OPs. Eventually, 24
CO-OPs that had signed loan agreements with HHS as of December 2012 received funding under the plan.
This accounted for just $2 billion, and the remaining part of the funding was eliminated by the legislation
passed by the US Congress on January 1, 2013, as a part of the fiscal cliff deal.

HEALTHCARE REFORM LEGISLATION ORIGINAL IMPLEMENTATION TIMELINE*MANAGED CARE ITEMS
2010
Bans lifetime limits on health insurance policies and permits only annual coverage limits, as determined by the Secretary of Health and Human Services
(HHS); bans rescissions (revocation of a policy due to illness).
Eliminates pre-existing condition clauses for children up to age 19.
Establishes a tax credit for small business with up to 25 employees and annual wages of below $50K to help subsidize employees insurance costs.
Requires insurers to adopt specified internal claims and appeals procedures.
Creates a temporary high-risk health insurance pool program to provide coverage for uninsured individuals with pre-existing conditions.
Provides a one-time rebate of $250 to Medicare Part D participants to begin process of reducing the so-called donut hole gap in coverage. Between 2010
and 2011, gradually reduces coverage gap for both branded and generic drugs.
2011
Tax on pharmaceutical industry begins: a fee of $2.5B in 2011 increases to $4.1B by 2018, then declines to $2.8B in 2019 and thereafter.
Establishes minimum medical loss ratio (85% of premium revenue for large groups and 80% for small groups) by requiring payment of a rebate to each
enrollee below that amount.
Payments to Medicare Advantage (MA) plans set to different percentages of Medicare fee-for-service (FFS) rates (ranging from 95% to 115%). Cost sharing
for Medicare-covered preventative services eliminated.
Five-year demonstration grants awarded to states to develop, implement, and evaluate alternatives to current tort litigation.
Develop national strategy for quality improvement, with healthcare services delivery, patient outcomes, and population health given priority.
2012
Insurers required to use uniform explanation of benefits (EOB) forms developed by the US Secretary of Health and Human Services.
Bonus payments to high-quality MA plans begin; rebates for MA plans reduced.
Fee-for-service and managed care payments for Medicaid increased to at least 100% of Medicare Part B FFS rates for primary care services from
physicians in family medicine, general internal medicine, and internal medicine specialties.
2013
Establishes of Consumer Operated and Oriented Plan (CO-OP) program to foster creation of nonprofit, member-run health insurance companies to be
offered through exchanges to spur industry competition.
Medical device excise tax (equal to 2.3% of providers device revenues) begins; excludes devices sold to the general public (e.g., eyeglasses, contact
lenses, hearing aids, etc.).
2014
Increased Medicaid and SCHIP eligibility will extend health insurance coverage to some 10 million individuals (rising to approximately 16 million in 2017).
Penalties implemented for hospitals that do not meet ARRA requirements for use of electronic health records under Medicare.
Imposes fee on health insurance providers, starting at $8B for 2014, rising to $14.3B in 2018 and thereafter.
The establishment of health insurance exchanges will extend health insurance coverage to some 8 million individuals (rising to some 23 million in 2017).
Requires states to establish American Health Benefit Exchanges, to facilitate the purchase of insurance. Insurers will compete for the business of
individuals and predominantly small employers that have not been able to obtain coverage at the same favorable rates as large employers. In addition,
states may form regional exchanges. Each plan participating in an exchange must meet standardized affordability, basic benefit, and consumer protection
requirements, as well as state requirements. Initially, only individuals and small employers (up to 100 employees) will be eligible to participate. Multistate
plans may be offered in the exchanges beginning in 2016. States may permit businesses with more than 100 employees to purchase coverage in the
exchanges starting in 2017.
Establishes a so-called individual mandate: all US citizens and legal residents will be required to obtain qualifying health coverage. When fully phased
in, it imposes a tax penalty of $695 (or 2.5% of income) for individuals who do not purchase coverage or do not meet the hardship exemption.
Establishes an employer mandate under which employers must provide insurance, pay penalties, or, in certain situations, do both.
Extends prohibition on rescissions to all individuals in group health plans; limits ability of insurance companies to discriminate in terms of premium ratings
based on family rating, age, or tobacco use, and implements guaranteed issue requirement.
Establishes an independent Payment Advisory Board to submit legislative proposals with recommendations to reduce the rate of growth in Medicare
spending if it exceeds a target rate.
MA rebate system based on plan quality phased in; MA plans required to have medical loss ratios no lower than 85%.
Annual fee on health insurance plans begins.
After 2014
Effective January 1, 2018, the Cadillac tax beginsan excise tax levied on health insurers of employer-sponsored health plans whose aggregate value
exceeds a certain threshold. For 2018, the threshold is $10,200 for individual plans and $27,500 for family plans; the tax is to be indexed to inflation.
*Any changes or temporary adjustments to this original timeline are discussed in the text of this Survey.
Sources: Standard & Poors; Congressional Budget Office; Ropes & Gray; Foley Hoag; US Chamber of Commerce.

Each state has seen different combinations of people and organizations coming together to form a CO-OP. For
instance, in Montana, the states former insurance commissioner has joined some prominent physicians and
leaders in labor and business to found a CO-OP. In contrast, in New York, the Freelancers Union, a nonprofit
organization for independent workers, has formed a CO-OP and plans to bring in some of its 150,000
members, among others.
Some positive aspects to reform for MCOs
Under the healthcare reform law, the CBO in May 2013 estimated that there will be 25 million fewer people
uninsured by 2016, a number that will remain unchanged through 2023. MCOs have started benefiting
from some positive effects of the healthcare reform. One example has been the rise in enrollment among
young adults between 18 and 25 years of age (who may be covered by their parents policies) amid declines
in other age groups within the under-65 cohort. Looking ahead, S&P believes the increasing enrollment
expected to start in 2014 through expanded Medicaid eligibility will not only help increase MCOs
premium revenue, but also help them leverage SG&A costs. Note, though, that the size of the premium rate
hikes that the MCOs may be able to charge will likely be limited by several factors: competition from the
exchanges, an actuarial-based formula designed to achieve the requisite MLRs, and state and federal
monitoring of premium increases. In addition, higher enrollment may provide MCOs more clout in price
negotiations with hospitals and doctors.
Further, according to a study published in September 2011 in Health Affairs, a monthly health-policy
journal published under the aegis of Project HOPE, a nonprofit international health education organization,
the number of uninsured and underinsured adults in the 19-to-64 age group increased from 61 million
(36% of that age group) in 2003 to 81 million (44%) in 2010. In this context, underinsured refers to those
adults who report at least one of the following three indicators: family out-of pocket medical care expenses
are equal to or more than 10% of income; medical expenses are at least 5% of income; or the per-person
deductible is equal to or more than 5% of income. Rising health costs and recessionary pressures have
accounted for the increase in the underinsured population. According to the study, the ACAs reforms, if
successful, could result in a 70% drop in the number of uninsured people and a huge decline in the number
of underinsured people. Also, based on the latest census figures (see The Pressing Need for Healthcare
Reform below), the number of uninsured declined in 2011, which was the first full year the ACA was in
effect. Meantime, millions of Americans are expected to have their existing individual health policies
terminated by the MCOs at the end of 2013 because the plans do not comply with all of the ACA
requirements, which state that the new policies have to cover all 10 essential health benefits. S&P expects
this group to be among the first to utilize the exchanges.
S&P believes the MCOs that are better able to manage under healthcare reform may well benefit by
acquiring the less successful ones, thus improving economies of scale and negotiating clout.
THE PRESSING NEED FOR HEALTHCARE REFORM
The problems facing the US healthcare system, while not new, have been intensifying, partly due to an aging
population, but recently exacerbated by the overall weak economic environment. US spending on healthcare
rose at more than twice the rate of general inflation from 2004 to 2009, according to the Centers for
Medicare & Medicaid Services (CMS), a division of the US Department of Health & Human Services
(HHS). In 2011, healthcare spending is estimated to have grown 3.9%, to around $2.7 trillion, while overall
inflation, as measured by the consumer price index, rose 1.2%.
Based on CMSs latest projections (published in September 2012), healthcare spending was estimated to have
grown by 3.9% in 2012 (over the estimated spending in 2011) to around $2.8 trillion and is projected to grow
by slightly under 3.9% in 2013. According to the CMS, these projections assume that the scheduled
Medicare physician payment rate updates under the Sustainable Growth Rate formula do not occur,
including a 24.7% cut scheduled for January 1, 2014. S&P is not surprised, since the US Congress has
continued to override this physician payment reduction provision. Instead, it employs an alternative
scenario, one in which physician fee schedule rates are assumed to grow 0.7% annually from 2014, a
method and rate consistent with the 2013 Medicare Trustees Report.

The US healthcare budget is expanding and growing more burdensome. In 2012, the federal government is
estimated to have paid around 26% of healthcare expenses in the US, a proportion that would gradually
grow to 31% by 2022, according to CMS estimates based on current law as of September 2013.
Despite continued efforts to improve the level of coverage in the US via the expansion of Medicare, the
Childrens Program (CHIP), and other private and government programs, the number of those lacking
access to health insurance coverage has remained stubbornly high as a percentage of population since 2002.
While the latest available data from the US Census Bureau indicates that the number of uninsured people
declined to 48.0 million in 2012, or 15.4% of the US population (from 48.6 million in 2011, or 15.7%), it
remains one of the highest percentages in the industrialized world.
The Census Bureau also noted that the percentage of people covered by private health insurance has
essentially leveled off; it was 63.9% in both 2011 and 2012. However, this figure is below 2009s 64.5%
and 2008s 67.2%. Meanwhile the percentage covered by government health insurance programs, including
Medicare and Medicaid, increased to 32.6% in 2012, from 32.2% in 2011, 31.2% in 2010, 30.6% in
2009, and 29.1% in 2008.
S&P believes that the number and
percentage of uninsured increased
through 2010, given the loss of jobs
amid the weak economy, while the
decline in 2011 was attributed mainly to
the ACA rule that children may be
covered by their parents health
insurance policies until the age of 26.
Although the unemployment rate has
declined from its peak of 10.1% in
October 2009 to 7.3% in August 2013,
S&P believes that many of the new job
openings, particularly in small firms, still
do not provide insurance coverage.
However, by 2015, according to the
ACA, they will be required to enroll the
new hires in a health plan. (The target
date was 2014 for large firms, but this
was delayed by one year.) Indeed, the
KFF noted that 57% of small firms (those with three to 199 workers) offered health benefits in 2013, down
from 61% in 2012. In contrast, 99% of employers with 200 or more workers offered health benefits in
2013, up from 98% in 2012.
State budget deficits appear to be abating
According to the June 2012 report by The Center on Budget and Policy Priorities (CBPP), which conducts
research on public policy, budget shortfalls in the fiscal year (FY) 2012 collectively totaled $107 billion. For
FY 2013, the report said that 31 states are projecting budget shortfalls totaling $55 billion. (Forty-six states
have fiscal years ending on June 30. Unlike the federal government, all states but Vermont are legally required
to balance their budgets.) Without the necessary revenues, states will have difficulty providing services such as
healthcare and education. Nonetheless, according to a September 2013 report by the CBPP (an update from a
report first released in June), in the 31 states for which data were available in June 2013, state income tax
collections in the first ten months of FY 13 were, on average, 5.7% higher than in the year-earlier period.
According to the CBPP, state revenue systems still face major challenges. States are still recovering from the
impact of the recession as their revenues likely still remain 3% below pre-recession (200709) levels, after
adjusting for inflation. It also noted that states without income taxes are missing out on the opportunity for
increased revenues, noting that part of the recent boost reflects the fact that income taxes are better growing
with the economy than sales or other taxes. In earlier reports, the CBPP noted that the states obsolete tax
Chart H01: THE
UNINSURED
POPULATION IN
THE US
12
13
14
15
16
17
30
35
40
45
50
55
2002 03 04 05 06 07 08 09 10 11 2012
THE UNINSURED POPULATION IN THE US
Number of uninsured (millions, left scale)
Percent of total population (right scale)
Source: US Census Bureau.

systems are unable to keep track of the e-commerce sales and service sector, and that the federal government is
cutting federal spending, which accounts for around 25% of the states revenues. It also warned that many
state policymakers, such as governors and leading legislators, have been planning large tax cuts, which would
further deteriorate state revenues.
In FY 2012, states were compelled to increase their Medicaid spending by an average of 28.7%, primarily to
substitute temporary Medicaid federal stimulus funds that expired in June 2011. The vast majority of these
shortfalls in FY 2013 have been closed through spending cuts.
To help find cost savings, states have been re-engineering healthcare payment and delivery systems by
upgrading their health information technology (IT) systems and developing integrated healthcare models.
States have been increasingly relying on MCOs over the years to care for their Medicaid beneficiaries.
Indeed, in FY 2010, 13 states expanded their use of managed care. By FY 2013, 35 states reported they
were expanding managed care, including 10 states that indicated plans to implement managed long-term
care, according to the KFF in a report dated October 2012.
According to a study published October 2013 by the Brookings Institution, a private nonprofit organization
devoted to independent research and innovative policy solutions, by mid-2013, at least nine states had
approved utilization of Accountable Care Organizations (ACOs) for providing care to their Medicaid
beneficiaries. An ACO is an organization run by the healthcare service provider, in which the participating
providers are collectively responsible for the care of an enrolled population. They also share in any savings
associated with improvements in the quality and efficiency of care by aligning Medicare with Medicaid.
Nonetheless, S&P believes the MCOs would be directly affected by state rate cuts.
Approximately 11 million more individuals will get health insurance through Medicaid under the ACA,
according to the CBO. Given this, we believe state budget pressures would worsen dramatically, if not for
the ACA calling for the federal government to cover 100% of the costs related to newly eligible individuals
for the years 201416. While the new number of individual getting insurance under the ACA is expected to
decline due to the Supreme Court decision, the number varies for different years. For 2022, four million
fewer people are expected to be insured under Medicaid. However, states would be on the hook for
potential Medicaid budget shortfalls that could occur as the federal support gradually declines to 90% for
years 2020 and later.
Uninsured struggle with healthcare access, costs
According to a KFF report published in October 2012, uninsured patients are experiencing significant
difficulties in accessing and affording health care. About 26% of uninsured adults surveyed say they have
forgone care in the past year because of its cost, compared with 4% of adults with private coverage. The
report also noted that people without Medicaid or some other insurance were less likely to visit a doctor, and
more likely to have unmet needs for prescription drugs, eye care, or mental healthcare. Further, these people
are less likely to receive timely preventive care, such as check-ups and screenings.
According to an article published online by Health Affairs in October 2012, the proportion of people under 65
years of age, with a high medical cost burden (defined as spending greater than 10% of family income on
healthcare) grew to 19.2% in 2006 from 14.4% in 2001. However, this figure did not change much during the
200709 recession and stood at 18.8% in 2009, despite decreasing income and rising unemployment. The
drop in average annual family income to $61,000 in 2009 (from $65,000 in 2006) was offset by lower out-of-
pocket health spending, which declined to $1,231 in 2009 (from $1,454 in 2006) due to the shift from
prescription drugs to cheaper generics.
To show that insurance garnered under the ACA will be affordable, the HHS released a report in September
2013, stating that about 10.7 million of the estimated 21.9 million uninsured Americans eligible to buy
insurance through the healthcare exchanges may be able to pay $100 or less per person per month, after
taking into account their available premium tax credits. In a report published in October, the HHS claimed
that based on data from the federally-facilitated and state partnership exchanges, 1.3 million (46%) of the 2.9
million uninsured single, young adults (ages 18-34) eligible for the health insurance exchanges could get
coverage for $50 per month or less after tax credits. Finally, a study published November 2013 by the

McKinsey Center for U.S. Health System Reform, a unit of management consulting firm McKinsey & Co.,
found zero-net-premium products widely available on the exchanges. The study estimated that seven to eight
million people (85% of which were currently uninsured) might be eligible for such plans, though many may
still face co-payments for services delivered.
MEDICARE MANAGED CARE UNDER INCREASING PRESSURE
Medicare Advantage (MA), which uses private payers to manage the care and cost of Medicare participants,
is not new, but the program became more popular because of provisions in the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA) that significantly raised MMA plans reimbursement
rates and expanded their availability and flexibility. The program aimed to attract more Medicare recipients
and private payers to Medicare managed care. While most Medicare recipients (approximately 49.4 million,
according to the KFF) are still enrolled in traditional fee-for-service plans, a growing number participate in
Medicare private health plans: around 15.0 million (including 14.4 million in MA) as of September 2013,
according to the CMSroughly 28% of all beneficiaries, according to our estimates. MA has provided
MCOs an opportunity for additional profits and revenue growth.
The MMA is best known for creating the Medicare Part D program, the first government-sponsored
prescription drug benefit for seniors. Part D members who do not participate in MA plans (most of which
include Part D benefits) numbered 20.1 million as of December 2012. For MCOs, one of the attractions of
participating in Medicare Part D has been the opportunity to transfer some Part D enrollees to the broader
and higher-margin MA contracts.
Nonetheless, the Medicare Advantage
program has become increasingly
controversial, mainly because
government payouts per Medicare
beneficiary are higher in MA than in
traditional Medicare fee-for-service.
In its March 2011, March 2012, and
March 2013 reports to Congress,
MedPAC estimated the MA payment
per person to be 110%, 107%, and
104%, respectively, of traditional
Medicare fee-for-service payments.
According to an article published
December 2012 in Health Affairs,
utilization rates for a majority of services in Medicare Advantage HMO plans were lower during the period
from 2003 through 2009 than in traditional Medicare. For instance, compared with traditional Medicare,
emergency department visits were 25%35% lower; inpatient medical days were 20%25% lower; and
ambulatory surgery or procedures, which were 25% lower in 2003, narrowed to a 7% difference in 2008.
Proponents of managed care say that integrated managed care plans deliver services more rationally by
tailoring their provider networks to the needs of users, imposing pre-approval requirements, and reviewing
utilization rates, because they have financial incentives to reduce the use of services.
According to a report released by the KFF in December 2012, beneficiaries will have around 20 Medicare
Advantage plans to choose from in 2013 (about the same number as in 2012), well below the high of 48 in
2009. Further, the report states that most of the enrollees in Medicare Advantage plans in 2012 will be able
to stay in the same plans, with higher premiums in 2013. An article dated March 28, 2012, in the New
England Journal of Medicine states that over the last four decades, Medicare spending per enrollee has
grown by a rate 2.6% higher than the rate of growth of per capita GDP. If the trend goes on, by 2060, all
federal revenues will be spent on Medicare. However, according to the article, there have been signs of
slowing growth in Medicaid expenditures, with Medicare spending per enrollee falling in line with the
growth in per capita GDP. Further, in November 2011, the actual Part B premium for 2012 was fixed at
$99.90, as against the actuary-projected premium of $106.60. In addition, in February 2013, the CBO
Chart H03: Medicare
Private Plan
Enrollment
5.3
5.5
6.1
7.6
9.0
10.4
11.3
11.9
12.6
13.9
15.0
0
2
4
6
8
10
12
14
16
2003 04 05 06 07 08 09 10 11 12 *2013
MEDICARE PRIVATE HEALTH PLAN ENROLLMENT
(Millions of enrollees)
*As of September.
Source: Centers for Medicare & Medicaid Services.

brought its Medicare spending projection down by $143 billion for the 10-year period from 2014 to 2023
(partly offset by reductions of $48 billion in collections of offsetting receipts and $10 billion in Medicare
savings as a result of sequestration) from its August 2012 projection, which implies slower growth in
Medicare spending.
Insurers say that their plans provide more benefits and save money for recipients vis--vis traditional
Medicare. Nevertheless, national MA reimbursement rates, which edged up in 2009, grew more slowly in
2010, despite the deferral of the drop in the physician payment rate required by a legal formula. (Congress
once again postponed the latest rate cut until December 2013, and we think it will be above the 27.4% cut
expected in 2012 unless it is delayed again or a permanent fix is found. As we noted earlier, the CMS
assumed that this cut would be postponed again when it set its final MA reimbursement rate for 2014.)
Looking ahead, while MA payment rates will transition over a three-year period to 2014 to a benchmark
that varies from 95% to 115% of fee-for-service payment levels, depending on the geography, the MCOs
would also be eligible for bonus payments, based on quality rankings.
Consequently, MCOs that have banked heavily on Medicare growth, such as Humana Inc., WellCare
Health Plans Inc., and Universal American Inc., have said they might curtail benefits to maintain margins or
at least temper the pressure on margins. Indeed, Avalere Health, a healthcare advisory, published in March
2012 an analysis of the Medicare private plan payment data released by the CMS, and noted that Medicare
Advantage plan enrollees received on average over $70 in additional benefits and reduced cost-sharing in
2010 at no charge to them.
A phased payment rate cut may not
keep MA packages as attractive as
they were in 201012, but S&P
believes that they will still offer
more benefits than the traditional
fee-for-service program in order to
retain members. As long as they do,
MCOs are likely to see MA
enrollment expand, aided by the
coming influx of the baby-boomer
generation, many of whom work for
companies that provide managed
care health insurance coverage
under the aegis of the MCOs.
Companies may also find
opportunities for consolidation and,
hence, improving economies of scale, as smaller, weaker players (including not-for-profit MA plans) find
themselves unable to operate profitably under the ACA rules. We think the probability of an eventual
shakeout in the industry is high. Starting in 2014, MA plans will be faced with reduced reimbursement rates
that are designed to bring MA payments in line with traditional Medicare payments and a mandated MLR
floor of 85%. Separately, the standalone Medicare Part D programs, now mature, will also continue to
grow, but remain only modest earnings-per-share (EPS) contributors due to their very slim margins.
DUAL ELIGIBLES
According to MedPAC, in 2011, there were about 10 million dual eligibles: low-income seniors and
younger persons with disabilities who are enrolled in both Medicare and Medicaid programs. They are the
most costly group of beneficiaries for both Medicaid and Medicare, accounting for a disproportionate
amount of spending. In the Medicare program, dual eligibles account for about 19% of the population, but
31% of spending; in the Medicaid program, they account for 15% of enrollees, but 40% of spending. Giant
MCO UnitedHealth Group estimated that for 2013, combined Medicare and Medicaid spending on dual
eligibles will reach $330 billion, with Medicare covering $180 billion (including costs for prescription
Table B04: MCO
membership
enrollment
MANAGED CARE ORGANIZATION MEMBERSHIP ENROLLMENT
(Ranked by Medicare Advantage enrollees, as of June 2013)
TOTAL MEDICAL % CHANGE MEDICARE ADVANTAGE
ENROLLMENT FROM DEC. ENROLLMENT (THOUS.)
COMPANY (THOUS.) 2012 DEC. 2012 JUN. 2013
UnitedHealth Group 45,000 10.0 2,565 2,920
Humana 12,371 2.3 2,326 2,446
WellPoint* 35,666 (1.3) 1,545 1,467
Aetna Inc. 21,968 20.4 448 948
CIGNA 14,286 1.7 426 458
WellCare Health Plans 2,842 57.9 213 272
Health Net 5,352 (1.5) 234 236
Universal American 134 0.0 134 134
Molina Healthcare 1,847 2.8 36 36
*Senior membership; Medicare Advantage membership not reported separately.
Source: Company reports.

