Filed by RightCHOICE Managed Care, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: RightCHOICE Managed Care, Inc.
Commission File No. 333-34750
The following communications contain forward-looking
statements within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform
Act of 1995. In particular, statements regarding the
reorganization of RightCHOICE Managed Care, Inc., a
Missouri corporation, are based on management's
current expectations or beliefs and are subject to a
number of factors and uncertainties that could cause
actual results to differ materially from those
described in the forward-looking statements. Careful
consideration should be given to risk factors included
in RightCHOICE's reports filed with the Securities and
Exchange Commission, especially the section entitled
"Risk Factors" in "ITEM 1. BUSINESS" of RightCHOICE's
Annual Report on Form 10-K for the year ended December
31, 1999.
PRESS RELEASE
For Further Information
Kevin Aandahl 314-923-6268
Deb Wiethop 314-923-4767
RIGHTCHOICE DELIVERS STRONG SECOND QUARTER EARNINGS
Strong Growth in Enrollment and Revenues Drives
Results; Progress Continues Toward Implementation
of Settlement Agreement
ST. LOUIS, JULY 27, 2000 - RightCHOICE Managed Care,
Inc. (NYSE:RIT) today reported a 118 percent increase
in second quarter net income to $8.5 million, or 45
cents diluted earnings per share, compared with net
income of $3.9 million, or 21 cents diluted earnings
per share, in the second quarter of 1999. It is the
ninth consecutive comparable quarter of improved
profitability for the company.
"Our steady and disciplined focus on building our
business plays a key role in sustaining our impressive financial
momentum," stated John O'Rourke, chairman, president and chief
executive officer of RightCHOICE. "Our second quarter
enrollment and revenue numbers remain strong, medical
costs remain in line with expectations, and our
efforts toward reducing administrative overhead costs
continue to be effective."
For the three months ended June 30, 2000, RightCHOICE
also reported:
- Operating income was $9.7 million, compared to
$4.5 million for second quarter 1999.
- Earnings before interest expense, taxes,
depreciation and amortization were $19.7 million
compared with $11.8 million for second quarter 1999.
- The medical margin per member per month (PMPM)
increased 13.6 percent to $25.83 PMPM from $22.74 PMPM for
second quarter 1999.
- The medical loss ratio (MLR) improved to 81.9
percent, compared with 82.6 percent, and the general and
administrative (G&A) expense ratio decreased to 18.7 percent compared
with 20.1 percent for second quarter 1999.
- Cash flow from operations was $15.8 million
compared with $3.6 million for the second quarter of 1999.
- Total membership increased to 2.4 million members
at June 30, 2000, a 10 percent increase over the second
quarter of 1999, including an increase in underwritten membership to
480,289 members at June 30, 2000, a 5 percent increase over
the second quarter of 1999.
For the six months ended June 30, 2000, RightCHOICE also
reported:
- Net income was $16.0 million or 84 cents diluted
earnings per share compared to $8.6 million or 46 cents diluted
earnings per share for the first six months of 1999.
- Operating income was $19.6 million, compared to
$9.1 million for the first six months of 1999.
- Earnings before interest expense, taxes,
depreciation and amortization were $37.3 million compared with $24.4
million for the first six months of 1999.
- The medical margin per member per month (PMPM)
increased 14.9 percent to $26.51 PMPM from $23.07 PMPM for the
first six months of 1999.
- The medical loss ratio (MLR) improved to 81.2
percent, compared with 82.2 percent, and the general and
administrative (G&A) expense ratio decreased to 19.2
percent compared with 20.2 percent for the first six
months of 1999.
- Cash flow from operations was $18.1 million
compared with a negative $0.9 million for the first six months of
1999.
STRONG SECOND QUARTER SALES
RightCHOICE continued its strong sales efforts
throughout the second quarter. During the first six
months of 2000, the company achieved 72 percent of its
new business group sales goal for the year. At the
end of second quarter 1999, this figure was 54
percent. The company retained about 90 percent of its
members in group and individual programs during the
second quarter of 2000. Enrollment at July 1, 2000,
added another 10,000 new members, up about 15 percent
over January 1, 2000, enrollment.
"Our improved service levels are providing positive
reinforcement to our current and potential customers
that we are the ones to do business with and that
makes us a strong competitor in the marketplace,"
O'Rourke said. "Service and program enhancements are
leading to higher retention of members and new sales
growth."
HealthLink, Inc., a wholly owned network rental
subsidiary with 1.7 million members at June 30, 2000,
achieved self-insured membership growth of 12 percent
over year-end 1999 and 15 percent over the second
quarter of 1999. HealthLink's membership growth in
the workers' compensation program increased 26 percent
over year-end 1999 to 649,703 members and 32 percent
over the second quarter of 1999. In the past three
years, HealthLink membership has grown by 58 percent.
