TALKING POINTS ISSUES RELATING TO STATUS, FINANCIAL PERFORMANCE AND OTHER CORPORATE ISSUES

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1 TALKING POINTS ISSUES RELATING TO STATUS, FINANCIAL PERFORMANCE AND OTHER CORPORATE ISSUES BCBSF's Status BCBSF's Status Blue Cross and Blue Shield of Florida (BCBSF) is a tax-paying mutual insurance company, subject to the same regulation by the Department of Insurance as other insurers operating in the state. BCBSF is an independent licensee of the Blue Cross and Blue Shield Association, an association of independent Blue Cross and Blue Shield companies nationwide. BCBSF has no plans to change its status as a mutual insurance company at this time. BCBSF Is Meeting Consumer's Needs Operating as a mutual insurance company, BCBSF has continued to be a leader, meeting the dynamic needs of more than two million Floridians. Strong enrollment gains, high retention and increases in policyholders' equity confirm BCBSF's ability as a mutual insurance company to continue offering Floridians access to high quality health care at the lowest possible cost. At the end of the first quarter of 1996, BCBSF's HMO, Health Options, reported 531,362 members, a 28 percent increase since the first quarter of More than 90 percent of Health Options' group customers renewed their coverage during BCBSF's Status In The Future BCBSF will continue to monitor the changing health care marketplace. Currently, the company has no plans to change its status as a mutual insurance company. 1

2 Status Continued Reasons for Possibly Changing Our Status As the health care marketplace continues to change, BCBSF may need access to additional capital in order to fund future growth and remain the state's leader in providing access to quality, affordable care. As a mutual insurance company, BCBSF only has access to capital that the company generates or could borrow. In order to match our competitors' ability to raise capital through stock offerings, BCBSF might consider converting to a publically-traded company. Additional capital might be needed to fund acquisitions, purchase equipment or expand our existing product line. Changes being made by Other BCBS Plans The Blue Cross and Blue Shield Association's board of directors voted in June 1994 to give the nation's 63 independent Blue Cross and Blue Shield licensees the flexibility to structure their business operations in a way that best serves their customer's needs. At this time, there are only a handful -- 7 or 8 out of Blue Cross and Blue Shield plans that are considering a for-profit conversion. This is by no means a national, system-wide shift. In fact, it really does not constitute a "trend." Financial Condition of BCBSF First Quarter 1996 Financial Results BCBSF's consolidated net income for the first quarter of 1996 was $22.3 million on revenues of $677.5 million. This is a decline from the first quarter of 1995, when the net income was $30.6 million on revenues of $618.5 million. Operating income for the first quarter of 1996 declined compared to the first quarter of Operating income was reported at $13.1 million compared with $29.8 million in 1995 first quarter. The declines in net and operating income were due to high claims expense. Revenue increased by 9.5 percent while claims expense rose by 12.6 percent. Claims expense is a combination of high utilization and increased medical costs. Financial Condition Continued 2

3 Total revenue of the HMO Group plans (Health Options and Capitol Health Plan) represents 38 percent of total company revenues. Investment and related income was $18.8 million, an increase of 70.9 percent over the first quarter of This increase was due to realized gains on investment sales. BCBSF continues to have a conservative investment portfolio that protects our customers. We have never invested in junk bonds or risky real estate ventures. Policyholders' Equity BCBSF has reported significant gains in policyholders' equity. In 1995, policyholders' equity grew $129 million -- or 23 percent -- to $688.4 million from $559.3 million in Policyholders' equity grew from $615.0 million at the end of the first quarter 1995 to $698.8 million at the end of the first quarter 1996, a 13.6 percent increase. BCBSF's commitment to increase policyholders' equity is a sign of the financial stability we offer our customers. Policyholders' equity is an important measure of the company's ability to meet its obligations during times of economic uncertainty or when claims expenses are higher than anticipated. As the company continues to grow, policyholders' equity will: be used to develop programs that continue to improve health care quality for customers while lowering overall costs. provide the resources needed to meet the challenges of reform and the changing demands of the health care market in terms of new systems, products and technology. provide the resources necessary for BCBSF to meet the needs of an expanding customer base. Customer Growth and Satisfaction 3