drugs) and Medicaid the remaining $150 billion, mainly for community and institutional long-term care
services. It projects that spending on dual-eligible individuals could total $5 trillion over the next 10 years.
These individuals are high cost; require a mix of medical, long-term care, behavioral health, and social
services; and have more limited financial resources than the general Medicare population. They are also a
highly diverse population in terms of service-use patterns and spending. While a substantial number require
no extraordinary spending, a small number are responsible for a high proportion of Medicare and/or
Medicaid spending. According to the KFF, the roughly 900,000 dual eligibles, who were in the top 10% of
spending in 2008 accounted for more than 60% of all dual-eligible spending.
According to Health Affairs, the current system of care for some elderly and disabled low-income people
who are eligible for both Medicare and Medicaid lacks proper care coordination between the programs, so
spending is higher. While Medicare and Medicaid are complementary programs, eligibility criteria, benefits,
and program management differ. This can lead to dual-eligible beneficiaries not getting appropriate care or
receiving unnecessary care and to cost shifting between providers and programs, which lead to higher
spending for both Medicare and Medicaid. The ACA strives for better coordination between the programs
through new models for delivery of care and financing. The CMS and 26 states are launching large-scale
managed care demonstration projects for dual eligibles. There are two models. Under the capitated model,
Medicare and Medicaid would each contribute a capitated payment on behalf of dual-eligible beneficiaries
to a single managed care plan, which would provide a full range of services to enrollees. The second model
will test a managed fee-for-service approach that may be structured in a number of ways.
After reviewing nine reports and studies of capitated managed care and FFS care coordination approaches,
KFF, in its October 2012 Issue Brief, reported that while capitated plans helped lower the hospitalization
rate, savings were difficult to achieve, as capitated payments were higher than traditional Medicare
payments under the FFS program. Further, FFS-based care coordination also showed mixed results, with
only a few programs being successful in reducing hospitalization rates and costs.
However, UnitedHealth Group studies published in January 2013 and April 2010 noted that managed long-
term care programs encourage the early detection and ongoing management of chronic and co-morbid
conditions, with a focus on maintaining the individuals highest level of functioning in the least restrictive
setting. Moreover, active state programs reduced or delayed admissions to nursing homes through better
care management, resulting in savings of 7.5%10% compared with passive fee-for-service programs. The
studies argue that with broader and more intensive implementation of integrated and coordinated care for
dual eligibles, the federal government should realize $106 billion in savings for Medicare and $83 billion for
Medicaid over a 10-year period.
MANAGED CARE PROFITABILITY UNLIKELY TO IMPROVE MUCH IN 2014
This Survey currently focuses on the six largest publicly traded, diversified managed care organizations
(MCOs), plus the niche MCOs, Molina Healthcare Inc. and WellCare Health Plans Inc. The groups
earnings per share (EPS), excluding one-time gains and costs and outliers, grew in the high-single digits in
2011, versus an increase of more than 25% in 2010; in 2012, they declined in the mid-teens. The continued
decline in commercial enrollment, partly reflecting high unemployment rates amid the still-tough economic
environment, has been outweighed by gains in Medicaid and MA enrollment. The change in enrollment mix
has put some upward pressure on the medical loss ratio (MLR, the percentage of premium revenues used to
pay for members medical bills), since Medicaid and MA plans have higher MLRs than commercial plans.
The fully insured commercial plans started to face MLR floors in 2011 and, therefore, should not see
unfavorable MLR comparisons as a result of this ACA rule in 2014. However, with the start of the
administrative fee that helps cover the ACAs costs (see Paying for it all above), the MCOs will face
mandated, incremental operating costs (i.e., selling, general and administrative, or SG&A). Hence, we think
the MCOs will find it more difficult to realize improved operating cost comparisons in 2015 and afterward
as the ACA requires the administrative fee to rise every year. Still, we expect the MCOs to enact additional
cost controls to help offset the rising administrative fee.

In addition, medical cost trends appear to have moderated to the low end of their historical mid- to high-single
digit range. Medical cost trends are a key indicator of companies ability to control their spending; along with
administrative costs, they are a major factor in setting premiums. The moderating factors in 201012 include
lower utilization of providers (physicians, clinics, and hospitals) amid the weak economy, and the continued
shift in cost-sharing (members paying a higher percentage of the costs), which encouraged them to reduce
healthcare spending. Utilization remained low through the first half of 2013, but insurers were reporting that
doctors and hospitals were increasing unit costs. Lastly, we note that the industry did not benefit as much in
2012 as it did in 2011, from what it refers to as favorable prior-period reserve development (PPRD) on
lowering MLRs, and it benefited even less in 2013.
The definition of PPRD is as follows: MCOs place in reserve an estimated amount of funds they expect will
be required to cover medical costs for a specified period; if those costs were overestimated, MCOs can deduct
the amount by which they overestimated in the past from the reserves established to cover costs tied to the
premiums they received during that period. Since the accounting books are closed at the end of a period, the
insurer can adjust the current periods estimated medical costs as exhibited on the income statement. For
instance, in its fourth-quarter 2011 earnings report, UnitedHealth Group Inc. posted the MLR of 80.8% for
full-year 2011. If not for the PPRD, reported medical costs for the year would have been 81.6% of premium
revenue; as a result, earnings would have been $4.29 per share rather than $4.73, by our analysis.
Even if healthcare reform never came to fruition, S&P believes that the industry would not have been able
to sustain its buoyant growth rate of the past several years. Despite pricing discipline and cost controls
implemented in recent years, the leading MCOs would have remained under pressure due to competition
and the weak economy. Commercial membership, which constitutes the bulk of sales, declined on an
organic basis from 2008 to 2011, due to the weak economy and, we believe, pricing discipline, assuming
employers and individuals dropped health insurance due to price. However, the decline moderated
significantly in 2011, with the ACAs rule that children can remain under their parents plans until they
reach 26 years of age.
Employers relying on the MCOs to absorb medical risks (as opposed to employers that self-fund and pay
MCOs a fee to administer their health insurance) will continue to respond to sharply rising premiums by
negotiating contracts that limit rate hikes. They can do this with buydowns (higher co-payments or reduced
benefits in exchange for pricing concessions) or by adopting high deductible, consumer-driven health plans
(CDHPs). Hence, the average annual premiums for single and family coverage grew 3.0% and 4.0%,
respectively, in 2012, according to the KFF, down from growth of 8% and 9% in 2011. We see the practice
of buydowns ongoing.
In addition, key enrollment growth drivers in 2006 and 2007, such as Medicare and Medicaid, appear to
have slowed following four years of Medicare rate increases, including those for 2008 and 2009. Rate
increases granted by states for 200913 for their Medicaid plans have been limited due to budget deficits
and, lately, many have been reducing Medicaid rates; this might have a negative impact on the MCOs
books. In addition, as noted earlier, MA plans face higher MLRs and, hence, increased pressure on profit
margins, from reduced reimbursement levels and assuming higher medical cost trends. Looking further out,
MA faces further reductions in reimbursement levels (with the exception of 2014 so far) and the advent of a
mandated MLR floor of 85% in 2014. Therefore, we believe that unless MCOs with Medicare and/or
Medicaid managed care programs grow them meaningfully via acquisitions and geographic expansion, these
programs will contribute more modestly to earnings growth over the long haul.
Looking at 2014, however, S&P sees improved revenue comparisons, partly related to commercial premium
rate hikes, higher commercial enrollment aided by the exchanges, and higher Medicare Advantage and
Medicaid enrollment. However, there will likely be additional pressure on the MLR, partly owing to such
factors as competitive pricing on the public exchanges; newly insured members with pre-existing health
conditions; pent-up demand from newly insured members, whether or not they have pre-existing conditions;
and the continued rise in MA and Medicaid enrollment as a percentage of total medical membership, with
the latter bolstered by Medicaid eligibility expansion in some states.

A modest offset to the MLR pressure may occur should the exchanges attract a relatively high level of newly
insured, younger, healthier members, which would help cross-subsidize the newly insured who are older and
likely less healthy. However, it is not known yet just how many younger, healthier people the exchanges will
attract. The conservative think tank National Center for Public Policy Analysis issued a report in August
2013 forecasting that the young invincibles will not participate because they could be at least $500 better
off if they forgo insurance and pay the $95 penalty. However, two polls released in September 2013 (one by
the Center for Studying Health System Change and the other by Reuters news service and market research
firm Ipsos) both showed that a strong majority of young people believe health insurance is important and
would purchase the insurance via the public exchanges if it is affordable.
One way MCOs participating in the public exchanges will be able to offer low-cost plans is to restrict the
rise in medical costs by restricting the size of the provider networks of the plans sold through those
exchanges. Other ways set up by the federal government to mitigate the risks for the MCOs participating in
the public exchanges are reinsurance (which covers high-dollar claims), risk corridors (which can prevent an
MCO from losing too much money, but also limit gains), and risk adjustment (wherein funds are
transferred from lower-risk plans to higher-risk plans). The first two methods will only be in effect through
the 2016 plan year, while the third is permanent. Note, though, that while the MLR would benefit from
favorable PPRD, analysts following managed healthcare companies exclude PPRD, favorable or
unfavorable, from their earnings forecasts.
Meanwhile, as noted earlier, there will be some operating cost pressure from the new administrative fee
hoisted onto the MCOs to help support the ACA, although S&P looks for improved operating cost controls
as a partial offset. Although S&P does not expect much operating margin improvement, if any at all,
earnings per share should benefit from higher revenues and possible stock repurchases. Over the long term,
S&P expects improved margin comparisons, assuming better control of the newly insureds medical costs
over time.
Recent stock performance is very favorable
During the recession in 2008, the S&P Managed Health Care Stock index plunged 54.8%, underperforming
both the S&P 1500 and the S&P Composite Health Care index, which dropped 38.2% and 25.2%,
respectively. In 2009, with the recession continuing, the S&P Managed Health Care Stock index rose
28.0%, outperforming the S&P 1500, which rose 24.3%, and the S&P Composite Health Care index,
which grew 18.3%, partly reflecting the weakness of pharmaceutical and biotechnology stocks. In 2010, the
S&P Managed Health Care Stock index rose 9.5%, underperforming the S&P 1500s 14.2% rise, which we
believe was due to investor concerns about the impact of the ACA on health insurers. However, it
outperformed the S&P Composite Health Care index, which grew only 3.2%, reflecting the relative
weakness of pharmaceutical,
biotechnology, and healthcare
equipment stocks. In 2011, the S&P
Managed Health Care Stock index
rose 34.0%, outperforming by a huge
margin the S&P 1500, which fell
0.3%, while also outperforming the
S&P Composite Health Care index,
which grew only 9.6%.
In 2012, the S&P Managed Health
Care Index rose 4.9%, while the S&P
1500 Composite Index was up 13.7%
and the S&P Composite Health Care
Index up 15.9%. Year to date through
October 31, 2013, the Managed
Health Care Index increased 31.8%,
compared with 23.7% for the S&P
1500 and 32.7% for the Composite
Chart H04: S&P
500 VS.
MANAGED CARE
STOCKS
50
100
150
200
250
300
350
400
450
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
S&P 500 VS. MANAGED CARE STOCKS
(December 31, 2001=100)
S&P 500 Managed Health Care Index
Source: S&P Indices.

Health Care Index. We think that the relative strength so far in 2013 of the S&P Managed Health Care
Index, versus that of the market as a whole, illustrates the idea that investors may have acclimated to the
ACA and see the health insurers benefiting from more people being required to purchase insurance and
from the pending Medicaid eligibility expansion. We also think the moderated medical cost trends helped.

INDUSTRY PROFILE
Managed care continues to evolve
Healthcare represents the largest sector of the US economy; according to the Centers for Medicare &
Medicaid Services (CMS), a division of the US Department of Health & Human Services (HHS), total
healthcare spending reached $2.70 trillion in 2011 (latest available historical figure)$8,680.00 per
capitaand 17.9% of the gross domestic product (GDP). The US government estimated that the figure rose
by 3.9% to $2.81 trillion (remaining at 17.9% of GDP) in 2012. The CMS expects healthcare spending to
increase to $5.01 trillion by 2022 ($14,664.00 per capita).
Of the total spent on healthcare, private payers covered an estimated 54.1% of the bill in 2011, comprising
32.1% from insurance companies, 11.3% from out-of-pocket payments by individuals, and 10.7% from
other sources. Public payers were responsible for the remaining 45.9%, with Medicare and Medicaid
(supported by federal and state funding) accounting for 35.7% and other sources, such as the US
Department of Veterans Affairs, contributing 9.3%.
SECTOR POISED TO BECOME MORE CONCENTRATED
The largest managed care organization (MCO) chain is the Blue Cross and Blue Shield Association
(BCBSA), a federation of 37 independent locally operated plans; as of September 2013, these plans
collectively served nearly 100 million, or about one in three, Americans. Members of this chain are mostly
not-for-profit companies. While there are 64 local BCBSA companies, many are divisions of larger groups,
such as not-for-profit Highmark Health Services and publicly held WellPoint Inc. The largest nonprofit
MCO is Kaiser Permanente (a partnership of the not-for-profit Kaiser Foundation Health Plan, the Kaiser
Foundation Hospitals, and the Permanente Medical Groups), with around 9.1 million members as of
August 2013.
Ranked by health plan enrollment, UnitedHealth Group was the nations largest publicly traded health
insurer as of June 30, 2013, with 45.0 million health plan members; its divisions are affiliated with the
BCBSA. WellPoint Inc. (35.7 million members) was second, followed by Aetna Inc. (22.0 million) and
CIGNA Corp. (14.3 million).
Relative to most other
industries, the MCO group
is fairly concentrated. S&P
Capital IQ (S&P) estimates
that together, the two largest
MCOsWellPoint and
UnitedHealth Group
controlled roughly one-third
of the US managed care
market at year-end 2012.
Nonetheless, the market
remains fragmented: there
are more than 1,450 health
insurers (albeit mostly small
ones), according to the
current National Directory
of Managed Care
Organizations, Online Database). Because no player has more than 20% market share, further consolidation
is likely, especially given the stagnation in traditional commercial markets and the increasing advantages of
economies of scale. Nonetheless, according to a 2012 report by the American Medical Association, 70% of
Table B09: Leading
publicly owned managed
care organizations
LEADING PUBLICLY-OWNED MANAGED CARE ORGANIZATIONS
(Ranked by 2012 revenues)
- - - - - - REVENUES (MIL.$) - - - - - - - - - - - NET INCOME (MIL.$) - - - - -
COMPANY 2011 2012 % CHG. 2011 2012 % CHG.
UnitedHealth Group 101,862 110,618 8.6 5,142 5,526 7.5
WellPoint 60,711 61,712 1.6 2,555 2,456 (3.9)
Humana 36,832 39,126 6.2 1,419 1,251 (11.8)
Aetna 33,612 35,545 5.8 1,966 1,770 (10.0)
CIGNA 21,865 29,119 33.2 1,260 1,623 28.8
Coventry Health Care 12,187 14,113 15.8 420 411 (2.1)
Health Net 11,415 11,289 (1.1) 278 85 NM
WellCare Health Plans 6,107 7,409 21.3 291 216 NM
Molina Healthcare 4,770 6,029 26.4 84 10 (88.4)
Acquired by Aetna in May 2013. NM-Not meaningf ul. Note: Percentages based on
unrounded data.
Source: S&P Capital IQ; Company reports.

the 385 metropolitan health insurance markets in the US are highly concentrated, based on the newly
revised (issued in 2010) US Department of Justice and Federal Trade Commission Horizontal Merger
Guidelines. It found that in 67% of metropolitan statistical areas (MSAs), at least one health insurer had an
HMO market share of 50% or greater, and in 68% of MSAs, at least one insurer had a PPO or POS market
share of 50% or greater.
Acquisitions have given these companies greater national reach, pricing power, and economies of scale,
which S&P believes has been putting pressure on others to expand. Looking ahead, S&P believes that the
operating pressures that the healthcare reform law imposes on the health insurance industry will likely lead
to further consolidation,
with the larger, more
financially secure players
absorbing smaller,
financially weaker ones.
Whats more, S&P would
not be surprised if reform is
a catalyst for consolidation,
as players conduct M&A to
improve economies of scale
or expand into faster-
growing markets. Indeed,
UnitedHealth Group signed
an agreement with the
Principal Financial Group
in October 2010 to renew
Principals members
policies as their contracts
expire over the next three
years. This follows
Principals decision to drop
its health insurance business
because of the problems it
foresees in functioning
under healthcare reform.
There is also sector
concentration in MA
enrollment, although it has
been declining. In 1999,
75% of enrollment was in
Aetna, Cigna, Health Net,
Humana, Kaiser
Permanente, PacifiCare,
and UnitedHealthcare (a
division of UnitedHealth
Group Inc.), and Blue Cross
Blue Shield affiliates. In
2011, six of these players
had 47.7% of the Medicare
Advantage market,
according to the Henry J.
Kaiser Family Foundation
(KFF), a nonprofit
organization that focuses
on healthcare policy.
Table B12: SELECTED
HEALTHCARE
MANAGEMENT
MERGERS &
ACQUISITIONS
SELECTED HEALTH INSURER MERGERS & ACQUISITIONS2010-2013
ANNOUNCED ANNOUNCED
ACQUIRER TARGET DATE VALUE (MIL$)
2013
WellCare Health Plans Healthf irst Health Plan Of New
Jersey
9/30/13 NA
HealthCare Partners, LLC Arizona Integrated Physicians 9/13/13 NA
WellCare Health Plans Windsor Health Group 9/5/13 NA
Cigna Corp. Alegis Care 9/3/13 NA
UnitedHealth Group Plus One Health Management 7/31/13 NA
Humana Inc. American Eldercare 7/24/13 NA
Highmark Inc. Triangle Urological Group 4/1/13 NA
WellCare Health Plans Missouri Care 1/22/13 NA
Centene Corp. AcariaHealth 1/14/13 146.2
2012
Centene Corp. Casenet, LLC 12/31/12 4.4
Humana Inc. Metropolitan Health Networks 11/2/12 795.6
Highmark Inc. Saint Vincent Health System 10/15/12 65.0
UnitedHealth Group Amil Participacoes SA 10/5/12 3,945.4
Aetna Inc. Coventry Health Care 8/19/12 7,311.5
Cigna Corp. DiamondView Tower 8/2/12 122.0
Cigna Corp. Finans Emeklilik ve Hayat A.S. 7/12/12 103.6
WellPoint Inc. AMERIGROUP Corporation 7/9/12 5,103.6
Highmark Inc. Jef f erson Regional Medical Center 6/11/12 200.0
WellPoint Inc. 1-800 CONTACTS 6/4/12 900.0
Universal American Corp APS Healthcare 1/11/12 280.5
2011
Cigna Corp. HealthSpring Inc. 10/24/11 4,195.7
Cigna Corp. Firstassist Insurance Services Ltd. 9/27/11 111.3
Health Alliance Plan of
Michigan
Midwest Health Plan 9/18/11 70.0
Blue Cross Blue Shield of
Michigan
The AmeriHealth Mercy Family of
Companies
8/9/11 170.0
Aetna Inc. PayFlex Systems USA 7/18/11 202.0
Aetna Inc. Continental Lif e Insurance Co. 6/13/11 276.0
Aetna Inc. Prodigy Health Group 4/28/11 600.0
UnitedHealth Group Inc. Physicians Health Choice of Texas 1/21/11 30.0
2010
Humana Inc. The Vitality Group 12/31/10 15.0
Aetna Inc. Medicity Inc. 12/7/10 490.0
Humana Inc. Concentra 11/19/10 804.7
Cigna Corp. Vanbreda International NV 8/31/10 412.0
HealthSpring Inc. Bravo Health Inc. 8/26/10 545.0
Molina Healthcare Molina Healthcare of Wisconsin 7/12/10 16.0
Humana Inc. Hummingbird Coaching Services 7/1/10 8.5
Molina Healthcare Molina Inf ormation Systems 1/18/10 131.3
Source: S&P Capital IQ.

(PacifiCare merged into UnitedHealthcare in 2005). The firms that dominated Medicare managed care in
1999UnitedHealthcare, Humana, Kaiser, and the BCBS affiliatescontinued to be dominant in 2013.
S&P believes they will remain dominant through 2014, and will likely see their MA businesses continue to
gain market share, partly assuming continued industry consolidation.
In May 2013, Aetna Inc. acquired Coventry Health Care Inc., a diversified MCO with a large presence in
the Medicaid market. In December 2012, WellPoint Inc. acquired Amerigroup Corp., a MCO focusing on
Medicaid. Two notable acquisitions that occurred in the first quarter of 2013 were Cignas purchase of
select Arcadian and Humana MA plans in Arkansas, Oklahoma, and Texas effective January 1, which were
part of a government-stipulated divestiture for Humana to complete its acquisition of Arcadian
Management Services that had occurred in April 2012. On January 22, 2013, WellCare Health Plans
acquired Missouri Care from Aetna, which Aetna was required to sell in order to acquire Coventry.
S&P Capital IQ believes MCOs are looking at overseas expansion prospects more seriously, owing to
slower growth in the relatively sluggish and mature US managed healthcare market. On October 29, 2012,
UnitedHealth Group Inc. acquired an approximate 65% stake in the leading Brazilian MCO, Amil Participaes
S.A. from controlling shareholders, and acquired another 25% stake through a tender offer in the first half
of 2013. In recent years, Aetna and Cigna have also made acquisitions or established partnerships with local
health insurers in international markets to cover expatriates and globally mobile employers.
INDUSTRY TRENDS
S&P Capital IQ (S&P) believes the economic and operating environment for the large managed care
organizations (MCOs) is less favorable than in recent years. Healthcare cost expansion in aggregate appears
to have ceased moderating, the unemployment rate is up significantly (though it has recently started a
gradual uneven decline), and government funding has been rising at a slower pace. With healthcare reform,
the government radically changes the way MCOs operate. Although it provides funding to help subsidize
the purchase of insurance by those in need (a positive for health insurers), it also imposes prohibitions on
certain long-standing insurance industry practices designed to improve profitability and will exact fees from
the insurers to help pay for the reforms. Meanwhile, MCOs continue to face a stagnant commercial market
(i.e., employer-sponsored health insurance), but they are diversifying into specialized products aimed at
previously overlooked markets. They also are increasingly participating in expanded government programs,
particularly Medicare, a federal program, and Medicaid, which is shared by federal and state governments.
Until the recession, the largest companies had been expanding nationally (and taking share from smaller
competitors), many through M&A, to satisfy the needs of corporate clients that operate nationally. S&P
believes that these companies continue to benefit from economies of scale.
Challenges continue to loom. The nations healthcare tab continues to mount and, with the healthcare
reform law, the federal government is likely to increase regulatory oversight. Chief deterrents to cost
containment are the aging population and the introduction of expensive, new technologies. Biotechnology
drugswhich are effective in some (but not all) patientsare now a part of the routine armamentarium
that doctors use to treat serious diseases, from cancer to multiple sclerosis, but can cost well in excess of
$100,000 per year. Hundreds of these drugs are in various stages of development, threatening to overwhelm
payers without appropriate utilization and cost controls in place.
HEALTHCARE SPENDING IS POISED TO REACCELERATE
In 2009, the rate of healthcare spending growth fell to the slowest pace in several years. That year, national
health expenditures grew 3.8%, down from 4.7% in 2008 and 6.2% in 2007, according to the Centers for
Medicare & Medicaid Services (CMS), part of the US Department of Health & Human Services (HHS). The
deceleration in 2009 reflected reduced utilization of provider services (such as hospital, physician, clinic,
and other). It occurred despite the H1N1 virus epidemic, a rise in Medicaid spending, and increases in
subsidized coverage provided through the Consolidated Omnibus Budget Reconciliation Act (COBRA),
which allows workers who have lost their jobs to maintain coverage with their former employer at full cost.