In addition to workers' compensation, HealthLink
provides network rental, administrative services and
other non-underwritten health benefit programs in
Missouri and six neighboring states.
SERVICE AND NETWORK IMPROVEMENTS
RightCHOICE believes that enhanced customer
satisfaction and healthy financial performance are
compatible goals. Efficient service contributes to
sales and profitability.
RightCHOICE has sustained superior performance for
its BlueCard(R) PPO program, which offers a uniform
plan to companies whose employees live or work
outside the local network service area. The company
averaged a service index score of 96.4 out of a
possible 100 points for the second quarter, which has
increased customer satisfaction.
On July 1, University Hospital and Ellis Fischel
Cancer Center, both of Columbia, Mo., joined the
company's PPO and HMO networks. RightCHOICE also has
new contracts with about 475 physicians affiliated
with University Hospital. Additions to RightCHOICE's
provider networks help attract new members and retain
current members. A greater selection of providers in
markets outside of the St. Louis Metropolitan area
provides members with more choices and convenience.
The addition of University Hospital is expected to
attract members not only in Central Missouri but
statewide as the BlueCard(R) PPO program will cover
those members who have
residences elsewhere but attend the three
universities and colleges in Columbia. RightCHOICE
now has contracts with four hospitals in Columbia.
In Southeast Missouri, two independent physician
associations have joined the company's PPO network,
adding about 100 additional physicians in that
region. RightCHOICE now has contracts with about 400
physicians in the Southeast Missouri region.
PRESCRIPTION DRUG BENEFITS
Choices for prescription drugs also are important for
our members. RightCHOICE's three-tier prescription
drug benefit offers members the choice of generic,
formulary or brand name pharmaceuticals at different
co-payment levels. For second quarter 2000, 92
percent of RightCHOICE underwritten members with a
drug benefit were covered under the three-tier
pharmacy benefit program.
RIGHTCHOICE JOINS CAQH EFFORTS TO IMPROVE NATION'S
HEALTH CARE SYSTEM
As a member of the Coalition for Affordable Quality
Health (CAQH), RightCHOICE has joined a group of more
than 20 of the nation's largest health insurers in a
cooperative effort to improve health care coverage,
service and quality for American consumers and their
doctors. CAQH is supporting and implementing a
series of achievable, concrete action steps designed
to strengthen the nation's health care system. They
include improving consumer access to quality care and
information, reducing administrative hassles and
working with doctors to improve quality. CAQH intends
to regularly report back on actions that have been
completed and actions planned for the future.
RightCHOICE has already taken steps compatible with
the CAQH's goals in the areas of physician programs,
access for members to directories and drug formulary
on the company web site, direct access to OB/GYN
services, access to emergency care, and support of an
independent review organization.
RIGHTCHOICE DATA MANAGEMENT EFFORTS EARN PRESTIGIOUS
AWARD
With about 5.6 million claims to process and more
than 1.5 million telephone calls answered per year,
RightCHOICE knows that employee access to complete,
accurate information is vital.
Since 1994, the company has developed a data
warehouse system to collect and analyze historical
information for key business decisions. RightCHOICE
recently received national recognition for its
efforts by winning the international Data Warehouse
Institute Best Practices in Data Quality 2000 award.
This award recognized RightCHOICE's work in
constructing key data elements and process tools for
measuring quality. With this award, RightCHOICE
advances to the national competition for overall
Leadership in Data Warehousing.
PGPP(R) UPDATE
RightCHOICE continues to work on cooperative
programs with physicians designed to increase client
satisfaction and improve the medical cost trend.
Plans continue for the specialist model of the
Physician Group Partners Program(R) (PGPP(R)) to be
introduced during fourth quarter 2000. Designed for
the PPO and POS programs, initial specialties to be
included are internal medicine/family practice, pediatrics, OB/GYN,
cardiology and orthopedics. Like the current program
for the HMO physicians, the program will include
patient satisfaction and quality measurements.
OUTLOOK
RightCHOICE's financial performance outlook for the
reminder of 2000:
- Average 7 to 8 percent annual premium revenue
growth rate per member per month.
- Medical cost per member per month trend increase
in the 6 to 7 percent range, and an MLR in the low-80s for the
year.
- Maintaining the G&A expense ratio of 20 percent
or less.
The targeted average premium revenue growth rate and
medical cost trend increase from 1999 to 2000 reflect
RightCHOICE's announced plans to exit the Medicare
HMO business which comprised approximately 4,800
lives as of June 30. On a "same store" basis -
excluding the Medicare risk membership from both
years - the targets are: premium revenue growth rate per member
per month of 9 to 10 percent, and medical cost per
member per month trend increase of 7 to 8 percent.
