ELV

Business Context and Reporting Period

This summary covers the Annual Report on Form 10-K for Anthem, Inc. (now Elevance Health) for the fiscal year ended December 31, 2003. Anthem is a leading publicly traded health benefits company operating as an independent licensee of the Blue Cross Blue Shield Association (BCBSA) in nine states: Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado, Nevada, and Virginia. As of year-end 2003, the company served approximately 11.9 million members through a diversified portfolio of managed care products (PPOs, HMOs, POS) and specialty services (pharmacy, dental, vision, life/disability).

Key Financial Metrics

Liquidity: Cash and investments totaled $7.38 billion at year-end. The company maintained a debt-to-total-capital ratio of 21.7%.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 27% primarily due to premium rate increases, membership growth (up 8% to 11.9 million), and the full-year inclusion of the Southeast segment (acquired via Trigon Healthcare in July 2002).
• Profitability: Net income rose 41% to $774.3 million. The benefit expense ratio improved by 160 basis points, driven by lower-than-anticipated medical costs and favorable litigation resolutions (specifically a $24.5 million reserve release in the Midwest segment).
• Membership Mix: Self-funded membership grew 14% (driven by National Accounts and BlueCard activity), while fully-insured membership grew only 1%. This shift reflects large employers assuming more risk.
• Cost of Care: Aggregate cost of care trend was 9% in 2003, down from 12% in 2002. Increases were driven by professional and outpatient services, partially offset by slower pharmacy cost growth.

Guidance, Outlook, and Risks

• Pending Merger: On October 27, 2003, Anthem announced a definitive agreement to merge with WellPoint Health Networks Inc. in a transaction valued at approximately $16.4 billion. The deal was expected to close in mid-2004, subject to regulatory and shareholder approvals. Anthem secured a $3.0 billion bridge loan commitment to fund the cash portion.
• Outlook: Management projected cost of care trends for 2004 to range between 9.5% and 10.5%, citing expected increases in pharmacy costs. The company anticipated achieving at least $75.0 million in synergy savings from the Trigon integration in 2004.
• Legal Contingencies: Anthem faces significant litigation risks, including Multi-District Litigation (MDL) in Florida regarding provider reimbursement practices (RICO claims) and class actions in Connecticut and Ohio. Management believes these will not have a material adverse effect on financial position.
• Regulatory Risks: The company is subject to extensive state and federal regulation, including small group reform laws, Medicare reimbursement changes, and the pending implementation of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

Investor Verification Checklist

• WellPoint Merger Status: Verify the regulatory approval status and expected closing date of the $16.4 billion WellPoint merger.
• Reserve Adequacy: Review the actuarial assumptions for unpaid claims liabilities, noting the $226.1 million favorable prior-year reserve development in 2003.
• Cost of Care Trends: Monitor the 2004 cost of care trend (projected 9.5%-10.5%) against actual performance, particularly regarding pharmacy costs.
• Legal Exposure: Track the status of the MDL provider track cases and the Ohio/Kentucky antitrust suits involving physician reimbursement rates.
• Debt Capacity: Assess the impact of the pending merger on leverage ratios and the company's ability to service the $3.0 billion bridge loan and future debt issuances.