In 2010, spending grew by 3.9%, partly reflecting the recessions impact and the reduction in the Medicare
Advantage reimbursement rate. According to a March 2012 article published in Health Affairs, a health
policy journal, the slower growth in spending in 2010 was due to lower spending on hospital care and
physician and clinical services, along with drastically low growth in spending on prescription drugs. In
2011, healthcare spending grew by 3.9%, as noted by CMS in June 2012 (latest actual available). This
modest growth largely reflects the lingering effects of the recession, slower medical price growth, lower
enrolments in private health insurance, and cost controls by employers.
Two studies by Harvard University researchers published in the May 2013 issue of Health Affairs opined
that the slowdown in healthcare spending from 2009 to 2011 reflected factors other than the weak
economy and, hence, believe the slowdown may persist. One study initially examined two factors that might
have caused the slowdown: job loss and benefit design changes that shifted more costs to insured people
(i.e., a reduction in employer generosity). Regarding the latter, the researchers found that such benefit
design changes accounted for about 20% of the observed rate of growth. Since they also observed a
slowdown when holding the benefit generosity constant, they figured other factors were also at work. One
would be the reduction in the rate of introduction of new technology. The authors of this study noted that
whether the healthcare spending slowdown is temporary or permanent is controversial and admitted that it
is not definitive, because it examined a period of only five years.
The second study published in the same issue of Health Affairs opined that if the slow rate of growth
continued during 2013 to 2022, public sector healthcare spending will be as much as $770 billion less than
predicted. They noted that while the data were not definitive, the researchers found the argument for a
structural change in the healthcare system contributing to the healthcare spending slowdown to be as least
as compelling as the argument citing the economic cycle. The researchers found that the recession
contributed 37% to the overall slowdown; changes in the insurance mix (the decline in private coverage and
the movement from private coverage to Medicaid and being uninsured), 3%; and Medicare payment rate
and policy changes, 5%.
The researchers found the remaining 55% less easy to explain, and suggested that changes that are more
fundamental may be at work. These changes include the less rapid development of new treatments
(particularly imaging technology and new pharmaceuticals), increased patient cost sharing, and greater
provider efficiency (the decline in hospital readmissions and infection rates). The researchers noted that the
CMS projected that national health spending growth will remain low through 2018 and increase markedly
thereafter, while the CBO forecasted that Medicare spending growth above GDP growth would stall
through 2018 and then surge. The researchers realize the $770 billion savings target by assuming a
continuation of the recent trends, the removal of the oft-postponed physician payment cuts, and the
Medicaid eligibility expansion called for by the ACA starting in 2014.
Table B07: Growth in
national healthcare
expenditures
GROWTH IN NATIONAL HEALTHCARE EXPENDITURES, BY SOURCE
(In percent, annual growth rates)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Consumer out-of -pocket 4.1 2.7 (1.5) 3.0 2.6 4.1 4.2 5.1 5.6 5.5 5.4
Total health insurance 3.8 4.0 7.8 6.4 6.2 6.0 6.4 6.8 6.9 6.7 6.9
Private health insurance 3.8 3.4 7.7 6.2 5.1 5.0 6.0 6.7 6.2 6.2 5.6
Employer-Sponsored PHI 3.9 3.4 4.6 5.6 4.1 3.9 4.5 6.7 6.5 6.2 5.8
Other PHI 2.3 3.2 65.2 13.7 16.7 16.3 19.0 6.7 3.8 5.7 4.2
Public f unds 3.5 4.2 7.1 6.4 6.6 6.6 6.8 6.6 7.1 6.9 7.4
Medicare 4.6 4.2 5.1 5.4 6.8 7.3 7.9 7.0 7.8 7.8 9.1
Medicaid 2.2 4.8 12.2 8.3 7.6 6.5 6.4 6.8 6.9 6.6 6.6
CHIP 4.3 6.9 0.0 9.0 6.8 (12.2) (44.5) (14.5) 27.7 (2.4) 0.0
Other public f unds 3.1 3.8 4.5 5.3 5.0 6.4 6.8 6.2 5.9 6.0 5.9
Total health expenditures 3.9 3.8 6.1 5.8 5.6 5.8 6.2 6.5 6.6 6.5 6.5
Through 2013, other private health insurance includes those with Medicare supplemental coverage and individually-
purchased plans; af ter 2013, other private health insurance includes only those with Medicare supplemental coverage.
Source: Centers f or Medicare and Medicaid Services' July 2013 f orecast report.

Indeed, over 2012 and 2013, CMS estimated (in September 2012) national health expenditures to grow by
3.9% and 3.8%, respectively. In 2014, healthcare spending is expected to accelerate to 6.1%, as individual
(including Medicaid eligibility expansion) and small-group coverage expands under the terms of the Patient
Protection and Affordable Care Act (ACA). Over 201522, healthcare spending is projected to grow at an
average rate of 6.2% annually, driven by ACA coverage expansion, faster projected economic growth, and
the end of the sequester. S&P believes the reasoning makes sense amid CMS assumption that physician
payment cuts attributed to the Sustainable Growth Rate formula for Medicare physician payments, will
either continue to be postponed or eventually dropped by Congress.
The growth in health spending is likely to resume outpacing gross domestic product (GDP) growth from 2013
onwards. If national healthcare spending accelerates, as the CMS projects, the healthcare tab in 2022 is likely
to reach $5.0 trillion, or 19.9% of GDP,
from its estimated 2012 level of 17.9% of
GDP.
A report by KFF published on April 22,
2013, opined that 77% of the recent
slowdown in healthcare spending growth
is attributed to the economy, while the
other 23% is explained by changes in the
health system, including increased
consumer cost sharing, tighter managed
care, and modifications in payment and
delivery. However, while it believes the
annual growth rate in health spending will
increase as the economy recovers, we
should not expect healthcare costs to spin
out of control or the ACA fueling an
increase in health costs. It points out that
not all of the slowdown is due to the
economy and if public- and private-sector efforts to contain healthcare costs continue to hold, we can reduce
the rate of growth by a percentage point or more. Interestingly, in our view, it notes that the transition of the
Baby Boomers into Medicare helps to slow the rate of growth, as Medicare is expected to grow more slowly
than private insurance will and slightly slower than GDP growth.
Separately, on October 2, 2013, data released by S&P for the S&P Healthcare Claims Indices (which
replaced the S&P Healthcare Economic Composite Index) show that for the 12-month period through May
2013, medical and prescription drug costs together rose 3.5% as drug costs rose 0.6% and medical costs
rose 4.2%. The S&P Healthcare Claims Indices are based on data on actual expenditures for
hospitalization, out-patient services and prescription drugs for Americans covered by commercial health
insurance plans, according to David Blitzer, Managing Director and Chairman of the Index Committee at
S&P Dow Jones Indices (which operates separately from S&P Capital IQ). He also explained that the
dataconfirm that while the rate of increase of medical care expenditures in the U.S. is slowing, it is still
rising faster than disposable personal income and that where possible, healthcare expenditures do
respond to economic incentives. According to S&P Dow Jones Indices, trends for total medical costs,
medical costs (excluding pharmaceuticals), and pharmaceuticals declined over the period. Two factors it
sees contributing to these developments were shifts from inpatient to outpatient treatments and cost-driven
shifts from branded to generic pharmaceuticals.
A look at spending by category
Healthcare spending and cost trends have a major impact on MCOs. As a result, S&P analyzes them in
greater depth, beginning with three major categories: hospitals, prescription drugs, and provider services.
Hospitals (inpatient and outpatient). Hospital spending consumes more of the nations healthcare budget
than any other category, estimated to account for 31.8% of all dollars spent on healthcare in 2012,
Chart H11: HEALTH
CARE COSTS vs.
INFLATION
(2)
0
2
4
6
8
10
12
14
16
18
20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Health insurance premiums*
Overall inflation
Workers' earnings
HEALTH CARE COSTS vs. INFLATION
(Year-to-year percent change)
*Family coverage.
Sources: Kaiser/HRET Survey of Employer-Sponsored Health Benefits;
US Bureau of Labor Statistics.

according to CMS data. In the mid- to late 1990s, managed care, coupled with the 1997 Balanced Budget
Act, suppressed hospital spending growth. S&P believes the pace of inflation in hospital spending was likely
slowed in 200709 by the recession.
The CMS notes that total hospital spending growth decelerated from 8.3% in 2002 to 4.3% in 2011 (latest
actual). The deceleration in 2011 (from 6.4% growth in 2009 and 4.9% in 2010) reflected slower price
growth and continued slow growth in the use of hospital services. As of September 2013, CMS estimated
hospital spending growth to have accelerated to 4.9% in 2012, which will slow to 4.1% growth in 2013,
partly reflecting reduced Medicare hospital spending growth under sequestration. It projected growth to
reaccelerate to 4.7% in 2014, bolstered by spending among the newly insured under the ACA, offset by
slower Medicare hospital spending updates. CMS sees hospital spending growth of 5.6% in 2015,
supported by the continued effects of expansion and the assumption of faster economic growth. Looking
ahead, it projects average annual growth of 6.4% per year from 2016 to 2022, reflecting the aging
population and assuming improved economic conditions.
Meanwhile, according to a study published March 1, 2013, in the American Journal of Managed Care,
unadjusted inpatient hospital prices per admission grew 8.2% per year from 2008 to 2010 for the
commercially insured population (under 65 years of age). The researchers estimated that 1.3 to 1.9
percentage points could be attributed to increased intensity per admission The report notes that hospital
charges are typically much higher than the prices insurers and consumers actually pay. Uninsured Americans
still get hit with the biggest hospital bills, according to a Bloomberg article dated March 11, 2013. The
article noted that Johns Hopkins University professor Gerard Anderson found that full charges at hospitals
grew an average 10% a year between 2000 and 2010. While hospitals have often sharply reduced their bills,
the final bill could still be unaffordable for many, particularly after adding the invoices from doctors who
perform the procedures. According to the American Hospital Association (AHA), a trade group, the
nations 5,000 community hospitals provided $41 billion in uncompensated care in 2011 (latest available).
S&P believes hospitals pushed for higher prices in 2010, 2011, and 2012, partly due to the recession when the
drop in the stock and bond markets led to reduced investment income and lower charitable giving. Whats
more, hospitals had come off one of their biggest building booms in history just as the credit crisis increased
the cost of capital for many borrowers, including hospitals.
Hospitals competitive focus on cutting-edge technology, niche specialty services, and amenities to attract
physicians and patients has led to targeted geographic expansion into new markets. According to a study by
the Center for Studying Health System Change (HSC) published in April 2012 in Health Affairs, hospitals
are expanding beyond traditional markets to seek well-insured patients. They enter new regions by building
full-service hospitals, establishing freestanding emergency departments and other outpatient services,
Table B06:
PERSONAL
HEALTHCARE
EXPENDITURES
PERSONAL HEALTHCARE EXPENDITURES
(In billions of dollars)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Hospital care 892 929 973 1,028 1,092 1,158 1,232 1,311 1,397 1,485 1,581
Prof essional services 755 785 841 887 933 984 1,045 1,115 1,190 1,268 1,352
Physician and clinical services 567 589 631 665 698 737 783 835 891 949 1,012
Other prof essional services 77 80 88 93 99 106 113 121 129 138 148
Dental services 112 117 122 129 136 142 150 160 170 181 191
Home health care 78 82 87 93 100 107 116 125 134 145 157
Nursing and continuing care f acilities 151 157 164 172 182 193 205 218 232 247 264
Retail outlet sales 351 355 376 400 422 447 473 503 536 571 609
Prescription drugs 261 262 276 295 312 331 351 373 398 426 455
Medical products 90 93 100 105 110 116 122 130 138 146 154
Durable medical equipment 41 42 44 46 48 50 53 56 59 63 67
Non-durable medical products 49 51 56 59 62 66 70 74 79 83 88
Other personal healthcare 138 145 154 164 175 187 200 214 229 244 261
TOTAL EXPENDITURES 2,807 2,915 3,093 3,273 3,458 3,660 3,889 4,142 4,416 4,702 5,009
Source: Centers f or Medicare and Medicaid Services' July 2013 f orecast report.

acquiring physician practices, and operating medical transport systems to shore up their referral bases and
increase inpatient admissions. Indeed, earlier, following an investigation of high healthcare costs, the
Pittsburgh Tribune-Review published an article on December 8, 2011, noting that from 2008 through
November 1, 2011, US hospitals borrowed $144 billion through public bond issues for construction,
refinancing, equipment, and other expenses, and that many new hospitals were being constructed in
geographies where there were already nearby facilities.
In addition, according to an article published in the New York Times on August 12, 2013, the ACAs cost-
reduction focus, combined with rising costs, are creating a wave of hospital consolidation, potentially
creating large regional and super-regional systems, not only to save money, but also to increase their
negotiating clout with insurers. However, by placing more people in health insurance rolls, the healthcare
reform law should also help reduce the level of uncompensated care and, hence, bad debt expense. Even so,
some dominant hospital systems and large physician groups are still capable of wresting higher payments
from insurers, resulting in higher healthcare costs. The higher payments may also result from the offering of
a unique service or access in a particular geographic area.
In late 2008 and in 2009, MCOs said they noticed that hospitals had begun to intensify their coding; i.e.,
providing similar, yet higher-cost services, or substituting higher-cost diagnostic imaging or therapies for
lower-cost, less profitable ones. In addition, in early May 2013, the Obama administration revealed what
more than 3,000 hospitals charge for common medical procedures. This is an early effort to challenge
healthcare costs by showing consumers that prices for the same service can vary by thousands and even tens
of thousands of dollars, even in the same geographic region. Note, though, that the federal database does
not differentiate between the costs at a high-quality hospital versus a low-quality one.
According to a study released September 2013 by the HSC, the highest priced hospitals in the 134 cities
studies are typically paid 60% more for inpatient services for the privately insured and almost 100% more
for outpatient care than the lowest-priced hospitals in the same communities. However, the listed prices
(also known as chargemaster prices) are relatively meaningless for insurers, which negotiate their own rates.
Still, hospitals with more market power have greater muscle in negotiations with insurers and can extract
higher prices. (The hospitals have to accept Medicare and Medicaid prices, though.) In any event, the
chargemaster prices are more relevant for those who are uninsured, as these are the prices hospitals try to
exact from this population, in S&Ps view. This practice should change as more of the uninsured gain
insurance through Medicaid eligibility expansion, starting in 2014, in those states willing to implement the
process. Moreover, the ACA required that most hospitals must charge uninsured patients no more than
what people with health insurance are billed. One weakness of the ACA, in our view, is that the rule applies
only to nonprofit institutions, which exempts a large portion of community hospitals. However, we note
that there will still be millions of uninsured, who will not be safeguarded from these charges.
In addition, a June 2010 report by the Medical Group Management Association, a professional
organization for physician practices, and a 2009 report by the American Medical Association noted that
doctors are increasingly choosing to work for hospitals over private practice. More recently, a study
published in March 2013 by healthcare staffing company Jackson Healthcare found that 52% of the 118
hospitals surveyed nationwide planned to acquire physician practices in 2013, up from 44% who closed
such deals in 2012. This trend has been attracting the attention of the US Federal Trade Commission (FTC),
according to an article posted April 1, 2013, on the web site of American Medical News, which is published
by the American Medical Association. The FTC is becoming more interested in whether these deals create
antitrust issues.
S&P believes health reforms are driving physicians and hospitals to align closely and share resources, as
reforms lead to the transition from a fee-for-service reimbursement system to one that focuses more on
quality outcomes and containing costs. A successful collaboration would require hospitals to invest in
people and processes. Hospitals will have to align compensation and reward performance, and alter the
practicing pattern to emphasize quality and efficiency rather than just volume.
Nonetheless, S&P believes this trend can also raise the clout of hospitals in their contract negotiations with
MCOs. According to an August 2011 HSC report, as hospitals aim to increase their market share and

revenue, the hospital employment of doctors has increased in the past few years. Increasing hospital
consolidation and the shift of care from the inpatient to the outpatient setting are also contributing to this
trend. Rising costs of private practice, coupled with stagnant reimbursement rates, have increasingly drawn
doctors to work for hospitals. The doctors employment in hospitals helps in clinical integration, leading to
better efficiency and lower costs. However, this can also increase costs as doctors face pressure from
hospitals to order treatments that are more expensive and to drive up the volume of services delivered. It
also results in an increase in fees due to facility fees charged by hospitals for doctor visits. Indeed, in its
2013 Report to Congress on Medicare Payment Policy, MedPAC noted that compared with rates in
physicians offices, Medicare payment rate for (office) visits are 80% higher and electrocardiograms are
over 70% higher when billed as outpatient services.
Prescription drug spending. Although prescription drug spending is a relatively small component (about
10%) of total national healthcare expenditures, it had been the fastest growing category historically. Indeed,
prescription drug outlays increased 111% from 2000 to 2010, while spending on hospitals and
physician/clinical services combined grew 89%, according to CMS data, and from 1990 to 2000, it rose at
200%, versus 73% for hospitals and physicians/clinical services.
S&P believes several developments have helped drive up drug spending at such a high rate and at a relatively
faster pace than spending on hospitals and physicians/clinical services in the last decade of the 20
th
century and
the first decade of the 21
st
century. These trends include the aging of the baby boomers (the estimated 77
million Americans born between 1946 and 1964), the availability of new branded and biotech drugs, the
pharmaceutical industrys payments to physicians (e.g., meals, money for consulting, speaking/or conducting
research), direct-to-consumer marketing, and doctors and patients insensitivity to prices. The doctor who
chooses the drug does not necessarily know the price and may be influenced by pharmaceutical
manufacturers reps touting the latest brand name drug and providing free samples. In addition, the original
tiered drug formularies had very small price differentials between the tiers.
Even so, based on CMS data, after peaking in 2001 at 14.7%, the prescription drug spending growth rate
fell to 0.4% in 2010, mainly driven by the growing use of generic drugs, further supported by the end of
patent protection for certain branded drugs, the introduction of fewer new drugs, and the increase in
Medicaid drug rebates. It temporarily spiked to 5.0% in 2009, reflecting greater use of antiviral drugs, as
well as faster price growth for brand-name prescription drugs, according to CMS.
Growth picked up in 2011, to 2.9%, due to faster growth in prescription drug prices for brand name and
specialty drugs, and increased spending on new brands. However, it saw this upward pressure tempered by
slower growth in the number of prescriptions dispensed and increasing penetration of generic drugs. IMS
Health, a leading provider of information, technology, and services for the healthcare industry, saw a small
decline in the use of prescription drugs by seniors and that the decline went hand-in-hand with a drop in
physician office visits and non-emergency room hospital admissions. The CMS estimated drug spending
declined by 0.8% in 2012, on increased adoption of generic drugs, increases in cost-sharing requirements
(i.e., the increase in co-payments by those covered by health insurance as a percentage of the price of drugs),
and lower spending on new medicines. In a report published May 2013, IMS Health saw a 3.5% decline in
total spending on US medicines on a real per capita basis in 2012 for similar reasons.
According to an online article published in September 2013 in Health Affairs, CMS projects 0.6% growth
in 2013, on the combined impact of diminished savings from patent expirations on average prescription
drug prices, higher sales of relatively expensive specialty drugs (especially recently approved cancer drugs),
and faster growth in the number of dispensed prescriptions. The agency expects it to accelerate to 5.2% in
2014, reflecting the expansion of Medicaid coverage as called for by the ACA, and then to grow at an
average annual rate of 6.5% from 2015 to 2022, owing to rising disposable income (particularly in the
years 2014 to 2016), the diminishing impact of patent expirations, and the prescribing of drugs earlier in
the treatment process as the population ages. According to Express Scripts 2012 Drug Trend Report,
spending on traditional prescription drugs declined 1.5% in 2012 (the first such decline in 20 years),
whereas spending on specialty drugs increased 18.4% in 2012.

Physician services. Physician and clinical services accounted for roughly 20% of national health
expenditures in 2011 and were estimated to account for 20% in 2012, the second largest spending category,
according to the CMS. The CMS estimates that the pace of growth fell from 3.5% in 2009 to 3.1% in 2010,
due to slower growth in the use and intensity of services, which S&P attributes to a weak H1N1 and seasonal
flu outbreaks and the recession, partially offset by increasing prices. Spending on physician and clinical
services grew at a faster rate of 4.3% in 2011, as faster growth in the use and intensity of services outweighed
the slower growth in prices. The CMS also noted that spending by private health insurance and Medicare, the
two largest payers of physician and clinical services, both accelerated in 2011.
According to the latest projections published by CMS, physician and clinical services spending growth for
2012 is estimated at 3.8%, driven largely by the improving economy, an aging population, and physicians
providing in their offices an increasing number of services that used to be provided by hospital outpatient
clinics, and physician and clinical spending growth.
Given that Medicare pays physicians at rates below those of commercial insurers, S&P thinks that if there is
no fix to the physician payment rate reductions, doctors might abandon current Medicare patients and/or
refuse new ones, resulting in declines in care for Medicare beneficiaries. There are already signs of that
happening, according to a Wall Street Journal article published July 29, 2013. While CMS found that there
has been an increase in the number of physicians who accepted Medicare, but opted out of the program in
2012, a survey from the American Academy of Family Physicians found that the proportion of family doctors
who accepted new Medicare patients in 2012 was 81%, compared with 83% in 2010. Separately, a study
published in the July 2013 issue of Health Affairs found that 33% of primary care physicians did not accept
new Medicaid patients in 201112.
In addition, according to a study posted in the September 2013 issue of Health Affairs, a retrospective analysis
of insurance claims for routine office visits, consultations, and preventive visits from more than 40 million
physician claims in 2007 revealed much variation in payments. Physicians at the high end of the payment
spectrum generally were paid more than twice what physicians at the low end were paid for the same service.
Whats more, little variation was explained by the patients age or sex, physicians specialty, or whether the
physician was in the insurers network, although it found that about one-third was explained by the
geographic location of the practice. Health plans and government payers have been trying to identify physician
cost profiles and characteristics to curtail healthcare spending. However, according to an earlier study
published November 12, 2012, by the Commonwealth Fund, the only characteristic that had significant
correlation with costs was experience. Surprisingly, it was the less experienced physicians who had higher cost
profiles than the more experienced ones.
Another study published in the March 2013 issue of Health Affairs sought to understand the attitude of
people toward healthcare costs covered under insurance. This study revealed that people did not make cost-
conscious decisions due to the following four reasons: the perception that higher cost treatment is the best; a
reluctance to make a tradeoff between health and money; a disinterest in costs borne by insurers and society as
a whole; and the impulse to act in self-interest at the expense of exploiting limited resources, also known as
commons dilemma.
S&P believes that the shortage of internists nationally is exacerbating this problem. Although the number of
medical school students continues to increase, adding 7,000 graduates every year, the American Association
of Medical Colleges predicted, in a study published in September 2010, that the shortage of doctors across
all specialties will quadruple to 63,000 by 2015. In a study published in March 2012, the group projected
the shortage of physicians to rise to 90,000 by 2020 and 130,000 by 2025. According to a Health Affairs
article published in January 2013, these estimates of physician shortages are based on ratios (such as one
physician for X number of patients). However, with coordinated care, support from non-physician
professionals (such as nurses), and the use of electronic communications, the patient panel size could be
expanded without hampering access. Since these practices are being adopted by health systems under
pressure to contain costs, the shortage of physicians might be overestimated. S&P believes that physicians
costs are also influenced by the size of the primary care physician and general surgeon populations serving
Medicare beneficiaries on a per-capita basis, which has been shrinking.