"We believe that the tremendous growth potential
we're seeing in the other segments of our business
will more than offset the gradual reduction of this
business through year-end 2000," O'Rourke stated.
PROGRESS CONTINUES TOWARD IMPLEMENTING SETTLEMENT AND
REORGANIZATION
The company continues to work toward completing the
proposed settlement with the state of Missouri. Both
RightCHOICE and its parent company, Blue Cross and
Blue Shield of Missouri, have reached agreement with
Missouri officials to resolve litigation initiated
against the parent company related to its continued
ownership of RightCHOICE after its creation in 1994.
The parties to the settlement have agreed to use
their best efforts to consummate the settlement and
the related reorganization by December 31, 2000.
"We are excited about the reorganization that will
result from the settlement because we believe that it
is in the best interest of members, RightCHOICE
shareholders and our communities," O'Rourke said.
"It's important to note that this settlement and the
reorganization is supported by 90 consumer groups
representing more than 1 million Missourians."
Progress that the parties have made toward
implementation of the settlement and the related
reorganization include the following:
- The Blue Cross and Blue Shield Association has
fully restored the licenses to use the Blue Cross and Blue
Shield names and service marks and has preliminarily approved the
reorganization.
- New RightCHOICE, which will be the resulting
company in the reorganization, has been incorporated.
- The Missouri Department of Insurance has issued
preliminary approval for the reorganization.
- Preliminary filings relating to the reorganization
have been made with the SEC.
- Blue Cross and Blue Shield of Missouri has
requested that the IRS issue a private letter tax ruling to the
effect that various aspects of the reorganization will be tax-
free. The company's special tax advisor, PricewaterhouseCoopers
LLP, has issued a tax opinion relating to the tax-
free nature of the reorganization.
- The Missouri Foundation for Health has been
incorporated and has received a determination from the IRS that it is
a tax-exempt organization. A nominating committee
has been formed to select a board of directors for
the Foundation.
- The company's lenders under its credit facility
have consented to the reorganization.
A number of significant conditions must be satisfied
before the settlement is completed, including finalizing the
preliminary filings made with the SEC and receipt of
approval of the reorganization from the company's
shareholders at a special shareholders' meeting that
currently is expected to be held
before the end of the year. The parties have sought
a private letter ruling from the IRS and final
approval of the reorganization from both the Blue
Cross and Blue Shield Association and the Missouri
Department of Insurance. The reorganization is also
conditioned upon the receipt of legal opinions from
counsel to the various parties. In addition, there
remains pending a case regarding the status of Blue
Cross and Blue Shield of Missouri that could affect
the closing of the reorganization. The case relates
to whether Blue Cross and Blue Shield of Missouri is
a public benefit or a mutual benefit company. The
issue is currently before the Cole County Circuit
Court.
After the reorganization, Blue Cross and Blue Shield
of Missouri and RightCHOICE will be combined. The
resulting company will be a fully for-profit
company with stock traded on the New York
Stock Exchange. The Missouri Foundation for Health
will own about 80 percent of the common stock
although that stock will be subject to a voting trust
and divestiture agreement in order to provide for the
orderly disposition of the stock.
The Foundation has agreed that at least 95 percent of
its shares will be voted as directed by the New
RightCHOICE Board of Directors on all matters except
those related to any future change of control of New
RightCHOICE.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This press release includes "forward-looking
statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These
statements are based on management's current
expectations and are naturally subject to uncertainty
and changes in circumstances. Actual results may
vary materially from the expectations described
above. Investors should not view these forward-
looking statements as guarantees of future
performance. The risks and uncertainties that could
cause actual results to differ materially are
detailed in the company's filings with the Securities
and Exchange Commission, including its most recent
Quarterly Report on Form 10-Q and Annual Report on
Form 10-K. RightCHOICE is not under any obligation,
and expressly disclaims any obligation, to update or
alter its forward-looking statements whether as a
result of new information, future events or
otherwise.
Blue Cross and Blue Shield of Missouri and its for-
profit subsidiary, RightCHOICE Managed Care, Inc.,
are the largest providers of health care benefits in
Missouri in terms of members.
IMPORTANT INFORMATION ABOUT PROPOSED REORGANIZATION
RightCHOICE Managed Care, Inc., a Delaware
corporation, referred to above as New RightCHOICE,
together with RightCHOICE Managed Care, Inc., a
Missouri corporation, referred to above as
RightCHOICE or the company, filed with the Securities
and Exchange Commission a preliminary proxy
statement/prospectus regarding the proposed
settlement and reorganization transaction described
above. In addition, New RightCHOICE and RightCHOICE
will prepare and file with the SEC a definitive proxy
statement/prospectus and other documents regarding
the proposed settlement and reorganization
transaction. You are urged to read the definitive
proxy statement/prospectus, when it becomes
available, because it will contain important
information. The definitive proxy
statement/prospectus will be sent to shareholders of
RightCHOICE seeking their approval of the proposed
settlement and reorganization transaction. You may
obtain a free copy of the definitive proxy
statement/prospectus (when it is available) and other
documents filed by New RightCHOICE (as well as by
RightCHOICE) with the SEC at the SEC's web site at
www.sec.gov. The definitive proxy
statement/prospectus (when it is available) and these
other documents may also be obtained for free by
RightCHOICE shareholders by directing a request to:
RightCHOICE Managed Care, Inc., 1831 Chestnut Street,
St. Louis, Missouri, 63103, Attn: Investor Relations,
telephone number (314) 923-4831; e-mail:
[email protected].
