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Eighth Annual Wall Street Comes to Washington
Eighth Annual Wall Street Comes to Washington
Roberta W. GoodmanFirst 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.
Roberta W. GoodmanFirst 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.
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Topics to AddressTopics to Address
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Topics to AddressTopics to Address
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Premium and Cost Trends, 1990-2003EPremium and Cost Trends, 1990-2003E
-2%0%2%4%6%8%
10%12%14%16%18%20%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Premium Pricing Medical Cost Trends
-2%0%2%4%6%8%
10%12%14%16%18%20%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Premium Pricing Medical Cost Trends
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
2003 Pricing Stabilizing; 2004 Should Moderate, but
Follow Cost Trend
2003 Pricing Stabilizing; 2004 Should Moderate, but
Follow Cost Trend
Cost Trend Inflection Point Reached in
2002
Cost Trend Inflection Point Reached in
2002
Components of the Medical Cost TrendComponents of the Medical Cost Trend
-5%
0%
5%
10%
15%
1996 1997 1998 1999 2000 2001 2002E 2003E
Inpatient Outpatient Drug Physician
-5%
0%
5%
10%
15%
1996 1997 1998 1999 2000 2001 2002E 2003E
Inpatient Outpatient Drug Physician
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Topics to AddressTopics to Address
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Cost-Sharing Low By Historical StandardsCost-Sharing Low By Historical Standards
0%5%
10%15%20%25%30%35%40%45%50%
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
P
2008
P
0%5%
10%15%20%25%30%35%40%45%50%
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
P
2008
P
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Out-Of-Pocket Costs as % of National Health Expenditures
Out-Of-Pocket Costs as % of National Health Expenditures
But More Visible in Current Economic ClimateBut More Visible in Current Economic Climate
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
P
2008
P
Medicare
Recessions
M'care PPS
Clinton health reform initiative
BBA97
Recessions
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
P
2008
P
Medicare
Recessions
M'care PPS
Clinton health reform initiative
BBA97
Recessions
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Annual Change, Total Health Expenditures as % of GDPAnnual Change, Total Health Expenditures as % of GDP
Product Design: Evolution or Revolution?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
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.Refer to important disclosures at the end of this report.
Elasticity of Demand ExistsElasticity of Demand Exists
StructureCo-Payment Level Low High %Chg Low High %Chg Low High %Chg
Member Payments $123 $126 2% $119 $116 -3% $134 $141 5%Plan Payments 602 437 -27% 559 339 -39% 532 295 -45%Spend per Member $725 $563 -22% $678 $455 -33% $666 $436 -35%Member as % 17% 22% 5% 18% 25% 8% 20% 32% 12%
Three TierTwo TierOne Tier
Source: JAMA 288(4)Source: JAMA 288(4)
Annual Per-Member Drug CostsAnnual Per-Member Drug Costs
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Care/Disease ManagementCare/Disease Management
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Focus on Costly Diseases Commonly: CHF, Asthma,
Diabetes Less Frequently: High Risk
Pregnancy, Depression, Oncology
Issues Data Integrity and Clinical
Approach Are Key Compliance Rates Measurement of Impact Multiple Morbidity Patients
Focus on Costly Diseases Commonly: CHF, Asthma,
Diabetes Less Frequently: High Risk
Pregnancy, Depression, Oncology
Issues Data Integrity and Clinical
Approach Are Key Compliance Rates Measurement of Impact Multiple Morbidity Patients
23%
85%25%
12%
52%
3%
0%
25%
50%
75%
100%
Percent of Population Percent of Expenditures
Top 25% Middle 25% Bottom 50%
23%
85%25%
12%
52%
3%
0%
25%
50%
75%
100%
Percent of Population Percent of Expenditures
Top 25% Middle 25% Bottom 50%
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Topics to AddressTopics to Address
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Administrative Expense Ratio Trends, 1990-2002Administrative Expense Ratio Trends, 1990-2002
10%
12%
14%
16%
18%
20%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Mean Industry Average, 1990-2002
10%
12%
14%
16%
18%
20%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Mean Industry Average, 1990-2002
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Topics to AddressTopics to Address
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Focusing on Cash Flows & Capital ReturnsFocusing 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
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.Refer to important disclosures at the end of this report.
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Premium and Cost Fundamentals
Product Design: Evolution or Revolution?
Efficiency Gains
Capital Deployment
Public Policy and Industry Implications
Topics to AddressTopics to Address
Refer to important disclosures at the end of this report.Refer to important disclosures at the end of this report.