The ACA has provisions, including funding, to encourage the expansion of residency slots, and 10% bonus
payments (from 2011 to 2015), to encourage primary care physicians covering Medicare beneficiaries to
continue to do so. It will also fund the training of advanced-practice nurses and family nurse practitioners
that would work with Medicare beneficiaries. Meanwhile, an article published December 4, 2012, in the
Journal of the American Medical Association found that only 21% of third-year residents planned to enter
internal medicine.
There are efforts to increase the primary care physician population. According to an article published April
5, 2013 on www.Medscape.com, a part of WebMD Health Professional Network, two of the nations
newest medical schools, Quinnipiac Universitys Frank H Netter MD School of Medicine in Connecticut
and the University of California-Riverside School of Medicine, hope to double the percentage of graduating
physicians who typically choose primary care through special programs. Separately, Representatives Allyson
Y. Schwartz (D., Pennsylvania) and Aaron Schock (R., Illinois) have proposed the Training Tomorrows
Doctors Today Act, which would create 15,000 new residency positions over the next five years, up from
the current 115,000. Meanwhile, the California legislature passed a bill in July 2013 aimed at addressing
the expected doctor shortage by expanding the medical services that could be provided by nurse practitioners.
However, there is also a shortage of nurse practitioners that S&P believes will be increasingly felt with the
rise in home healthcare under the ACA.
To prevent primary care doctors covering Medicaid beneficiaries from dropping their practice, the ACA also
increases Medicaid payments to 100% of the Medicare rates for 2013 and 2014. S&P believes that in order
for this provision to accomplish its goal, the Medicare physician fix should be in place. Despite the
widespread belief that the fee-for-service payment system for healthcare providers will be replaced, it will
likely to remain the primary payment method to physicians, so that ensuring the accuracy of these payments
will be important to the success of broader payment reforms.
GETTING HEALTHCARE SPENDING UNDER CONTROL
S&P believes that 2013 will mark the 16th consecutive year that the rate of growth for healthcare spending
outpaces US economic growth. For this reason, controlling healthcare costs remains a priority for policy
makers, payers, and consumers. Major drivers that shape healthcare spending are pricing, utilization rates,
and public funds committed to healthcare-oriented entitlement programs. In response, insurers are
consistently testing new approaches, including pay-for-performance incentives, faster adoption of
information technology, and better controls over spending on specialty pharmacy and biotech drugs.
MCOs must watch pharmaceutical costs closely
Health insurers use a variety of tactics to rein in rising pharmaceutical expenses, including tiered formularies,
mail-order programs, and step therapies (having patients take the least expensive appropriate medication to
start and switch to costlier ones if the first treatment is ineffective).
According to KFF, in 2013 as in prior years, nearly all (98%) of covered workers in employer-sponsored plans
have prescription drug coverage, and a large majority of the covered workers (92%) had some sort of tiered
cost-sharing formulary for prescription drugs. MCOs use formularies to determine how much members should
contribute to the cost of a drug, with the first tier (mainly comprising generics) requiring the smallest co-
payments; the third tier requires the largest. From 2000 to 2013, average co-payments for tier 1 drugs rose
25% (from $8 per prescription in 2001 to $10 by 2004, and remaining at that level through 2013, albeit
temporarily climbing to $11 in 2006, 2007, and 2010). Average co-payments for tier 2, or preferred tier (i.e.,
brand name drugs that the formulary wants to promote), rose 93% (from $15 to $29). Those on tier 3
(nonpreferred) rose 79% (from $29 to $52), while those on tier 4 (lifestyle drugs or biologics) rose 36% (from
$59 in 2004, when data was first obtained, to $80 in 2013), according to the KFF.
According to a study published May 2013 by the IMS Institute for Healthcare Informatics (IMS), a global
healthcare research firm and a unit of IMS Health, total spending on US medicines declined 3.5% on a real
per-capita basis in 2012, the first such decline in 55 years. Drivers included lower utilization of branded
drugs, the increased availability of low-cost generic drugs (which now account for 84% of all prescriptions),
moderating price increases, and lower spending on recently launched medicines. In addition, the number of

patient visits to doctors offices declined 0.9%, and non-emergency room admissions declined further. These
factors restricted total healthcare spending on medicine to $325.8 billion, down 1.0% from 2011, despite
the 1.2% rise in the total number of prescriptions.
According to a study published June 2013 by the IMS Institute for Healthcare Informatics, improved
medicine use could save about $213 billion in avoidable costs in the US. The study identified six levers that
would help improve the use of medicine: increasing adherence to medicines, ensuring timely use of medicine,
optimizing antibiotic use, avoiding medication errors, using low-cost generics wherever possible, and
managing polypharmacy (the use of multiple medications).
According to a CMS press release dated July 29, 2013, since the ACAs enactment, more than 6.6 million
Americans with Medicare who reached the Part D coverage gap known as the donut hole have been able
to save over $7 billion on prescription drugs. As a result of the ACA, people in 2013 with Medicare in the
donut hole received a 52.5% discount on covered brand name drugs and 21% on generics. The discounts
on both will increase to 75% by 2020.
Other programs use financial incentives or penalties to encourage members to take advantage of available
generics, mail-order dispensing pharmacies, and preventive care therapies. The Internal Revenue Service
permits payers offering high-deductible plans to cover certain drugs that prevent disease, even if the member
has not yet met the deductible. (See the How the Industry Operates section of this Survey for more
information on high-deductible plans.)
Patent expirations good for generics
While these cost-containment programs have helped, the biggest impact on MCOs pharmaceutical budgets in
2006 and 2007 came from the plethora of best-selling innovative drugs that lost patent protection, paving the
way for introduction of genericslower-cost
copies of those drugs. A turning point was
reached in 2006: at least six top-selling
drugs, each with annual sales in excess of $1
billion, went off patent and faced immediate
generic competition.
Generic drug utilization is increasing slowly
but steadily. In 2009, generics accounted for
three out of four prescriptions (or roughly
75% of over 3.9 billion dispensed), up from
61% at 2006s start, according to studies
published in May 2009 and July 2010 by
IMS Health for the Generic Pharmaceutical
Industry Association (GPhA), a trade group.
The generics share increased to 78% of all
the prescriptions written in the US in 2010
and to 80% in 2011, with savings from the
use of generic drugs estimated at $158
billion in 2010 and $192.8 billion in 2011.
It expects the generic share to reach 87% in
2015. According to IMS Health, a 3%
increase in generic utilization nationwide
yields $10 billion in savings. Moreover,
generics cost just $0.16 of every dollar spent
on prescription drugs. Further, IMS Health
estimates that the global market for generics
has grown from $124 billion in 2005 to
$242 billion in 2011, and is projected to
reach $400 billion$453 billion by 2016.
Chart H08: SALES
OF GENERIC
LAUNCHES
20.4
35.5
11.2
16.8
13.3
0
5
10
15
20
25
30
35
40
2011
Lipitor
Zyprexa
Levaquin
Concerta
Taxotere
E2012
Plavix
Singulair
Seroquel
Lexapro
Actos
Diovan HCT
Eloxatin
Geodon
Tricor
Provigil
E2013
Cymbalta
Diovan
Niaspan
E2013
Nexium
Copaxone
Celebrex
E2015
Abilify
Namenda
Lovaza
Androgel
SALES OF GENERIC LAUNCHES*
(Billions of dollars)
*Includes all expected generic launches for the year. Note: The timing of
generic introductions and number of suppliers can be impacted by a variety
of factors, including legal challenges, regulatory issues and manufacturing
capacity.
Sources: IMS Health; CVS Caremark estimates.
KEY GENERIC LAUNCHES

According to a study by IMS Institute for Healthcare Informatics published in August 2012, the savings
from the use of generic drugs totaled slightly over $1 trillion from 2002 to 2011, including $192 billion in
2011 alone. According to Express Scripts 2012 Drug Trend Report, in 2012, the cost of treating ailments
such as diabetes, high blood pressure, and cholesterol, dropped for the first time in 20 years due to the
availability of cheaper generic drugs. In its 2013 Drug Trend Report, Express Scripts noted that although
the drug trend (the rate of change in total spend driven by utilization and unit cost) in 2012 was 2.7%, it
was mainly due to the higher costs (average unit cost up 18.7%) associated with specialty drugs, with 22
approved by the FDA in 2012. Even so, the overall trend was tempered by a 0.6% rise in utilization of
traditional drugs outweighed by a 2.2% decline in unit cost, due to the wave of blockbuster drug (those
with annual sales of $1 billion or more) and patent expirations in many of the top therapy classes.
According to pharmaceutical distributor AmerisourceBergen, there were over 50 new generic drug launches
in its fiscal year ended September 30, 2012, 35 of which it labeled as primary. It saw fewer launches in
fiscal 2013, but expects resumed growth afterward, although it did not provide counts. Patent expirations
are also rising, with 11 of the top 20 drugs set to lose their patents between 2012 and 2015, according to
pharmacy benefits manager (PBM) Medco Health Solutions Inc. (which was acquired by Express Scripts
Inc. in April 2012). MCOs aggressively convert their members to generics. PBMs, which affiliate with many
MCOs to help administer pharmacy benefits, can transfer patients to a generic drug within days of patent
expiration. Whats more, this is also being done via therapeutic substitution, a relatively new practice whereby
a patented brand name drug is substituted with a generic that is not identical. For example, consumers had
been motivated to use the generic version of Zocor, an anticholesterol drug, instead of Lipitor, a more
expensive, brand-name statin from Pfizer Inc., prior to Lipitors patent expiration in 2011.
Controlling hospital spending
According to a January 2013 report by the American Hospital Association (AHA), the healthcare sector
plays a prominent role in the economy and hospital care is an important part of this sector. Hospitals are
the second-largest private sector employer, employing about 5.5 million people and spending over $702
billion in 2011 (latest available) on goods and services. A look at the data reveals that, in recent years,
hospitals have borne the greatest responsibility for healthcare cost increases. This rise in spending on
hospital care is due largely to higher prices charged by hospitals to cover their rising costs.
The exact correlation between rising costs and rising hospital prices cannot be determined because hospitals
use complex and varied strategies to determine their prices. Hospitals official charges, which vary greatly
among institutions, tend to be much higher than the actual amounts paid to them for goods and services. In
2004, US hospitals were paid only 38% of their charges by patients or insurers, according to Health Affairs
magazine, and we believe it has remained not far from that level. The amount that payers actually hand
over to hospitals varies widely for identical procedures and services, even within the same institution,
because each payer negotiates separately with individual hospitals or hospital groups.
In recent years, some MCOs have introduced tactics to control hospital spending. The CMS compiles and
discloses indices on the quality of care, service, and compliance with safety measures to help consumers
decide which hospital networks to use. Its weakness is that the compliance with safety measures does not
guarantee better surgical outcomes, and the CMS plans on reporting more outcome measures in the future,
according to an article published October 18, 2010, in the Wall Street Journal. Some MCOs disclose the
estimated cost of certain common medical procedures and tests, while others have dropped certain higher-
priced hospital chains from their provider networks if others are accessible by their members. In our view,
the effectiveness of such plans depends on whether the enrollees primary care physician has admitting
privileges in the lower-cost hospital. Furthermore, according to a May 2012 study by HSC, due to the
negotiating power of MCOs, even dominant health plans are wary of disrupting the status quo by trying to
constrain prices, because insurers can simply pass along higher costs to employers and their workers.
To reduce utilization, many MCOs have reinstated prior authorization requirements, stricter length-of-stay
reviews, payment cuts after a threshold has been met, and higher deductibles for hospitalization. Moreover,
MCOs have been recently paring the number of doctors and hospitals in the provider networks to be used

by individuals and families signing up for health insurance via the public health insurance exchanges
promoted by the ACA, which S&P believes gives these insurers some clout in their price negotiations.
The industry is also witnessing a trend where the large publicly traded MCOs are either providing services
through building or acquiring their own clinics or hospitals or acquiring other MCOs with clinics. These
clinics and MCO-owned hospitals provide immediate care enabling the patients to save on their hospital
bills and insurers to reduce costs amid the state spending cuts. Molina Healthcare owned 27 primary care
clinics in California, Florida, New Mexico, and Washington, and managed three county-owned primary
care clinics under a contract with Fairfax County, Virginia, as of September 30, 2013. According to
Humanas 2012 10-K filing, its subsidiary, Concentra Inc., acquired in December 2010, delivers primary
care, occupational medicine, urgent care, physical therapy, and wellness services to employees and the
general public through its operation of 330 medical centers and over 250 worksite medical facilities. In
August 2011, WellPoint Inc. completed the acquisition of CareMore Health Group, which offers Medicare
Advantage and Special Needs Plans through its 26 clinics. Finally, we note that Highmark, a Blue Cross
Blue Shield-licensed health insurer in Pennsylvania, has been acquiring hospitals.
Meanwhile, the CMS announced in August 2008 that starting October 1, 2008, it would no longer reimburse
hospitals for the treatment of injuries or illnesses that could have been prevented if the hospital had taken
proper precautions. Since the CMS first ruled on the issue, several MCOs and state Medicaid programs have
followed suit, ending reimbursement for preventable errors and never events, such as surgery on a wrong
body part, surgery on a wrong patient, and wrong surgery on a patient. A report published in January 2012
by the office of the Inspector General of the US Department of Health & Human Services (HHS) found that
hospital incident reporting systems captured only an estimated 14% of the patient harm events experienced
by Medicare beneficiaries. In addition, the ACA established the Hospital Readmissions Reduction Program
(HRRP), which ties hospital payments to readmission rate and penalizes those hospitals whose rates exceed
a national benchmark.
According to the Robert Wood Johnson Foundation (RWJF), better coordination of patient transfers among
care sites could help improve the quality of care and save money. RWJF also stated that mismanagement of
care transitions was responsible for $25 billion$45 billion in additional expenditures in 2011. As per the
Value-Based Purchasing Program, beginning in October 2012, Medicare has started withholding 1% of
total hospital reimbursements, and payments to hospitals depend on the quality of care they provide.
Further, the federal government, under the Hospital Readmissions Reduction Program (HRRP), has started
penalizing hospitals that have higher readmission rates than the national average. However, according to a
study by the Commonwealth Fund published February 25, 2013, economic incentives alone are not
sufficient to achieve the desired reduction in readmission rates. Extensive efforts targeting the quality of care
need to be undertaken.
Even employers have started taking initiatives to reduce healthcare spending and are promoting wellness
programs. However, according to a study published March 5, 2013 by the Commonwealth Fund, although
wellness programs reduced hospitalization rates, outpatient visits increased, resulting in no substantial
change to employers costs.
S&P also believes that the rise in home healthcare utilization is helping to reduce hospital stays and limit the
rise in hospital spending, as home healthcare costs a fraction of hospital care. Although home healthcare
spending has grown faster than hospital spending, the CMS expects home healthcare spending to grow from
2.8% of total national health expenditures in 2011 to 3.1% in 2022.
Accountable care organizations: a possible new way to control healthcare spending
The CMS started a number of bundled payment models under the ACA, which is a departure from the
traditional fee-for-service (FFS) payment model. The bundled payment model provides payment for the
entire healthcare a patient needs over a defined clinical period as against payment for each different service
availed of by the patient. A November 2011 article published in the Health Affairs magazine evaluated the
implementation of one such bundled payment pilot model PROMETHEUS Payment, a three-year pilot
project that was scheduled to end in 2011, and noted that the implementation has faced numerous
challenges. (PROMETHEUS was an acronym for Provider Payment Reform for Outcomes, Margins,

Evidence, Transparency Hassle-reduction, Excellence, Understandability, and Sustainability.) None of the
three pilot sites has made bundled payments as of May 2011, even when the model has been in place since
July 2008 at the first two sites and since August 2009 at the third site. The problems possibly arose due to
the complex nature of the payment model, such as defining the kind of services that should, or should not,
be made a part of the bundle.
Looking ahead, the ACA seeks to garner savings from the development of accountable care organizations,
or ACOs, for which the final rules governing them were published by the US Department of Health &
Human Services on October 20, 2011. ACOs would be comprised of hospitals, physicians, and other
providers, and would be paid by Medicare to cover all Medicare beneficiaries in a given service area. In
addition, through team-based practice, ACOs may help alleviate the shortage of primary care physicians by
allowing primary care practices to care for larger numbers of patients more efficiently. In this regard, we
note that the Federal Trade Commission and the US Department of Justice proposed an enforcement policy,
also on March 31, 2011, regarding antitrust laws to collaborations among otherwise independent providers
and provider groups participating as ACOs. In any event, if the ACO meets quality and cost targets, the
hospitals and doctors would share in the savings and possibly receive bonuses.
In July 2012, CMS announced that it had entered into agreements with 88 new ACOs, thereby increasing the
total number of organizations participating in Medicare shared-saving initiatives to 153, and in January
2013, it announced the formation of another 106 ACOs. The 250-plus ACOs are diverse: roughly half are
physician-led organizations and 20% include community health centers, rural health clinics, and critical
access hospitals that serve low-income and rural communities. According to CMS, as of February 28, 2012,
around 4 million beneficiaries were receiving care from providers participating in Medicare shared-savings
initiatives. CMS sees health outcomes improving and adverse events are falling, and estimates that these
ACOs will save up to $940 million in the first four years. However, ACOs have also begun to be utilized for
the coverage of Medicaid beneficiaries in some states (see State budget deficits appear to be abating in the
Current Environment) and the under-65, non-Medicaid, insured population.
The payment model of an ACO is value-driven (i.e., it bases the payments made to physicians on the quality
and cost of care they provide), unlike the FFS model, where more services by physicians mean more
payments to them. The financial incentives in the FFS model might lead to more and more services by the
physician without any significant positive impact on the patients health. However, designing an ACO might
not be that easy, as it is difficult to have one ACO meet the requirements of different healthcare consumers,
thus leading to a possible risk of limiting access to quality healthcare.
Still, the ACO is being viewed as a significant source for healthcare cost savings. Indeed, a study published
by the Agency for Healthcare Research and Quality (a unit of HHS) in August 2013 noted that the top 1%
of the patient population accounted for 21% of the $1.26 trillion Americans spent on healthcare in 2010.
This compares to the bottom half of the patient population, which accounted for only 2.8% of the
spending. The people in this cohort have multiple, chronic medical conditions and are known as super-
utilizers, according to a story jointly published by KFF and The Washington Post, which also notes that
many suffer from extreme uncoordinated care. Some are dual eligibles (beneficiaries of both Medicare
and Medicaid), and some are uninsured. The article noted that coordinated care plans have been beneficial
to such patients and views ACOs as one answer.
The move toward ACOs may also encourage hospitals and doctors to consolidate, according to industry
experts, which could drive up costs. According to the Center for Studying Health System Change (HSC), and
reported October 13, 2010 by KFFs daily online newsletter, Kaiser Health News, hospitals employing
doctors generally have more negotiating clout with insurers than doctors working in private practice. In
December 2012, Premier Research Institute conducted a study in which it evaluated the readiness of
organizations to become successful ACOs, based on the following six core capabilities: a people-centered
foundation; health homes; high-value network; payer partnership; population health data management; and
ACO leadership. None of the organizations assessed in the study managed to get a score of one, on a scale
of 0 to 1, on any of the given parameters.

HEALTHCARE IT: ARE TECHNOLOGY INVESTMENTS A LONG-TERM SOLUTION TO COSTS?
President Obama saw substantial savings from investments in healthcare information technology (HCIT),
including electronic health/medical records (EHR/EMR), decision support systems, and computerized
physician order entry. These expected savings were the primary impetus behind the up-to-$27 billion
investment in HCIT over a 10-year period proposed in the Health Information Technology for Economic
and Clinical Health (HITECH) Act, which was enacted as part of the American Recovery and Reinvestment
Act of 2009 (ARRA). The regulations also provided for penalties for institutions not using specified EHR
after 2015 and downward revisions to Medicare payments, also beginning in 2015.
In essence, an EHR system can make a patients health information available when and where it is needed,
and clinicians do not have to worry about drugs or treatments prescribed by another provider, so care is
coordinated. They can identify safety issues, such as a patients drug allergies and inform clinicians whether
the drug they would prescribe using the EHR system would interact with another drug the patient is already
taking. Linked to the patients computer, they can be used to provide follow-up care for the patient and
provide the patient with additional resources. The system can also reduce paperwork time for providers and
reduce the duplication of testing. However, a study published March 24, 2011, in the New England Journal
of Medicine noted while HCIT holds great promise in helping clinicians improve patient care, so far they
have difficulty using EHRs to support care delivery and coordination, relying instead on EHRs primarily for
documentation and billing purposes.
On July 13, 2010, the Centers for Medicare & Medicaid Services (CMS) and the Office of the National
Coordinator for Information Technology (ONC) issued final regulations defining meaningful use and
setting standard for the electronic health record incentive program. The regulation issued by the CMS
defines the minimum requirements providers must meet through their use of certified EHR technology to
qualify for the payments. The ONC identifies the standards and certification criteria for the certification
of EHR technology, so eligible professionals and hospitals may be assured that the systems they adopt are
capable of performing the required functions.
On August 23, 2012, the final requirements were outlined for the second stage of the incentive program
associated with the meaningful use of EHR technology, which overwrites the second stage rules proposed
on February 23, 2012. The final rule adds two new core objectives to the second stage reporting requirements
for physicians and hospitals. The first rule requires physicians to use secure electronic messaging to
communicate relevant health information with patients. The second rule requires hospitals to automatically
track medications from order to administration, using assistive technologies in conjunction with an
electronic medication administration record (eMAR). The final rule also adds outpatient lab reporting
and recording clinical notes for both physicians and hospitals as a menu objective. This gives hospitals
the flexibility to select other objectives for meeting the meaningful use requirement and thus receive the
incentive payment. The earliest that any hospital can proceed to stage two of meaningful use is in 2014.
According to a CMS press release dated May 22, 2013, the US Department of Health and Human Services
had met and exceeded its goal for 50% of doctor offices and 80% of eligible hospitals to have EHRs by the
end of 2013 and to use them meaningfully to manage patients medical information and prescriptions.
(More than 291,000 doctors and other eligible professionals, and over 3,800 hospitals were reached.) In
contrast, researchers from the Robert Wood Johnson Foundation (RJWF), Mathematica Policy Research,
and the Harvard School of Public Health found that only 38.2% of physicians report having adopted basic
EHRs by the end of 2012, according to a report published July 2013 by RJWF. In addition, only 44% of
hospitals reported having at least a basic EHR. Although 42% reported implementing all 14 stages of core
functionalities, versus 4% in 2010, only 5% of hospitals could meet all 16 stage-two core functionalities.
On the bright side, in S&Ps view, 63% reported meeting 1115 functionalities, suggesting that they are
close to meeting the full range. In any event, any hospitals unable to meet stage-one meaningfuluse criteria
by July 2014 will face penalties in the form of reduced Medicare payments. Stage-two criteria will begin to
be applied in fiscal year 2014, which began on October 1, 2013, and penalties for failure to attest to the
achievement of meaningful use will begin in fiscal 2015, as noted in an article posted in the August 2013
edition of Health Affairs.