FINANCIAL TABLES FOLLOW:
RightCHOICE Managed Care, Inc.
Consolidated Financial and Operating Results
(Unaudited; amounts in thousands except shares, per
share and operating data)
THREE MONTHS ENDED
JUNE 30, 2000 1999
Premium revenues:
Alliance PPO $ 64,176 $ 50,891
AllianceChoice POS 48,179 40,952
HMO (includes other POS) 54,331 50,891
Medicare supplement 22,457 23,275
Managed indemnity 519 900
Other specialty services 15,809 11,365
Total premium revenues 205,471 178,274
Fees and other income 24,473 20,937
Total revenues 229,944 199,211
Operating expenses:
Health care services 168,342 147,237
Commissions 8,883 7,458
General and administrative 38,524 35,780
Depreciation and amortization 4,459 4,189
Total operating expenses 220,208 194,664
Operating income 9,736 4,547
Investment income, net:
Interest and dividends 3,680 3,504
Realized gains (losses), net 926 (717)
Total investment income, net 4,606 2,787
Interest expense (1,065) (941)
Other income, net 856 248
Income tax expense 5,629 2,734
Net income $ 8,504 $ 3,907
Basic earnings per share $ 0.46 $ 0.21
Diluted earnings per share $ 0.45 $ 0.21
Weighted average common shares 18,673,000 18,673,000
BALANCE SHEET DATA:
Cash and investments $ 258,149 $ 229,706
Total assets $ 523,887 $ 498,699
Medical claims payable $ 116,246 $ 107,288
Debt $ 30,063 $ 38,063
Shareholders' equity $ 173,669 $ 150,586
Book value per share* $ 9.30 $ 8.06
Tangible book value per share* $ 5.70 $ 4.16
*Based on weighted average common shares
OPERATING DATA:
Membership at end of period
Underwritten:
Alliance PPO 166,711 143,014
AllianceChoice POS 136,900 124,906
HMO (includes other POS) 124,375 131,704
Medicare supplement 50,795 54,968
Managed indemnity 1,508 2,054
Self-funded:
PPO 44,110 45,792
HMO 7,687 7,694
ASO (includes HealthLink):
Workers' Compensation 649,703 492,000
Other ASO 1,245,397 1,205,898
Total 2,427,186 2,208,030
Medical loss ratio 81.9% 82.6%
G&A ratio 18.7% 20.1%
Adjusted G&A ratio (excluding
depreciation and amortization) 16.8% 18.0%
NOTE: Health care services expense includes
credit for amortization of the provision for losses on a
single contract.
RightCHOICE Managed Care, Inc.
Consolidated Financial and Operating Results
(Unaudited; amounts in thousands except shares,
per share and operating data)
SIX MONTHS ENDED
JUNE 30, 2000 1999
Premium revenues:
Alliance PPO $ 122,339 $ 101,047
AllianceChoice POS 94,665 81,070
HMO (includes other POS) 110,651 104,393
Medicare supplement 45,253 46,863
Managed indemnity 1,104 1,851
Other specialty services 30,198 22,268
Total premium revenues 404,210 357,492
Fees and other income 48,376 41,732
Total revenues 452,586 399,224
Operating expenses:
Health care services 328,411 293,985
Commissions 17,828 15,367
General and administrative 77,991 72,340
Depreciation and amortization 8,792 8,383
Total operating expenses 433,022 390,075
Operating income 19,564 9,149
Investment income, net:
Interest and dividends 6,904 6,711
Realized gains (losses), net 1,065 (449)
Total investment income, net 7,969 6,262
Interest expense (1,978) (2,009)
Other income, net 948 556
Income tax expense 10,537 5,374
Net income $ 15,966 $ 8,584
Basic earnings per share $ 0.86 $ 0.46
Diluted earnings per share $ 0.84 $ 0.46
Weighted average common shares 18,673,000 18,673,000
OPERATING DATA:
Medical loss ratio 81.2% 82.2%
G&A ratio 19.2% 20.2%
Adjusted G&A ratio (excluding
depreciation and amortization) 17.2% 18.1%
NOTE: Health care services expense includes credit for
amortization of the provision for losses on a
single contract.