4 Eighty-five percent of our customers have chosen a coordinated approach to health care through Health Options or our Preferred Provider Organization product. Over the last 12 months, Health Options has grown in membership by 28 percent, making it one of the fastest-growing HMOs in Florida. The gain in Health Options customer enrollment represents steady, solid growth. Health Options continues to grow in membership because customers are seeing the value in coordinated, preventive health care programs. The group retention number is 88.9 percent for the first quarter of Overall, 88 percent of BCBSF customers renewed their coverage. Companywide, BCBSF insures approximately 2.0 million Floridians. Florida Department of Insurance Ranking Report shows that Health Options has the largest commercial HMO enrollment in the state, with 483,200 group members. In the first quarter of this year, Health Options increased its membership number by 30,423 for a total of 531,362 customers. Network Health Care Advantages of network health care include preventive care, quality measurement, management of chronic conditions and the ability to provide comprehensive care within a budget. By making quality health care more affordable, this approach also expands access to more Floridians. Over 3.5 million Floridians have chosen HMOs over traditional health plans for quality health care. This growth is proof that comprehensive care plans provide high quality care, with more comprehensive benefits, more preventive services and lower out-of-pocket costs. Quality Health Options adds to the quality of its customers' care by promoting health and wellness. An example is our Healthy Addition program, a statewide prenatal care program providing education services and high risk monitoring, designed to reduce low birth-weight or premature deliveries. More at-risk mothers have carried their babies to term as a result of this program. Quality Continued 4

5 As the leader in the health care industry in Florida, BCBSF is continually developing programs that promote illness prevention and early detection of disease. Two illnesses that the company is currently developing programs for include diabetes and asthma. These programs will help to elevate the quality of care that customers receive from their health care partners. During 1995, Health Options earned full accreditation from the National Committee for Quality Assurance (NCQA). NCQA accreditation is the seal of quality all consumers should look for when considering a health plan. Full accreditation demonstrates that Health Options performs well when measured against NCQA's national standards for quality management and improvement, physician credentialing, preventive health services and medical record management. Presumed "Social Mission" There is a presumption that all Blues plans began as the same type of company and that all plans received favorable treatment by hospitals and state governments. This simply is not true. Each Blue Cross and Blue Shield plan is an independent local health care company, with its own history of origin. BCBSF was not created as a charitable institution, and we did not receive special discounts and tax exemptions because of our status. BCBSF has a distinct heritage that includes an intense focus on serving its local communities. Both corporately and individually, we need to support activities that benefit us as a society and are consistent with what our organization is trying to achieve. Most Blues Plans no longer have any required social mission or market obligations. In fact, some Plans never had such requirements, and BCBSF is one example. Regulators and legislators have realized that the burden of providing coverage for high risk populations must be shared by a broader base of carriers or taxpayers. No single company, or its policyholders, should have to bear that financial responsibility. Social Mission Continued 5

6 BCBSF became a mutual in This type of status means that BCBSF is subject to the same regulation by the Department of Insurance and tax burden as other insurers operating in the state. Company Reorganization BCBSF has undertaken a reengineering effort to ensure that we can compete effectively in the marketplace of the future and can continue providing quality, affordable health care to our customers. BCBSF is redesigning the way we conduct business. One example of this is a pilot we are conducting for a virtual office set-up with our providers. We are working in partnership with several providers to test the efficiency and quality of a paperless, electronic communication system between us and our providers. Reengineering does not always mean downsizing of staff. Any staff realignment that is done will help BCBSF become more efficient to ensure we can remain competitive in the marketplace. The majority of employees who have been realigned to date (approximately 110 people) have found other positions within the company. BCBSF currently has over 350 open positions in the company, so many of the employees can be transferred to other positions. BCBSF has a commitment to preparing our workforce for the future of health care. We have embarked on a workforce preparation project to help our employees gain the necessary competencies to compete for future positions. Executive Compensation To provide the highest quality, most cost-effective health care delivery and financing programs to our customers, BCBSF must attract and retain highly qualified, talented and innovative executives. We compete for executives with large national life and health insurers and other health care financing and delivery organizations including managed care companies. Our compensation policies are measured against this competitive market. 6

