1

Brad BowlusPresident, CEO

PacifiCare Health Plans

James FreyPresident

PacifiCare of California

.…a health and consumer services company making people’s lives better

Contracting Strategies

2 .…a health and consumer services company making people’s lives better

Contracting Overview

• Risk Of Conversion Under Control

• Supporting Claims, Medical Management, Disease Management And Contracting Infrastructure In Place

• Solid Financial Performance Occurring In Both Capitated And Directly Contracted Models

• Delegated Model Oversight Enhanced

3 .…a health and consumer services company making people’s lives better

Delivery System- Commercial Segment / All Products

3.1%

37.0%

15.9%

2.5%

53.6%

20.5%

2.1%

62.2%

21.5%

5.0%

74.3%

27.3%

0.0%

25.0%

50.0%

75.0%

100.0%

December, 2000 December, 2001 March, 2002(Actual)

December, 2003(Projected)

CA Non-CA Total PHS

PHS Physician Risk PHS Hospital Risk

31.7%

59.7%

42.3%

40.7%

71.6%

51.6%

43.2%

75.2%

53.5%

53.1%

83.4%

63.7%

0.0%

25.0%

50.0%

75.0%

100.0%

December, 2000 December, 2001 March, 2002(Actual)

December, 2003(Projected)

CA Non-CA Total PHS

4

Can We Manage Risk?

89%

76%

89% 87%81%

48%

59%

31%

0%

25%

50%

75%

100%

CommercialPhysician

CommercialHospital

Secure HorizonsPhysician

Secure HorizonsHospital

AZ CO

• Market Leaders In Both States

At - Risk Membership As Of 3/31/02

5 .…a health and consumer services company making people’s lives better

Improving Clinical, Service & Cost Outcomes

• Integrated Contracting And Medical Management Approach

• Leverage All Products Into Single Negotiation: “Concentrated Contract Leverage”

• Target Performance Based Compensation

• Timely and Accurate Claims Payment In Exchange For Lowest Possible Unit Cost

• Implement Limited Transplant Network January, 2003

• Unique Quality Measurement System

• Narrow Networks And Tiered Networks Concentrate Penetration Into “High Performing” Providers

6 .…a health and consumer services company making people’s lives better

Environmental Scan- Delivery System

• Significant Delivery System Variation Still Exists Around Cost, Quality, And Service

• Current Products Are Priced To The “Average”

• The “Average” Is Configured Around 200% + Variation In Cost:

– Major Unit Cost Variation

– Enormous Utilization Variation

– Major Pharmacy Variation

• Empower Consumers With Information On Cost, Quality, And Service

2001 Hospital Cost Variation: California2001 Hospital Cost Variation: California

Source: PHS Internal DataSource: PHS Internal Data

0

10

20

30

40

50

60

<50% 50% 67% 83% 100% 117% 133% 150% >150%

MedianMedian

7

• PacifiCare Of California Is Both Willing And Prepared To Reimburse Providers With A Full Range Of Capitated And FFS Arrangements

• Currently 325 Groups Operating Under Delegated Arrangements

• Amount Of Risk A Group Bears Differs Significantly From One Group To Another Based On Their Financial Capabilities

PacifiCare Of California: Philosophy Toward Risk

8

• Kaiser Effect

• Utilization And Unit Cost Data For Delegated Providers Available To Price & Manage Risk

• DMHC Approach Is To Stabilize

• Groups Have Strong Commitment To Capitation

PacifiCare Of California: Capitation Overview

9

PacifiCare Of California: Delegated Oversight

• Rigorous Review Processes In Place To Identify & Manage Delegated Risk

• Process Overview:

Step 1: Calculate Liquidity Position For All (Working Capital Vs. Risk)

Step 2: Some Providers Go To Level 2 Oversight

» Review Financial Statements And Cash Flow Forecasts

» Review IBNR Methodology

Step 3: Some Providers Go To Level 3 Oversight

» Site Visit For Potentially Unstable Providers

Step 4: Based On Reviews, Establish Security And/Or Solvency Reserves Or Move To FFS If Necessary