TELECONFERENCE SCRIPT
Teleconference Script FINAL 7-27-00
Second Quarter 2000
Thursday, July 27
11 a.m. Central Time, Noon Eastern Time.
Dial-in: 1-800-210-9006
Replay: 1-888-203-1112; access code: 993907.
NOTE: During pre-conference session with Operator, ask
Operator to introduce John O'Rourke as Chairman, President
and Chief Executive Officer of RightCHOICE Managed Care.
INTRODUCTION BY JOHN O'ROURKE:
Good morning and thank you for joining us today. With me
is Sandra Van Trease, senior executive vice president and
chief operating officer. Sandra is also chief financial
officer.
Briefly, I want to remind you that the information we'll
share with you in this conference call includes various
"forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
statements are based on our current expectations and are
naturally subject to uncertainty and changes in
circumstances. Actual results may vary materially from
those that we discuss today. Additional information that
could cause actual results to differ materially from those
in the forward-looking statements can be found under the
caption "Risk Factors" in our most recent Annual Report on
Form 10-K on file with the SEC.
RECAP RESULTS:
Now, I'd like to recap our very positive second quarter
results which represents a record-breaking quarter for
RightCHOICE. Back in June we pre-announced that earnings
per share would be higher than expected. And, today we
reported earnings of $8.5 million or 45 cents per diluted
share, our highest quarterly earnings since RightCHOICE went
public in 1994. We now have posted nine consecutive
comparable quarters of improved profitability and this is by
far our best second quarter, exceeding the comparable
quarter last year by 118%. Year-to-date, our net income is
$16 million, or 84 cents per diluted share.
Our cash-generating ability continues to be stronger than
ever. For the second quarter of 2000, compared with the same
period last year:
- Earnings before interest expense, taxes, depreciation
and amortization were $19.7 million compared to $11.8
million.
- We've more than doubled our operating income, to $9.7
million from $4.5 million, and
- Our cash flow from operations was $15.8 million, more
than four times our cash flow of $3.6 million in last year's
second quarter.
Additionally, RightCHOICE operating income more than doubled
to $19.6 million in the first half of 2000 compared with
$9.1 million in the first six months of 1999.
At June 30, 2000, our cash and investments balance was
$258.1 million dollars; total long-term debt was $30.1
million dollars; and shareholders' equity at the end of the
period was $173.7 million dollars or $9.30 per share.
There are several key factors driving our improved
performance.
First, we've done a good job of meeting or exceeding our
targets for operating ratios and margins. That includes
keeping our medical loss ratio in the low 80's - we're at
81.2 percent, year-to-date. Our overhead - as measured by
our G&A ratio - is under 20 percent - at 19.2 percent for
the first six months. And, our medical margin was $26.51 per
member per month, up 15 percent comparing the first six
months of 2000 to the same period in 1999.
Second, the investments we've made in our service and
marketing infrastructure are definitely paying off with high
retention rates and excellent sales results. During the
second quarter, we retained 9 out of 10 members in both
group and individual programs. Through June 30th, we've met
72 percent of our new business group sales goal and ended
the quarter with 480,000 underwritten members. Even better,
at July 1st, we added another 10,000 lives to our membership
- making this a very successful year-to-date selling effort.
A third and very important factor in our performance is our
HealthLink business. HealthLink continues to enjoy great
success and contributes to our exceptional growth in fee
income and operating earnings.
The HealthLink contribution resulted in overall growth in
RightCHOICE fee income of 16 percent in the first six months
of 2000 compared with the same period last year. Membership
in HealthLink has grown 12 percent just since year-end 1999,
and has grown 58 percent in the last three years.
So to recap, the significant upside is due to the
combination of solid margins and operating ratios, and
healthy growth in both underwritten membership and
administrative services.
I'm very proud to say that our management team deserves
tremendous credit for working together to generate these
results. As an organization, we're committed to keeping our
focus on continuous improvement. We won't take our eye off
the ball. At the same time, we're now in a position to
further reinforce our leadership and increase our visibility
in the industry.
One of the ways we're doing this is by joining with other
leading health insurers nationwide to launch the Coalition
for Affordable Quality Health Care. The coalition's mission
reflects our strong commitment to make the health care
experience better for doctors and consumers. It's backed up
by our individual and collective efforts to:
- Help consumers gain access to quality care and
information;
- To make administration easier for doctors and members;
and
- To help doctors and other health care professionals
improve overall health care quality.