Medicare Reform and Prescription DrugsMedicare 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
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.Refer to important disclosures at the end of this report.
Sources UsedSources 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
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 CertificationAnalyst 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.
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.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 Inv. Banking Relationships* CountPercent Buy 97 54.80% Buy 41 42.27% Neutral 71 40.11% Neutral 12 16.90% Sell 9 5.08% Sell 1 11.11%Investment Rating Distribution: Global Group (as of 31 December 2002) Coverage Universe Count Percent Inv. Banking Relationships* CountPercent Buy 1110 43.46% Buy 391 35.23% Neutral 1236 48.39% Neutral 319 25.81% Sell 208 8.14% Sell 43 20.67%* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.
Price charts for the equity securities referenced in this research report are available at http://www.ml.com/research/pricecharts.asp, or call 1-888-ML-CHART to have them mailed.
[AET, ATH, CI, CVH, FHCC, HNT, HUM, MME, OHP, PHSY, UNH, WLP] MLPF&S or one or more of its affiliates acts as a market maker for the recommended securities to the extent that MLPF&S or such affiliate is willing to buy and sell such securities for its own account on a regular and continuous basis.[AET, ATH, OHP, UNH] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.[AET, ATH, CI, UNH, WLP] MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months.[AET, ATH, CI, CVH, FHCC, HNT, HUM, MME, OHP, UNH, WLP] MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company within the next three months.[AET, HUM, MME, WLP] MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this company calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934.
In Germany, this report should be read as though Merrill Lynch has acted as a member of a consortium which has underwritten the most recent offering of securities during the last five years for companies covered in this report and holds 1% or more of the share capital of such companies.The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch, including profits derived from investment banking revenues.OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not considered to be secure); and 9 - pays no cash dividend.Copyright 2003 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. Any unauthorized use or disclosure is prohibited. This report has been prepared and issued by MLPF&S and/or one of its affiliates and has been approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is regulated by the FSA; has been considered and distributed in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC; and is distributed in Singapore by Merrill Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd, which are regulated by the Monetary Authority of Singapore. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Additional information available.Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (“related investments”). MLPF&S, its affiliates, directors, officers, employees and employee benefit programs may have a long or short position in any securities of this issuer(s) or in related investments. MLPF&S or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report.This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance.Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.
Investment Rating Distribution: Health Care Group (as of 31 December 2002) Coverage Universe Count Percent Inv. Banking Relationships* CountPercent Buy 97 54.80% Buy 41 42.27% Neutral 71 40.11% Neutral 12 16.90% Sell 9 5.08% Sell 1 11.11%Investment Rating Distribution: Global Group (as of 31 December 2002) Coverage Universe Count Percent Inv. Banking Relationships* CountPercent Buy 1110 43.46% Buy 391 35.23% Neutral 1236 48.39% Neutral 319 25.81% Sell 208 8.14% Sell 43 20.67%* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.
Price charts for the equity securities referenced in this research report are available at http://www.ml.com/research/pricecharts.asp, or call 1-888-ML-CHART to have them mailed.
[AET, ATH, CI, CVH, FHCC, HNT, HUM, MME, OHP, PHSY, UNH, WLP] MLPF&S or one or more of its affiliates acts as a market maker for the recommended securities to the extent that MLPF&S or such affiliate is willing to buy and sell such securities for its own account on a regular and continuous basis.[AET, ATH, OHP, UNH] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.[AET, ATH, CI, UNH, WLP] MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months.[AET, ATH, CI, CVH, FHCC, HNT, HUM, MME, OHP, UNH, WLP] MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company within the next three months.[AET, HUM, MME, WLP] MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this company calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934.
In Germany, this report should be read as though Merrill Lynch has acted as a member of a consortium which has underwritten the most recent offering of securities during the last five years for companies covered in this report and holds 1% or more of the share capital of such companies.The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch, including profits derived from investment banking revenues.OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not considered to be secure); and 9 - pays no cash dividend.Copyright 2003 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. Any unauthorized use or disclosure is prohibited. This report has been prepared and issued by MLPF&S and/or one of its affiliates and has been approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is regulated by the FSA; has been considered and distributed in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC; and is distributed in Singapore by Merrill Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd, which are regulated by the Monetary Authority of Singapore. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Additional information available.Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (“related investments”). MLPF&S, its affiliates, directors, officers, employees and employee benefit programs may have a long or short position in any securities of this issuer(s) or in related investments. MLPF&S or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report.This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance.Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.