The results of a study funded by HHS, published in November 2011, revealed that though electronic
prescribing is an important tool to improve efficiency and patient safety, there are still some obstacles with
respect to the adoption of the technology by physicians and pharmacies. While e-prescribing facilitates
electronic exchange of prescription data between physician practices and pharmacies, issues such as the need
to manually edit important information (such as the drug name or dosage) were causing problems. However,
the study also observed that physician practices will actively work toward ironing out the challenges facing
e-prescribing to obtain federal incentives associated with adoption of the technology.
According to a study by BMC Medical Informatics and Decision Making published in September 2012,
hospitals with a high level of health information technology (HIT) were significantly better in terms of
mortality rates, patient satisfaction, and quality measures as HIT enabled them to engage in quality
improvement practices. According to another study published in the Journal of General Internal Medicine in
October 2012, physicians using EHR scored significantly higher on quality of ambulatory care, compared
with those not using EHR. These studies support the efforts of the government to promote EHR.
We have not come across any estimates regarding the potential amount of medical cost savings from the use
of electronic health records. According to a May 2008 analysis by the nonpartisan Congressional Budget
Office (CBO), a research arm of Congress, while HCIT can be an essential component of an effort to
reduce costsby itself it typically does not produce a reduction in costs. The Commonwealth Fund, a
private foundation that promotes a high-performing healthcare system, estimates that the US pays
approximately 2.5% more in healthcare administrative costs than other developed countries; if these costs
were eliminated, the savings would total approximately $50 billion per year.
So far, however, the story is mixed. According to a New York Times article published September 21, 2012,
the move to EHR may be costing Medicare, private insurers, and patients billions of dollars more, as it makes
it easier for hospitals and physicians to bill more for services, some of which may not have been provided.
According to the newspapers analysis of Medicare data from the American Hospital Directory, which
provides data and statistics on more than 6,000 hospitals nationwide, hospitals received $1 billion more in
Medicare reimbursement than they received five years earlier, at least in part by changing the billing codes
they assign to patients in emergency rooms. More recently, according to an article published January 2013
in Health Affairs, a new analysis by the RAND Corporation found that the conversion to EHR has failed so
far to produce the hoped for healthcare cost savings and has had mixed results in improving efficiency and
safety. It attributes the disappointing performance of HIT to the following: the sluggish adoption of HIT
systems, coupled with the choice of systems that are neither interoperable nor easy to use; and the failure of
healthcare providers and institutions to reengineer care processes to reap the full benefits of HIT.
Meantime, according to a report posted July 2013 by the American Hospital Association, based on a survey
of 785 hospitals, nearly 95% reported they were moderately or very confident of meeting the scheduled
October 1, 2014 implementation date for the adoption of the ICD-10 clinical diagnoses and procedures
classification system. This project is separate from the meaningful use program described above. Some
92% of the hospitals are also working with their associated physicians to implement ICD-10. ICD-10 is the
10th revision of the International Statistical Classification of Diseases and Related Health Problems (ICD), a
medical classification list by the World Health Organization (WHO). The ICD defines the universe of
diseases, disorders, injuries and other related health conditions.
Separately, on September 12, 2011, WellPoint, the nations second largest health insurer in terms of
membership as of December 31, 2012, and IBM, the largest IT company and maker of computers,
announced an agreement, under which WellPoint will utilize IBM Watson technology to help improve
patient care through the delivery of up-to-date, evidenced-based healthcare. The Watson is a computing
system designed to rival a humans ability to answer questions poised in natural language with speed and
accuracy. WellPoint and IBM envision that new applications will allow physicians to use Watson to
consult patient medical histories, recent test results, recommended treatment protocols and the latest
research findings loaded into Watson to discuss the best and most effective courses of treatment with their
patients. WellPoint had plans to employ the Watson technology starting in early 2012, working with select
physician groups in clinical pilots. In February 2013, IBM and WellPoint announced the latters first
commercially developed application based on Watson technology, tools designed to accelerate and

streamline the prior authorization process at health plans. Should the overall project prove successful, S&P
believes other large health insurers may adopt Watson technology, or develop technology in-house, to
accomplish the same thing. We also would not be surprised if such a system, which should help control
medical costs, is eventually shared by several insurers, large and small, to allow the system to be more
affordable for each.
Health management programs
A key issue for payers is the number of people with chronic diseases, such as asthma and diabetes that are
expensive and complex to treat. Many have set up disease-management programs. A survey of the members of
the National Association of Manufacturers and the ERISA Industry Council by the public relations firm
Health2Resources found that 77% of employers offered formal health and wellness programs in 2008 (latest
available), up slightly from 2007 levels, and over half of those without programs planned to add them. In
addition, 48% of employers offer formal disease management programs, approximately the same level as in
2007. In its 2009 survey (latest available), Health2Resources found a decline in the percentage of companies
offering wellness programs (to almost 66%), but attributes the trend to the smaller size of companies
contained in the later sample that was surveyed. Even so, Health2Resources discovered that the percentage of
companies measuring return on investment from health and wellness programs increased, from 14% in 2007
to 73% in 2009.
According to the Wall Street Journal, a growing number of plans offer specially trained case managers to
coordinate care for patients during a major illness or with costly and complex medical conditions, such as
cancer or an organ transplant. However, according to an article published March 14, 2011, in the Archives of
Internal Medicine and summarized on the Center for Studying Health System Change (HSC) website,
carefully designed programs implementing best practices for patients with multiple chronic conditions have
shown only limited success.
Engaging employees in health and wellness programs, however, is challenging, according to the HSC,
because participation typically is voluntary. The ACA seeks to encourage participation in such programs by
providing grants, technical assistance, and other resources to help small employers establish wellness
programs and permitting employers to offer employees rewardsin the form of premium discounts, waivers
of cost-sharing requirements, or additional benefitsof up to 30% of the cost of participating in a wellness
program. But while the HSC believes that the investment payoff is difficult to demonstrate and it may take
three to five years to determine the return on investment, results of a survey released by management
consultant Mercer in March 2011 showed that high participation in wellness programs led to lower medical
cost trends for the employers that sponsored the programs.
An Aon Hewitt survey (published in August 2013) of 837 participants representing organizations of varying
size, industries and US geographic region found that 75% of the employers, to encourage participation, gave
employees incentives for filling out a health risk questionnaire and 71% did the same for biometric
screenings. Data for 2013 showed that 48% of employers used cash and gift cards to drive wellness
participation (up from 37% in 2011), while 56% have incentives in place that focus on taking specific
action. However, only 24% have incentives on achieving outcomes.
According to another Aon Hewitt survey, the 2013 Consumer Health Mindset, consumers say they know
what they need to do to be healthy, but more often than not, life gets in the way of actually doing it or
sustaining it. They report experiencing a fair amount of stress, particularly from finances and work, and
often deal with it in sedentary ways. In addition, they say they are not getting the guidance they need to
make the best health-related decisions.
CONSUMERISM CONTINUES TO GROW
One of managed cares key preoccupations since 2006 has been consumerism: the trend toward getting
consumers more involved in, and better informed about, their healthcare. The premise is that if consumers
have to pay more out-of-pocket for services and medications, they will be more aware of the economic
consequences of their healthcare decision-making and pay more attention to costs when making such
decisions. They could conceivably forgo unnecessary treatments or choose less expensive drugs.

According to the 2013 UBA Health Plan Survey, which was released August 2013 by United Benefit
Advisors, an alliance of independent benefit advisory firms, employers covered 18% more of a single
employees health insurance premium, or $934 per employee, in 2013, but asked employees with
dependents to pick up 3% more of the family premium, $492 on average. Even so, the average employee
saw an overall increase in healthcare cost due to rising out-of-pocket costs, including higher in-network
deductibles, in-network co-insurance, and much higher out-of-pocket maximums. In-network deductibles
rose $91 to $1,852 for a single and $216 to $4,225 for a family, while the out-of-pocket maximums (after
the deductible) for in-network grew by $152 to $3,641 for a single and $433 to $8,043 for a family, or
more than 17 times the level required five years earlier. In addition, the average in-network co-insurance
dropped from 90% to 80%.
Critics worry that higher out-of-pocket expenses will prevent many participants, especially those with low
incomes and chronic diseases, from getting needed treatment. They further maintain that such plans, while
favorable to employers seeking to reduce their healthcare costs, are less beneficial to employees. Indeed,
according to an article in the June 2013 issue of Health Affairs, CDHPs reduce the long-term use of
outpatient physician visits, including cancer screenings, and prescription drugs; however the researchers
found an increase in emergency department use. Nonetheless, according to a survey by the Employee Benefit
Research Institute (EBRI) in 2012, as many as 36% of the 4,498 privately insured adults ages 21-64
reported having enrolled in a high-deductible plan, which is a plan where the coverage requires individuals
to spend at least $1,000 for individuals and $2,000 per annum for a family. Another 31% of the respondents
were enrolled in consumer-driven health plans, having the same amount of deductibles, but also having a
health savings account (HSA) or Healthcare Reimbursement Arrangement (HRA). (For definitions of HSAs
and HRAs, see Consumer-driven health plans below.) The rest were in more traditional health plans.
The problem associated with the rising membership in high-deductible plans is the tendency of the covered
individuals/families to reduce their spending on preventive healthcare measures such as vaccination shots,
mammography, cervical cancer screening. A study by the Rand Corporation (a non-profit entity providing
research and analysis), which was published in the American Journal of Managed Care in March 2011,
examined the spending patterns across 808,707 households insured through 53 large US employers, 28 of
which offered a high-deductible health plan (HDHP) or consumer-directed health plan (CDHP). The study
found that the health spending for families enrolling in HDHPs or CDHPs for the first time was 14% less
than similar families enrolled in conventional plans. While significant savings for enrollees were realized for
plans with deductibles of at least $1,000, they also reduced the use of preventative care in the first year. The
ACA, in order to avoid this spending trend among families, lays down a waiver on deductibles for preventive
treatments as a necessary requirement for health plans to be listed on state-based healthcare exchanges.
Further, according UBA, consumer-directed health plans (CDHPs) grew at a rate of 33.9% in 2009 and
covered more employees (15.4% of all employees covered) than HMO plans (13.6%) that year. In 2010,
however, they grew at a rate of 18.1%, but no longer cover more employees (12.4%) than HMO plans
(15.4%). In 2011, CDHPs grew at a rate of 13.9% and covered more employees (17.3% of all employees
covered) than HMO plans (11.9%). However, while 1.8% fewer employers offered CDHPs in 2012, they
were still offered to more employees (22.5%) than HMO plans (19.1%) for the fourth consecutive year.
According to UBA, the CDHPs experienced an average increase in savings of 4.7%, which is below the
average 5.0% increase of all plans. UBA notes, however, that in 2012, first-year implementation of CDHPs
did not produce an appreciable savings (only 1.75%) over the plans they were replacing or HSA, a
significant reduction from prior years. As these plans have become more prevalent, the percentage of savings
has continually declined. In addition, employers with 1,000 or more employees saw enrollment in CDHPs
drop substantially from 15.9% in 2011 to 11.3% in 2012. S&P believes that employees have become less
interested in high-deductible health plans with savings options, which account for the bulk of the CDHPs.
While these require lower average monthly premiums for individuals and families than other plan types,
users have to more closely watch their healthcare spending and pay upfront for more common medical
procedures. Even so, according to KFF data, 19% of employees receiving insurance from employers were
enrolled in high deductible plans. Further, these plans have overtaken HMOs as the second most popular
option by US employers.

The ACA does not directly address consumerism, but S&P expects it to continue to be practiced. Thats
because consumerism benefits MCOs by relieving them of some of the continual pressure to raise employer
premium rates in order to keep up with rising medical costs. Enrollees and their employers benefit from
lower premiums than they might otherwise have had to pay, but they typically have higher out-of-pocket
costs for common procedures. Employers still select insurers for most consumers, but insurers offer enrollees
more options than in the past, which requires consumers to make choices. Consumerism could also lead
companies that previously could not afford to offer healthcare insurance to their employees to offer lower-
cost, more flexible health plans.
Consumer-driven health plans
The core of consumerism involves enrolling people in CDHPshigh-deductible health insurance plans that
can be combined with tax-exempt savings accounts. They can use money that they saved voluntarily in their
savings account to pay for out-of-pocket medical expenses. Currently, there exist two kinds of tax-exempt
accounts specifically targeted at healthcare: HSAs and healthcare reimbursement accounts (HRAs). HSAs were
created by the MMA and have been available since 2004; HRAs came on the market in 2001. In both cases,
users benefit from lower premiums and the ability to put pretax dollars into a savings account that can be
rolled over annually as unused funds build up. According to an article on Healthaffairs.com in May 2012, an
increase in the number of consumer-driven health plans from its current level of 13% of the total employer-
sponsored insurance plans to 50% could reduce annual healthcare spending by around $57 billion. According
to the 2013 UBA Health Plan Survey, preferred provider organizations (PPOs) were a dominant plan type,
accounting for 47.2% of all plans, 46.9% in 2011, while HMOs accounted for 18.4%, versus 19.1%, and
CDHPs accounted for 24.1%, up from 22.5%.
Employers and employees can contribute pretax income to HSAs, or individuals can set up HSAs that are
not affiliated with an employer. HSAs stay with individuals even when they switch jobs, and the money
accumulated in them can be invested in interest-earning investments. They essentially work much like
401(k) plans, with the funds deducted from payroll prior to taxation. Their chief disadvantage is that only
people enrolled in plans with deductibles of at least $1,200 for an individual and $2,400 for families, as of
January 1, 2010 can take advantage of them. The maximum amounts of money that can be set aside for
2014 (up from 2013), are $3,300 for a single plan or $6,550 for a family plan, with a catch-up contribution
of $1,000 for a single or family plan for those aged 55 years or above and not enrolled in Medicare. The
maximum out-of-pocket expenses are $6,350 and $12,700, respectively. HSA Bank, a leading HSA
administrator and a division of Webster Bank, N.A., reported on January 2011 that its deposits grew in
three years by $500 million to $1.8 billion, amid the weak economy. Under the ACA, starting in 2011,
over-the-counter medications would no longer count as qualified medical expenses for HSAs, and the tax
penalty for nonqualified HSA distributions increases from 10% to 20%.
According to the KFF, the percentage of covered workers enrolled in a plan with a general annual deductible
of $1,000 or more for single coverage rose from 10% in 2006 to 38% in 2012. S&P believes high-deductible
plans, often linked to a tax-advantaged HSA, may be becoming the only health insurance option offered by
many firms, as companies shift an increasing percentage of healthcare spending onto their employees.
According to The Philadelphia Inquirer, proponents of high-deductible plans say consumers will make more
cost-conscious healthcare choices if they have to spend their own money. The Robert Wood Johnson
Foundation found that consumers in such plans cut their medical spending by 5%14%, but it is unclear
whether the savings are the result of cutbacks in unnecessary care or of failure to seek needed treatment.
HRAs, unlike HSAs, are employer-funded and are not portable from one employer to another. People who
are enrolled in low-deductible plans can use HRAs; this is not the case for HSAs. According to the
Consumer Engagement in Health Care Survey (CEHCS), sponsored by the Employee Benefit Research
Institute and Mathew Greenwald and Associates, the balance in HRAs and HSAs increased to $17.8 billion
in 2012, up from $12.4 billion in 2011 and $7.3 billion in 2010. The number of accounts increased to 11.6
million from 8.5 million in 2011 and 5.4 million in 2010. The average account balance increased to $1,534
in 2012 from $1,470 in 2011 and $1,355 in 2010.

HOW THE INDUSTRY OPERATES
The managed care industry began in 1933 with the establishment of the prepaid health plan by Dr. Sidney
Garfield in California. At the time, insurers or patients themselves paid for healthcare services as they were
dispensed; that is, on an indemnity or fee-for-service basis. In 1938, Dr. Garfield teamed up with industrialist
Henry Kaiser to insure a group of construction workers through a group practice prepayment plan. That
plan, which became known as Kaiser Permanente, is now the largest nonprofit health maintenance
organization (HMO) in the US, with more than 9 million members as of December 2012.
Prepaid health plans, or managed care, began to gain popularity in the 1970s. Over the years, insurers have
sought to shift more people into these plans to contain medical costs that have surged due to population
growth and inefficiencies in healthcare delivery. Managed care programs give providers incentives to control
costs in ways that indemnity plans do not. They also reduce spending by achieving economies of scale,
practicing preventive medicine, and enforcing tighter standards and controls.
WHAT IS A MANAGED CARE PLAN?
Health insurance plans are either indemnity (fee-for-service) or managed care. Indemnity plans, which
dominated the market for several decades, pay providers for each service, with patients contributing a
portion of the bill. These plans have lost favor to managed care, which now predominates. Two popular
types of managed care organizations (MCOs) in the United States are HMOs and preferred provider
organizations (PPOs).
Health maintenance organizations
HMOs are the most restrictive type of health insurance plan, but they are the least expensive for members.
They typically require a flat monthly premium and a minimal co-payment from members seeking services
often $20 to $30 per primary care physician visit, and a higher amount for a specialist visitand do not make
members pay deductibles. HMOs employ or contract networks of doctors, hospitals, and other professionals
and organizations in a city or region to service members in that geographic area. The members have to use
providers in the HMOs network, which enables the HMO to leverage its size to obtain favorable contracts
with providers. Providers, in turn, are guaranteed a large volume of patients.
HMOs often have favored capitated contracts, which pay providers a fixed monthly fee for a range of
services, regardless of the quantity of services or treatments. The provider generally subcontracts with
specialists and others to furnish the necessary services that it cannot perform. Capitated contracts may
encourage providers to focus on prevention. They also may reduce unnecessary services by shifting (to doctors
and hospitals) some of the risk that reimbursements will not cover all treatment costs. However, an HMO
with many capitated providers will have to step in to cover services if those providers become insolvent.
In the end, the HMO is responsible for healthcare coverage for its members, and it may incur unexpected
costs in meeting that obligation. HMOs enter into a variety of contracts, depending on what is legally
allowable from region to region. For example, the HMO operations of Health Net Inc. and WellPoint Inc.
place physicians and medical groups in California under capitation contracts. Most HMOs outside
California, in contrast, whether of these or other companies, reimburse physicians according to a discounted
fee-for-service schedule. However, some capitation contracts do exist as well. The non-physician
components of all hospital services, which generally are contracted for multiyear terms, are covered by
capitation, per diem rates, case rates, and discounted fee-for-service schedules.
The six most common types of HMOs are staff, group, network, independent practice association (IPA),
mixed, and direct contract. All require participating providers to agree to use procedures implemented by plan
administrators. These include utilization management methodsprotocols for treating certain health
conditions. Providers also agree to accept the HMOs reimbursement structure and payment levels.
Staff. This type of HMO hires the physicians and other healthcare providers in its networks as salaried
employees. It also may reward physicians with bonuses or incentive payments for performance and

productivity. The staff model HMO generally employs physicians in all specialties to give enrollees a full
range of care, though it may subcontract with local specialists for less frequently needed healthcare services.
Group. This HMO contracts with a multi-specialty physician group practice to provide services to its
members. The doctors are thus employed by the group practice, not the HMO. They offer a broad range of
services under one roof, as well as inpatient services through affiliated hospitals. Although doctors, in some
cases, may see both HMO and non-HMO patients, their principal focus is usually on treating HMO members.
Network. This type of HMO engages more than one group practice to provide services to its members. As
with a group model HMO, it may contract with broad-based, multi-specialty group practices. Alternatively, it
may contract with several small doctor groups, each consisting of about seven to 15 physicians with a full
range of specialties, including family practice and/or internal medicine, pediatrics, obstetrics/gynecology, and
other specialties. Either way, physician groups are compensated on a capitated basis and are responsible for
providing all physician services to the HMO members assigned to them.
Independent practice association (IPA). An IPA contracts with a regional association of physicians to
provide physician services to its members. Physicians affiliated with an IPA remain individual practitioners
who also treat non-HMO patients and maintain their own offices, medical records, and support staff.
Mixed. This plan incorporates more than one form of HMO. For instance, a staff model HMO also might
contract with independent physician groups or with individual private practice physicians.
Direct contract. This model of HMO arranges for solo health practitioners to provide their services to
members. It recruits both primary care and specialist physicians. A direct contract HMO typically uses a
primary care case management approachalso referred to as the gatekeeper systemin which each
member has a primary doctor, who refers patients to other specialists in the HMO as needed.
Preferred provider organizations
Less restrictive than HMOs, PPOs allow enrollees to select physicians either within or outside the plans
network. When patients use out-of-network providers, however, their fees are higher. PPOs are similar to
HMOs in that participating providers agree to use procedures implemented by plan administrators and to
accept the PPOs reimbursement structure and payment levels. PPOs often limit the size of their
participating provider networks. By requiring a lower co-payment for in-network visits, the PPO helps to
increase the volume of patients for these providers.
Point-of-service plan
Many HMOs offer a point-of-service (POS) plan. Like an HMO, such a plan allows patients to see
physicians within its network for a small co-payment. Like a PPO, however, it permits patients to see
physicians outside the network, for which they pay a percentage of the charge after meeting the deductible.
POS plans tend to charge higher monthly premiums than do HMOs.
Consumer-directed health plans
To address cost issues, MCOs and employers are increasingly adopting consumer-driven, or consumer-
directed, health plans (CDHPs). (See the Industry Trends section of this Survey for more details on the
status of CDHPs.) CDHPs are basically high-deductible health plans with savings options (also known as
HDHP/SOs) and can be classified into three loosely defined groups.
Health reimbursement arrangement (HRA). This is a tax-exempt savings account funded by employers
and used by employees to pay medical expenses. It is often offered as part of a high-deductible health
plan, although the government does not require HRA users to belong to plans with high deductibles
(typically $1,000 or more for individuals and $1,500 or more for a family). If the HRA is attached to
an HDHP, the employee typically pays for healthcare first out of the HRA or out of pocket until the
deductible is met, then goes into the traditional managed care program. Unspent funds can be carried
over to the next year, but employees cannot take the funds with them if they leave their job.