This is a major initiative, and it's groundbreaking for our
industry. It focuses on concrete action steps that we, as
participating companies, can - and are - implementing. The
idea is to provide our members -- and the network health
care professionals who care for them -- with high quality
service and information. The end goal is a system that
works. As an industry this is the right step forward. The
coalition's objectives are compatible with our business
approach, and some of you are very familiar with
RightCHOICE's programs that are very physician- and member-
focused. These include programs such as:
- Our Physician Group Partners Program;
- Internet access to provider directories;
- Having our drug formulary on the company website;
- The dramatic reduction in preauthorization
requirements, and
- Our support of an independent review organization for
issues concerning medical necessity.
Also supporting our leadership position, I'd like to
highlight several accomplishments, for which RightCHOICE is
getting well-deserved recognition:
- We've been awarded an international best practices
award for our Data Warehouse System, which Sandra will
discuss further.
- NCQA has reissued our one-year accreditation for
BlueCHOICE HMO. As we've discussed in the past,
accreditation is important to building our ability to
compete effectively, especially for large employer
contracts.
- RightCHOICE has been included for the first time in the
Russell 2000 index. We're pleased to be included within
this flagship index, which represents about 11% of the
investable US stock market. While it's purely quantitative,
it represents a milestone for our company and gives us an
added measure of visibility among small cap companies.
Before turning the call over to Sandra Van Trease to review
our operations in detail, let's take a moment to review our
progress on the settlement with the State of Missouri -
which continues to move forward.
SETTLEMENT UPDATE
First, here is just a bit of background for anyone who is
not fully aware of the settlement and reorganization.
We and our parent company, Blue Cross and Blue Shield of
Missouri, reached a settlement agreement with the Missouri
Attorney General and the Department of Insurance that will
result in the merger of Blue Cross and Blue Shield with
RightCHOICE. RightCHOICE will become a Delaware for-profit
corporation and a direct licensee of the Blue Cross and Blue
Shield Association.
Through this agreement, litigation with the state of
Missouri related to Blue Cross and Blue Shield of Missouri
and its ownership of RightCHOICE will be settled. A new
public benefit foundation will own approximately 80 percent
of RightCHOICE stock and receive approximately $13 million
in cash. The foundation is expected to serve the health
care needs of under- and uninsured Missourians in our
service area.
The foundation has agreed that 95 percent of its stock will
be voted as directed by the new RightCHOICE board of
directors on all matters except future changes of control.
The foundation also agreed to sell its RightCHOICE stock in
an orderly manner, under a divestiture plan.
Since signing the definitive reorganization agreement this
spring, we've been moving to satisfy the various conditions
to closing. An update on those activities includes several
key accomplishments:
- The Missouri Foundation for Health has been
incorporated and has received an IRS determination letter on
its tax-exempt status. And, the nominating committee to
select the Foundation board has been formed.
- New RightCHOICE has been incorporated in Delaware.
- We've received preliminary approval of the
reorganization by the Blue Cross and Blue Shield
Association's Board of Directors and by the Missouri
Department of Insurance.
- We have made preliminary filings with the SEC.
- PricewaterhouseCoopers has issued a tax opinion related
to the tax-free nature of the reorganization, and we've
requested that the IRS issue a private letter tax ruling,
which is still pending.
There are a number of conditions to closing that remain,
including the delivery of legal opinions from counsel to the
various parties.
Also pending is a case regarding the status of Blue Cross
and Blue Shield of Missouri that relates to whether it is a
mutual benefit corporation or public benefit corporation.
This could affect the timing of the closing. This is
described in detail in the filings made with the SEC. Once
completed, the final proxy statement and prospectus will be
sent to the shareholders of RightCHOICE in advance of their
vote on the reorganization.
Because there are variables outside our control, we can't
give you a precise timeline, but we believe we're on track
and hope -- before the end of the year-- to hold the special
shareholders' meeting to approve the reorganization.
The settlement agreement is a win-win opportunity for our
company, our community and our shareholders. In the
meantime, our focus continues on the opportunities to grow,
improve our performance and increase our value to our
members. Now, I'll turn the call over to Sandra Van Trease.
SANDRA VAN TREASE:
Thanks, John. During our first quarter conference call, we
described the initiatives that set the stage for successful
sales and membership growth. As we indicated back in April,
proposal activity has been very robust, and we've enjoyed a
high retention rate and strong close ratio.
The result was a very strong second quarter enrollment
period. As John mentioned, at June 30, we had 480,000
underwritten members, with another 10,000 enrolled as of
July 1. Moving forward into the second half, we expect our
typical 10% annualized turnover factor and the anticipated
run-off of approximately 4,800 members who are part of our
Medicare risk HMO business, which we're exiting as of
December 31, 2000.
Nevertheless, the strength of our sales effort thus far, and
the outlook for solid sales for the remainder of the year,
more than offset the gradual reduction of those members, and
keep us on track for top line annual growth in total
underwritten membership this year.