7 Executive Compensation Continued BCBSF's ability to compete nationally for its executives has contributed significantly to sound management, enrollment growth and the financial stability of our company. All compensation policies are established by the BCBSF Board of Directors, many of whom represent the public. These policies are developed following extensive review and analysis of compensation practices throughout the nation. Blue Cross and Blue Shield of Florida does not compete with other Blues plans. Rather, we compete with major national insurers who do business in Florida. It is the company's policy not to disclose the salaries of our employees. Rate Increases It has always been BCBSF's objective to provide its customers with quality benefits at the most reasonable cost possible. We will continue to work to hold down medical costs while still providing access to the highest quality care possible. BCBSF has been successful in slowing the rate of premium increases in many of its products. All individual rate increases are approved by the Florida State Department of Insurance before being implemented. As health care services become more expensive, and as people use their benefits more often, rates must reflect the increase in claims payouts. This is how BCBSF assures that our policyholders will have needed coverage now and in the future. Grassroots/Lobbying Initiatives BCBSF has a responsibility to protect the quality of health care that our two million customers have come to expect. HMOs and PPOs continue to face challenges in the legislative and political arenas. Grassroots/Lobbying Initiatives Continued 7

8 BCBSF feels that it has an obligation to its customers, and Florida consumers, to keep them informed about the threats to the quality and affordability of their health care. This is especially important since voters may be asked to decide on a ballot initiative in 1996 that could eliminate quality care at an affordable cost. To protect the interests of our customers, BCBSF is committed to defeating harmful legislation for health care. If the bills in this year's session would have passed, the price tag associated with diminished quality and higher costs would have been far greater than the price of keeping the public and legislators informed Florida Legislative Session There were several health care-related bills introduced in the House and Senate this year that BCBSF considered harmful to our customers. Fortunately, the majority of the harmful legislation did not pass, including several Direct Access and Any Willing Provider bills that would have given special privileges to dermatologists, ophthalmologists, optometrists, teaching hospitals and cancer centers. These bills would have undermined the patient's ability to benefit from coordinated care and raised the cost of health care. Objectionable legislation that did pass relates to maternal length of hospital stay, emergency rooms and civil remedy. Legislation that we have long supported also passed: Guaranteed renewability of individual coverage; "portability" through credit for previous qualifying coverage; and "mini-cobra," or continuation of coverage for employees of small companies (<20 employees). Revised 7/12/96, 5:30 p.m. galtlkg2.doc 8

9 HIV/AIDS Case Management Talking Points In response to New York Times Magazine Article BCBSF offers a wide variety of insurance products to meet the different needs of our 2 million customers. Prescription drug coverage and benefits also vary from product to product depending on the specifics of the policy. BCBSF's South Florida region has an active HIV/AIDS case management program. There are currently 350 cases of HIV/AIDS that are handled by case management. The two main goals of the HIV/AIDS case management program are to improve the quality of life for our patients and decrease the effects of the disease. This often includes using prescription drugs for pain relief and for medication. Only drugs that have been approved by the Federal Drug Administration are covered by BCBSF. Case managers are often able to provide FDA-approved drugs for off-label use for their AIDS patients, but experimental drugs are not covered by BCBSF. If a drug that has been approved is not available in local pharmacies in Florida, BCBSF can often obtain the drug directly from the pharmaceutical manufacturer to benefit our patients. BCBSF sells several types of conversion policies, which are guaranteed issue products for customers who have lost group coverage for whatever reason. Less than 250 of our 2 million customers have a conversion policy.

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