Health savings account (HSA). In order to participate in this plan, consumers must belong to a high-
deductible health plan (minimum deductible in 2010 and 2011 was $1,200 for individuals and $2,400
for families). In 2012, the limits were increased to $3,100 for individuals and $6,250 for families. For
2013, the limits have been further increased to $3,250 for individuals and $6,450 for families, and for
2014, they are $3,300 and $6,550, respectively. People 55 years of age and over are also allowed a
catch-up contribution of $1,000 for both the singe and family plans. In this case, the individuals set up
and contribute to a tax-exempt savings option, known as a health savings account (HSA). Employers
can also contribute to an HSA, but the employee owns the HSA and can take it if he/she leaves the
company. Employers that offer health benefits and want to motivate their workers to join HDHPs often
arrange contribution programs to these plans.
Customized package. In these plans, employees use web-based tools to choose from a predetermined
selection of network offerings and benefit packages.
KEYS TO SUCCESS
Enrollment levels, product offerings, network relationships, cost controls, and management ability (including
the ability to set rates correctly) all influence the success of a managed healthcare company.
Enrollment
Certain factors have propelled the expansion of managed care companies in the US. Perhaps most important,
managed care plans offer a means of allocating finite resources. The model can deliver healthcare services at a
lower cost, while maintaining a high quality of care, by standardizing treatment practices and by permitting
providers to share clinical experiences gathered from a broad and diverse patient base.
MCOs can control costs much more efficiently than fee-for-service insurers, and they can leverage this cost
advantage when pricing their services. For employers that provide their workers with healthcare coverage,
price considerations are important. As penetration of a managed care firm reaches a particular threshold,
they can negotiate more favorable provider contracts, create virtually integrated delivery networks, and
further improve their operating cost structures. If a company is unable to penetrate a market sufficiently, or
finds the market to be less profitable than projected, it may decide to exit.
Choice of plans
Initially, MCOs offered HMOs as the only alternative to traditional indemnity plans. While HMOs control
medical cost inflation, they offer members no flexibility. During recent years, members often have favored
PPO plans. To remain competitive in todays market and offer choices in terms of cost and service levels,
MCOs need to have a broad product offering, including HMO and PPO plans, as well as hybrids.
Building the network
A health plans network of physicians, hospitals, and other treatment facilities is critical to its ability to
provide quality, cost-effective service. Most HMOs require patients to choose a primary care doctor; this
physician acts as a gatekeeper and is responsible for diagnosing patients, formulating treatment plans, and
referring patients to specialists within the HMO or in contracted facilities.
Cost controls
A well-run managed care company needs an efficient set of cost controls. Properly used by management,
cost controls compel or strongly encourage participants in a plan to exert the financial discipline needed to
hold medical costs at reasonable levels. Cost controls can affect decisions made by patients, providers, or
manufacturers. Plans continually evaluate new cost-control tools.
Well-established cost-control systems usually share certain characteristics: utilization review and
monitoring, education, and claims management. Utilization is controlled through routine procedures for
reviewing hospital usage of individual patients, controlling patient referrals to other specialists and
healthcare facilities, and monitoring the frequency and cost of such referrals. Physicians are also subject to a
utilization review process. Regular reports comparing actual and forecast service usage aid planning.

Comprehensive healthcare education for both plan enrollees (including regular physicals, dietary advice, and
other proactive measures) and providers also helps to control costs. Finally, claims management is crucial,
making sure that an MCOs charges and payments correspond with a doctors diagnosis and treatment.
Medical claims adjusters must have clearly defined treatment and claim management guidelines, as each
procedure has a different code number, and the amount paid must match it. The MCO also must have a
method for accurately estimating outside claims that have been incurred, but for which bills have not yet
been received (known as incurred but not reported, or IBNR) at the end of an accounting period.
Management ability
A successful MCO needs experienced managers to run the business and keep a sharp focus on its financial
health. Its management team must be able to navigate the challenging, continually evolving healthcare
environment and communicate the companys operating strategies and outlook to investors.
Making rates competitive
As enrollment has reached saturation levels in many US regions, plans face escalating competition. Until 2011,
those that accurately estimated their potential costs for the upcoming year had a competitive advantage
because they set appropriate premium rates. However, the Patient Protection and Affordable Care Act of 2010
mandates that health insurers spend at least 80% of premiums received on medical costs for individual and
small-group accounts (the percentage rises to 85% for large-group accounts). S&P believes rates will depend
on how low a health insurer can drive down standard medical and administrative costs, and possibly have
room for some incremental medical benefits its rivals do not offer.
Although many managed care plans admit new members year round, they typically hold an open-enrollment
period in the fourth quarter, when most new members sign up for coverage and existing members renew
their coverage for the following year. Health plans set their initial commercial premium rates during the
fourth quarter, based largely on their forecasts of medical cost trends for the upcoming year. As the year
advances and additional new members register, health plans reset their premium rates to parallel shifts in
medical cost trends.
In addition to future cost expectations, insurers base their increases on experience with the previous
years lags in premium pricing and claim payments, as well as administrative and marketing costs, and
expected profits. The commercial premium rate increases announced by the publicly traded MCOs are
average increases. Actual premiums may vary from one corporate plan to another, across different
geographical regions and patient populations, and for other reasons.
MEDICARE AND MANAGED CARE
Medicare is a federal program that provides health benefits to Americans who are aged 65 and older, and to
some Americans who have disabilities but are under the age of 65. According to CMS, as of July 1, 2012
(latest available), roughly 50.8 million Americans were covered by Medicare, including 42.2 million seniors
and 8.6 million disabled persons. These figures likely increased in 2013, with about 72% of Medicare
recipients receiving Medicare directly from the government through traditional fee-for-service programs,
while 28% belonged to Medicares managed care programs (now called Medicare Advantage, but
previously known as Medicare+Choice), based on data from the CMS.
Since 2003 and until President Obamas administration, the government had been particularly eager to
encourage greater use of the managed care portion of Medicare, assuming that would help slow growth in
healthcare spending, particularly in light of the expense of the new drug benefit. The government had taken
steps to encourage beneficiaries to participate in private MCOs. It improved payments to plans and
expanded the types of plans offered on a regional basis. These improvements, along with the addition of
prescription drug benefits, are gradually increasing enrollmentbut they also cost more. The fluctuating
participation over the years reflects changes to the program, as the government sought to balance attractive
terms against escalating costs.

Budget pressures led to declining enrollment
The Balanced Budget Act of 1997 (BBA) allowed the CMS to establish more flexible HMO plans for
Medicare participants, including PPOs, PSOs, and private fee-for-service plans. The BBA created the
Medicare+Choice (M+C) program to expand the kinds of private plans that may contract with Medicare,
including commercial HMOs and PPOs.
The BBA achieved its goal of lowering Medicare spending partly by having M+C plans paid on a capitation
basis: each plan was paid a fixed, predetermined amount per month per member, regardless of the number
and nature of services the member used. However, the effects were more severe than expected, leading many
HMOs to reduce their participation in the program. Medicare HMO enrollment peaked in 1999 at 6.9
million before falling to a low of 5.3 million in 2003, despite the enactment by Congress of the Benefits
Improvement and Protection Act (BIPA) to increase payments to plans and stop erosion of participation.
but the MMA reversed the trend
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), in addition to
establishing Medicare Part D, the prescription drug benefit, which became effective in 2006, also improved
federal payment rates for other Medicare programs, including an average 10.6% increase in payments to
Medicare Advantage (MA) plans. The increase helped reverse the outflow of MCOs from MA and the
reduction of services to seniors in the plans.
Medicare pays Part D drug plans their risk-adjusted bid minus the enrollee premium for Part D. Plans get
payments representing premiums and cost-sharing amounts for certain low-income beneficiaries for whom
premiums are reduced or waived. Plans also get payments for 80% of the costs of catastrophic coverage.
With MMA, indications are that certain MCOs expanded their service areas, while others have returned to
certain counties from which they had departed due to insufficient government reimbursement. According to
the CMS, Medicare private health plan enrollment was 14.98 million across 688 prepaid contracts
(including 558 Medicare Advantage and 130 other plan types) as of September 2013, up from 5.3 million
(285 contracts) in 2003. We estimate that the 2013 figure represents about 28% of all Medicare
beneficiaries, versus 12.6% in 2003.
The KFF attributes the growth to higher plan payments and new marketing opportunities arising from
Medicare Part D. Enrollment still varies widely by state, however, KFF points out. All Medicare
beneficiaries now have access to a MA plan (according to MedPAC, an advisory committee to the CMS),
including one that does not require a network (private fee-for-service, or PFFS). Regional preferred provider
organizations (R-PPOs) were established to provide rural beneficiaries greater access to MA plans, but
attracted little interest. According to KFF, the major source of variation across the country rests in available
choices of local HMOs and PPOs.
Nationwide, 2,074 MA plans were offered in 2013, according to KFF, versus 1,974 in 2012. The average
Medicare beneficiary had a choice of 20 MA plans, about the same number as in 2012, but down from 24
in 2011, including 10 HMOs, four local PPOs, two regional PPOs, and two PFFS plans, as well as other
plans such as cost plans and Medical Savings Account (MSA) plans. Beneficiaries in urban areas chose from
among 22 plans, on average, while beneficiaries in rural counties chose among 13 plans. KFF also notes that
in 2013, HMOs accounted for 65% of MA enrollment; local PPOs, 22%; regional PPOs, 7%; PFFS plans,
4%; and other, 3%.
Nonetheless, the excess payments of MA over those for traditional Medicare fee-for-servicewhich are
viewed by critics of MA as exacerbating the federal government budget deficithas led to restrictions on MA
operations, via the Medicare Improvements for Patients and Providers Act (MIPPA) of 2008, and the
restructuring of MA payments as called for by the Patient Protection and Affordable Care Act (ACA),
signed into law on March 23, 2010. (For more information on the changes Medicare Advantage is
undergoing, see the Current Environment section of this Survey.)

MEDICAID AND MANAGED CARE
According to the CMS, the Medicaid program provided health coverage and long-term care support services
to 55.4 million low-income US residents on average at any given time in fiscal 2011 (latest available).
Combined federal and state spending on Medicaid was an estimated $416.8 billion in calendar 2012, or
14.9% of all spending on US healthcare, a share that the CMS estimates will grow to 41.5% by 2022, due to
the ACAs expansion of Medicaid eligibility requirements. In FY 2012, 50% of Medicaid recipients were
children, followed by low-income adults (23%), disabled Americans (18%), and the elderly (9%). About 67%
of Medicaid spending, however, benefited the elderly (in nursing homes) and people with disabilities.
Medicaid pays for basic medical care, hospitalizations, nursing home stays, and many outpatient services.
Optional services, which most states offer, include prescription drugs, dental services, eyeglasses and hearing
aids, medical equipment and supplies, ambulance services, immediate care for the developmentally disabled,
and hospice care.
Operated by the states, Medicaid is jointly funded by the states and the federal government. The federal
governments share of the cost varies by state and averaged 57% nationwide until 2009, according to the
Congressional Budget Office (CBO). Provisions in President Obamas stimulus package and in subsequent
legislation temporarily increased the federal portion of the costs to about 68% ($273 billion) in 2010 and to
64% ($274 billion) in 2011. The average federal share dropped back to 57% in July 2011 as the program
expired and was $251 billion in fiscal 2012. Looking ahead, starting in calendar 2014, the federal government
will pay all of the costs of covering enrollees newly eligible under the ACAs coverage expansion. According
to its latest projections (May 2013), federal Medicaid spending is expected to be $265 billion in 2013 and
$298 billion in 2014. From 2017 to 2020, the federal share of that spending will decline gradually to 90%,
where it will remain thereafter. According to CBO estimates, those changes will result in a federal share of
Medicaids spending that averages 60% by 2020.
Medicaids budget growth is attributable to the economys performance as well as an aging population.
Recessions that create job losses lead to higher enrollment in the program. As the population ages, more
people will be placed in nursing homes, which are largely funded by Medicaid. Per capita spending for
Medicaid benefits has not increased as rapidly as per capita spending in the private sector, according to the
Henry J. Kaiser Family Foundation (KFF), a nonprofit healthcare research and analysis firm.
Over the past decade, regulators have sought to restrain the programs costs, particularly by enrolling more
beneficiaries in managed care and by decreasing the mandatory benefits. According to the latest available
CMS data, enrollment in Medicaid managed care plans rose from 2.7 million in 1991 (9.5% of the total
Medicaid population at the time) to over 56.0 million (71.6%) as of December 31, 2010 (latest available).
Note, though, that only about half of these Medicaid beneficiaries are in managed care organizations, which
provide comprehensive healthcare coverage; the rest are in other types of health plans.
Payments and participation
Medicaid operates as a vendor payment program, with states paying providers directly. Participating
providers must accept the Medicaid reimbursement level as payment in full. Each state has relatively broad
discretion in determining the reimbursement methodology and resulting rate for services, within federally
imposed upper limits and restrictions, with three exceptions. First, for institutional services, payment may
not exceed amounts that would be paid under Medicare payment rates. Second, different limits apply for
disproportionate share hospitalshospitals that accept Medicaid or uninsured patients. (However, most
hospitals accept such patients, whom they bill according to a sliding scale of charges.) Third, for hospice
care services, rates cannot be lower than Medicare rates.
Currently, 48 states and Puerto Rico offer some form of managed Medicaid programs. However, widening
budget gaps at the state level, owing to continuing economic softness and sluggish state revenue growth,
threatens Medicaid coverage for low-income individuals and families. In the fiscal years from 2002 to 2013,
most states made Medicaid cost-containment efforts, including provider rate reductions or freezes, prescription
drug cost controls, benefit limits or eliminations, and/or eligibility cuts and restrictions.

MCOs have been active in the Medicaid managed care market for several years, with mixed results. Several
have reported financial problems in certain markets and in certain medical specialties (such as neonatal
care), but this could be due to their inexperience in the field and to pricing discipline, which has been an
issue as plans aggressively compete for new business.
Outlook
Over time, S&P expects more federal oversight. The DRA includes provisions for greater federal supervision of
Medicaid fraud and abuses. In a number of studies released in recent years, the Government Accountability
Office (GAO) has reported on several cases of abuse and fraud in the Medicaid program. For example, a
report issued in June 2005 noted that states have used contingency-fee consultants to implement projects to
maximize federal Medicaid reimbursements; other reports issued in November 2007 spoke of financing
schemes and questionable methods to increase federal reimbursement, and noted that thousands of Medicaid
providers abuse the federal tax system. The Department of Health & Human Services estimated that the
federal share of improper payments in the Medicaid program in fiscal 2010 was $22.5 billion.
S&P thinks factors that influence an MCOs decision to enter or exit a Medicaid market would normally
include the adequacy of capitation rates, the stability of enrollment volume, and the administrative costs of
participating. However, publicly traded MCOs catering exclusively to Medicaid beneficiaries have seen
growth in enrollment and profitability since 2003, due in part to efforts by certain states to increase
mandatory managed care enrollment by Medicaid beneficiaries, and all MCOs with Medicaid businesses have
seen an influx of Medicaid recipients as a result of the recession that started in late 2007. Looking ahead,
S&P believes that Medicaid managed care businesses will gain additional members from the expanded
eligibility requirements and federal government financial support as called for by the healthcare reform
legislation that was signed into law in March 2010.
KEY INDUSTRY RATIOS AND STATISTICS
Unemployment statistics. Most managed care members are enrolled through their employers, so any
changes in unemployment levels can have a direct effect on commercial plan enrollment. The impact is often
delayed, however, due to severance packages that many terminated employees receive, as well as provisions
in the Consolidated Omnibus Budget Reconciliation Act (COBRA) that extend health insurance coverage to
workers who lose their jobs.
Unemployment statistics by region give the analyst an idea of general economic trends in different areas.
Enrollment growth tends to be higher in areas exhibiting strong employment numbers, as economic
expansion leads to a certain percentage of new employees being enrolled in managed care plans.
Regional and national unemployment numbers are available from the US Department of Labor on a monthly
basis. The unemployment rate has risen from an average 4.6% in 2007 to a peak of 10.1% in October
2009. Since that time, it has declined, albeit unevenly, to reach 7.3% in August 2013. As of October 2013,
Standard & Poors Economics (which operates separately from S&P Capital IQ) was projecting that
unemployment would be 7.5% for full-year 2013 and 7.0% in 2014.
Job market weakness and high health insurance premium rates and out-of-pocket expenses led to enrollment
declines at various times in recent years. According to the US Census Bureau, the number of people covered by
private health insurance, which includes managed care, declined from 203.9 million in 2007 to 195.8 million
in 2010. We believe that the publicly traded, financially healthy managed care organizations (MCOs) have
resorted to countering weak new commercial enrollment trends via acquisitions and/or attracting accounts
away from less financially healthy MCOs. In addition, aggressive moves into both the government-sponsored
managed care market and smaller specialty markets have helped to maintain enrollment and have even
contributed to modest growth.
US federal budget. Projected federal budget surpluses and deficits are important because a large portion
of government spending goes directly to entitlement programs such as Medicare and Medicaid. In the past,
attempts to reduce the deficit produced substantial budget cuts in these entitlement programs.

The Congressional Budget Office (CBO), the government agency that provides Congress with economic and
budgetary analyses, issues annual estimates of federal spending for the following fiscal year (October 1
through September 30). In this accounting, Medicare spending is listed in a section on entitlement programs,
where it is broken down by service category. The analyst should review budget figures for a period of
several years to uncover trends in spending and expenses, as well as review line items for clues about where
future budgets may be headed.
Along with its spending estimates, the CBO projects federal budget surpluses and deficits for future years.
With the swing from a budget surplus of $127 billion in fiscal 2001 to deficits that began in fiscal 2002 and
continued through 2010, the climate has been mixed for healthcare providers and insurers.
In the Updated Budget Projections: Fiscal Years 2013 to 2023, published in May 2013, the CBO pegged the
baseline deficit for fiscal 2013 at $642 billion, which is below fiscal 2012s $1.1 trillion and 2011s $1.30
trillion deficit. The actual deficit for fiscal 2010 was $1.294 trillion, much lower than the $1.413 trillion
deficit for fiscal 2009. As measured by the size of the deficit relative to the economy, it tripled in 2009 to
9.9%, its highest level since the end of World War II, and declined to 8.9% in 2010. The surge in 2009 was
caused by federal spending rising to a total of $3.5 trillion, while revenues dropped 18% to $536 billion,
owing to the deep recession that began in December 2007, which caused substantial drops in corporate
profits and taxable personal income. The largest contributors to the deficit were the American Recovery and
Reinvestment Act of 2009 (ARRA), the Troubled Asset Relief Program (TARP), payments to Fannie Mae
and Freddie Mac, as well as increased outlays for Medicaid, Medicare, Social Security and unemployment
benefits, and defense spending. Looking ahead, the CBO forecasts the deficits to shrink to 2.4% of GDP by
fiscal 2015 and rise to 4.0% in 2023.
Despite federal budget deficits, Medicare spending continues to surge: it consumed $374 billion in fiscal
2006 and $551 billion in fiscal 2012 (excluding offsetting receipts from premium payments and amounts
paid by states from savings on Medicaids prescription drug costs), according to the CBO. Much of the
growth has been attributed to the implementation of the Medicare prescription drug benefit, which went
into effect January 1, 2006, and to the popularity of the Medicare Advantage (MA) program.
In December 2005, in an early effort to put a brake on rising Medicare costs, Congress passed the Deficit
Reduction Act (DRA) of 2005, which aimed to reduce mandatory outlays by an estimated $39 billion
between 2006 and 2010 and by $99 billion from 2006 through 2015. The savings would be achieved by
reducing payments for certain imaging services and home healthcare services, and by improving the
accuracy with which payments to managed care plans are adjusted to reflect differences between real and
expected costs as patients medical statuses change.
Despite the DRA and the Patient Protection and Affordable Care Act of 2010 (ACA), according to its report
published in March 2013, the CBO projected that federal spending on mandatory healthcare programs,
including Medicare, Medicaid, Childrens Health Insurance Program (CHIP), and subsidies that will be
provided through the health insurance exchanges that were recently established, will increase from an
estimated 4.7% of GDP in 2013 to 5.9% in 2023. S&P Capital IQ (S&P) believes that MCOs, especially
those with large Medicare populations, benefited from the passage of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, which increased subsidies for Medicare managed care
members. However, in S&Ps view, the ACA will have a primarily negative impact, in the long term, on
MCOs involved in the Medicare managed care programs. It sees an eventual shakeout of the industry
favoring the large, publicly traded MCOs. (For additional information, see the Current Environment
section of this Survey.)
Demographics. US census figures, which can be obtained through the US Census Bureau, provide insight
into population growth trends. Naturally, these trends have an impact on demand for healthcare services.
As the profile of the US population shifts, the population in the older segments of society is increasing the
most rapidly. Accordingly, the need for efficient medical care has risen dramatically and should continue to
do so for years to come. In particular, managed care penetration into the Medicare and Medicaid segments
ultimately will reflect much of the nations shifting demographics, assuming that the government continues
to provide adequate premium rates.