Looking into 2001, you'll recall that the Missouri
Consolidated Health Care HMO contract expires at the end of
2000. And, although it comprises about 40,000 member lives,
it has been an unprofitable business.
As we discussed in the first quarter call, we're focusing on
profitable growth. Our sales and marketing management have
implemented a very effective sales strategy that has focused
on several key elements that include: having the best team
on field; emphasizing service; simplifying the product
offering; and rationalizing our distribution channels.
We believe this has given us an advantage in the market,
where we compete very effectively head-to-head with our core
competitors without sacrificing margin.
The bulk of our growth has come from this improved sales
strategy across the board. It's notable that growth is
consistent among group sizes - including our 100+ groups,
the emerging market groups that have 25-99 employees, as
well as small group and individual sales.
From a product perspective, growth has been primarily in
three main product areas:
- Alliance PPO - which features the Blue Card, that many
employers are truly embracing;
- AllianceCHOICE, our point-of-service plan, and
- Our RightCHOICE-branded plan in Southern Illinois.
Southern Illinois is an adjacent market, but it's outside
our Blue Cross service area. We've branded our products as
RightCHOICE - but use the very well respected HealthLink
provider network. It's very gratifying to see sales
momentum growing there.
Given our strong sales capability, our differentiating
qualities and the market opportunity, we see continued room
for growth in St. Louis and throughout our service area -
especially Central and Southeast Missouri. To that point,
our network development efforts outside the metropolitan St.
Louis area not only support our growth strategy, but also
our objective of increasing access to health care for
consumers throughout our service areas.
We've had a good deal of success with our network strategy.
For example, as of July 1st, we added to our PPO and HMO
networks the University Hospital and Ellis Fischel Cancer
Center in Columbia. This is a city in Central Missouri,
where the University of Missouri is located. We also have
new contracts with about 475 physicians affiliated with the
University Hospital. In Southeast Missouri, we continue to
expand our physician network with two physician groups
totaling about 100 doctors being added to our PPO network in
that region.
Just as the development of our in-state networks support our
growth, the BlueCard PPO nationwide network continues to be
a very strong differentiator for us.
Through BlueCard, we're positioned as the local provider
with a national network. This offers employers the
flexibility they need when they have employees and
dependents in multiple markets. Our service record in the
BlueCard program has been outstanding, with our recent
quarterly score at 96.4 out of 100 possible points.
BlueCard is a classic example of the value of "being Blue" -
a difference that our clients recognize and embrace.
Service, marketing success and financial performance are
closely tied. That's why we continue to monitor and work
toward continuous improvement in all of these areas,
including timeliness in the claims area.
CLAIMS:
During the first quarter, we experienced an increase in
claims inventory and a decrease in timeliness related to
upgrades in our imaging system and consolidation of the
function of converting paper claims to electronic images at
a single processing center.
We're pleased to report that these upgrades are achieving
the desired increases in our efficiency and claims
processing timeliness, which has returned to normal.
At June 30, claims payable were $116.2 million dollars with
an average of 63 days to pay. This reduction in average days
to pay stems primarily from the continued improvement in our
claims entry inventory levels, from over 7 days of inventory
on hand in January, down to under 2 days of inventory at the
end of June. Our goal is to achieve no more than one day of
claims entry inventory on hand. Further, our level of
suspended claims has also decreased significantly, from over
13 days on hand in January to less than 9 days at the end of
June.
Claims are the driving component in our total information
system -- which is the lifeblood of our business. That's why
we've made the significant investments in information
technology and processes over the past several years.
Those investments are paying off in many ways - and one of
the most visible dividends is industry recognition for best
practices. As John mentioned, we've won a prestigious
international award from the Data Warehousing Institute for
Best Practices in Data Quality.
Our data warehouse system provides us with a critical tool
to package and analyze archived data, helping us make key
business decisions. More than 5.6 million claims annually
feed into 550 fields in our warehouse. The Best Practices
Award we received was specifically for our Key Data Elements
process. That process identifies and continuously samples
the 62 data fields that are the most critical in making
business decisions.
Our information systems team deserves a great deal of credit
for the success of the Key Data Elements process. Even more
gratifying than the award - is the knowledge that this tool
has resulted in improvements that benefit our network health
care providers and our members, creating a measurable,
favorable impact on our business success.
MEDICAL MANAGEMENT
In fact, our data warehouse system is just one of the tools
that allows us to add value to our relationships with
physicians. The Physician Group Partners program, as well as
disease management programs, are supported by our ability to
capture, analyze and then act on data.
For example, our initiative to reduce the number of
procedures that require precertification has proceeded very
well and provides recognized value for providers and
members, especially those in our HMO plan.
Today, we require pre-cert for just 26 procedures or
services. Some examples of inpatient procedures/services
that still require pre-certification include:
- hysterectomy which studies have shown a higher
utilization rate in this part of the country than any other;
- procedures that address chest and abdominal pain; and
- services that address diabetes and hypertension.
