Transcript Screenshow Information Page

Eighth Annual Wall Street Comes to
Washington
Roberta W. Goodman
First Vice President
Merrill Lynch Global Securities Research
Refer to important disclosures at the end of this report.
Analyst Certification on slide 49.
Investors should assume that Merrill Lynch is seeking or will seek investment
banking or other business relationships with the companies in this report.
Topics to Address
 Premium and Cost Fundamentals
 Product Design: Evolution or Revolution?
 Efficiency Gains
 Capital Deployment
 Public Policy and Industry Implications
Refer to important disclosures at the end of this report.
Topics to Address
 Premium and Cost Fundamentals
 Product Design: Evolution or Revolution?
 Efficiency Gains
 Capital Deployment
 Public Policy and Industry Implications
Refer to important disclosures at the end of this report.
Premium and Cost Trends, 1990-2003E
2003 Pricing Stabilizing;
2004 Should Moderate, but
Follow Cost Trend
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Cost Trend Inflection
Point Reached in
2002
Premium Pricing
Medical Cost Trends
Refer to important disclosures at the end of this report.
Components of the Medical Cost Trend
15%
10%
5%
0%
-5%
1996
1997
1998
Inpatient
1999
2000
Outpatient
Drug
2001
2002E 2003E
Physician
Refer to important disclosures at the end of this report.
Topics to Address
 Premium and Cost Fundamentals
 Product Design: Evolution or Revolution?
 Efficiency Gains
 Capital Deployment
 Public Policy and Industry Implications
Refer to important disclosures at the end of this report.
Cost-Sharing Low By Historical Standards
19
60
19
64
19
68
19
72
19
76
19
80
19
84
19
88
19
92
19
96
20
0
20 0
04
20 P
08
P
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Out-Of-Pocket Costs as % of National Health
Expenditures
Refer to important disclosures at the end of this report.
But More Visible in Current Economic Climate
Annual Change, Total Health Expenditures as % of GDP
1.0%
Recessions
Recessions
0.8%
0.6%
0.4%
0.2%
0.0%
BBA97
-0.2%
M'care PPS
Medicare
Clinton health reform initiative
19
60
19
64
19
68
19
72
19
76
19
80
19
84
19
88
19
92
19
96
20
0
20 0
04
20 P
08
P
-0.4%
Refer to important disclosures at the end of this report.
Product Design: Evolution or Revolution?
 Self-Funding and Vendor Consolidation
 Increased Cost Sharing: Impacts Demand “At the Margin”
per Rand Corporation Studies
 Tiered (or Narrowed) Networks: Increases Contracting
Leverage, But Adoption Slow and Providers Resistant
 “Consumer Directed Plans” Engage the Consumer, But
Not a Panacea (and Not Without Side Effects)
… The Key Issue Remains the Complex Needs of
Patients with Catastrophic Illness/Multiple Morbidities
Refer to important disclosures at the end of this report.
Elasticity of Demand Exists
Annual Per-Member Drug Costs
Structure
Co-Payment Level
One Tier
Two Tier
Three Tier
Low High %Chg Low High %Chg Low High %Chg
Member Payments
Plan Payments
Spend per Member
Member as %
$123
602
$725
17%
$126
2% $119 $116 -3% $134 $141
5%
437 -27%
559 339 -39%
532 295 -45%
$563 -22% $678 $455 -33% $666 $436 -35%
22%
5% 18% 25%
8% 20% 32% 12%
Source: JAMA 288(4)
Refer to important disclosures at the end of this report.
Care/Disease Management
 Focus on Costly Diseases
3%
100%
12%
75%
52%
 Commonly: CHF, Asthma,
Diabetes
 Less Frequently: High Risk
Pregnancy, Depression,
Oncology
50%
85%
25%
25%
23%
0%
Percent of Population
Top 25%
Percent of Expenditures
Middle 25%
Bottom 50%
 Issues
 Data Integrity and Clinical
Approach Are Key
 Compliance Rates
 Measurement of Impact
 Multiple Morbidity Patients
Refer to important disclosures at the end of this report.
Topics to Address
 Premium and Cost Fundamentals
 Product Design: Evolution or Revolution?
 Efficiency Gains
 Capital Deployment
 Public Policy and Industry Implications
Refer to important disclosures at the end of this report.
Administrative Expense Ratio Trends, 1990-2002
20%
18%
16%
14%
12%
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
10%
Mean
Industry Average, 1990-2002
Refer to important disclosures at the end of this report.
Topics to Address
 Premium and Cost Fundamentals
 Product Design: Evolution or Revolution?
 Efficiency Gains
 Capital Deployment
 Public Policy and Industry Implications
Refer to important disclosures at the end of this report.
Focusing on Cash Flows & Capital Returns
 Public Companies Focused on Balance Sheet
Improvements (Share Repurchases, Debt Reduction) to
Improve ROE and ROIC
 Blues: Conversions and Association Requirements
 Minimal Expansion Focus: Withdrawals the Rule,
Acquisitions and De Novo Start-Ups the Exception
 Near-Term Conditions Unlikely to Produce a Down-Turn
in the (So-Called) Underwriting Cycle
Refer to important disclosures at the end of this report.
Topics to Address
 Premium and Cost Fundamentals
 Product Design: Evolution or Revolution?
 Efficiency Gains
 Capital Deployment
 Public Policy and Industry Implications
Refer to important disclosures at the end of this report.
Medicare Reform and Prescription Drugs
 Actuarial Soundness Required for Participation
 Payment Levels/Growth Must Reflect Underlying
Costs
 Adverse Selection Problems
 Service Area Integrity
 Benefit Flexibility Required
 Competitive Bid Structures Problematic
Refer to important disclosures at the end of this report.
Sources Used
 American Association of Health Plans
 Bureau of Economic Analysis
 Center for Studying Health System Change
 Centers for Medicare & Medicaid Services
 Interstudy
 Milliman USA
 Rand Corporation
 SEC filings
 Merrill Lynch Estimates
Analyst Certification
I, Roberta W. Goodman, hereby certify that the views
expressed in this research report accurately reflect my
personal views about the subject securities and issuers. I
also certify that no part of my compensation was, is, or
will be, directly or indirectly, related to the specific
recommendations or view expressed in this research
report.
Refer to important disclosures at the end of this report.
Investment Rating Distribution: Health Care Group (as of 31 December 2002)
Coverage Universe
Count
Percent
Percent
Buy
97
54.80%
Neutral
71
40.11%
Sell
9
5.08%
Investment Rating Distribution: Global Group (as of 31 December 2002)
Coverage Universe
Count
Percent
Percent
Buy
1110
43.46%
Neutral
1236
48.39%
Sell
208
8.14%
* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.
Inv. Banking Relationships*
Count
Buy
Neutral
Sell
42.27%
16.90%
11.11%
41
12
1
Inv. Banking Relationships*
Count
Buy
Neutral
Sell
35.23%
25.81%
20.67%
391
319
43
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