ELV

Business Context and Reporting Period

This Form 10-Q covers Anthem, Inc. (now Elevance Health) for the quarterly period ended March 31, 2002. The company is a major health benefits provider and an independent licensee of the Blue Cross Blue Shield Association, operating in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado, and Nevada. The reporting period follows the company's demutualization and initial public offering in November 2001. The company recently announced a pending $4.0 billion acquisition of Trigon Healthcare, Inc.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenue increased 10% ($255.2 million), driven by an 11% increase in premiums due to rate hikes and membership growth. Administrative fees decreased 6% primarily due to the sale of the TRICARE business in May 2001.
• Profitability: Net income rose 41% ($29.2 million). Operating gain surged 78% to $106.6 million, aided by improved underwriting results and a 57% reduction in goodwill amortization following the adoption of FAS 142.
• Membership: Total membership increased 2% to 8.17 million. Excluding the sold TRICARE business, membership grew 7%, with significant gains in National accounts (14%) and Individual business (10%).
• Investment Income: Net investment income increased 12% to $60.5 million due to higher average portfolio balances. However, net realized gains on investments dropped 75% to $3.3 million.
• Cost Trends: Overall cost of care trends were approximately 13% on a rolling 12-month basis, driven by higher outpatient utilization and an 18% increase in prescription drug costs.

Guidance, Outlook, and Risks

• Acquisitions: The company is pursuing the acquisition of Trigon Healthcare (Virginia) valued at ~$4.0 billion, requiring ~$1.2 billion in cash. A bridge loan commitment has been secured, with plans to issue up to $1.0 billion in debt securities for permanent financing. The acquisition of Blue Cross and Blue Shield of Kansas ($190 million) is currently under appeal after regulatory disapproval.
• Stock Repurchase: The Board approved a $400 million stock repurchase program. As of May 9, 2002, the company had repurchased 542,500 shares for $36.5 million.
• Litigation Risks: The company faces multiple class-action lawsuits in Connecticut regarding ERISA violations and provider payment practices. A significant wrongful death case in Ohio (Dardinger) is pending appeal at the Supreme Court of Ohio regarding punitive damages, though compensatory damages have been paid.
• Regulatory Contingencies: Ongoing federal reviews and subpoenas relate to Medicare fiscal intermediary operations (Parts A and B) and the Federal Employee Program (FEP). The company believes potential fines are unlikely to be material.
• Accounting Changes: Adoption of FAS 142 eliminated goodwill amortization, improving reported earnings. A transitional impairment test for goodwill is required by June 30, 2002, with no material impairment expected.

Investor Verification Checklist

• Trigon Acquisition Financing: Verify the status of the $1.2 billion bridge loan and the timeline for the $1.0 billion permanent debt issuance.
• BCBS-Kansas Appeal: Monitor the outcome of the appeal against the Kansas Insurance Commissioner's disapproval of the $190 million acquisition.
• Ohio Litigation (Dardinger): Track the Supreme Court of Ohio's decision on the remanded punitive damages claim, which could impact future liability exposure.
• Medicare Audits: Review updates on federal government reviews of Medicare fiscal intermediary operations and potential penalties.
• Cost of Care Trends: Assess the sustainability of the 13% medical cost trend and the effectiveness of three-tiered drug programs in controlling prescription costs.