Projected commercial premium rates. Over the course of a year, as medical cost patterns among the
commercial customer base become apparent, managed healthcare companies begin negotiating premium
rates for the year ahead. Negotiations typically move forward in late fall, and managed care companies
often inform financial analysts of the range of estimated premium rate hikes. Analysts then can project
profit margin trends for the following year, which may be accurate to the extent that medical cost patterns
do not shift materially.
The healthcare reform laws requirement of minimal spending on medical benefits as a percentage of
premiums (85% for group accounts and 80% for individual accounts) will likely put limits on how high
MCOs can raise premium rates and MCOs will not be able to raise rates at 10% or above, without
triggering a review by the CMS. Consequently, S&P sees publicly traded MCOs having to rely equally on
enrollment growth promised by the health reform legislation (via expanded Medicaid eligibility and the
offer of tax credits to help people pay for insurance), and on the recovery of the job market, permitting
more employer-based coverage, while continuing to focus on SG&A cost control to increase profits.
Projected premium rates in Medicare plans. Each March, the Centers for Medicare & Medicaid Services
(CMS), a division of the US Department of Health & Human Services (HHS), releases an estimate of
Medicare rates for the coming fiscal year, broken down by state. A revised number typically is announced in
September, after the CMS has accumulated more data to determine likely medical cost trends for the next
calendar year. Medicare premiums and cost sharing are indexed to rise annually, according to the Henry J.
Kaiser Family Foundation (KFF), a nonprofit focused on health benefits and policy research. The monthly
premium for Medicare Part B, which covers physician services, and for outpatient and home healthcare, has
risen from $3 per month in 1966, when the program first went into effect, to $104.90 per month in 2013.
Analysts closely follow both of these numbers, which usually have an immediate impact on stock prices.
Medicare monthly premiums for Part B for those who filed individual tax returns and had annual incomes
below $85,000 or those who filed joint tax returns and had incomes of below $170,000 and who account
for 73% of beneficiaries are $104.90 per member in 2013. In 2012, the standard Medicare Part B premium
was $99.90, or $15.50 lower than the 2011 premium of $115.40. In 2010, it was $96.40, the same as in
2009, to prevent beneficiaries Social Security income from declining because of no cost-of-living increase in
2010. Beneficiaries with higher incomes pay higher premiums and, in 2013, their premiums would range
from $42 above the standard premium to $280.30 above.
Beginning in 2011, the healthcare reform law froze the income thresholds at 2010 levels through 2019. A
2.9% tax (split equally between employers and employees) covers Medicare Part A. The healthcare reform
law increases the Medicare payroll tax for higher-income taxpayers (more than $200,000 per individual and
$250,000 per couple) by 0.9 percentage points (from 1.45% to 2.35%), beginning in 2013.
The weighted average monthly Medicare Part D premium for Medicare stand-alone drug plans (which
excludes the drug plans that are part of Medicare Advantage plans) was $38.29 in 2011 (weighted by 2010
enrollment, with actual premiums ranging from $14.80 to $133.40, depending on plan and region),
compared with $37.25 in 2010 (with actual premiums ranging from $8.80 to $120.20). In 2012, the
weighted average premium was $37.78 (with actual premiums ranging from $15.10 to $131.80), and it is
projected to be $40.18 in 2013 (with actual premiums ranging from $15 to $165.40). When the Part D
stand-alone premium is combined with the Part D cost of the Medicare Advantage premium, the weighted
average monthly premium has ranged from $29 to $31 from 2009 to 2013. This is because some MA plans
have a $0 cost for drug coverage.
HOW TO ANALYZE A MANAGED CARE COMPANY
When looking at a managed care company, it is important to consider its fundamental strengths and
weaknesses. Key variables influencing its financial health and future prospects include enrollment, provider
contracts, and location. The income statement and balance sheet document the companys financial
condition and permit comparative analysis with its peers.

THE DEFINING TRAITS OF AN MCO
The key traits of a managed care organization (MCO) are its membership profile, its relationships with
providers, and its geographic location.
Membership profile
What is the breakdown of plan enrollees, in terms of commercial members (at-risk and self-insured) and
Medicare and Medicaid recipients? Although premium rates for the Medicare Advantage program (MA;
formerly known as Medicare+Choice) are currently significantly higher than commercial rates, service
utilization and benefits package costs are also higher. As a result, MA margins are generally lower than
those for commercial membership. They are still attractive, however, and increasingly appealing because
enrollment in these programs continues to grow even as it slows for the private commercial healthcare
industry, which is larger.
We believe that the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which set
higher reimbursement rates starting in 2004, alleviated most of the margin pressure. But, starting in the spring
of 2007, Congress held a series of hearings about payments to private MA contractors, which eventually led to
the passage of the Medicare Improvement for Patients and Providers Act of 2008, or MIPPA, in July 2008.
MIPPA essentially required most of the high-cost Medicare Private Fee-for-Service plans to convert to lower-
cost coordinated-care plans by 2011. (For more information on MIPPA and other moves to limit the rising
costs of MA, see the Current Environment section of this Survey.)
For companies focused on commercial members, industry competition restrained profitability through the
mid-1990s, but the group has been solidly profitable since 1998. Medicaid plan profitability is volatile and
depends on state budgets that fund coverage.
Provider relationships
MCOs provider relationships are key factors in providing good service to members. Does management have
the proper set of provider contracts in place that will enable it to control costs? What percentage of contracts
is capitated? In these contracts, do healthcare service providers assume all or part of the risk/reward that
medical costs will or will not exceed projections? The industry has moved away from capitated contracts to
fee-for-service and shared-risk provider arrangements. Those companies that continue to rely too heavily on
capitated provider agreements might face higher levels of risk in the future.
Location and demographics
It is important to ascertain the geographic territory of the provider base and the membership market. In
which areas does the plan operate, and where will it expand? To fully serve its members, an MCO needs to
operate in a geographic area with a full range of doctors and hospitals. If the healthcare provider base is too
small, service may be poor and enrollment could suffer. A dense metropolitan area is more likely to have a
large physician population. In addition, the larger MCOs are seeking to expand their services nationally in
order to meet multiple needs of large corporate customers.
General US census data, broken down by state, helps to assess the potential of a given region based on the
characteristics of its population. Normally, a densely populated region, with numerous people under age 65
and a prosperous economy, offers attractive opportunities. In addition, census data on managed care
penetration can be useful in determining whether given markets are underserved or saturated.
A WALK THROUGH THE INCOME STATEMENT
Important items to consider on the income statement include premium revenues and other income, the medical
loss ratio, administrative and other expenses, profit margins, and earnings per share. In addition, if a company
has made acquisitions, it is wise to analyze revenue growth and expense ratios on a same-store basis. Most
companies report such information, especially in the case of large acquisitions.

Premium revenues
An MCO analyst begins with a focus on premium revenues earned. This component is derived from the
number of current members multiplied by the premium rates.
For commercial contracts, rates are generally set before contract renewal, which usually occurs in the fourth
quarter of the prior year. During periods of medical cost inflation, contracts signed later in the year may
carry higher rates than those signed earlier. For Medicare contracts, the Centers for Medicare & Medicaid
Services (CMS) sets rates during the month of September; rates vary by geographic region. At the state level,
regulators set Medicaid rates sometime in the middle of each year.
Premium revenues are recognized in the month in which the related enrollees are first entitled to healthcare
services. Premiums collected in advance are recorded as unearned premiums or deferred revenue.
Other income
How much income does the MCO generate from sources other than premiums, such as administrative fees,
interest income, and other sources? If other income represents a significant portion of revenue, it should be
carefully scrutinized. Some MCOs include investment income as revenue. Given the difficulty of projecting
changes in investment income, however, S&P Capital IQ (S&P) believes that a prudent analysis should not
count on this category of income as a source of growth.
Medical cost ratio
The medical cost ratio (MCR) is an expense ratio in the managed care sector that correlates inversely to the
gross profit margin. Sometimes referred to as the medical loss ratio (MLR), it is determined by dividing a
companys total amount of direct medical costssuch as pharmaceutical, doctor, outpatient, and hospital-
related costsby its premium revenues. Traditionally, this ratio has been used to determine a companys
effectiveness in managing its enrollees; it can indicate managements ability to control costs and predict
future costs in an era of rapid medical cost inflation.
Historically, an MCO with an MCR of about 80% (i.e., spending 80 cents of each premium dollar on medical
costs) has been seen as adequately managing its patient base. In 2001 and 2002, the industry ratio rose
modestly, as buydowns reduced premium yields despite premium hikes. (A buydown occurs when an employer
reduces its premium expense by requiring a higher co-payment from an employee.) Other factors affecting the
run-up in the MLR included the emergence of expensive new drugs with no therapeutic alternatives, hospital
cost inflation caused by labor and supply costs, and hospital industry consolidation.
From 2005 through 2007, MCR trends among the major MCOs were mixed, with some edging up slightly,
largely because of the higher per-patient cost of Medicare and Medicaid. However, some MCOs saw
moderating MCRs in their commercial businesses because of increased generic drug penetration, better
utilization control, higher premium rates, and the culling of unprofitable accounts.
In 2008, some MCOs targeted premium yield increases closer to medical cost trends, resulting in
commercial MCRs at above 2007s levels, and the consolidated MCRs for most MCOs under S&P
analytical coverage rose further, mainly owing to rising Medicare and Medicaid businesses. We saw a
similar pattern in 2009, while the MCR trend moderated in 2010 and again in 2011 as a result of lower
hospital and doctor utilization amid a mild flu season. For nonprofit MCOs, the MCR often exceeds 90%,
as many such plans must allocate a certain amount of each premium dollar to cover medical costs.
(Commercial MCRs include private medical expenses onlynot government expenses.)
When looking at the MCR, the analyst should focus on its principal components, including pharmaceutical
expenditures, hospital utilization (as measured by annualized bed-days per thousand members), outpatient
services, and physician costs. Each MCO uses its own methods to predict cost trends and control utilization
among members. For those able to accurately gauge medical cost patterns, annual rate settings generally
cover medical costs and generate an adequate profit margin. Conversely, those that underestimate service
usage will suffer as their MCRs rise.

Administrative expenses
The remaining expense items on an MCOs income statement relate to administrative spendingon such areas
as marketing, billings and collections, database maintenance, and customer serviceand for malpractice and
other insurance costs. The administrative cost ratio is calculated by dividing the selling, general, and
administrative (SG&A) costs by total operating revenues (total revenues minus investment income, if the
MCO considers the latter a revenue source). It usually varies from 14% to 18% during normal business cycles,
but the administrative cost ratio, which is usually in the mid- to upper teens, can rise or fall depending on a
companys operating strategies, business mix, and business cycle.
An MCOs membership mixthe proportion of small group or individual members versus those from large
organizationscan affect its administrative cost ratio. With large organizations, a single sales effort can
yield a substantial influx of new members. In contrast, small groups and individuals require repeated sales
efforts to obtain an equivalent amount of business. For this reason, small group and individual plans are
usually charged higher premiums per member than are large group plans.
Interest expense
Historically, MCOs have not been concerned much with interest expense. Capital expenditures were
typically a small portion of costs (aside from spending on information systems), and few participants held
substantial amounts of debt. In the challenging operating environment of the mid-1990s, some companies
took on debt to fund acquisitions and restructure operations. More recently, historically low interest rates
have enabled some firms to reduce interest costs and obtain more favorable financing terms.
Per-member ratios
To compare performance among MCOs on something of a per unit basis, analysts divide each companys
revenue, expense, and utilization figures by its total membership. For example, an analyst can compute
quarterly revenue per member to compare MCOs abilities to generate revenue on their enrollment levels.
Some publicly traded MCOs make available per-member per-month figures, which enable analysts to
monitor monthly trends and make comparisons more accurately.
For MCOs with large and diverse membership bases, cost issues arising in certain segments of the
population can be mitigated somewhat by stability in other business lines, though this is not always the
case. For example, an MCO with a sizable percentage of Medicare Advantage members most likely would
have lower margins than an MCO with a smaller percentage of such members.
An MCO that has implemented advanced information technology is likely enjoying administrative cost
savings, some of which might be reinvested in marketing or product development. For smaller MCOs with
more focused membership profiles, demographic-related cost trends are not easily muted. Even so, some
regionally focused firms have proven adept at expanding a profitable commercial membership and
controlling costs.
Earnings per share
Along with profitability measures, an analyst should consider whether the company has a strong track
record of meeting its earnings per share (EPS) targets and whether the rate of premium revenue growth is in
line with earnings growth. Comparing these growth rates can reveal whether an MCO is sacrificing profits
to expand membership.
The impact of acquisitions
It is important to know whether an MCOs sales and earnings growth is acquisition driven or internally
(organically) driven. Internal growth shows how effectively the company manages its existing geographic
territory. If growth is acquisition driven, it is important to examine such areas as membership growth,
medical loss ratios, and other relevant statistics on a same-store basis. Growth generated via acquisitions
often masks underlying performance trends in revenue growth and margins.

BEHIND THE BALANCE SHEET
A typical MCO balance sheet shows a large amount of cash along with a modest amount of debt. One reason
is that companies bidding on Medicare and Medicaid contracts must maintain certain financial ratios. For
example, contracts for Medicaid and the US Department of Defenses TRICARE program require health
insurers to have a debt-to-equity ratio no greater than 1-to-1. (TRICARE is a program for active-duty and
retired members of the uniformed services, and for their family members and survivors.)
A strong balance sheet is also a selling point. Potential commercial accounts must feel confident that an
MCO will maintain adequate liquidity to ensure that the accounts employees will not lose medical coverage
if the MCO stumbles during a difficult business cycle.
Reserve adjustments can affect earnings
Among the more significant items on an MCO balance sheet are the reserves for claims, losses, and loss
adjustment expenses. These reserve levels are calculated based on the accumulation of cost estimates for
unpaid claims and losses reported before the close of the accounting period. Added in is a provision for the
current estimate of the probable cost of claims, losses, and loss adjustment expenses that have happened but
have not yet been reported (called incurred but not reported, or IBNR, expenses). The methods for
making such estimates vary from company to company, and adjustments resulting from these estimates are
reflected in the MCOs current operations.
Assuming that management has made adequate IBNR reserve estimates, there is no material impact on the
income statement from overestimating or underestimating the costs to cover claims. There have been
instances of reported earnings being inflated by a reduction in the reserves, whether the reduction was
appropriate or not. In other cases, earnings have declined due to a poorly conceived reserve policy or
higher-than-expected costs, such as bad debt expense. Some analysts prefer to exclude the reserve
adjustments from the historical data on their income statement models in order to get a more accurate
picture of performance during a given period.
OTHER FACTORS TO CONSIDER
In determining an MCOs growth prospects, it is important to look beyond the financial statements. Some
historical perspective can shed light on the challenges facing managed care companies as they weigh the
relative benefits of boosting enrollment versus controlling costs.
In the past, fierce market share competition among industry participants kept a tight lid on premium rates
despite rising medical and administrative costs. Beginning in 2002, MCOs became intent on raising
premiums more meaningfully to boost profitability, possibly at the cost of some enrollment. Although
MCOs continue to seek to increase their membership levels, S&P expects that overall growth in health plan
enrollment likely will outpace job trends, which has been soft amid the weak economy, given increasing
Medicare Advantage and Medicaid managed care membership.
Prospects for MCOs depend heavily on the regulatory environment. Changes in federal and/or state
reimbursement rates or policies affect MCOs with high exposure to Medicare or Medicaid. In addition, the
healthcare reform law has a multitude of provisions detailing requirements to be followed by MCOs.
Regulatory and other external events can significantly affect MCO stock performance. Along with the
political and regulatory climate, developments related to high-profile lawsuits, media reports, and the
publics perception of the industry are also important factors.
Finally, investors and analysts must keep a sharp eye on emerging trends that can lead to deteriorating
fundamentals, such as rising drug and provider (doctor, hospital, and clinic) costs, or potentially positive
fundamentals, such as the adoption of health coverage plans that are more affordable or provide access to
more people. It is important to gauge the extent to which such trends affect the MCO industry as a whole
versus particular companies. Also important is determining whether these trends will have long-term effects on
industrywide or company fundamentals or just temporarily alter investor psychology.

VALUING PUBLICLY TRADED MANAGED HEALTHCARE STOCKS
Valuing managed care company stocks is similar to valuing the stocks of other industries. Many analysts use
comparative price-to-earnings (P/E) ratios and price-to-earnings growth (known as PEG) ratios. One way is
to set an average target P/E or PEG ratio for the group, based on the membership and/or earnings growth
prospects one sees. The next step is to set the individual company target P/E or PEG ratios above or below
the average set for the group, based on where one expects the performance and/or risk level of the company
to be versus those of the group as a whole. Analysts sometimes base valuations on P/E and PEG comparisons
with those of the S&P 500 or S&P 1500 SuperComposite. One method that can be used is Discounted Cash
Flow (DCF), which derives a stock price by deriving the net present value of future cash flows. The problem
we see here is that the net present value is really the stocks current intrinsic value, not a value one would
see 12 months hence.
Another comparative technique involves using the ratio of enterprise value (market cap, or the number of
shares times the share price, plus debt, minority interest, and preferred shares, minus total cash and cash
equivalents) to the companys EBITDA (earnings before interest, taxes and depreciation and amortization).
Perhaps unique to managed healthcare companies is the enrollment of each cohort, whether commercial
enrollment, Medicare Advantage enrollment, and/or Medicaid enrollment, and the analyst can find a way to
determine the value applied to each member to derive a market cap and divide that market cap by the
number of shares. Finally, one could use a variety of methods and derive an average target price.
The difficulty in making valuation comparisons of managed healthcare companies is that there are a variety
of managed care companies and they are not alike in the percentages of member types. Some specialize in
Medicare, Medicaid, or commercial enrollment, others are diversified with all three, and some have non-
health plan businesses. In addition, the geographic coverage can be different.

GLOSSARY
Acute careHospital care focused on a patient whose physical or mental condition requires immediate intervention and
constant medical attention, equipment, and personnel.
Adverse selectionA situation in which a health plan has a disproportionate number of members who require very high levels
of medical care. Insurance companies strive to avoid adverse selection unless they receive supplemental payments for the care
provided to the sickest patients.
Ambulatory careNonemergency healthcare services given to patients who do not require overnight hospitalization.
Benefit designThe process of determining levels of coverage and types of services to be included in a health plan, at
specified rates of reimbursement. Decisions are based on many factors.
BuydownA revision in a benefit plan, such as an increased copayment, that allows the purchaser to pay a reduced premium
price.
CapitationA compensation method under which a health maintenance organization (HMO) pays doctors and other healthcare
providers a fixed monthly fee for performing a range of services for each HMO member under their care, regardless of the actual
level of service usage.
CoinsuranceA percentage of the cost of service or drug, paid by the plan member. Coinsurance is usually used by indemnity
plans or preferred provider organizations (PPOs).
CopaymentA nominal, flat fee that the plan member pays when he or she gets services or drugs. Copayments generally are
aimed at covering administrative costs.
Cost sharingA method of reimbursement that holds the patient partially responsible for payment of medical services or
therapies. Used as a cost containment strategy to restrain consumer demand for certain medical care.
Cost shiftingThe redistribution of payment for medical care in which a provider overcharges one payer for a service in order
to compensate for discounts provided to another payer.
Fee-for-serviceMethod of payment in which providers are compensated for each service they perform.
FormularyA list of drugs covered by a plan, usually developed by an advisory committee of experts known as the Pharmacy
and Therapeutics or P&T Committee and organized by the plan. Formularies change over time as new drugs come on the market
and new information about existing drugs becomes available. There are three kinds of formularies: open, closed, and negative.
The first emphasizes inclusion, or what is covered, and the latter two emphasize what is not covered.
GatekeeperA term typically used to refer to an HMOs primary care physicians or nurse practitioners, who are responsible for
referring members to specialists or other services.
Health maintenance organization (HMO)A health plan that both pays for and provides (or arranges to provide) access to a
comprehensive range of medical services. To belong to an HMO, members pay a fixed monthly premium that does not vary based
on the level of service utilization.
Independent practice association (IPA)An HMO that contracts with individual physicians in private practice to provide
care to the HMOs members within a private office setting.
Managed careA method of delivering and paying for healthcare through a system of provider networks. Managed care plans
include HMOs, PPOs, point-of-service (POS) plans, and similar coordinated plan networks.

MedicaidA health benefit program for low-income US residents who are aged, blind, disabled, or members of families with
dependent children. The program also pays nursing home costs for indigent elderly patients. Although state and federal
governments jointly fund Medicaid, each state sets eligibility standards.
Medical cost trendsIncreases or decreases over time in costs of medical services and treatments. Managed care
organizations consider medical cost trends when setting premium rates for health insurance plans.
Medical loss ratio (MLR)Also known as medical cost ratio (MCR), this is the percentage of premium revenue a plan uses to
pay for medical care covered by the plan. The MLR is an important indicator of insurance companies abilities to control medical
expenditures and match their premium rates with their projected expenses. A ratio of 0.80 means that 80% of a plans premiums
were used to cover medical costs.
Outcomes managementAn evaluation of the relative success and cost efficiency of medical products and services.
Outcomes researchA study of the results of various treatment protocols to determine the most effective ways to treat
specific health problems.
Pay-for-performance (P4P)A program that offers incentives to providers for meeting certain criteria for quality of care. The
programs currently are experimental and have different reward systems; some deduct a percentage of reimbursement if providers
do not meet the criteria over time. P4P is widely viewed as a quality measure, but it does have the aim of reducing the cost of
care as well.
Physician practice management (PPM)An organization that manages all of the back-office, or administrative, functions of
a physician group practice, so that doctors can focus on treating patients. By banding together in this organized fashion,
physicians attempt to regain some of the market power they have lost to HMOs.
Point of service (POS)A managed care plan in which members may receive services from providers either within or outside
the plans network. Members typically pay a portion of the cost of their care when they seek treatment outside the network.
Preferred provider organization (PPO)A healthcare organization that pays almost completely for services obtained from its
network of preferred providers, but pays only partially for services obtained from out-of-network providers.
Primary careRoutine healthcare provided in a doctors office or health center. Such care focuses on prevention or early
detection of health problems through regular physicals, blood pressure tests, mammograms, and similar procedures.
Quality assuranceA compilation of guidelines to measure and ensure the quality of services provided, including corrective
actions to be taken in connection with patient, administrative, and support services.
Risk corridorRelates to whether, over the range of upside and downside risks, the risk-sharing arrangement remains the
same (i.e., no corridor) or varies in some way as the upside/downside risks change.
Third-party administratorAn independent entity that administers (but does not share the risk of) the benefits, claims, and
administration for a self-insured group.
TransparencyIn an effort to improve consumers access to information on healthcare financing, several demonstration
programs set up by health plans and state and federal governments are asking providers and manufacturers to explain publicly
how they arrive at their pricing structures. Transparency of this process is crucial if consumer-driven health plans are to win
broad acceptance, because consumers need to know the true cost of the services they receive in order to judge the value of
those services.

INDUSTRY REFERENCES
PERIODICALS
Health Affairs
http://www.healthaffairs.org
Monthly magazine; covers broad health policy issues of
current concern or interest.
Health Plan Week
http://aishealth.com/marketplace/health-plan-week
Published 45 times a year; covers managed healthcare
regulatory developments and company-specific
developments regarding Medicare and/or Medicaid.
Managed Care
http://www.managedcaremag.com
Monthly; covers trends and developments in the healthcare
industry, including physician and HMO provider contracts,
physician networks, regulatory developments, interviews,
and statistics.
Managed Care Digest Series
http://www.managedcaredigest.com
Annual; covers trends in the healthcare industry. The series
includes HMO-PPO/Medicare-Medicaid Digest,
Institutional Highlights Digest, Managed Care Trends
Digest, and Medical Group Practice Digest.
Modern Healthcare
http://www.modernhealthcare.com
Weekly; covers recent developments and regulatory issues
in the healthcare industry and publishes interviews and
statistics.
BOOKS
Essentials of Managed Health Care, 4th Ed.
Peter R. Kongstvedt
Sudbury, MA; Jones and Bartlett, 2003
Managed Care: What It Is and How It Works, 2nd Ed.
Peter R. Kongstvedt
The Managed Health Care Dictionary, 2nd Ed.
Richard Rognehaugh
CONSULTANTS/RESEARCH FIRMS
Center for Studying Health System Change
http://www.hschange.org
Nonpartisan policy research organization that designs and
conducts studies focused on the US healthcare system to
inform policy decisions in government and private industry.
The Commonwealth Fund
http://www.commonwealthfund.org
Private foundation that studies healthcare systems
performance and conducts independent research on
healthcare issues in the US and abroad.
Employee Benefit Research Institute (EBRI)
http://www.ebri.org
Nonprofit, nonpartisan organization devoted to developing
sound employee benefits programs and enhancing public
policies through objective research.
Henry J. Kaiser Family Foundation
http://www.kff.org
Nonprofit foundation dedicated to studying and reporting
on the US healthcare system. Publishes reports on
government programs, medical spending trends, and
various policy initiatives.
Mercer Human Resource Consulting
http://www.mercerhr.com
Human resources consulting firm.
National Institute of Health Care Management
http://www.nihcm.org
Nonprofit, nonpartisan group that conducts research on
healthcare issues.
Towers Watson
http://www.towerswatson.com
Consulting firm with large human resources practice. It
publishes an annual report on trends in employee benefits
including useful information on healthcare benefit trends
and costs.

