<p>Managed Care<br/>Third Annual Proprietary<br/>Health Benefits Survey<br/>Scott Fidel<br/>Research Analyst<br/>(212) 250 3716<br/><a href="mailto:scott.fidel@db.com">scott.fidel@db.com</a><br/>Justin Bowers<br/>Research Associate<br/>(1) 212 250 8564<br/><a href="mailto:justin.bowers@db.com">justin.bowers@db.com</a><br/>Gregg Genova<br/>Associate Analyst<br/>(1) 212 250 0128<br/><a href="mailto:gregg.genova@db.com">gregg.genova@db.com</a><br/>Fundamental, Industry, Thematic, Thought Leading<br/>Deutsche Bank Company Research's Research Product Committee has deemed<br/>this work F.I.T.T. for our clients seeking differentiated ideas. Here our managed<br/>care team gauges the outlook for the Commercial employer-sponsored market in<br/>2009. We conducted proprietary telephonic interviews of senior health benefits<br/>executives at 94 employers located across the U.S. Our grassroots research<br/>indicates that Commercial underwriting margins (MLRs) should remain relatively<br/>stable in 2009 -- margin performance could vary though across individual MCOs.<br/>Deutsche Bank Securities Inc.<br/>All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local<br/>exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche<br/>Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm<br/>may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single<br/>factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research<br/>is available to customers of DBSI in the United States at no cost. Customers can access IR at<br/><a href="http://gm.db.com/IndependentResearch">http://gm.db.com/IndependentResearch</a> or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE<br/>LOCATED IN APPENDIX 1.<br/>FITT Research<br/>Companies featured<br/>Aetna (AET.N),USD29.24 Buy<br/>AmeriGroup (AGP.N),USD29.07 Hold<br/>CIGNA (CI.N),USD18.15 Hold<br/>Centene (CNC.N),USD19.66 Hold<br/>Coventry Health Care (CVH.N),USD15.19 Sell<br/>Health Net (HNT.N),USD12.05 Hold<br/>HealthSpring (HS.N),USD19.80 Hold<br/>Humana (HUM.N),USD38.12 Hold<br/>Magellan Health (MGLN.OQ),USD39.19 Hold<br/>Molina (MOH.N),USD18.44 Hold<br/>Universal American (UAM.N),USD9.74 Hold<br/>UnitedHealth Group (UNH.N),USD27.14 Buy<br/>WellCare Health Plans (WCG.N),USD13.72 Hold<br/>WellPoint (WLP.N),USD44.47 Buy<br/>Fundamental: Commercial pricing discipline remains steady for 2009<br/>Employers expect net blended rates on a straight average basis to increase by<br/>7.3% in 2009, flat with 2008. On a weighted average basis, blended rates are<br/>expected to increase by 6.4% in 2009, up from 5.9% in 2008. Importantly,<br/>employers expect weighted average fully-insured premium rate increases should<br/>track above anticipated self-funded claims trends in 2009, indicating Commercial<br/>MLRs should be relatively stable this year. However, the pricing data appears<br/>mixed across companies; fully-insured rate increases are accelerating at the<br/>national MCOs and non-profit Blues plans in our survey for 2009, although rates<br/>are stable to decelerating at many of the regional and local managed care plans.<br/>Industry: Our survey illuminates fewer market share shifts among carriers<br/>Our survey indicates fewer market share shifts among plans in 2009 relative to<br/>2008. Aetna is generating the best retention rates among the public MCOs, while<br/>United appears to be making progress in healing its frayed customer relationships.<br/>The regional MCOs such as Coventry, Health Net, and Humana are showing<br/>weaker retention rates relative to the national MCOs. The non-profit Blues are<br/>generating strong retention rates but fewer new business wins, likely reflecting<br/>improving pricing discipline. Kaiser could pick up market share in 2009.<br/>Thematic: Pricing trends show variation across health plans for 2009<br/>While uncertainties abound in the broader economy heading into 2009, the<br/>managed care industry overall is pricing its Commercial product to cover costs.<br/>The survey shows three national MCOs (Aetna, United, and WellPoint) pricing<br/>above expected cost trends, although Cigna’s spread is narrowing for 2009.<br/>Thought Leading: Pricing diverging between national and regional plans<br/>Our survey reinforces our view that pricing appears to be firming among the nonprofit<br/>Blues. We have increased confidence in our Commercial MLR forecasts for<br/>Aetna, WellPoint, and UnitedHealth; we rate all three of these stocks Buy and are<br/>raising our ests and price target on UNH shares. However, we have reduced<br/>confidence in the Commercial MLR prospects for Cigna and Coventry. We are<br/>thus downgrading our ratings on Cigna to Hold (from Buy) and Coventry to Sell<br/>(from Hold) based on higher observed MLR risks. Overall we have a neutral view<br/>on managed care for 2009; we are positive on the “Big Three” (AET, WLP, and<br/>UNH) although more cautious on the regional and government pure play MCOs.</p><p>Table of Contents<br/>Executive summary ........................................................................... 3<br/>Outlook: Stable Commercial MLR Outlook for 2009.................................................................3<br/>Valuation: The group appears attractive on key measures........................................................6<br/>Downside Risks to our neutral industry view............................................................................6<br/>Upside Risks to our neutral industry view.................................................................................7<br/>2009 DB Employer Health Benefits Survey ..................................... 8<br/>Employers project blended rate increases of 6.4% for 2009....................................................8<br/>“Same-store” analysis sheds light on relative underwriting risks ...........................................11<br/>Background and description of our survey methodology........................................................12<br/>Regional analysis ............................................................................. 15<br/>Blended rate increases show variance across markets ..........................................................15<br/>Northeast: Fully-insured pricing robust; cost trends up slightly ..............................................17<br/>Mid-Atlantic: Fully-insured pricing improving for 2009............................................................18<br/>Southeast: Market share shifts observed for 2009; rates stable.............................................19<br/>Midwest: Price/cost spreads contracting in 2009...................................................................20<br/>West: Self-funded claims trends accelerating in 2009 ............................................................21<br/>Southwest: fully-insured rates – Solid spread above self-funded............................................22<br/>Survey results for individual MCOs ............................................... 24<br/>Pricing outlooks vary across carriers.......................................................................................24<br/>Blended rate increases vary across carriers............................................................................26<br/>MCOs appear less willing to negotiate on ASO fees in 2009 .................................................27<br/>Retention: Aetna and NFP Blues lead with 100% in our survey .............................................28<br/>Public company analysis................................................................. 31<br/>Aetna (Buy-rated) ....................................................................................................................31<br/>WellPoint (Buy-Rated) .............................................................................................................32<br/>UnitedHealth Group (Buy-Rated) .............................................................................................33<br/>Cigna (Hold-Rated) ..................................................................................................................34<br/>Other Public Health Plans .......................................................................................................35<br/>Pricing distribution and cost containment strategies.................. 36<br/>Distribution of pricing more concentrated in 2009..................................................................36<br/>Price increases also concentrated across customer size in 2009..............................................37<br/>Consumer-driven product penetration growing for 2009........................................................38<br/>Disease management penetration to increase in 2009...........................................................40<br/>Benefit buydowns relatively stable in 2009.............................................................................43<br/>Additional analysis of survey data................................................. 45<br/>Health plan premium rate tables by carrier, 2008-2009 ..........................................................45<br/>Health plan premium rate tables by region, 2008-2009 ..........................................................49<br/>Health plan premium rate tables by plan size, 2008-2009.......................................................52</p><p></p><p>
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