On an outpatient basis, we still require pre-certification
for such procedures as cardiac catheterization, cataract
surgery, and laminectomies.
A very interesting synergy emerges from this: many of the
remaining precertification conditions automatically refer to
the appropriate RightCHOICE disease management program, such
as congestive heart failure. In that way, we enhance our
value to the member, and maximize the opportunity to manage
cost and utilization for identified high-cost disease
states.
We're equally focused on what might be perceived as the
"softer side" of medical management and issues of economic
concern to physicians.
We're being rewarded for our initiative and leadership in
working with physicians on a proactive and creative basis,
such as through our Physician Consultative Committee.
In fact, RightCHOICE was favorably profiled in four bylined
newsletter articles written by leaders in the medical
community. The over-riding message is that RightCHOICE is
taking the initiative in working with physicians on such
issues as contracting, timely claims payment and medical
malpractice insurance.
OUTLOOK:
Given our healthy balance sheet and strong performance in
the first half of the year -- and notwithstanding the
possibility of experiencing higher costs in the second half
of the year - our financial outlook for 2000 is as follows.
There are two ways to look at the premium and medical cost
trend targets.
First, reflecting the transition of the 4,800 Medicare risk
members off the books; said another way, including the
reduction of these members from 4,800 in June 2000 to zero
by December 2000:
- Our average annual premium revenue growth target per
member per month is in the 7 to 8 percent range.
- Also on that basis, our targeted medical cost trend per
member per month is 6 to 7 percent.
If we exclude the Medicare risk business from both 1999 and
2000, on a "same store basis" -- we're targeting:
- the premium revenue growth rate at 9 to 10 percent, and
- The medical cost trend at 7 to 8 percent.
Either way - we plan to continue managing our ratios -
targeting our medical loss ratio to be in the low 80s for
the year, and our general & administrative expense ratio to
be 20 percent or less for the year. At this point, I'd like
to turn it back to John.
JOHN:
It's tremendously gratifying to speak with you today, to
report record-breaking financial results, and describe
RightCHOICE's exciting corporate initiatives.
Our members and shareholders alike are receiving the
benefits of our disciplined focus on doing things right the
first time, paying attention to service and quality, and
simplifying access to quality, affordable health care as
much as possible.
We've worked hard to achieve improvement, and we don't
intend to become complacent or lose focus. We do business in
a competitive arena, and know we must keep our edge in order
to continue delivering growth, profits and value.
The challenges ahead are not unique to RightCHOICE - but we
think that many of our solutions are.
Over the past year, the market has adjusted to the reality
of cost-based pricing, and we're very gratified to see that
our clients - old and new - embrace our value equation.
Yet, we realize that double-digit rate increases are not
indefinite -- and that there are many factors that threaten
access to affordable, quality healthcare:
- As hospital and physician groups grapple with their
strategic decisions, costs escalate;
- Despite our success in controlling the drug cost trend
through benefit design, both the utilization and unit costs
of prescription drugs show no sign of slowing down in the
near term;
- Legislative initiatives often seem bent on creating
unintended consequences - through mandates that serve to
drive costs and increase the pool of uninsured.
So, what does RightCHOICE do differently?
First of all, we're using our human and technological assets
to get as much administrative cost out of our operations,
while achieving continuous service improvement at every
level. "Energy" is the key in the value equation, and we're
successfully reducing the "energy cost" needed to do
business with RightCHOICE.
Second - and more importantly -- we're leveraging our
leadership and integrity to earn a seat at the table with
all of the players in the health care arena: employers,
physicians and legislators. .And, not just locally, but on a
statewide and national level.
We just participated in a valuable forum with the Missouri
Association of Health Plans - where we seek to impact the
Missouri legislative agenda through education and the
exchange of ideas. And, as we mentioned earlier, we're a
member of the new Coalition for Affordable Quality Health -
taking action to improve the system.
I'm very proud to serve as the chairman of the national
Health Policy and Legislation Committee of the Blue Cross
and Blue Shield Association. Among the issues we're studying
is the role that employers play in the direct provision of
health care coverage. We believe our Association must study
and determine what the optimum market and regulatory
framework should be. We want to effectively shape our
industry -- whether under the current model of employer-
based coverage or one that evolves toward individual choice.
The point is -- we recognize that our unique position as a
publicly traded Blue plan is one we must maximize in order
to continue growing and creating value for our members and
our investors. As proven in our results announced today - -
these are mutually compatible objectives.
I'll now take your questions.
Thank you for joining us today. Interest from the investment
community is becoming more evident and we welcome investors
to take a very close look at our operations and business
model.
We invite you to contact us at anytime.
Operator, please repeat the replay number and close the
call.