TRADE ASSOCIATIONS
Academy of Managed Care Pharmacy
http://www.amcp.org
Nonprofit professional organization representing managed
care pharmacies and pharmacists; provides information on
managed care pharmacy benefit trends and contracting
arrangements with pharmaceutical companies.
American Association of Managed Care Nurses Inc.
http://www.aamcn.org
Nonprofit trade group for nurses; establishes standards for
managed care nursing practice and seeks to educate the
public and influence public policy regarding the managed
healthcare industry.
American Medical Association
http://www.ama-assn.org
Develops and promotes standards in medical practice,
research, and education, and advocates on behalf of
patients and physicians.
Americas Health Insurance Plans
http://www.ahip.org
Trade association representing more than 300 private
healthcare systems that provide health, long-term care,
dental, disability, and supplemental coverage to more than
123 million Americans.
Blue Cross and Blue Shield Association (BCBSA)
http://www.bcbs.com
Trade association for independent locally operated Blue
Cross and Blue Shield plans.
National Association of Dental Plans
http://www.nadp.org
A nonprofit trade association representing companies that
provide dental benefits through programs such as dental
HMOs, dental preferred provider organizations (PPOs),
referral plans, and indemnity policies.
National Association of Managed Care Physicians
http://www.namcp.org
Nonprofit organization of medical directors, physicians,
medical students, and residents working in the managed
care environment; seeks to develop the best delivery
system for patients in managed healthcare.
GOVERNMENT AGENCIES
Centers for Medicare & Medicaid Services (CMS)
http://www.cms.hhs.gov
A division of the US Department of Health & Human
Services; oversees administration of the Medicare and
Medicaid programs and sets compensation rates for
participating providers. Publishes Health Care Financing
Review, an annual summary and analysis of Medicare and
Medicaid programs and the national healthcare system,
and Medicare and Medicaid Statistical Supplement,
containing statistics on hospital utilization rates, number of
uninsured people, service categories, HMO enrollment, etc.
Federal Trade Commission (FTC)
http://www.ftc.gov
Enforces federal laws and rules prohibiting unfair or
deceptive practices or methods of competition. Created in
1914, the FTC is led by five commissioners.
US Department of Health & Human Services (HHS)
http://www.hhs.gov
Cabinet-level federal agency that is the US governments
principal overseer of health-related issues. Among other
things, the HHS funds medical research, works to control
infectious diseases, provides immunization services,
ensures food and drug safety, and administers Medicare
and Medicaid.
ONLINE RESOURCES
Atlantic Information Services Inc.:
http://www.aishealth.com
Congressional Budget Office: http://www.cbo.gov
FedStats: http://www.fedstats.gov
HealthLeaders: http://www.healthleaders.com
Medscape: http://www.medscape.com
National Institute for Health Care Management:
http://www.nihcm.org
The Robert Wood Johnson Foundation:
http://www.rwjf.org
US Census Bureau: http://www.census.gov
US Department of Labor: http://www.dol.gov

COMPARATIVE COMPANY ANALYSIS
Operating Revenues
Million $ CAGR (%) Index Basis (2002 = 100)
Ticker Company Yr. End 2012 2011 2010 2009 2008 2007 2002 10-Yr. 5-Yr. 1-Yr. 2012 2011 2010 2009 2008
MANAGED HEALTH CARE
AET [] AETNA INC DEC 36,595.9 F 33,779.8 A,F 34,246.0 F 34,733.9 A,F 30,950.7 F 27,599.6 A,F 19,878.7 D,F 6.3 5.8 8.3 184 170 172 175 156
CNC CENTENE CORP DEC 8,667.6 5,340.6 4,448.3 4,102.9 3,364.5 D 2,919.3 D 461.5 34.1 24.3 62.3 1,878 1,157 964 889 729
CI [] CIGNA CORP DEC 29,119.0 A 21,998.0 21,235.0 18,414.0 19,101.0 A 17,623.0 19,343.0 D,F 4.2 10.6 32.4 151 114 110 95 99
HNT HEALTH NET INC DEC 11,248.6 D,F 11,901.0 F 13,619.9 F 15,703.2 15,370.0 14,108.3 10,194.8 1.0 (4.4) (5.5) 110 117 134 154 151
HUM [] HUMANA INC DEC 39,126.0 F 36,832.0 F 33,868.2 F 30,960.4 F 28,946.4 F 25,290.0 F 11,280.8 F 13.2 9.1 6.2 347 327 300 274 257
MGLN MAGELLAN HEALTH SERVICES INC DEC 3,207.4 2,799.4 2,969.2 2,641.8 A 2,625.4 2,156.0 1,753.1 C 6.2 8.3 14.6 183 160 169 151 150
MOH MOLINA HEALTHCARE INC DEC 6,028.8 4,769.9 A 4,086.0 A 3,669.4 A 3,112.4 2,492.5 A 644.2 25.1 19.3 26.4 936 740 634 570 483
UNH [] UNITEDHEALTH GROUP INC DEC 110,618.0 101,862.0 94,155.0 87,138.0 81,186.0 75,431.0 25,020.0 F 16.0 8.0 8.6 442 407 376 348 324
WCG WELLCARE HEALTH PLANS INC DEC 7,409.0 A 6,106.9 5,440.2 6,878.2 6,521.9 5,390.8 921.8 A 23.2 6.6 21.3 804 662 590 746 707
WLP [] WELLPOINT INC DEC 61,711.7 60,710.7 58,801.8 61,235.8 A 61,251.1 61,134.3 13,281.6 A 16.6 0.2 1.6 465 457 443 461 461
OTHER COMPANIES WITH SIGNIFICANT MANAGED CARE OPERATIONS
UAM UNIVERSAL AMERICAN CORP DEC 2,177.5 A 2,282.7 D 5,687.2 4,963.5 4,659.2 3,032.6 A 331.5 20.7 (6.4) (4.6) 657 689 1,715 1,497 1,405
Note: Data as originally reported. CAGR-Compound annual growth rate. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the following calendar year.
**Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change.
D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.

Net Income
Million $ CAGR (%) Index Basis (2002 = 100)
Ticker Company Yr. End 2012 2011 2010 2009 2008 2007 2002 10-Yr. 5-Yr. 1-Yr. 2012 2011 2010 2009 2008
MANAGED HEALTH CARE
AET [] AETNA INC DEC 1,657.9 1,985.7 1,766.8 1,276.5 1,384.1 1,831.0 393.2 15.5 (2.0) (16.5) 422 505 449 325 352
CNC CENTENE CORP DEC 1.9 111.2 90.9 86.1 84.2 41.3 25.6 (23.1) (46.2) (98.3) 7 434 355 336 329
CI [] CIGNA CORP DEC 1,623.0 1,327.0 1,345.0 1,301.0 288.0 1,120.0 (397.0) NM 7.7 22.3 NM NM NM NM NM
HNT HEALTH NET INC DEC 25.7 72.1 204.2 (49.0) 95.0 193.7 234.5 (19.8) (33.2) (64.4) 11 31 87 (21) 41
HUM [] HUMANA INC DEC 1,222.0 1,419.0 1,099.4 1,039.7 647.2 833.7 142.8 24.0 7.9 (13.9) 856 994 770 728 453
MGLN MAGELLAN HEALTH SERVICES INC DEC 151.0 129.6 138.7 106.7 86.2 94.2 (542.3) NM 9.9 16.5 NM NM NM NM NM
MOH MOLINA HEALTHCARE INC DEC 9.8 20.8 55.0 30.9 62.4 58.3 30.5 (10.7) (30.0) (53.0) 32 68 180 101 205
UNH [] UNITEDHEALTH GROUP INC DEC 5,526.0 5,142.0 4,634.0 3,822.0 2,977.0 4,654.0 1,352.0 15.1 3.5 7.5 409 380 343 283 220
WCG WELLCARE HEALTH PLANS INC DEC 184.7 264.2 (53.4) 39.9 (36.8) 216.2 32.6 18.9 (3.1) (30.1) 567 811 (164) 122 (113)
WLP [] WELLPOINT INC DEC 2,655.5 2,646.7 2,887.1 4,745.9 2,490.7 3,345.4 549.1 17.1 (4.5) 0.3 484 482 526 864 454
UAM UNIVERSAL AMERICAN CORP DEC 53.0 0.3 187.7 140.3 95.1 84.1 30.1 5.8 (8.8) NM 176 1 623 466 316
Note: Data as originally reported. CAGR-Compound annual growth rate. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600.
#Of the following calendar year. **Not calculated; data for base year or end year not available.

Return on Revenues (%) Return on Assets (%) Return on Equity (%)
Ticker Company Yr. End 2012 2011 2010 2009 2008 2012 2011 2010 2009 2008 2012 2011 2010 2009 2008
MANAGED HEALTH CARE
AET [] AETNA INC DEC 4.5 5.9 5.2 3.7 4.5 4.1 5.2 4.6 3.4 3.2 16.2 19.8 18.2 14.4 15.2
CNC CENTENE CORP DEC 0.0 2.1 2.0 2.1 2.5 0.1 5.4 5.0 5.5 6.6 0.2 12.9 13.0 15.6 18.4
CI [] CIGNA CORP DEC 5.6 6.0 6.3 7.1 1.5 3.1 2.7 3.0 3.1 0.7 17.9 17.7 22.3 28.9 6.9
HNT HEALTH NET INC DEC 0.2 0.6 1.5 NM 0.6 0.7 1.9 4.9 NM 1.9 1.7 4.6 12.0 NM 5.2
HUM [] HUMANA INC DEC 3.1 3.9 3.2 3.4 2.2 6.5 8.4 7.3 7.6 5.0 14.5 18.9 17.3 20.3 15.3
MGLN MAGELLAN HEALTH SERVICES INC DEC 4.7 4.6 4.7 4.0 3.3 10.6 9.0 9.3 7.5 6.0 16.2 13.8 13.9 11.5 9.5
MOH MOLINA HEALTHCARE INC DEC 0.2 0.4 1.3 0.8 2.0 0.5 1.3 4.0 2.6 5.4 1.3 2.8 8.7 5.9 12.5
UNH [] UNITEDHEALTH GROUP INC DEC 5.0 5.0 4.9 4.4 3.7 7.4 7.9 7.6 6.7 5.6 18.6 19.0 18.7 17.2 14.6
WCG WELLCARE HEALTH PLANS INC DEC 2.5 4.3 NM 0.6 NM 7.2 11.2 NM 1.8 NM 15.1 27.1 NM 4.7 NM
WLP [] WELLPOINT INC DEC 4.3 4.4 4.9 7.8 4.1 4.8 5.2 5.6 9.4 5.0 11.3 11.2 11.9 20.5 11.2
UAM UNIVERSAL AMERICAN CORP DEC 2.4 0.0 3.3 2.8 2.0 2.2 0.0 5.0 3.7 2.4 5.3 0.0 12.7 10.1 7.1
Note: Data as originally reported. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the following calendar year.

Debt as a % of
Current Ratio Debt / Capital Ratio (%) Net Working Capital
MANAGED HEALTH CARE
AET [] AETNA INC DEC 1.0 0.7 0.8 0.8 0.7 37.3 27.8 26.0 27.7 30.8 NM NM NM NM NM
CNC CENTENE CORP DEC 1.1 1.1 0.9 0.9 1.0 36.0 27.1 29.2 33.8 34.6 303.4 340.2 NM NM NM
CI [] CIGNA CORP DEC NA NA NA NA NA 33.5 37.4 25.6 31.0 36.7 NA NA NA NA NA
HNT HEALTH NET INC DEC 1.9 1.9 1.7 1.7 1.6 24.3 26.2 19.0 22.7 27.1 35.3 41.0 30.1 37.9 49.0
HUM [] HUMANA INC DEC 1.8 1.8 1.8 1.8 1.6 22.8 17.1 19.4 22.5 30.3 48.9 32.4 38.0 42.0 60.3
MGLN MAGELLAN HEALTH SERVICES INC DEC 2.2 2.0 2.2 2.0 2.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
MOH MOLINA HEALTHCARE INC DEC 1.6 1.7 1.7 1.7 1.9 24.2 21.6 18.2 22.3 28.1 50.2 48.6 41.8 49.5 58.7
UNH [] UNITEDHEALTH GROUP INC DEC 0.8 0.9 0.8 0.8 0.8 28.2 27.4 25.1 27.6 35.3 NM NM NM NM NM
WCG WELLCARE HEALTH PLANS INC DEC 1.9 1.9 1.5 1.5 1.2 8.1 10.8 0.0 0.0 0.0 12.2 13.5 0.0 0.0 0.0
WLP [] WELLPOINT INC DEC 1.8 1.7 1.9 1.9 0.8 34.3 24.5 23.6 23.4 25.0 114.0 74.7 67.2 62.2 NM
UAM UNIVERSAL AMERICAN CORP DEC NA NA NA NA NA 13.1 3.7 17.9 22.1 24.4 NA NA NA NA NA

Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)
Ticker Company Yr. End 2012 2011 2010 2009 2008 2012 2011 2010 2009 2008
MANAGED HEALTH CARE
AET [] AETNA INC DEC 11 - 7 9 - 6 8 - 6 12 - 6 21 - 5 14 8 1 1 1 2.0 - 1.4 1.5 - 1.0 0.2 - 0.1 0.2 - 0.1 0.3 - 0.1
CNC CENTENE CORP DEC NM - NM 18 - 11 14 - 9 11 - 8 15 - 7 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
CI [] CIGNA CORP DEC 10 - 7 11 - 8 8 - 6 8 - 3 54 - 8 1 1 1 1 4 0.1 - 0.1 0.1 - 0.1 0.1 - 0.1 0.3 - 0.1 0.5 - 0.1
HNT HEALTH NET INC DEC NM - 54 42 - 25 14 - 6 NM - NM 60 - 8 0 0 0 NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
HUM [] HUMANA INC DEC 13 - 8 11 - 6 9 - 7 7 - 3 23 - 6 14 9 0 0 0 1.7 - 1.1 1.4 - 0.8 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
MGLN MAGELLAN HEALTH SERVICES INC DEC 10 - 7 13 - 10 12 - 8 14 - 9 22 - 14 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
MOH MOLINA HEALTHCARE INC DEC NM - 84 65 - 31 16 - 10 22 - 14 20 - 7 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
UNH [] UNITEDHEALTH GROUP INC DEC 11 - 9 11 - 8 9 - 7 10 - 5 24 - 6 15 13 10 1 1 1.6 - 1.3 1.7 - 1.1 1.5 - 1.1 0.2 - 0.1 0.2 - 0.1
WCG WELLCARE HEALTH PLANS INC DEC 17 - 11 10 - 5 NM - NM 41 - 7 NM - NM 0 0 NM 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
WLP [] WELLPOINT INC DEC 9 - 6 11 - 8 10 - 7 6 - 3 19 - 6 14 14 0 0 0 2.2 - 1.5 1.8 - 1.2 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0
UAM UNIVERSAL AMERICAN CORP DEC 22 - 13 NM - NM 9 - 5 7 - 3 24 - 6 164 NM 83 0 0 13.0 - 7.3 159.3 - 59.4 17.0 - 9.7 0.0 - 0.0 0.0 - 0.0
2008 2012 2011 2010 2009

Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)
MANAGED HEALTH CARE
AET [] AETNA INC DEC 4.87 5.33 4.25 2.89 2.91 10.30 8.46 11.05 8.74 5.33 51.14 - 34.58 46.01 - 30.60 35.96 - 25.00 34.91 - 18.66 59.80 - 14.21
CNC CENTENE CORP DEC 0.04 2.22 1.87 2.00 1.95 12.93 12.31 9.81 8.19 7.45 50.98 - 24.26 40.81 - 25.08 26.43 - 17.60 22.50 - 15.00 28.49 - 13.10
CI [] CIGNA CORP DEC 5.70 4.90 4.93 4.75 1.05 9.47 16.85 11.65 8.66 1.94 54.53 - 39.01 52.95 - 36.76 39.26 - 29.12 38.12 - 12.68 56.98 - 8.00
HNT HEALTH NET INC DEC 0.31 0.81 2.08 (0.47) 0.89 11.98 9.96 11.25 10.23 8.76 41.22 - 16.65 34.03 - 20.51 29.75 - 12.90 24.69 - 10.52 52.96 - 7.38
HUM [] HUMANA INC DEC 7.56 8.58 6.55 6.21 3.87 28.27 29.80 23.49 20.80 12.99 96.46 - 59.92 90.95 - 54.57 61.33 - 43.05 46.20 - 18.57 88.10 - 22.33
MGLN MAGELLAN HEALTH SERVICES INC DEC 5.51 4.25 4.10 3.03 2.18 20.31 13.75 16.52 13.30 13.24 56.58 - 40.24 56.76 - 41.10 50.10 - 34.59 42.09 - 28.68 48.10 - 30.12
MOH MOLINA HEALTHCARE INC DEC 0.21 0.45 1.33 0.79 1.50 11.84 10.90 8.83 8.55 7.93 36.83 - 17.63 29.03 - 13.93 21.20 - 13.35 17.17 - 10.81 29.96 - 10.75
UNH [] UNITEDHEALTH GROUP INC DEC 5.38 4.81 4.14 3.27 2.45 (4.70) 1.46 0.16 0.43 (1.36) 60.75 - 49.82 53.50 - 36.37 38.06 - 27.13 33.25 - 16.18 57.86 - 14.51
WCG WELLCARE HEALTH PLANS INC DEC 4.29 6.17 (1.26) 0.95 (0.89) 24.21 23.24 16.68 17.87 16.10 74.41 - 45.29 59.05 - 29.47 37.82 - 22.25 39.12 - 6.23 58.73 - 6.12
WLP [] WELLPOINT INC DEC 8.26 7.35 7.03 9.96 4.79 (9.22) 4.41 6.75 7.42 (1.70) 74.73 - 52.51 81.92 - 56.61 70.00 - 46.52 60.89 - 29.32 90.00 - 27.50
UAM UNIVERSAL AMERICAN CORP DEC 0.61 0.01 2.40 1.73 1.09 8.28 10.93 11.00 10.10 7.39 13.62 - 7.68 23.55 - 8.79 20.70 - 11.78 12.04 - 5.33 25.97 - 6.43
J-This amount includes intangibles that cannot be identified.
The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poors.
In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poors.
The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.

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Intermediary distributes S&P Capital IQs Industry Surveys, the
Intermediary, and not S&P Capital IQ, is solely responsible for
complying with all applicable regulations, laws, rules, circulars, codes
and guidelines established by local and/or regional regulatory
authorities, including laws in connection with the distribution of third-
party investment research, licensing requirements, supervisory and
record keeping obligations that the Intermediary may have under the
applicable laws and regulations of the territories where it distributes
the Industry Surveys.

Industry Surveys are not directed to, or intended for distribution to or
use by, any person or entity who is a citizen or resident of or located in
any locality, state, country or other jurisdiction where such
distribution, publication, availability or use would be contrary to law
or regulation or which would subject S&P Capital IQ or its affiliates to
any registration or licensing requirements in such jurisdiction.

Industry Surveys are not directed to, or intended for distribution to or
use by, any person or entity who is not in a class qualified to receive
Industry Surveys (e.g., a qualified person and/or investor), as defined
by the local laws or regulations in the country or jurisdiction where the
person is domiciled, a citizen or resident of, or the entity is legally
registered or domiciled.

S&P Capital IQs Industry Surveys are not intended for distribution in
or directed to entities, residents or investors in: Albania, Belarus,
Bosnia, Burma, Cote dIvoire, Croatia, Cuba, Democratic Republic of
the Congo, Former Yugoslav Republic of Macedonia, Herzegovina,
Iran, Iraq, Kosovo, Lebanon, Libya, Montenegro and Serbia, North
Korea, Somalia, Sudan, Syria, Taiwan, Yemen and Zimbabwe.

For residents of Australia: Industry Surveys are issued and/or
distributed in Australia by SPIS. Any express or implied opinion
contained in an Industry Survey is limited to General Advice and
based solely on consideration of the investment merits of the financial
product(s) alone. The information in an Industry Survey has not been
prepared for use by retail investors and has been prepared without
taking account of any particular investors financial or investment
objectives, financial situation or needs. Before acting on any advice,
any investor using the advice should consider its appropriateness
having regard to their own or their clients objectives, financial
situation and needs. Investors should obtain a Product Disclosure
Statement relating to the product and consider the statement before
making any decision or recommendation about whether to acquire the
product. Each opinion must be weighed solely as one factor in any
investment decision made by or on behalf of any adviser and any such
adviser must accordingly make their own assessment taking into
account an individuals particular circumstances.

SPIS holds an Australian Financial Services License Number 258896.
Please refer to the SPIS Financial Services Guide for more information
at:
www.spcapitaliq.com/FinancialServicesGuide

For residents of Kuwait: The Distributor, and not S&P Capital IQ, is
responsible for complying with all relevant licensing requirements as
set forth by the Kuwait Capital Markets Law (CML) and Kuwait
Capital Markets Authority (CMA) and with all relevant rules and
regulations set out in the CML and CMA rule books.

For residents of Malaysia: All queries in relation to Industry Surveys
should be referred to Ahmad Halim at ahmad.halim@spcapitaliq.com.

For residents of Mexico: S&P Capital IQ is not regulated or supervised
by the Mexican National Banking and Securities Commission
(CNBV). S&P Capital IQ has a licensed rating agency affiliate in
Mexico (Standard & Poors, S.A. De C.V.), of which S&P maintains
firewalls and seeks to avoid conflicts of interest, pursuant to approved
policies.

For residents of Qatar: The Distributor, and not S&P Capital IQ, is
responsible for complying with all relevant licensing requirements as
set forth by the Qatar Financial Markets Authority or the Qatar
Central Bank, and with all relevant rules and regulations set out in the
Qatar Financial Markets Authoritys rule book, including third party
branded investment research distribution of securities that are admitted
for trading on a Qatari securities exchange (Admitted Securities).

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